The Power of Will

The Power of Will

“Where there’s a will, there’s a way.”

This phrase, although some would call it cliché, points out that there is always a way, but you often times won’t find it without first having the will to find it.

Out of all the skills you can master, all the talents you can hone, and all of the muscles you can strengthen, your will power muscle is probably the most important. Without a strong will power muscle, all of your other skills or talents become mildly useless.

In order to make sure we are all on the same page, let’s define what will power is.

Will:

1. the faculty by which a person decides on and initiates action.

2. More control deliberately exerted to do something or to restrain one’s own impulses.

Ultimately, it is the actions we take that define the life in which we lead. It’s those actions that we will, which ultimately create our environment, our reality, and the core driving forces of our destiny.

We often forget, however, the other side of things. It’s also the actions we do not take which define our lives. It’s also the actions we don’t take that will create our reality and change the course of our destiny.

What sits at the crux of all action or inaction?

Will power.

Your life is going to happen whether you craft it yourself or just let it happen for you, but in order to craft it, you must have the will to change the future path you’re headed to the future path you envision. Then, you must use that will power to change your future possibilities through action in the present.

Will power must be used for action as well as inaction, whereby inaction ultimately means restraint. When you choose to go for a run when you’d rather sit around and eat junk food, you are using your willpower for action. When you refrain from indulging in your favorite kind of cookie offered for free, you are using your willpower for inaction.

With those thoughts in mind, I think a very simple way to view will power then is the ability to hold opposites.

When you have a certain goal in mind or a vision for the future, it can be clear the things you need to do or refrain from doing in order to attain that future, but for instant gratification purposes and the present moment, you may very likely desire to do the opposite.

Will power then is the art of holding opposites. The ability to feel a craving, desire, or pang in the present moment, but at the very same time, holding your commitment to make a different choice. Will power is your ability to make and keep promises to yourself.

Will power is that conversation you have with yourself when you set out to do something and you get to the hard part where you want to quit. Part of you says to just stop. Part of you rejects the changes you’re making and wants you to stay the same or slip back to the comfortable. The other part believes in your goal you set for yourself. The other part has a clear vision for the future possibility and wants you to attain it.

The question is:

Who is going to win?

The perpetual battle of your opposites.

Which part of you are you going to follow? The easier option is rarely the option that will yield your changed future.

You have to keep in mind that you are changing your destiny. You are changing the course of your life. It is not a single action that will change things. It’s instead the accumulation of many actions over a long period of time that will manifest that destiny. It’s forcing an action until it, not only becomes a habit that you do regularly, but also becomes part of the very essence that is you.

Do you think that happens overnight? Do you think it takes a single act of will power?

Will power, like many things, is developed through practice. Practice your will power and you will find that attaining your goals is much easier. You’ll find yourself manifesting the destiny you envision for your future.

And so I urge you to become comfortable with holding your opposites. Be aware of your opposites because they are your destiny changing in front of your eyes. Follow your opposites and make the choices that will lead you to the future possibility you wish to attain.

Strengthen your will power and you will strengthen your soul.

5 Important Characteristics of a Leader

5 Important Characteristics of a Leader

Outside of our investments, we all should dedicate some time to self-improvement. This article serves to help you grow in your leadership, whether that means with your investment portfolio, your new business initiative, or among your family and friends. Whether you’ve been elected to take the lead on a new project or you’re setting out to start an initiative of your own, you need to build a loyal team that will help you attain your goals.

Where do you start?

It doesn’t have to be complicated. Here are 5 simple words to help remind you how to build a culture, organize a system, and lead effectively:

Equalize

We all want to feel like we’re on a level playing field. That’s why dictatorships don’t work. Empower your team members to contribute in whichever way they can. This will give them a sense of ownership of the project and they will be more invested in its success. They will feel like part of a team as opposed to part of the work. Being the leader doesn’t mean giving orders, it means organizing action amongst the team that will yield the most efficient and desired results. It means showing; not telling. More specifically, showing someone a solution that they may not have seen for themselves, which isn’t necessarily unique to yourself as the leader. By empowering your team, you’re empowering them to lead. Eventually, they will likely show you a solution you would not have considered for yourself. When that happens, you know you’ve equalized.

