How can we know if a corporate will renew their lease?

Question

I am looking to buy a commercial building in Texas with several tenants and anchored by a corporate one. Their lease has 2 years remaning and several 5-years options. In short, if they renew 2 years from now then this is a good deal. If not, it can be a bad one as they accounted for 70% of income and building was designed for them with a drive through.
How can we know if theyy will renew? We can camp outside and count customers but any market intelligence services can provide that data?
Thanks in advance.

Paul Falbo · Answer

Hi Quang:

Hook 'em Horns and welcome to BP.

Options to renew, by their nature, benefit the tenant only.  Once negotiated into a lease, the tenant may, or may not exercise their option(s). It is their option.  If the rents specified for the option periods are too high, then the tenant can negotiate a better deal to stay.  Landlords may call their bluff; but, then they usually have to negotiate a new lease and pay commissions.  I've seen both ways and a couple in between.

Usually, option provisions specify the rent structure for the option periods, or a means of establishing the rate such as "market rent" or "to be determined by independent appraiser(s)."

First, you could simply ask the corporation's Director of Real Estate.  You could ask the franchisee, if it is a franchise operator as opposed to a corporate store.  Neither are required to answer your phone call, nor, are required to give you an answer. And, the answer they give you may not be truthful, or valid in two years.

I would look at the original term of the lease, without options, and if they have been there for 8 years, and traffic is good, then you MIGHT be able to discern that they would want to stay.  If, on the other hand, a newer, bigger competitor in the neighborhood might portend the tenant's slow demise and eagerness to complete their original term.

Another way of gaining insight is to go to the restaurant and speak to the manager.  Ask them how the store is doing, how long he/she has been a manager there, who their target market is, etc.  A lot of managers like to talk.  Maybe the owner will be there.  Maybe the tenant doesn't like the current ownership....maybe they do.

Go there during off peak hours, and purchase a drink or some food.  You can be your own secret shopper.

Look at the immediate neighborhood, the competition, ingress, egress, location, etc., and supporting demographics for the use. Look for articles about the tenant.  Speak to customers and ask them about the service.

Is this the original tenant, or is it a second generation tenant?  Does the operator have other locations.  Is it a regional or national brand?

Austin, and Texas in general, is a good place for retail, and real estate investments; but, I would always remember the adage of Location, Location, Location.

Paul

Joel Owens · Answer

Hi Quang,

Welcome to Bigger Pockets! I love commercial real estate and getting these questions as mostly there is a bunch of residential stuff here.

Is this an anchored shopping center, unanchored?? How is this property structured with it's leasing?? Is this is a ground lease purchase, NN, NNN structure??

So is the large corporate tenant the only one and the small ones are mom and pop??

Is there a co-tenant anchor clause whereby if the anchor tenant leaves the other tenants can break their lease?? Usually there is because without that extra foot traffic sales go down at the mom and pops and they can't pay their lease rates or you have to give concessions for them to stay.

How is the credit of the corporate tenant?? Are they investment grade BBB- or higher or just credit grade ?? Is this a normal location or them or did they build in an unusually location for the area and now they are looking to move?? Does the store appear run down on the outside and inside or did the corporation just put a bunch of money into (re-imaging the store)?? This is usually a clue they might be staying if just 2 years left.

Is the landlord responsible for repairs?? The tenant might keep the run down space as a bargaining chip for the landlord to do major TI upon the option or a rent rate reduction. Does the lease structure spell out what options there will be for renewal and is it tied to the CPI index?? Generally you do not want rent rate set at more than 10% of gross sales and ideally 8%.

Franchisees it is usually easier to obtain sales but some corporate stores  have a provision in the lease where they will not give out sales figures at all. You can ask the tenant to renew an option period early as a condition of you buying the property. When you ask for this generally the tenant will ask for something in return for making the commitment earlier than they are required to.

If you post the property here or contact me I can give my opinion on it.

Hope it helps.