Advisory: Investment Risk on single-tenant properties with long term lease.
Investors normally prefer long-term leases on single-tenant properties, e.g. Walgreens. They are concerned that the tenants may not renew the leases when the leases expire if the leases have just a few years left. And so, these properties tend to have lower cap rate, e.g. 6% when the leases are relative new, i.e. have 20-25 years left. The cap rate tend to be higher, e.g. 7% when the leases have 5-10 years left. This simply means properties with new leases have a potential risk of depreciation. They may be bought at 6% cap and sold at 7% or 16% reduction in value!
If the business is profitable, the tenant is not going to simply shut down the location just because the lease expires. You can tell if the business is profitable by reviewing the P&L’s statements (Profit and Loss) of the tenant. However, the P&Ls are not always available and so rent to sales revenue ratio is an indicator of profitability –- admittedly not a very precise indicator.
Conclusion: by choosing a property with 5-10 yrs left on a lease to a credit tenant with a profitable location, you will be able to avoid the potential risk of depreciation. In addition, you will get better returns and the security of a credit tenant.
1. Office Building in Cedar Hill, TX: 76,905 SF 3-story class-A 3-yrs old modern office building on 3.54 acres lot in high-growth, high income Dallas suburbs. Easy access to hwy 67. Surrounded by Wal-Mart, JCPenney, and 725,000 SF Uptown Village at Cedar Hill. 61% occupied. NOI not avail. $7.95M. Just over $100/SF.
2. Retail center in Pelham, AL: 74,008 SF neighborhood center built in 2008 on 9.35 acres lot near I-65 in fast growing middle-class Birmingham suburbs. Anchored by 45,600 SF Publix Supermarkets with over 1000 stores in the US. 93% NNN leased. In place NOI $970K/yr. $12.76M. 7.6% cap.
3. Strip Mall in Austin, TX: 5010 SF strip center built in 2008 on .64 ac lot. 100% NNN leased to 4 good tenants. NOI $115K/yr. $1.439M. 8% cap.
4. Apartments in Lake Worth, FL: 51-unit apartments on 1.24 acres lot just a short block from the beaches. 90% occupied. NOI $231K/yr. $2.4M. 9.6% cap.
5. Shopping Center in Sacramento, CA: 64,171 SF shopping center on 4.62 acres corner lot near Kaiser Permanente - Sacramento and Hwy 99. Anchored by 54,128 SF Food Source grocery (owned by Raley’s, a regional chain). 100% NNN leased to 9 tenants. NOI $540K/yr. $6.59M. 8.2% cap.
6. Shopping center in Pasco, WA: 117,030 SF shopping center on 10.4 acres corner parcel. Anchored by 3 national tenants: Albertsons Supermarkets, Rite Aid and Dollar Tree. 96% leased. NOI $780K/yr. $10M. 7.8% cap. WA is a state with o state income taxes.
7. Sonic Restaurant in Bonney Lake, WA: 2961 SF restaurant built in 2009 on .68 ac outparcel to Lowe’s in growing middle-class Seattle suburbs. 20 yrs absolute NNN ground lease (land is for sale) to an operator with 38 locations. NOI $90K/yr with 10% rent bump every 5 yrs. $1.335M. 6.75% cap.
8. Rite Aid in Reading, MA: 13,611 SF drug store on a corner lot in affluent Boston suburbs (AHI $99K/yr in 1 mile). 20 yrs NNN lease. NOI $303K/yr with 10% rent bump every 10 yrs. $3.469M. 8.75% cap.
9. KFC in Kingman, AZ: 2866 SF KFC in front of Wal-Mart and across from Kingman medical center. Strong sales of over $1.4M/yr. New 15 yrs absolute NNN lease. NOI $112K/yr with 6% rent bump every 5 yrs. $1.445M. 7.75% cap.
10. Strip Center in Meridian, IL: 4500 SF strip center on .8 ac outparcel to Lowe’s in growing and high income (AHI $87K/yr in 1 mile) Chicago suburbs. 100% NNN leased to 3 tenant. NOI $74K/yr. $923K. 8% cap.
© Transmercial 2011.
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