Familiarize

Get to know your team on all levels. The more you and your team understand each other, the stronger your relationship, the better your communication, and the more cohesive you will work together. Understand each person’s personality; their strengths and weaknesses. Learn how different personalities can enhance one another and build a strong team. Understand your team from a work and efficiency stand point, then also implement fun team building activities so that you can also understand each person on a more personal level. Know their likes and dislikes, hobbies, habits, wants and needs. This is how you can come to understand their underlying motivations, justification for their actions, and how to appeal to them during project management. This is also how you build the personal relationship and turn colleagues into friends. In fact, while you’re familiarizing yourself with your team, also take the time to familiarize yourself with…yourself.

Through all of this familiarizing, you will create a strong, unified, and complimentary team ready to take on any project.

 

Organize

Systems can only work efficiently with organization. Most people work best in an organized environment. In an unorganized environment, no one has a clear idea of what’s getting done or how it’s getting done. Chaos ensues and business likely suffers. Put systems in place that organize processes and paint a clear picture for how to repeat desired results. These systems and processes don’t need to be rigid, but they must exist. Allow for criticism or constructive feedback on how to improve the processes or systems, but before that can happen, you must implement. Without systems, you will never scale. Without process, you might strike gold here or there, but you will never remain consistent.

 

Energize

Energy and emotions are contagious. Your employees will adopt whatever mood their peers are in and if you are going to be their leader, that will likely mean they will adopt whatever mood you are in. You have to become the source of positive energy everyone can feed off of. If you get excited about a new product launch, project, or initiative, so will your team members. Like Gretchen Rubin says: Act the way you want to feel. Even if you’re in a sour mood, put a smile on and walk confidently with purpose! Before you know it, everyone around you will be doing the same and you may even find your sour mood has dissipated.

 

Utilize

Don’t forget about the team you’ve built. You’ve built a great team, now release them onto the project! You may be the leader, but you’re only one person. Without delegation, you will become encumbered and overworked. Delegate the necessary work to the appropriate team members and let the systems you put in place do their jobs. You should contribute where necessary and step in as the leader when issues arise, but let the project take a life of its own so that you can focus on the bigger picture and organizing the next project.

 

Keep these few simple action items in the back of your mind and you will continue to be a successful leader. You will increase member engagement. You will increase efficiency. You will increase synergy. You will increase member satisfaction and loyalty. Most importantly, you and your team will accomplish whatever goals you set out to accomplish.

Does The Guarantee On Your Restaurant Net Lease Have Upside or Downside?

Does The Guarantee On Your Restaurant Net Lease Have Upside or Downside?

One of the biggest metrics investors look at when purchasing a single-tenant net-leased asset is the guarantee behind the lease. It is a major factor in weighing risk vs. return when it comes to net-leased assets.

It can also be a major factor that is misunderstood or overlooked without careful investigation.

For example, let’s say you are considering the purchase of a Taco Bell net-leased asset:

You perform a quick Google search to discover that Taco Bell is S&P rated BB and operates 7,000 locations!

That is quite a strong concept!

Hold on…You also learn that Taco Bell is actually a subsidiary of Yum! Brands, which owns Taco Bell, KFC, and Pizza Hut comprising of over 43,000 locations!

That must be a risk-free investment then…

Well, not necessarily.

Thinking this is the best investment since sliced bread, you put the property under contract. During the due diligence period, you investigate the lease to learn that it is actually only guaranteed by an entity named “Taco Bell 5 FL Tacos, LLC”…

What does that mean?

Come to find out, the franchisee operating this Taco Bell only has 5 stores…and only ONE of their stores is backing this lease through the referenced entity…

It is easy to see how an investment backed by corporate Taco Bell holds drastically different risk factors than an investment backed by a 5-unit franchisee only offering a 1-unit guarantee on their lease. These are important risk factors that have significant impact on the values you can demand for your investment property and the return you can expect to yield from purchasing one of these properties.

These are also important factors that your broker/investment advisor should be making you aware of and helping you analyze, not only prior to a purchase, but prior to a contract for purchase.

With that in mind, existing guarantees can have upside or downside tied to the strength of what is backing the lease.

The typical rule of thumb in any investment is:

The Higher The Risk, The Higher The Return!

A corporate 20-year Taco Bell lease may sell for a 4.5% cap rate, while a 5-unit Taco Bell lease with just 3 years remaining might sell for an 8% cap rate. With a weaker guarantee or lesser lease term comes more inherent risk, but also more reward.

This can be especially true for your guarantee.

