where to find info for negotiating NNN lease

Question

Hello,

Relative has a stand alone NN property (drug store - national tenant) and lease is currently being renegotiated.  I am in a small market - central NY.  No growth.  Believe store to be reasonably good performer.  Not really any good options for tenant to relocate store  - all seem quite a bit less desirable. Building is older.  Struggling to figure out what is a good lease rate - I don't have a whole lot of information to go on - obviously tenant knows what they are paying everywhere.  Not a ton of commercial property nearby to compare. Current lease rates are significantly higher than nearby strip.

Ideally would like to figure out what a comparable store would be paying in rent but not sure how to do that.  Any help would be appreciated.

Joel Owens · Answer

What do you mean lease is being renegotiated??

Is this CVS, Walgreens, or  Rite Aid??

The lease rate is generally set by annual sales for a drug store. Anything over 10% is a caution.

Generally lease provisions are set way in advance. 15 to 20 year term with options spelled out. The pharmacy sets this up so that when options come up they either exercise or not and landlord has no leverage. So the fact there is a renegotiation going on is troublesome. The pharmacy wouldn't do this unless sales were down and they wanted to pay less. If the landlord wanted them to pay more the option would already be spelled out in the lease.

The fact this is NN it sounds like the pharmacy might want a bunch of expensive improvements to stay. The fact the lease rate is cheaper than surrounding isn't deciding factor for a pharmacy. They will gladly pay more for a better location even if rent is higher because sales increases to offset it.

Without being involved in your deal or knowing the specifics it would be hard for me to comment further. Is your family trying to sell this off now or in the future?? If so that is another component you need to consider. I review pharmacy leases all the time for clients looking to purchase or sell. Components in the lease affect financing and future value. I have seen some crazy leases where a Walgreens has a 7 cap but in the option period no rental increases for 40 years which is insane. The only time you would buy such a product is for tax purposes. The lease is almost everything in NNN and it's that important to get it right.

Sam Erickson · Answer

@Brian B Take a look at Loopnet.com or costar.com.  Both are your best resources for commercial lease rates.

If your already higher then the strip malls around you I don't know that you will have much room to do anything.  I'm assuming this space is much larger then the spaces for lease in the strips, if that's the case typically the per sq. ft. lease rate is lower for a larger space.

Any national chain is going to have their own formula to figure out what they can pay in rent.  For example I work with a Sandwich chain with about 130 stores as their Real Estate Manager.  Our number is 10% (very common for most QSRs). This means we can pay on an annual bases 10% of our gross sales.  Anything above that the deal won't make sense or would have to make up the difference else where with labor, GOGS, etc. Often times these areas area already running very lean and there isn't anything to take from.

Don't necessarily let the fact that there aren't any other "good" options around you think you can get more then you can.  Building new is always an option for the national guys.