Commercial Lease Buyout

[Matt Splittgerber]

I am meeting with a broker tomorrow in regards to this question, but I was curious if anyone else has dealt with this scenario and what percentage they received.

I have a dark QSR that the operator still owes 8 years on NNN. Its a good location, and the operator is a big outfit and still paying the rent. They have approached us about a buyout of their lease. Has anyone negotiated one of these buyouts and what percentage of the remaining lease did you take as a lump to let them walk away? Like i said, I'm going to let an experienced broker negotiate this, but just curious what others have seen.

[Joel Owens]

Can't give legal advice. If it's absolute NNN leave them paying the rent. A buyout in that case usually does nothing for you unless more tenants banging down the door to lease it up right away with similar rents or higher with the same credit.

If you feel the tenant is fixing to go bankrupt as a brand then might be good to negotiate and take what you can get. You need to pay attention to sublease language and also default provisions with bankruptcy to see how the lease and tenant could be handled.

Certain items I tend to let my acquisitions director handle and other legal items my commercial real estate attorney.

Would have to see your location to see possible desirability. Remember it's not just current in place income and your cap rate on the dark space. It's what is the demand and the market doing NOW for your location. Sometimes developers get leases minted in the moment with above market rents for that building size. So that dark 7 cap could be a tenant occupied only 5% return with a new tenant if replacement rents are lower. You need to know the sales that brand was doing at that location when it shut down compared to their brand average nationally and then what the health ratio score was.

Example 100k NOI in rent for QSR you typically want to see 1 million in sales or higher (10%) at a minimum. If they are paying 100k rent and 2 million in sales would imply a 5% rent ratio to sales which is crushing it usually. Anything above 10% when you add in food and labor starts getting into the danger zone where they shut down or start asking for rent reduction help to stay afloat. Brand tenant saturation levels in the area make a difference as well. If you have an emerging market where income, population, and traffic counts growing but not as many brands their yet that can be appealing to tenants to get in and establish themselves. That way first 3 to 5 years they crush it with sales and profit before saturation kicks in from competition. Competition tends to bring reduction in average sales ticket because of coupons to maintain market share presence. I was in food for decades before getting into commercial real estate so know it well. Everyone has to eat but NOT at your restaurant! This is often lost on people with less experience in the business.