Today, I’m going to take a look at the preferred type of product for most of my buyers, and frankly for most buyers on the market these days, and that is triple net or absolute net, single tenant, single parcel, corporate leased retail. We’re talking the Wal-Mart’s, Home Depots, Kohl’s on the large end. Walgreens and CVSs in the mid size range end and 7- Elevens, Circle K, and Yum Brand’s Taco Bell and KFC and similar on the smaller end. Most of the small and mid range stores are built on out-parcels as shadow anchors to the big guys such as the Wal-Mart’s, Home depot, Kohl’s, etc. They are almost always on single parcels with shared access easements for ingress egress.
It would also be nice if the property was fee simple so you the buyer can take the depreciation, but the majority of the time, these are built as fee simple, ground lease, meaning the tenant owns the building on your land
Let’s examine this in a bit more detail. Fast food and fast casual restaurants do well in both good and bad economic times. In good times, it’s simply to save time, hence the moniker – fast food. In bad economic times, consumers switch to fast food from healthier foods due to cost. When the economy is in a rough patch, the fast food sector remains stable. When budgets get tighter, families tend to make the adjustment from going out to a nice restaurant for a sit down meal to fast food or fast casual. I think with regards to fast food, Taco Bell and KFC, often dualed on the same parcel and both owned by Yum Brands (think Pepsi), is a great choice. Fast casual give us even more choices, but I would have to say that Chipotle and Panera Bread would be two of my top choices, both raving successes.
It makes perfect sense to be shopping in this segment, but what should a buyer be looking for and looking out for? In a perfect world – single tenant of course, single parcel, S&P BBB or better credit, ten year or longer corporate lease, absolute net, which ‘should’ mean no landlord responsibilities. I say ‘should’ because I mean …. read the lease and then have a real estate attorney licensed in the state where the property is read the lease to make certain it says what you think or wish it does and that the terms are enforceable in that state. You’ve all heard ‘the devil is in the details’ correct? Make sure that if you purchase that you have a tenant estoppel signed so that you know and can prove that the tenant stipulates to having read and understands the lease. I don’t mean to be preachy, but I’m not joking on this issue. If you’re putting some leverage on the property, the lender will make sure there’s an tenant estoppel signed to protect the bank, but have your attorney draft one to protect you the buyer.
This applies mostly to multitenant, but in some states as is the case with Ohio, CAM charges have to be delineated item by item or they are not enforceable. Regarding triple net, NNN, single tenant type lease, the best situation is an absolute net lease or a bond lease where the tenant direct pays all the expenses and there’s no direct landlord involvement.
Normally, what I look for in a property is one fresh from the developer with the triple net tenant moved in and settled plus the ‘punch list’ items taken care of. Problem is that the developers have been building very little new product.
Since this the hot product type in 2012, I’m going to do several posts on this type of product in the near future