You may take on more risk purchasing the 5-unit franchisee backed lease, but what if a larger 200-unit operator is considering buying out that smaller franchise? If that 200-unit operator buys out your tenant and decides to guarantee the lease with the entire lot of their locations, you could easily gain 100-200 basis points worth of value overnight.

That is what some like to call upside.

KBP Foods, a large franchisee of Yum! Brands concepts, recently acquired 78 KFC locations. According to Nation’s Restaurant News (NRN), this was just one of many recent acquisitions that have helped the operator reach 530 locations in 20 states. One of those purchases was an acquisition as small as four locations in Lawrence and Topeka, Kansas. These units were purchased from franchisees and the investors owning the real estate under those operations must be popping the champagne right about now because their small franchise tenant just evolved into a powerhouse operator and one of the largest Yum! Brand franchisees in existence. Even without a change in the guarantee, the perception of now having a very strong operator can alone impact the value and equity of the investment.

My warning is that it can work in the opposite direction as well.

Part of KBP Food’s feeding frenzy in acquiring locations included 41 locations in Texas directly from Corporate KFC. This is not unexpected. Last year, Yum! Brands announced they would shift the ownership of their stores drastically into the hands of franchisees; taking their 10,000 corporate run stores and shrinking that number to fewer than 1,000 by the end of 2018, according to USA Today.

Those investors that had a corporate KFC lease just had a change of tenant…From Corporate run to franchisee run…overnight. While in some lease structures, the landlord is protected for the life of the lease, there is certainly downside when it is time to re-up and your new tenant has a fraction of the net-worth your previous tenant came to the table with. In the KBP Foods scenario, the downside in equity may not be as dramatic; a tenant shift from Corporate run location to a 530-unit operation, although a sure hit in the risk department, is still a pill you can swallow. Some leases, however, allow for corporate guarantees to revert to franchisee guarantees as small as 10 or fewer units…

That  is where there can be downside.

Which scenario strikes a chord with your current portfolio?

Do you have upside or downside?

If these are factors you actively consider when looking at deals, then you are ahead of the game and I would be happy to take you to the next level with the specialized insight I can provide. If you were unaware of these factors or fail to consider them on a regular basis, you and I should connect immediately.

Please reach out and I will make myself available.

I’m helping clients all over the Nation evaluate their upside/downside on a daily basis; analyzing property value, risk, and equity to help clients get clear on their options at any given time within the market and execute on a proactive strategy around these seemingly reactive assets. Feel free to reach out to me for more specific insight around your restaurant investments as I welcome the opportunity to help you do the same even if there is no immediate business to be had on the horizon.

A Few Quick Thoughts on Good & Bad Habits

A Few Quick Thoughts on Good & Bad Habits

Just a few quick thoughts on self-development. Outside of investments, we can all strive to be better, do better, and grow further. This is meant to be a very short read aimed at helping get outside of your day to day grind to identify a few ways you might be able to help yourself grow, improve, or expand your horizons.

2 Excuses for Failing to Change our Habits:

1. We Are Creatures of Habit

Let’s get serious. We’re only human. And as we travel through this journey of life, we become comfortable in the consistent. We come to know what we can expect from things that never change. We don’t inherently like change. Breaking a habit doesn’t just mean a temporary change, it means a life-style change. If you’re not ready to make the change for life, you’ll likely fall back into the habit. Although, this is the nature of humans, it’s also an excuse to stay in the habit. If you want to change, don’t let this excuse hold you back. Your mind is stronger than the human creature that you are. Break it!

2. We Are Motivated by Instant Gratification…and Demotivated by Lack of Instant Gratification

When we want things to change, we want them to change now. We don’t want them to change later. That’s why the world is filled with get rich quick schemes, diets that claim you’ll lose 50 pounds in a week, and pipe dream infomercials that seem too good to be true, but still somehow leave you wanting to order them. At the end of the day, for real results, you’ll have to put in real work. Many times when we don’t get that instant gratification, we lose our motivation to go on…so we fall back into the same habits that yield that instant gratification. When you work at something and it doesn’t happen right away, don’t use that as an excuse to fall back into your old pattern. Find little “wins” along the way and keep pushing. Eventually that instant gratification will be replaced by the ebb and flow of your new established habit!

Reasons Changing Habits is so Damn Hard:

1.     You Want Someone To Do It For You

Habits were built by no one except for ourselves. You created this habit; you alone will break this habit. Others may give you tools that can help, but if you don’t do it, no one will. No one can break your habit for you and that’s why sometimes habits are so hard to break. It would be great if we really could sit back on the couch, eating a bag of potato chips and watching cartoons riddled with adult humor, while a vibrating belt melted away all of our body fat. That sounds easy, right!? That’s false hope. If you want something, go get it. If you don’t go get it, you don’t really want it.

