Posted by ray@lcorn on February 04, 2010 at 08:46:39:
In Reply to: Dollar General Stores posted by ohiobill on February 02, 2010 at 22:49:07:
ohiobill,
It just so happens that I used Dollar General as an example in an article about NNN properties.
The direct link to that article is http://www.creonline.com/articles/art-286.html
Please read that first because it provides background context for my comments.
Understand that with single-tenant net lease (STNL) deals the residual value is a critical component in the initial valuation. This is the "as-dark" value as explained in the article. Like a single-family house, if they don't renew, you're 100% vacant. So trying to value the property based on the income stream after deducting some arbitrary projected vacancy number is pointless.
Second, the deals you're looking at are higher on the risk scale than a new store simply because the lease is past the primary term and the renewals are short-fused, and they are not true NNN properties (more on that in a moment). A five-year renewal in the STNL retail world is a blink of an eye, because if it goes vacant it may take a year to fill the space. The risk is reflected in the market prices for new DG deals at 8.5%-9% caps, and those in renewals are 10.5% and higher depending on the market demographics.
In order to establish the likelihood of renewal you need to know the store sales figures and compare to the DG average store sales company-wide (available in their SEC reports). In the deals I've done on DG stores, some of the leases provide annual reporting of sales figures, some don't. As far as I can tell it depends on how savvy the original developer was in demanding the right to the sales figures. I would also recommend analysis of the market demographics as to population, employment and income trends over the past 3 years and a 3 year projection. A market with falling demos is riskier than the opposite case.
Given that most DG stores are steel buildings built on second tier sites, the most likely scenario for a replacement tenant is a local service type business, perhaps office/warehouse use. This again is part of the residual value calculation.
As to management fees, the DG leases are actually double-net (NN), with the landlord responsible for exterior maintenance of the building, grounds and parking lot and dollar limited HVAC maintenance. In most cases the work is done on annual contracts with sub-contractors. If you think you need a management company to take care of that, then be prepared to pay a 10% surcharge over the actual cost. The lease payments can be set up for direct deposit into your account, so again, no need for fee management to collect the rents.
For loan underwriting purposes the management fee will be at the lowest end of the market rates where the store is located. In my market that would be about 3%.
ray
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