Best NNN ? What’s the ideal cap rate in Midwest restaurants?

Question

Hi, I’m a newbie to NNN. Looking for consistent cash flow on the invested cash. What’s the good cap rate range? What is the current interest rate on LTV 70-75%? I’m focusing on restaurants for now.

Jacob Dawson · Answer

Hey San, I am a retail broker based out of the Chicago area. I specialize in multi-tenant retail, as well as STNL (Single Tenant Net Lease)/NNN. I would say you should ask yourself how safe of an investment do you want? With the QSR (quick-service restaurants) or any, you run into the problem of deciding whether you want a franchise guaranteed or a secured corporate location. What's the difference? Well, let me give you an example. Let's say we have a KFC restaurant chain operated by an operator who runs three other KFC locations in the area. If the lease is a franchise guarantee, then your lease is only backed by the other three restaurants (super risky, and you probably won't be able to get a loan for one of those deals). However, if you go for a KFC that is corporate-backed well, let's just say for the remainder of your lease, you'll be getting cash flow. With a corporate-backed lease or corporate guaranteed as we call it even if the operator goes bankrupt, the corporation that owns KFS (YUM! Brands) is responsible for backing the space with another tenant. A corporate guaranteed lease is your best bet. Additionally, a corporate guaranteed lease will have a lower cap rate.

I hope I answered your question. If you have any more questions or want to discuss this topic further, please reach out! I am happy to assist.

I hope I answered your question. If you have any more questions or want to discuss this topic further, please reach out! I am happy to assist.

Joel Owens · Answer

Dollar stores most are crap properties. Sheet metal sides and back and in locations that long term have little to any residual value.

About 10% of Dollar Stores have upgraded construction and in good strong suburban to urban core locations. No doubt the businesses likely do well in these kinds of times. Those kinds of upgraded properties tend to be 5.5 to 6.25 cap for newly minted leases and priced high 1's to mid 2 millions.

To get a low price Dollar Store in strong suburban likely not much time left on primary lease so more value add deals. You can find higher cap 7.0 with new lease but locations are weak rural areas with low price points. I don't really like those types of properties.

Additionally there are some Dollar Trees that occupy old pharmacy buildings that have great construction in strong suburban areas.

You can also sometimes find pharmacies with vintage Rite Aid leases that were converted to Walgreens when they did the partial buyout. Those leases tend to have rental increases in the option periods whereas as most pharmacy leases the rent stays flat forever.

The flat rent is really the killer on those properties as year over year the inflationary dollars for your returns can become weaker and weaker. Example 100,000 today with flat rent for 15 years likely worth 65k to 70k in future value. If someone is doing estate planning and likely will pass away before then that not that big of a deal to some as they just want a yearly return to live on and not worry about the payment increases.

It's all situational which is why I have to have one on one phone calls with my NNN clients to assess their needs versus what is the realities of the market and see if what they are looking for is possible or not.

San Patel · Answer

@Amit M.What do you mean with those keywords?

Amit M. · Answer

avoid

sheep

slaughterhouse

——————

3words

Bryan Pore · Answer

@San Patel I sent you a connect on here. We do a lot of dollars stores across the US.

San Patel · Answer

@Bryan Pore After thinking through, I'm considering gas station and dollar store franchises worth taking a look as these two businesses are very consistent in every market. Restaurants businesses are taking a hit now, I'm sure it will recover, but not sure how long it is going to take. I guess restaurant franchises may be cheap this year.

Bryan Pore · Answer

@San Patel have you thought about something like a CVS or Dollar Store. Those are pretty solid and doing so well right now even with everything going on. We sell a lot of those all across the US paying attention to good growth areas. They are pretty amazon resistant as well which is a big factor. The retail side of things are interesting right now that’s for sure.

Amit M. · Answer

Cheesecake Factory is probably trading at attractive prices now, I imagine.

San Patel · Answer

@Jacob Dawson Thanks, appreciate your reply!

Ronald Rohde · Answer

Sure, I don't think my answer implied any management duties. Either way, you don't want your tenant to be losing money.

Best NNN ? What’s the ideal cap rate in Midwest restaurants?

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