Dollar General - Build to Suit

[Mark Dante]

Has anybody here done a build-to-suit for Dollar General?  I own a commercial property in a semi-rural area.  Although I'm not gung-ho on Dollar General (or any dollar store for that matter) as a tenant, my site's location would make sense for me.  (Should they leave after 15 years, I have use for the building.)  

It is my understanding that DG  has their own preferred builders.  Given the cap rates I've seen on these DG's, it seems the margins are pretty thin.  When it comes to negotiating, I'm sure DG  has a pretty good idea of what it will cost to build.  Further, since I'm assuming they'd require a preferred builder do the project, I'm guessing the builder would inform them of the exact cost.  

DG seems to stick to 15 year terms with increases of 10% every 5 years.  Further, I've read that DG's cost as low as $250,000 to build and the average store is about 9,000 square feet.  (That's $27/square foot, which seems extremely low.  I understand they tend to go cheap, but $27??.)  For arguments sake, let's say it would run $450,000.  And let's say I put a value of $200,000 on the land (including site work).  So the entire project  value is $650,000.  Based on the 7% cap rates I'm seeing on new DG's that are being sold by developers,  am I looking at rents of about $45,000/year (for the 1st 5 years, at least) or $3750/month.  If I were to finance 100% of the building ($450,000) at 5.25% for 15 years, I'm looking at a payment of $43,404/year or $3617/month.  Do these #'s sound about right?

So when negotiating, would DG say (a.) we are using a preferred building, (b.) the cost will be $X, (c.) the land is valued at $Y, and therefore, we are willing to pay a corresponding return to you of 7%?  By the same token, would it make sense for me to say that I am expecting a return on land of 9% or 10% so the land portion of payments ought to be higher?

In summary, I am trying to determine what I can expect from them.  

thanks in advance

[Joel Owens]

Most Dollar Generals are 1 million to 1.7 million in price nationally for new builds. Most are in weak suburban to rural locations which brick façade or stone on front and sheet metal sides and back.

They do not typically have 10% rental increases every 5 years. Instead they have flat rent for 15 years in the primary term and renewal increases in the option periods. There are only about 10% of Dollar Generals that might be okay. They have upgraded construction around the whole building and are in strong suburban locations. Cap rate instead of close to 7 is usually 6.3 to 6.5 cap because of the high quality area and building construction. Those tend to be 1.8 million to 2.5 million in price.

Dollar General usually demands to know what cost you have into the land as the owner. I have developer associates where it's a volume game. They make maybe 300k profit if everything goes right and if problems maybe 200k per property developed. As they told me it is a volume game where they know Dollar General will come back to them again and again for more sites instead of a (one and done) type situation with a commercial tenant. 

If your property could be used by a different tenant you might come out much better. I don't like flat rent deals that much because year over year inflation is eating into returns and weakening value of the existing cash flow. QSR foods typically have rental increases in the primary term. Most developers construct for a 9 cap break even and sell for 5's to 6's so after resale cost make about 200 basis point spread in profit.