Planning Your Exit Strategy

 

Most times, when we determine the best property for our clients to purchase, we emphasize the importance of not only the entry strategy, but also, just as important, is the exit strategy. Normally, when an investor purchases a NNN restaurant property, the most important focus is how to get in the deal and how much will it cost. We ask you to take a half step back, just momentarily, to look at how we position our clients for long term success.

We believe that the Exit Strategy is just as important as the entry strategy and here’s why:

At Marcus & Millichap, we do two things and we do them more effectively than any CRE firm in the nation. We build and preserve our client’s wealth. While it is imperative to thoroughly examine each property’s worth for our investors based on their acquisition criteria and coupled this with the dozen or so variables that are factors in the overall value equation, it is also crucial to be able to measure what the property will be worth in the future.

Because of our extensive restaurant brand and tenant knowledge, we are privy to certain information that most brokers don’t have access to. If we know that a certain restaurant franchisee has a pattern of dividing their portfolio into subsidiaries and smaller lease guarantees and the language in the lease is ambiguous and provides them this option, we will factor this into the future value of the property’s worth. Simply put, when a lease guarantee is reduced from a massive franchisee guarantee to a smaller regional subsidiary guarantee, the restaurant’s lease and real estate value is negatively altered. We often advise our clients away from this type of scenario. Conversely, we have also experienced the opposite trend. Our experience has shown us that certain restaurant corporations are reducing the amount of total franchisees they communicate and do business with. As a result, they offer financial incentive for the smaller Mom & Pop franchisee to sell their business operation to a larger regional franchisee. They also offer financial incentives for the larger company to purchase those businesses such as extensions of the franchisee agreements for a reduced cost. This play increases the value of a Restaurant Property as the larger restaurant guarantee increases stability and worth due to the size and history of the larger company.  These are just two examples of what we commonly experience and are able to steer and advise our clients accordingly.

As restaurant specialists, we know this category more precisely than “Catch All” brokers that not only handle other retail categories, but also other completely different product types.

Let’s talk about lease length:

There is definitely a “Best” time to purchase a restaurant asset. We know that there are lease trigger value reduction times. These are defined as increments of time in which the lease reduces from a “5” number to below. Please allow me to explain. When a lease term reduces from 20 to 19 years, 15 to 14 years, 10 to 9 years and 5 to 4 years, the value perception dramatically alters the worth. We have seen properties lose over 50 basis points literally overnight and 35 to 45 basis points is typical. This is why we target properties that have just come out of one of those value reductions for client acquisitions. If we can pursue and secure a property with 18 or 19 years remaining on an original 20 year lease, that is the best scenario. It is exactly like driving a brand new car off of the lot. You know the saying, “That car just lost 10% of its value without traveling one block.” Why do many savvy investors buy cars with one or two years on them with ultra-low mileage? It’s because they allowed the original owner to take that loss and they purchase the car, virtually new, but at a discounted price.

SMART!!!

The same theory applies with NNN Restaurant Properties.

Now that we covered entry strategy, let’s talk about exit strategy:

The same property that you purchased with 19 years on the lease, we will recommend that you hold and cash flow for 8 ½ years, until the lease term has 10 ½ years remaining. Then, as your broker, we can list and transact this property at the absolute highest price by promoting the fact that there is an impending rent increase (which is most often the case every five years), and the perception will be a secure lengthy 10+ year term. With this strategy, you are on the positive side of the “5” number and transact the property before it loses significant value.

When we secure your property acquisition, we always provide the best-case scenario as to when to sell and exit that same property you are buying to maximize its value and your equity. Most brokers do not employ a long-term approach with their clients and are simply focused on the single transaction. Many of our most successful NNN restaurant property clients execute this strategy over and over. It truly assists them in “Climbing the Ladder” one rung at a time and has proven to be extremely effective. In fact, many have shared with us that this one strategy is responsible for much of their wealth.

Because we have the largest inventory of properties and buyers in the nation, our ability to access and secure a property for you with the right “formula” is compounded and multiplied. This fact coupled with our specialization of restaurant properties allow us to guide our clients like no other broker can. We always joke that we are the brain surgeons of restaurant and it really is true!

We build long term relationships with our clients. We are not simply seeking to secure one transaction, but instead take the time to learn about our clients and their goals and long-term objectives. We enjoy investing our time in our clients to learn as much as possible, so we can most effectively guide them to successfully reach their destination.

Above outlines just a few strategies and perspectives that we wanted to share with you. It’s no mystery that the majority of our 30 almost thirty property closings last year were multiple transactions for the same client. We either executed dispositions or acquisitions for our client for multiple properties. Or, we handled the disposition of their property (known as down-leg) and also represented them in their acquisition of their next property (called up-leg) in a 1031 Exchange.

There is a definitive reason for this. Our clients know that they are in the best hands possible. We leave no stone unturned on our mission to provide the absolute best brokerage services for our clients. Our resources coupled with our unwavering commitment we make to our clients is truly second to none and we demonstrate this each and every week. We have the bundle of letters of recommendation to prove it! Ask to see them or a phone number for one of our many satisfied long-term clients who would be happy to share their experience.

 

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