2. You Want To Do It For Someone Else

A lot of times we want to change a habit because others are pressuring us to change. It becomes much harder to change for someone else because the motivation pushing us is based in a negative sense. We feel that if we do not change, negative things will happen. A much more energizing approach that creates a more sustainable motivation is the vision for how things will be better when you finally do change. You have to want to do it for yourself before you can make a lasting change. Many habit changes must become lifestyle changes. We must commit to change for a lifetime. There is no end goal of “I did it”, and that’s hard for us to grasp. Without that sustainable positive motivation pushing us for ourselves, we won’t last without a finish line in sight.

At the end of the day, habits are difficult to break and difficult to sustain. It’s hard work, but worth it if you’re changing negative habits into positive ones. Put in the work. Make the commitment. Dedicate your mind and time to building a better life for yourself.

Applebee’s: Good or Bad Investment?

Applebee’s: Good or Bad Investment?

It was November of 1980 in Decatur, Georgia when the doors opened for T.J. Applebee’s Rx for Edibles and Elixirs. Six years later, the concept changed names to Applebee’s Neighborhood Grill and Bar to reflect the original vision for the concept being a local place that everyone could call home. Fast forward 20 years later and Applebee’s had grown large enough to attract the attention of DineEquity, formerly IHOP Corporation, which acquired Applebee’s for $2.1 Billion in 2007 to create the largest full-service restaurant company in the world.

Now we are in 2017 and times are changing! Fast casual concepts have been picking up steam since the early 2000’s. With consumer preferences continuing to shift towards a larger variety of tastes along with a desire for healthier choices, fast casual as a segment has began to take market share from both casual dining and quick service restaurant concepts with the rise of trendy concepts. In light of these changing consumer preferences, Applebee’s made a number of shifts over the past few years in strategy, offering, marketing, etc. in order to maintain that market share and recapture their customers.

Even still, the company has seen regular declines in same-store sales recently and it has hurt the perception of Applebee’s as an investment. The average cap rate for Applebee’s sold in 2016 was 5.90%; year to date 2017, the average cap rate is 6.21%. That means that over the past twelve months, cap rates have climbed over 30 basis points.

That doesn’t sound too bad…

The recent announcement that DineEquity would close up to 135 locations in fiscal 2017 is what has really created the most recent shift in perception and cap rates. The average cap rate for on-market Applebee’s properties right now is 6.73%; over 80 basis points from the 2016 average. Further, the average cap rate for Applebee’s properties hitting the market since August is 7%. That is over 100 basis points lower than where cap rates were for a comparable asset 12 months prior. This is not happening across the board for restaurant net-leased assets. The restaurant sector actually continues to see some of the most compressed cap rates across all other net-leased food groups; staying about 40-50 basis points lower than other comparable net-leased assets in other sectors. This is a direct result of buyer perception and an influx of inventory hitting the market.

So as a buyer, you should stay away, right?

Not necessarily.

Many argue that now is the time to enter the Applebee’s concept and take advantage of these inflated cap rates for a proven concept with a long-term lease in place. Applebee’s has been on a steady decline, however, recently there have been a number of changes within executive management and they are shaking things up. What they did not tell you prior to rolling out the breaking story of all the anticipated location closures was that they had identified most of these closures quite some time ago. In fact, half of the stores they plan to close have likely already shut their doors. According to Nation’s Restaurant News (NRN), the Applebee’s brand president, John Cywinski, said this was a strategic move and many of the store closures are stores that “need to close and perhaps should have closed a long time ago”. In addition, Applebee’s has vowed to get back to their American roots. Instead of continuing the attempt to capture a new demographic, they are going back to listening to what their core demographic is asking for. According to Inc.com, Cywinski made this statement regarding their new focus:

Now, let’s shift attention to our guests and perhaps one of the brand’s strategic missteps. Over the past few years, the brand’s set out to reposition or reinvent Applebee’s as a modern bar and grill in overt pursuit of a more youthful and affluent demographic with a more independent or even sophisticated dining mindset, including a clear pendulum swing towards millennials. In my perspective, this pursuit led to decisions that created confusion among core guests, as Applebee’s intentionally drifted from its — what I’ll call its Middle America roots and its abundant value position. While we certainly hope to extend our reach, we can’t alienate boomers or Gen-Xers in the process. Much of what we are currently unwinding at the moment is related to this offensive repositioning.

