Looking at a new single tenant restaurant deal - new construction. Building was built specifically for tenant, 20 year absolute net lease with personal and corporate guarantee, 1.5% yearly rent escalators, two 10 year options.
My problem though is rental rate is significantly above market - like double market rent on per sq ft basis for that area. Probably because developer is amortizing TI over 20 years. However, that leads to value problems at end of lease. I.e. I would effectively take a bath on property value even if property reverted back to market rates at end of 20 years.
My questions are:
1. Is it common for rent to be so high relative to market rents for new construction QSRs? And should I really be paying a cap rate on amortized TI?
2. How common is it for QSRs to actually continue to accept above market rent at end of 20 years when exercises their options? We would still likely be talking 120% of market rent on per sq ft basis.
1. Generally, yes.
2. Each specific franchise will re-evaluate their location every 20 years since they are going to either do a major remodel or ground up build.
We are looking at an old Wendy's right now for a small mom and pop business. Our offer is going to be in the $250,000 range. The owner bought it 10 years ago for $1.3M, because the income supported that number. I will use a land value as a terminal value in many of these STNL deals I come across unless they are in absolutely great locations (think Wrigley in Chicago) and in those cases you generally wish they didn't renew the options.
Ok, but then how in the world are newly constructed QSRs good deals? Even after 20 years at a 6.75% or 7% cap rate, the terminal value is so low, that effectively the IRR over that time frame is basically zero. I mean, who would buy these things then besides suckers?
Multi tenant lease rates and STNL lease rates vary in the market.
I look at who is guaranteeing the lease, rent increases, do they disclose ongoing sales, any early termination rights,etc. I look at between 500 and 1,000 of these a week nationally. It's all I do pretty much day in and day out.
Developers rents can be slightly above market which is okay if location is good. If rents are way above then your down payment for equity gets wiped out if they fail in the primary term of the lease.
If you can send me the OM/flyer I can give you my opinion of it.