New Development

[Adam McLellan]

I've been seeking to sign many new leases for my growing restaurant chain. Largely due to a larger competitor ousting my bids (has a corporately guaranteed lease.) I'm running low on good opportunities to expand to. Any advice on how to get a better ear on new developments. We are open to most of Orlando but really interested in Lake Nona, Oviedo, maitland, and ocoee.

[Joel Owens]

Hi Adam,

That is tough.

You have to figure in simply paying more in the lease to make yourself attractive to a land owner or a developer.

You have to see it from their perspective. I am buying the land to develop the parcel out. As the developer I want to extract the best value for the "highest and best use" of that parcel.

I have what is called my "5 levels" of security.

1. Parent corporate guarantee on the lease backed by a BBB- or better investment grade company. ( think thousands of locations guarantee this one location so it does not matter it loses money as they still pay the lease to protect the credit rating and borrowing power etc.)

2. Subsidiary of parent corp. ( think Taco bell with 200 locations in one state etc.)

3. Large franchisee with a track record and hundreds of stores.

4. Small franchisee with a new store or stores.

5. No franchise concept ( Joe's tacos ) being lowest security and hardest to finance.  

The developer has their all in costs  for cap rate and then the selling cap rate to an investor buyer putting 25 to 35% down on the primary lease for the income stream. The stronger the national tenant and guarantee the lower cap rate generally the developer can sell for.

If I have to pick a smaller unknown restaurant local to  a market in expansion mode versus a national one I have to get a lot of concessions from the restaurant. A national tenant might agree to 1 percent annual increase to 1.5%. A local restaurant needs to be at 2.5% to 3% annual increases to make it sellable for a developer and appetizing for an investor to purchase from them.

If I get a corporate guaranteed Taco Bell at a 7 cap for  a new lease with 1.5% annual increases that can be a great deal. In that case likely 25% down to buy a property as an investor.

If it's a small franchisee I want to see a higher cap or 2 to 2.5% annual increases because a lender will likely want a higher DSCR and 35% down to offset risk of the less desirable guaranteed operator.

If you are not willing to put in annual increases that are hefty to land the best locations then you will need to settle for the less desirable locations to structure the lease the way you want or lose out to national companies.

Two opposing forces are your risk as a growing restaurant and my risk as a developer.

You might or might not see restaurants as wanting to split out risk. Say you have 100 restaurants. You might get advice from your attorney to create subsidiaries for small groups of restaurants so that the bad ones can be dumped without affecting the good ones.

As a developer I take the opposite view. I want all your stores and you guaranteeing personally the lease. I want to see audited financials for all stores to see the health of the organization. Are they growing too fast and too soon? Will they go boom and bust?? How deep is the operators pocket with a personal guarantee and will they be able to float the business for awhile if problems occur?? Is the sales to rent ratio annually at 10% or below??  ( example 100k annual rent on 1,000,000 or greater store location sales ).   

I want the most security I can get from the operator. I want to know if this location the tenant signed a lease on becomes a dog it won't matter if it loses money because I the landlord have their flagship stores on the hook making bank propping up my lease revenue stream to get paid.

It's a tug of war to find middle ground between the developer and the operator to do a deal.

Hope it helps.