Getting NNN tenant for commercial land

[Danny N.]

I have a property on a somewhat busy 4 lane street that has VPD count of 18,000 and 5 mile population of 192,000 according to a listing close by. Is that high or low in terms what companies are looking for? What I'd like to do is do something with the land, it is currently a tire shop and the business is shutting down. It is 31,000 sq ft of land and there will be no structure I will knock it down, its a cheap and small office.

I would like to build something and have a big name lease it, its right next to alot of businesses and a neighborhood and there isn't much in the form of fast food near by. If that isn't an option, how would I go about beginning to look at building something on the land. Would I contact a local broker like marcus and millchap and ask them for advice and someone to help me or what?

[Joel Owens]

Hi Danny,

I am a commercial principal broker and also a retail developer as well. I am very familiar with the Texas market.

The main concern first is that since you had a tire place on the site after you get them out you need a new phase 1 environmental on the property. If you have contamination it can cost a lot to clean up.

Second you need to update your survey. With the survey you should get a CAD file. Your engineer firm will take the CAD file and overlay various building configurations with the site. 31,000 sq ft is about .71 acre. With buffers etc. probably all of that land is not usable so maybe .50 acre.

Likely on that site you could fit a building with 2 tenants in it or one stand alone fast food type building. The fast casual restaurants generally sit on larger sites.

Do you have the corner? Is it at the red light or stop sign if you do? If you do have the corner could you buy and assemble other land pieces around it to make it bigger?

5 mile radius while important means nothing compared to 1 mile radius projections. VPD of 18,000 is decent but not fantastic and it will generally qualify for fast food. 

18,000 cars a day you need to check with the department of transportation if traffic count has stayed the same year over year,gone up, or gone down? Additionally you need to check on how many vehicles a day pass by your land? You could have 18k cars a day on the street but 12,000 are on the other side with the median and your side gets only 6,000.. big difference. You also need to check how many current lanes the road is 2,4 etc. wide? Check for any upcoming road projects and when that would start? Typically once road work improvements are complete for your area it is a benefit unless the traffic is diverted away with the improvements from your road decreasing traffic in the future or making the road wider will have the DOT take part of your land adversely impacting what you can fit on the site. Potential tenants generally do not like going in while big road construction is ongoing in front of the site because customers are lazy and do not want to work to go to a place. This is different from road work for a development versus road widening from the state,county,city that is slated for a 2 to 3 year completion but takes 5 or longer because of funding issues or project plan problems that have to be modified to be solved at additional cost and time.

A key is access to your site. Is there an easy turn in for your site? Is there a median where you have to do a u-turn to get in? Even if 18,000 cars a day go by are you on the going to work side or going home side? This is important for a restaurant concept that typically does a big breakfast or lunch versus dinner business.

To get rent per sq ft comps you can expect you would look at STNL rent rates in that area with other fast food properties for sale on NNN lease and see what they are paying per sq ft but would have to adjust for location etc. to make sure yours is similar.

Most restaurants do not like going above 10% expected rent to sales ratio. So let's take for instance a Burger King. I do not know the stats right in front of me but say the average Burger King nationally does 1,000,000 a year according to the corporate site.

10% of that for a lease would be 100,000 annually NNN. Anything above that once you add in food and labor a restaurant can get in the danger zone. So say a 4,000 sq ft Burger King would be 25 a foot for the lease.

To determine selling cap rate you would need to look at who is going to guarantee that lease when you build.

Highest:

1. Burger King corporate for all stores

2. Burger King subsidiary where say hundreds of stores over multiple states back the lease instead of thousands

3. Large franchisee with hundreds of stores and decades of success in the system.

4. Small franchisee with just 1 or 2 stores starting out.

The lower you go on lease guarantee typically the higher cap rate you have to sell for on the more a buyer has to put down with a lender for the debt service coverage ratio on the loan. Lender know risk levels and will give terms and rate accordingly. When you build you have a construction loan and then convert to perm later on as a developer or you can just sell off right away.

Say on a new build for a Burger King the cap rate is 6.5 percent. That is about a 1,535,000 resale price. You already own the land.

Figure just as an example:

4,000 sq ft at a 100 a foot for exterior and site work = 400,000

Interior TI tenant improvements of 40 a foot = 200,000

Legal and other items = 100,000   

700,000 total cost in

1,535,000 sale price to an end buy and hold investor on the lease payments from the tenant

1,535,000 X .06 commission = 92,100

Closing costs = 30,000

Let's just make the cost 150,000 to be easy. 

400,000 + 200,000 + 100,000 + 150,000 = 850,000

1,535,000 - 850,000 = 685,000 profit before taxes