Applebee’s is upgrading image, equipment, and focus. They have embraced technology and begun implementing tablets into their POS systems. They have adjusted the menu and pricing strategies under new executive management. To top it all off, they are getting back to the roots of their core demographic and are revved up to crush it out of the park. Good or bad investment? It depends on your threshold for risk and your hunger for return. For every seller looking to transition from Applebee’s to a different asset or net-leased sector, there are three buyers trying to take advantage of the inflated cap rate environment around the concept.

Like any long-term net-leased investment, it is important to weigh all the factors heavily before moving forward. Ultimately, anything can happen over the next 15-20 years. If you are concerned with maintaining your cash flow for the extent of the new 15 year Applebee’s lease you are looking to purchase, then get critical of the guarantee behind the lease and weigh the risk that it holds. If you would rather take a 7% return when all other restaurants are trading 100 to 200 basis points lower, then simply assume they will vacate at the end of the lease and evaluate the core real estate for the future. If the financial strength of the guarantee holds weight and you are positioned on over an acre of land, on a decent thoroughfare, in a growing area, then a dive into an Applebee’s bottom might be your smartest move; worst case scenario you re-tenant after the base term with a growing concept after collecting an average of 7-8% on a passive net-leased asset…the upside, though, is that you could enter into the monster concept on a downswing and get to ride it back up through its transformation.

Church’s Chicken: A Work in Progress

Church’s Chicken: A Work in Progress

Church’s Chicken is an American chain of fast food restaurants specializing in fried chicken. The chain was founded as Church’s Fried Chicken To Go by George W. Church, Sr., on April 17, 1952, in San Antonio, Texas, across the street from The Alamo. The company, with more than 1,700 locations in 25 countries, is the third-largest chicken restaurant chain behind KFC and Popeyes Louisiana Kitchen.

Church’s is known for thriving in tough markets housing lower income demographics. Many investors actually prefer these investments because there is a sort of hedge against risk in these markets. The perception is that regardless of what hardships hit these markets, they will always need to eat cheap and Church’s is there to provide that service. In the recent past, however, with the chicken market exploding, Church’s has had some tough competition. Church’s as an organization has made serious strides towards improving their competitive position.

According to the organization itself, burger joints and grocery stores are stealing their thunder lately. It could be argued, however, that their biggest competition is the local shop across the street. Even they agree that the business is a battle of street corners. Essentially, it is all about real estate…Who has the hard corner with the highest traffic counts? Who is most likely to pull customers in from the street and capitalize on their impulse for dinner?

Admittedly, Church’s as an organization is working on both variety of offering and also increasing volume through drive-through efficiency. According to Nation’s Restaurant News (NRN), Church’s has been ramping up their technological offering in an attempt to improve their drive through experience.

Who is the drive through competition though?

Chick Fil A, Raising Cane’s, Zaxby’s…There is some tough competition out there. Church’s has clocked their drive-through time in at just over three minutes and 30 seconds, which is impressive, but you also have to get the order right. According to recent data published by QSR Magazine on the accuracy of QSR fast food joints, some of the top contenders include Raising Cane’s topping the list at over 97% accuracy…Chick Fil A pulling 3rd with over 93% accuracy…and Zaxby’s clocking in at over 90% accuracy. Church’s Chicken unfortunately did not make the top 15 on the list.

With a dinner oriented business, focused on a lower income demographic and catering to the entire family, there is still little competition for the type of value their $5 Real Big Deal brings. It is hard to beat a deal that cheap that can feed the family while also offering choices that allow you to customize your meal.

When it comes to Church’s Chicken as a real estate investment, there are certain characteristics the deal holds that you cannot ignore:

  • Like many QSR properties, the real estate tends to maintain core desirable properties:
    • Hard Corner
    • Main Thoroughfare
    • Good Ingress/Egress
  • The rents are low
    • With rents averaging around $20 PSF as a concept, if the demographics were to shift in a landlord’s favor, there could be some generous upside in rent appreciation.
  • Demographics have a sustainable need
    • The target demographic, although thrifty, has proven to spend money on convenience. The concept works and is typically recession-proof. Even when there is a downturn, the main household income for this demographic will not shift as dramatically as other higher income areas. Because the demographic is self-sustainable, they can often replicate the disposable income necessary to spend money on eating out more readily than other economically hard-hitting areas.

