Burger King moved out but still has 10 years left on lease - how to flip and profit?

Question

Hey guys,

I ran by a deal where BK moved out but still has a 10 year absolute NNN lease in place. They're paying about 20% less then market rates. I'm wondering if I were to purchase it, would BK pay a fee upfront to break the lease? Is there a standard percentage fee they'd usually pay? Has anyone ever came across this situation?

I'm thinking of purchasing the property, finding another equal credit tenant as BK or better to lease the building at a slightly higher rate (about 15% under market right now), then having BK pay the fee and ultimately selling the property.

It's a great area with solid demos and many other national on the same block, no clue why they couldn't survive.

Thanks

Dylan Tanner · Answer

i agree, 6.75 isn't good. he purchased it last year for a price that doesn't give him much room at all to lower his price and he's not super motivated to sell it at a steal since he has the cash flow. i agree with your opinion on lower the price, but since I can't do it, i may have to end up brokering it and make the commish! thank you sir.

Joel Owens · Answer

For QSR food restaurant a 6.75% cap isn't good at all. You can hit 7's on brand new 15 to 20 year leases for food. 2% bump is good per year. I have seen as high as 2.5% to 3 but that was for a single franchisee which carries much more risk on the guarantee. Most times it is 1.5 to 2% annually for corps. Sometimes they will throw in a crappy 1% annually but if purchase starting cap is really high then it average out to close to the same return as the higher bumps over times. As the years go down on the primary term the selling cap to exit goes up because if not an all cash buyer the lender will only count years left primary for amort. schedule and basically double the length term at best. I would knock the seller down on price to limit your all cash risk and increase going in cap.

Dylan Tanner · Answer

10 years until options kick in. 10% in 5 years cap rate is 6.75% free and clear, but he doesn't want to finance. penalty, i'm thinking $100k. 10 years left equals about 700k.

Joel Owens · Answer

How many years left on the primary term before options kick in?? What are the annual rent bump percentages in primary term?? The price the landlord wants to sell at what current cap does that come out too for the income stream of the lease?? Does landlord own free and clear OR is there a loan in place that must be assumed or can you assume the loan with less equity cash down than retiring the loan outright?? Why hasn't the landlord approached BK to pay a penalty yet?? What kind of penalty would you be going after BK for to break the lease?? Example if 8 years primary left and total payout with rent bumps is 700k how much are looking for in a penalty break fee?? To get a feel you would need to talk to BK corporates lease administration department. Many times they will tell you they will only talk to the current owner of the property and will not speak to you. You need to find out what the landlord has tried so far. I would imagine the landlord is selling because they have already tried some avenues you have mentioned but maybe not. It depends on if the owner is a developer, seasoned multi property owner, a REIT, or just an individual with one or two net lease properties and little experience.

Dylan Tanner · Answer

@Joel Owens , To answer some of your questions: - it's guaranteed by BK corporate - LL contacted me directly wanting to sell and I told him I'd buy - it's currently in the primary term - this is an absolute NNN lease I'm partnering with a good friend to purchase the property cash. When running my analysis, the only downside I see is I will only profit if BK pays a penalty. If I flip it without BK paying a penalty, I'd just break even and that's whats making my draw back a bit. For the reason of relying on BK to pay a penalty to profit, I may just broker it to another buyer and make the commission on it. So I've got few options available.

Joel Owens · Answer

You have to find out of BK moved to a better location and then is going to sub lease that location to someone else OR did that location go out of business?? In NNN you have the primary term of the lease and then the option periods. You would need to make sure this lease is not a ground lease or a NN lease as that affects the returns greatly. This property for Burger King could have been a individual franchisee store, a larger franchisee, a subsidiary group of parent corp Burger King ,or a guarantee from Burger King itself. Makes a HUGE difference who is guaranteeing the lease. The corp BK will generally not default on a payment because they want to protect credit rating and borrowing power. A franchisee that is failing might not care about such things. Why would they move and still pay for an existing lease?? The reason is when they entered a market that might have been the only location possible. Now they located a premium location and have to jump at it before it's gone and cannot wait until the end of their lease to expire. In these cases they will just sublease even if not for full lease amount until the lease ends or pay the landlord a penalty to exit the property early. The landlord may not let them out if they think the building needs a bunch of work to re-rent with time and money. Really BK doesn't need you to work out options with the existing landlord. Do you have money to pursue such a property??