How to avoid getting screwed?

Question

Have been keeping an eye on some vacant land near where I live (Chicago, IL). Former auto repair shop. Current owner demolished the building and did a Phase I, which came back clean. Original plan was to build a Starbucks with a drive-thru, but the City didn't approve the special-use permit required after strong opposition from neighbors who were concerned about traffic congestion, pollution, litter, etc.

Starbucks withdrew its plans because the proposed site was a relocation of an existing store nearby. Without the drive-thru, it wasn't worthwhile for the coffee chain. Not to mention bad PR. Owner is asking for $600,000, but the RE broker said the seller is definitely willing to negotiate. I can easily get for $500,000, if not $450,000.

Here's where things get interesting. There's a Popeyes franchisee that's looking to add more stores in the area. The guy operates about 3 locations in the area. The nearest Popeyes from the site is 5 miles, which is owned by the franchisee I'm referring to. I reached out and he said he would happily be a tenant if I find a location he likes.

Based on my quick-and-dirty analysis, fair market value is $80,000/year NNN ground lease. Conservative 6% of sales. The CAP rate would be at least 13%-18%. Wouldn't mind holding or flipping.

So I have a location and tenant identified. Property is under contract for full asking price (will negotiate once Popeyes approves site). 120 due diligence period with multiple contingencies. No earnest money, but showed partial proof of funds (which would be down payment to lender).

Since there's a HUGE FOR SALE SIGN on the vacant lot, how can I prevent being bypassed when the franchisee is given the address to do a drive-by?

Greg Dickerson · Answer

You are going about this entirely the wrong way. You need to be honest and forthright at all times with everyone you do business with. You will never make it in business being dishonest and misleading people.

Bruce Petersen · Answer

@Armaan Hooda

As you have now heard form many people in this thread, you feel shady and misleading. This has the potential to blow up in your face and can tarnish your reputation.

If I were on the other side of this from you I would likely never deal with you again.

For what it's worth, I have never re-traded a deal, ever. As an investor you don't have to renegotiate as you mentioned. If the deal works at his ask I just close, there may be future dealings with him or the broker in the future if you prove to be a good buyer. Quit thinking you HAVE to win in the deal by re-trading, I don't like dealing with people like you as I don't feel I can trust you.

You seem to dismiss everyone that brings this thought but many have said the same thing in some form, I think you should listen to the advice you are receiving.

Greg Dickerson · Answer

If the property was sold for $3 million it had to include the building which did cost the developer to build. Otherwise it would have been a land lease sale at a much lower price.

The best way to handle deals like this is to know what the tenant can and will pay. You can find that out without disclosure of the location. Once you have an idea of the potential income you then get the property under contract with a feasibility period, non disclosure non circumvent clause, contingent on you finding a suitable tenant at your rates. You can tie the purchase price to the value of the lease, density, number of units etc. The key is to be upfront and honest about what you plan to do.

Bruce Petersen · Answer

Interesting that he closed his account after this?!?!  ;-)

Armaan H. · Answer

Account Closed

Based on the fact that the chain is growing in Chicago, but doesn't have a location in the immediate area. Property also fits Popeyes' site criteria in terms of size, traffic count, population, etc.

Franchisee is interested in the area, but whether franchisee and corporate like particular location TBD.

Account Closed · Answer

How did you know popeyes was interested?

Greg Dickerson · Answer

Yes in a ground lease situation the tenant will pay for and do their own construction.

Yes you can look at comps in the area but every national chain has a real estate department and they will tell you what there criteria is and what they are able to pay in certain markets. You can often find it on the corporate website. They do not beat around the bush or play games so just tell them you are working on some sites in the city not the exact site and they will tell you straight up what they can do. They will already know the demographic info but you could provide traffic counts.

Armaan H. · Answer

@Greg Dickerson

Got it, but what if it was a ground lease? In that case, the tenant does it's own construction, right?

Also, how do you suggest I find out what tenants are willing to pay without disclosing the location? Are there lease comps or something?

Armaan H. · Answer

@Joel Owens

Now this is great advice, thanks Joel.

You are correct that Popeyes' newer stores have drive-thrus. I'm banking on that it's NOT a must have requirement as it was Starbucks.

The nearest Popeyes doesn't have a drive-thru, but seems to do a good amount of business. Based on average unit of sales of $1.3MM, Popeyes should be able to pay about $80K in annual rent.

For new construction/new lease (10 years/NNN), I feel the final product can go for a 7.5% CAP rate given current interest rate environment.

A small time Popeyes franchisee is not of the same strength as a behemoth like Starbucks. But the Popeyes brand is a strong one, with an extremely low failure rate. Popeyes is still growing and Chicago is a long-time strong market for the chain. Popeyes is publicly traded under RBI, Inc., but corporate doesn't guarantee franchisee obligations.

The franchisee will have to invest north of $1MM if he decides to move forward. Talk about having skin in the game. His investment will naturally increase the value of the currently-vacant lot.

Armaan H. · Answer

@Jeff Cagle

The contract is for full asking price. Its a placeholder until I can come up with a precise offer. Seller knows this.

What kind of real estate investor are you if you don't expect me to negotiate?

How am I suppose to make an offer if I don't know what I'm working with? Maybe Popeyes is willing to pay only $40,000/gross lease. Kinda the point of DD. You think I'm gonna pay $600K if that's the case?

If Popeyes agrees to $80K/NNN do you think I'll walk away from a 13%+ CAP rate?

So there's nothing sleazy here. Maybe I wasn't clear enough for you. If the seller doesn't like my revised offer, he can tell me to f*** off, and I'd be fine with that.

By the way, negotiating during DD was an idea I read in a BP discussion forum.

How to avoid getting screwed?

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