Over the past twelve months, Church’s Chicken has had an average cap rate of 7%. Similar to the story above regarding the sustainable demographic, the cap rate has also remained fairly stagnant compared to other concepts. Why? Mainly because while the risk or perception of risk in other concepts varies greatly around market traction, the perception of risk for these types of assets remains fairly the same over time. The guarantee has not shifted much; and although the demographics will never demand a certain amount of sales, the demand for the concept and product is there. The density of the population and demand from the surrounding population will sustain the concept.

The challenge for an owner is: what happens if they leave?

If you own a Church’s Chicken and the lease term is approaching, a major question is: Will they stay or will they go? As an owner with this question in mind, you hold significant risk. Although compared to other net-leased investments, the average Church’s Chicken pays a fairly low rent per square foot, the sustainability of the cash flow stream can still be unclear. The nature of the target demographic is a pro in the fact that it is in constant need of the product, but a con in the fact that even though the base rent is low, if Church’s left, you would be stuck trying to lease to a local tenant likely at half the market rate. Your cash flow would be cut in half. If you are a savvy investor and have enough tenant relationships to redevelop the parcel or sit on it until it can be redeveloped with a stronger tenant, then you are in good shape.

Most of us, however, are not in that kind of position.

I urge clients to look at their investments critically and evaluate their options on a regular basis. I am here to help. I’m evaluating risk, cash flow, equity, and future value for clients on a daily basis and I’m happy to do the same for you. As you plan your long-term investment strategy, it is imperative that you look at how your existing portfolio fits into your long-term plan. An investment like Church’s Chicken has its pros and its cons; it can certainly be a strong part of a comprehensive portfolio, but my point is that nothing should be left to chance. If you are not looking at these investments with a strict magnifying glass and comparing them to the rest of your long-term plan, then you need to re-evaluate your investment strategy. I am happy to help wherever it makes sense, so please reach out if you are curious about your existing portfolio, looking to diversify, or simply wish to keep a pulse on what is happening in the market and how you can best capitalize on the recent market changes.

Starbucks, New Leases, & Termination Options

Starbucks, New Leases, & Termination Options

Starbucks as a tenant is notorious for their hardball negotiation tactics.

Who can blame them? Starbucks, founded in 1971 out of Seattle, is one of the strongest quick service restaurant (QSR) tenants you could wish to have occupy your property. With over $20 Billion in revenue, over 26,000 locations nationwide, and a credit rating of A2, it is no wonder Starbucks is one of the highest paying restaurant tenants in rent averaging over $60 per square foot.

They negotiate hard simply because they have the leverage to do so.

If you would like a lesson on how to negotiate, I will reserve that for a separate article or you can contact me directly to discuss in more detail, but for now I want to address how these negotiations can impact the value of your property. These hardball negotiations on Starbucks end will certainly put them in a further position of power in regard to controlling their own destiny with their real estate and location growth, but it should be understood that it does not mean Starbucks is an investment to now shy away from. If anything, it should show that they are a stronger investment than ever. Not only are they one of the strongest guarantees you can secure, but they are looking out for their own long-term interests and success.

In recent years, Starbucks has been approaching landlords about signing new 10-year leases. Typically, when a store reaches the 10-year old mark, it is time to upgrade the store. For Starbucks, this could mean significant capital expenditures to bring the store up to new standards. They see these expenditures as a necessary evil and tend to ask the landlord in return for a new longer lease in order to secure their capital investment long-term. Sometimes they ask for a rent reduction or some other concessions, while other times they may just be looking to secure a new 10-year lease in lieu of exercising their next 5-year option. If you have been approached with this offer, I am sure you felt butterflies in your stomach as your eyeballs turned to dollar signs and you felt like your investment just became 10-years stronger. There is no doubt that Starbucks showing interest in signing a new 10-year lease is a solid opportunity to explore, but reel your excitement in a bit and prepare to read the fine print.

Many of these new 10-year leases include a termination option at year 5, which is not the end of the world. After all, if they are willing to put real dollars into renovations and sign a new 10-year lease, it would appear their intent is to stay for the entire 10 years; that 5-year termination clause is simply a hedge against an unforeseeable future. It is important, however, to understand how this will affect the equity of your entire investment. The value of your property is directly correlated to how much lease term you have remaining and the strength of your guarantee.

