STNL as first investment
I’m looking to buy properties on my own and have thought of buying STNL in my local market. What are some things to look out for?
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Make sure the lease is iron clad. A STNL is essentially like a bond. Assuming it's an investment grade credit, you're basically investing in the credit quality of the tenant. If you're buying a Starbucks for a 5 cap, you better hope they'll stick around. Check the lease terms. Also make sure if they do vacate then you can refill it at a similar rent psf. Some rural markets have starbucks paying like $60 psf when the market rent is like $20. So basically if they vacate you would be screwed.
Even then, the intrinsic value of the real estate is the most important thing. Never buy net lease properties on the credit worthiness of the tenant alone. Investors like to think of them as bonds, but it’s still first and foremost a real estate play. Always think of your end game… If you buy a Starbucks at 50 bucks a foot and they bust out, or decide not to renew, who will you back fill the property with to replace the rent?
A prime example is Walgreens. For the longest time they were considered the Belle of the Ball in terms of net lease investment because of their investment grade credit, their great locations in prime markets, and their corporate guarantee behind their leases, which have always been way over market. They signed nice long 15-25 year absolute net leases and traded for very low cap rates.
Well just this last week, it’s been announced that Walgreens’ bond rating has just been cut down to Junk Status, due to their high debt relative to earnings and risks associated with its push to offer more healthcare services. A lot of their stores will end up closing and due to their corner lot locations and square shaped buildings, backfill is going to be tough and they may get 1/2-2-/3 of the rent per foot that Walgreens was paying. Cap rates are already starting to rise on those offerings , and whoever owns a Walgreens property will be screwed if it’s not backfilled properly.
Who actually is signing the lease? Starbucks, Inc. or Starbucks DAL Store#45309 LLC? Best to get the actual parent company signing or backstopping the lease.
co-tenancy clause. Grocer sucks and leaves? tenant can terminate their lease
AIPlacer for cell phone traffic, compare to other stores in area
Drug store? It needs to sell liquor
Bank? Compare deposits to other branches, this data is publicly available
Check the reimbursements, you might even get some lift through admin fee.
Do they report sales? Check the occupancy ratio
Make sure lease includes SDNA and clause requiring them to provide estoppel
Check what sort of maintenance agreements are part of the HOA if it exists as a pad within a larger shopping center.
Franchise? you're not leasing to a national tenant, that some dude trying his hand at the QSR business, structure accordingly.
They are okay for ease of ownership but are usually best for covered land plays. Make sure the lease is true/absolute NNN with zero landlord responsibility. Best stnl deals are ones that can easily be backfilled so avoid Walgreens/cvs or some QSRs (Sonic, Starbucks, Dunkin, etc).
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