Family Dollar -Dollar Tree

[Margot Weatherford]

Commercial Brokers/ Investors that are familiar with Family Dollar/ Dollar Tree stores. What cap rate do you consider strong as a buyer right now when purchasing one of these locations? Every investor wants a 10% cap, but what, in your experience, is the current realistic cap for this retail chain purchase? Thank you!

[Joel Owens]

In my view investors tend to think of properties in the wrong way for NNN. I focus on the dirt, then the tenant, then the lease terms, and finally the going in cap rate.

If I own bad dirt then the other 3 really do not matter much at all. Now the KEY is to get good to great dirt at an affordable price. If you have amazing dirt but paid a crazy price to get it then if tenant ever goes dark the upside tends to be minimal but the risk is high. This is where rent per foot on the lease comes in for the location. Sometimes tenants want extra TI on new development than is standard so developer gets them to start out at inflated rent. That way for developer putting in extra 100k in TI they get 250k more (hopefully) when they sell.

5 years or less remaining on the lease those are almost impossible to finance and most are cash offers. Lenders are shoring up their books so want to see longer primary lease terms. Even credit tenants investment grade interest rates are about 6.5 to 7% right now. Banks and credit unions are having to offer very high cd's etc. to get deposits in the banks. If they are paying out 5% rates to their customers to relend out they usually need at least 150 spread to make any money.

CMBS and LIfe Insurance can be lower on the interest rates but you can get yield maintenance or defeasance which is very expensive if you want to break the loan early. Loans can generally be assumed but they can take a long time with lots of costs.

If you are buying the dollar stores stick to absolute NNN and upgraded construction in stronger suburban areas. Dollar Trees can be good ones where former CVS or Walgreens used to be. The rent is often low per foot but the location is strong corner with good traffic counts and sightlines.

Regular Dollar Trees and Dollar Generals for good locations in the current markets with good term left are going for about 6 to 6.5 cap rates. Smaller suburban markets about a 7 cap. You are not going to see 10 caps for long remaining term left. Number one sellers do not have to sell when they have 10 years remaining on primary term. They can wait it out until interest rates fall again in their favor or keep doing cash flow and loan payoff until they sell at a slightly higher cap rate later on. Number two there are about 14 million millionaires in the United States of America currently. Most are in the 1 to 10 million net worth range. As they get older they want just enough money to retire so often pay CASH for NNN assets below 3 million in price. That keeps cap rate pressure down on the smaller price NNN assets.

NN lease with sheet metal sides and back recipe for disaster with few years left. You buy at a small price thinking high cash flow yield but then do not factor to renew tenant will likely want new roof, parking lot, etc. at hundreds of thousands of cost. When you model that out it's a loser usually UNLESS dirt is incredible and you want them to leave to knock the building down and redevelop at much higher rents. If it's middle of nowhere stand to lose a ton of money long term.

Sometimes buyers still buy the crap because it's only credit tenant in lower price range buying all cash for 1 million and they think I will live off the money and the estate with the kids can have the worthless property later. All they care about is the passive cash flow today. Not all think like that but some have irrational thoughts on NNN. I only work with investors that work exclusively with me with a written agreement. Time is money and extensive knowledge in a particular field doesn't come for free.

So what am I doing with existing clients with interest rates so high that want to buy NNN with long term leases and strong tenant.

1. Trying to buy NNN single tenant where cap rate is no more than 25 basis points less than current interest rates. With 30 year amortization and about 40% down that gives about 4.5% cash on cash return before mortgage paydown. Hopefully with no to small prepay penalty on the loan they can refi in a few years with rental increases and boost yield to a stronger cash on cash return.

2. Seeing if some owners can do owner finance for 5 years at below market interest rates so you have workable spreads between debt and cap rate on purchase. This might only be 10 to 20% of properties on the market.

3. Pay all cash for the NNN property hopefully at a 6.5 to 7 cap yield. You won't get the mortgage paydown build up but usable cash flow to you right away typically higher. Paying cash the location tends to not be as strong say if 3 million cash small to mid suburban spot versus 6 million leveraging strong suburban to fringes of urban core.

4. You do a partial 1031 exchange or not at all ( pay the tax ) and invest in value add turn around deals with a syndicator or on your own.

None of what I have posted here is legal advice. I have clients buying 3 million, 6 million, 10 plus million in price properties. We are focused on the ARC CURVE as I call it.

This is where for investment grade credit tenant we are trying to time cap rate uptick on larger priced properties with good term left say 10 years plus primary term. Buy at 7 cap plus when interest rates at 6.5 to 7% Have going in 4% cash on cash but then hopefully in a few years rates dip back closer to low 5's or in the 4's. Then with rental increases and refi you likely have 200 to 250 spread between debt and cap rate with monster cash flow for single tenant passive NNN property whereas if investors waited the sellers typically sell on 75 to 150 spreads in lower debt market times. So if rates drop to say 4.5 then in lower price range properties sub 3 million the sellers likely push asking prices and cap rates down to 5 to 5.25 again.

I could keep going on and on.  

Hope it helps.