In this scenario, guarantee is not the issue, however, remaining lease term is. On paper, it appears you have a new 10-year lease. From the graph below, you can see that the average cap rate for a 10-14 year corporate lease over the past 12 months has been 5.88%. Talk about equity; if Starbucks is $60 per square foot on a 2,000 SF building ($120,000 NOI), then a 5.88% cap rate puts your value just over $2MM.

cap rate versus guarantee vs lease term graph

Here is the problem:

Investors and buyers will not see a new 10-year lease. Investors will see a termination option in year five and in order to hedge their own risk, they will assume the tenant will leave after 5 years. Effectively, that simple little 5-year termination clause crushes your current value as an opportunity cost versus a true 10-year lease. You will see from the graph above that the average cap rate for a 5-9 year corporate lease is at 6.27%. You just lost about 40 basis points worth of value and that is being generous because these figures include a range of lease terms lumped together. More realistically, you are looking at a 50-75 basis point hit in value by keeping that 5-year termination clause in a new 10-year lease. See more detailed recent cap rates for Starbucks specifically at my last cap rate market update.

When it comes down to it, however, fighting over striking the 5-year termination option from your new lease is not worth losing Starbucks as a tenant. There are few tenants willing to pay $60 per square foot and so the likelihood of replacing that rent and cash flow stream is slim if you do not come to an agreement with Starbucks. Hence, why they hold all the leverage.

Here is the silver lining: Do not beat yourself up if you have signed a new 10-year lease with Starbucks and it includes one of those 5-year termination options. The values are still strong for Starbucks net-leased properties and investor perception is still very strong for these assets as they are still great long-term investments with solid financial backing and stability.

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I listed this Starbucks location in New Port Richey, Florida (pictured above) recently and if you are looking to enter the net-leased investment realm, consider this deal. Just as mentioned above, this client had Starbucks approach him about signing a new 10-year lease. They were asking to include a termination option at year 5. Through working with me, the client was able to secure a very marketable deal. Starbucks signed a new 10-year lease, keeping their option to terminate in year 5, however they are required to give 6 months notice to the landlord and pay a penalty of about $50,000. Worst case scenario, that equates to almost an entire year of cash flow for the landlord if they do plan to exercise their option to terminate in year 5. In these situations, though, all signs point to an intent to stay long-term. Starbucks is investing dollars to renovate the location and if you ever visit, the drive thru stack consistently wraps around the entire building. As an investor, how can you go wrong with a new 10-year Starbucks deal on a hard corner with frontage on a thoroughfare that boasts 59,000 cars per day?

That’s Net-Lease Investor Gold.

You can find more details on this specific Starbucks Offering Here

Ultimately, it comes down to what your long-term strategy is for the property. It is often times easy with these “coupon clipper” properties to set them and forget them. Rent is deposited every month, year after year, and the landlord gets to sit back and sip the pina coladas, but I urge all my clients to stay fresh on their feet. Before you know it, you could be down to just 12 months remaining on your lease, which does not put you in much of a position of power when it comes to tenant renewal, property values, and retaining your existing cash flow. I work with clients on a regular basis to keep a pulse on the market and ensure they are maximizing their equity, exchanging in and out of the market, and over time increasing the overall portfolio value of their investments. Some of the strategies I help clients execute on include sale-leasebacks and blend-and-extends among other strategies to help them mitigate risk and maximize value in situations such as these.

More specifically, I have helped many Starbucks landlords find a Win-Win common ground with Starbucks during negotiations as referenced above in order to maintain their cash flow stream, maximize the value of their investment, and ultimately establish a successful future for Starbucks to stay at their property long-term. If you would like more detailed information around how to maximize the value of your property through new lease negotiations or if you have interest in purchasing a Starbucks net-leased property, please contact me directly at 813-387-4796 and I would be happy to help wherever it makes sense.

Restaurant Sector More Bullish Than Others

Restaurant Sector More Bullish Than Others

A brand-new Taco Bell just sold for a 5.5% cap rate in Fleming Island, Florida! If you know where cap rates have been trading across product types in the net-leased sector, this may not appear to be too surprising. Cap rates have compressed in the net-leased sector as far as 120 basis points from where they were at the last market peak, but this go around, the restaurant sector has compressed even further than other net-leased product types. That means that values today are some of the highest we have ever seen, especially in the restaurant sector.

