Has anybody here done a build-to-suit for Dollar General? I own a commercial property in a semi-rural area. Although I'm not gung-ho on Dollar General (or any dollar store for that matter) as a tenant, my site's location would make sense for me. (Should they leave after 15 years, I have use for the building.)
It is my understanding that DG has their own preferred builders. Given the cap rates I've seen on these DG's, it seems the margins are pretty thin. When it comes to negotiating, I'm sure DG has a pretty good idea of what it will cost to build. Further, since I'm assuming they'd require a preferred builder do the project, I'm guessing the builder would inform them of the exact cost.
DG seems to stick to 15 year terms with increases of 10% every 5 years. Further, I've read that DG's cost as low as $250,000 to build and the average store is about 9,000 square feet. (That's $27/square foot, which seems extremely low. I understand they tend to go cheap, but $27??.) For arguments sake, let's say it would run $450,000. And let's say I put a value of $200,000 on the land (including site work). So the entire project value is $650,000. Based on the 7% cap rates I'm seeing on new DG's that are being sold by developers, am I looking at rents of about $45,000/year (for the 1st 5 years, at least) or $3750/month. If I were to finance 100% of the building ($450,000) at 5.25% for 15 years, I'm looking at a payment of $43,404/year or $3617/month. Do these #'s sound about right?
So when negotiating, would DG say (a.) we are using a preferred building, (b.) the cost will be $X, (c.) the land is valued at $Y, and therefore, we are willing to pay a corresponding return to you of 7%? By the same token, would it make sense for me to say that I am expecting a return on land of 9% or 10% so the land portion of payments ought to be higher?
In summary, I am trying to determine what I can expect from them.
thanks in advance
Most Dollar Generals are 1 million to 1.7 million in price nationally for new builds. Most are in weak suburban to rural locations which brick façade or stone on front and sheet metal sides and back.
They do not typically have 10% rental increases every 5 years. Instead they have flat rent for 15 years in the primary term and renewal increases in the option periods. There are only about 10% of Dollar Generals that might be okay. They have upgraded construction around the whole building and are in strong suburban locations. Cap rate instead of close to 7 is usually 6.3 to 6.5 cap because of the high quality area and building construction. Those tend to be 1.8 million to 2.5 million in price.
Dollar General usually demands to know what cost you have into the land as the owner. I have developer associates where it's a volume game. They make maybe 300k profit if everything goes right and if problems maybe 200k per property developed. As they told me it is a volume game where they know Dollar General will come back to them again and again for more sites instead of a (one and done) type situation with a commercial tenant.
If your property could be used by a different tenant you might come out much better. I don't like flat rent deals that much because year over year inflation is eating into returns and weakening value of the existing cash flow. QSR foods typically have rental increases in the primary term. Most developers construct for a 9 cap break even and sell for 5's to 6's so after resale cost make about 200 basis point spread in profit.
DG stores can be a good niche. They do not have preferred builders or GC's for ground up they work with Developers (who can also be a GC) that do turn key packages for them. You have to deliver to their specs. The $250k is probably for inline build outs not free standing units. You are going to have a hard time delivering a 9000 sqft building for under $750,000 in most areas. This includes everything but land so the $1million to $1.7 million @Joel Owens mentioned likely includes land.
On a side note Cal Turner Jr the grandson of the founder is a friend of mine. Very cool guy and a billionaire.
I've done well over 30 Dollar Tree deals , which for intents and purposes share the same economics and deal structures. With that said your calculations are incorrect. You cannot build a Dollar General or any other 10,000 sf Dollar store for $250,000. The real cost for the building(s) themselves run between $65 for a shell delivery up to $85 psf or higher for a vanilla box. So you have nearly $1,000,000 in building construction alone. I cannot confirm whether DG still does 15 year deals, but Family Dollar use to until they were acquired by Dollar Tree. Most likely they are only 10 year deals and the truth is they are really NN deals not a full NNN deal as many believe. At the end of the day, it is very unlikely you can develop a free standing Dollar store for less than $1.2 million all in (Site, Soft, Construction, Land, Financing etc.), and that is being generous. The way developers make money on these deals is based upon volume. Once they find a developer that can delivery as promised they end up giving them as many deals as they can handle until they can no longer handle them anymore, at which time they then move onto the next guy in line. Also, you have to account for the rising costs in construction + increase in interest rates & couple that with the fact that each of the 3 Dollar stores have yet to adjust their rent threshold, which means the deals get thinner and thinner. You are luckily to to make $200k after you sell the asset at a 7% cap including leasing and investment sales commissions. On top of that, if you are not a seasoned developer and are unable to deliver on the exact date agreed upon in the lease they charge you a $1,000 x day late penalty. I did a deal with a developer who was 1.5 years late on his delivery and DT made him pay over over $500k in late fees via free rent - thats over half of the total base rent.
If you are really looking to do a DG deal you but lack the development experience you are better off selling the property or if you have low to no basis in the land then do a fee for service development with one of their preferred guys and pay them the $100k to manage the project.
If you have a good site then make it happen, but get the right advice from those who work with these retailers on a daily basis and don't believe what you read because these company's are changing daily as a direct result of share holder pressure and stock market pricing. Best of luck.
Dollar General most are absolute NNN. The other competitors mentioned are typically NN. So cap rates sometimes are slightly better but you have to watch out for what is written into the lease for landlord roof, structure, parking lot, utility lines, etc. Depending on what is in there can make those investments a loser. Buyers like them paying all cash below 2 million because it's just about the only way except for medical to get something close to a 7 cap with a long term lease going in for STNL.
