Deal or no deal on retail pad

[Robert T.]

We have a retail pad (land) on a very busy street in a hot area, surrounded by many chain restaurants.  Broker brought in a franchisee (12 stores) of a national chain QSR who wants to do a 15 year primary term, provided we put in about 400K as tenant improvement. The land is worth about 600-700K. They will build the 2000 sf building according to their corporate specs and do a triple net lease of 75K per year. Benefit is the rent, and risk may be franchisee failure and going dark, being a STNL as compared to multi-tenant or a land lease. Anyone done this kind of hybrid deal? Any advice on risk management?

[Joel Owens]

400k tenant improvement??

QSR runs about 25 to 35 a foot for interior TI. Typical QSR size is about 2,000 feet. You are at about 60,000 to 70,000 TI.

Where on Earth are they getting 400k??

You need to research the restaurant chain. They will have average sales nationally. Generally you want them at 10% rent to sales ratio including their base rent,landlord paid insurance on your behalf, and estimated property taxes. So to be around 10% they would need sales average about of 850,000 annually once all the stuff above base rent they are paying is added in. Anything above 10% having to pay food and labor costs they can be in trouble.

I would not give them blocked rent. Rental increase needs to be annually and not every five years. Needs to go up 2% or more every year. No way would I give 400k TI. Sometimes the franchisees I have heard of developer friends building out and the franchisee funding goes away and now you are left with a fractured project. Developers like building more corporate.

2,000 sq ft building is 200ft TI. That is nuts. Never heard of that one.