As a frame of reference, 2007 saw one of the hottest historical markets ever; values peaked and buyers were bullish. In that market, brand new 15-year to 20-year Taco Bell leases were trading at 7% cap rates. These long-term Taco Bell deals were typically backed by 50+ unit operators. The Taco Bell in Fleming Island that just sold was a new 20-year lease backed by a 19-unit guarantee and traded for at a 5.5% cap rate. That is a 150-basis point spread from the last market cycle and it’s not an exception.

dunkin representative photo

Just last month, we sold a brand-new Dunkin Donuts with a shorter-term lease and a smaller guarantee at a 5% cap rate. The deal was a brand-new 10-year Dunkin Donuts lease backed by a 13-unit guarantee in St. Petersburg, Florida. Within only a few weeks of bringing it to market at a 5% cap rate, we had sourced multiple offers. The competition created ultimately resulted in a 36-day closing at full list price. Only 12 months ago, 10-year Dunkin Donuts deals were trading at an average cap rate of 6%. For further perspective, in 2006, the average cap rate for a comparable Dunkin Donuts was 7%.

We are seeing restaurant properties trade 25-50 basis points lower on a cap rate basis than most other net-leased sectors right now.

Restaurants are hot!

Even when faced with the potential risk of shifting consumer trends and the sales slumps of the casual dining sector, buyers understand that restaurants serving the general population are not going anywhere. Similar to how multi-tenant shopping centers are attracting more service based tenants to compete with online sales competition, restaurant brands are evolving to cater to these changing consumer trends and when the dust settles, people will still need to eat.

Because of the aggressive restaurant cap rates versus other sectors, owners in the restaurant sector have been weighing their options and crafting a strategy for how to take advantage of these recent trends. For our clients, the biggest concern is where to put the money and ensure a successful exchange. The initial thought is that you are trading into the same market and so the opportunity is perceived to be a wash, however, we have had success in moving our clients from the restaurant sector to other net-leased sectors where cap rates, although compressed, are not as bullish.

Often times, there are opportunities across other sectors such as drug stores and auto-related investments that can not only replace or improve our client’s current cash flow position, but also improve their real estate investment in general; better guarantee, longer lease term, or upgrading their core real estate to larger parcels or hard corners.

Values remain the highest they have ever been, while cap rates remain more compressed than in the last market peak. Both buyers and sellers should remain bullish in the current market as prices in this market are still extremely aggressive compared to the historical 10-year average and the net-leased opportunities on the market offer a long-term passive cash flow stream often with a hedge against inflation via regular rental increases, especially across other sectors.

Whether or not you plan on transacting in 2017, I am always available as a specialized restaurant net-leased expert and resource for market information. It is my mission to ensure you have the tools necessary to proactively plan your long-term investment strategy. For more detailed research specific to your property or market, give me a call directly to discuss how I can help.

National Net-Leased Report | 2017 Outlook

National Net-Leased Report | 2017 Outlook

The outlook for 2017 remains strong. Restaurants are still hanging on to some of the lowest cap rates across the net-leased sector, which bodes well for existing investors’ values. One would think that these low returns would deter buyers, but with all of the exchange capital floating around and the stability of restaurant net-leased investments, buyers still view these long-term investments as a hedge against inflation.

Check out the cap rate comparison graph below showing the most recent cap rate ranges by both sector and major brand:

Cap Rate Comparison Across Sectors

Overall, positive economic momentum has carried into 2017 and it is being driven by confident consumers. Although rising interest rates have sparked a slight investor re-calibration, there still seems to be some runway left in this market. The spread between cap rates and the 10-year treasury is maintaining a steady gap and although we would anticipate interest rates to go up at some point, they appear somewhat stable for now.

Net-leased properties recorded a 23.9 percent advance in the average asking rent last year, which has more than doubled the pace of multi-tenant shopping centers over the same period. A lot of this is due to strong corporate backed tenants or franchisees getting aggressive to secure additional sites and locations. The good news is that asking rents in net-leased properties are still below the pre-crisis peak with an average tenant paying $19.62 per square foot nationwide.

For 2017, store openings will be led by the dollar-store segment, however consistent expansion in the fast-food sector will continue over the comping year. From all angles, I see this year shaping up to be a busy one across the entire net-leased sector!

Access the Full Report Here

If you would like more specialized insight or research in regard to your current investment portfolio or more information around what restaurant net-leased investments are currently available on the market, feel free to contact me directly at 813-387-4796.