Restaurants and all of that sub 2 million tend to be 5.5 caps asking for the good stuff with national names and guarantees. Chick fila and Mcdonalds can be in the 4's for cap rate. Sometimes you can buy a ground lease for around 2 million where if it was NNN rent would be higher in that area and go for 3.5 million for the same property. Ground lease though you are not typically getting any depreciation like a true NNN.
People think in commercial under 2 million is a big price for a purchase but it is teeny, tiny. Not much quality product in strong suburban areas for those price points. When they do become available they receive multiple offers sometimes 5 or 6 and you can't mess around as they go close to asking price. When you get in the 3,4,5 million range for quality not as many buyers so can get a little better cap rate on the purchase.
For under 2 million I personally like Auto Zone, Advance Auto type stores. They tend to be 6,000 to 8,000 sq ft but location of property and build quality is usually much better than the cheap shells for DG type stores. Occasionally you can find a nice DG store but maybe only 10% of the time. Buyers have to be realistic and ready when the occasional diamond pops up to buy in that lower price range. I look at about 1,000 a week and see maybe 10 to 15% is the really good stuff.
Thanks for the responses. My question is more along of the lines of "how does DG determine what rent they will pay?". I suppose it could be boiled down further: How does ANY national tenant that is having a property built by the landlord as a build-to-suit determine rent?
I think Joel's response that DG demand to know the cost is what I was most looking for.
Cost to build aside, I have a hard time justifying the return (and I could personally use the building after 15 years).
On another note, I spoke with somebody at DollarTree on another property we have. Their returns seem even lower. I was told they were looking at just under $10/square foot for a 7-year term. And this is for a build-to-suit.
Thanks for all the responses.
p.s. When one googles 'cost to build a dollar general', the first 3 or 4 results indicate $250,000. I spoke with a local developer who has done a few and he told me, generally speaking, $75/square foot. And he said he'd never deal with them again!
That is why I would not do new development for such thin margins and make it up on volume. I like value add properties more. Quicker to turn and spreads can be larger buying from the right motivated seller.
New development all the expenses have gone up including land cost. My friends build new development but very selective about locations and tenants when they do it now. Developers coming into the late cycle that are over optimistic and timeline to finish and expected rents can lose their as$. I saw it the last downturn in 2007.
Risk/reward is on a sliding scale depending on the size and scope of the project you are doing. The higher return has to balance out the greater risk ratio.
@Joel Owens you wrote above that medical is one of the few lower priced options for getting close to 7 cap and long term lease. What do you see as the general downsides to owning medical in the sub $2mil price range? Also, what’s your take on medical in the $3-5 mil range, vs other options? STNL or otherwise.
It's all about location. When we search for clients anything sub 2 million it is harder to find what I consider quality properties to own for tenant and location with return.
The properties tend to go close to asking.
When you go 3 to 5 million in price the availability of quality product greatly increases and the cap rate tends to rise as well.
3 to 5 million range I like national site down restaurants with investment grade rating. Long term 15 or 20 year leases with 2% annual increases. Cap rates usually asking 6's but try to negotiate closer to high 6's. Remember Dollar General is typically flat for 15 years just like pharmacy (CVS, Walgreens) so the dollar value deteriorates over time and location is not great with dollar stores most of the time.
So Dollar store might start out at say high 6 cap or right at 7 but it stays that way versus a restaurant getting 2% increases over 20 years the blended cap rate is much higher for return and location tends to be much stronger. Sometimes I feel buyers focus too much on the tenant, the lease, or the going in cap rate versus the whole package. There is a lot of sub standard stuff developers sell that I view as duds of a property. The developers do not want to own these properties long term so will do almost whatever it takes to sell them after being developed. The developers tend to only keep the really strong properties with ultra high quality where they have a great cap rate to cost for return.
You have to find a compelling reason for sellers to sell the good stuff like they need to recapitalize, estate sale and kiddos do not want to own real estate, divorce with division of assets, partnership break up, sponsor death and limiting partners want to dissolve and get back capital, etc.
Owning the NNN is the easy part. Evaluating tons of properties and finding the diamonds is the hard part. I sift through a lot of mediocre crap for my clients to find THE ONE.
So in the $3-5mil range, medical buildings in their own right aren’t any more or less attractive than a solid restaurant, auto parts store, etc? No extra stability to medical in decent locations? Or some unique downsides to this asset class?
Joel - My concern with a NNN restaurant is that once the lease is up, the landlord is left with a building that is distinctly a Taco Bell or distinctly a Burger King, etc.. Conversely, with a nondescript office it would seem to have more use. As an example, we have a former KFC building. When the lease with KFC expired, it sat empty for a few years before a family-owned restaurant took over. Do your investors show any reservations regarding restaurant leases?
Medical it depends on who is the operator. Is it a single doc or a medium size to larger sized company? What is the traffic county daily that passes by it? Do the incomes dictate more private payers or lower income type folks relying on medicade etc.?
Is it a brand new building or an older building on a sale leaseback? TI's for medical can be intensive. Are rents at, below, or above current market for that box size? Is the guarantee personal and corporate? If corporate is it parent corp across all locations, subsidiary, or just one location backing it, does guarantee burn off after so many years?
Mark hard to know without looking at the location. Sounds more like it Is the cold belt location that might have led to the long time before re-tenanting. In warm belt states KFC or similar box size is easily picked up by other tenants expanding. Long term warm belt states have more outward growth patterns as baby boomers migrate away from cold belt states.
It's also location dependent even in a warm belt state. Sometimes I see stuff that should have never been built for restaurant location. So it gets converted to office or something else. Sometimes developers try to hard to make a site work when it should have been a pass to begin with.