How to price year 13 on a small town dollar store with 11 years left on the lease

Question

Take a rural dollar store listed at $1,340,000 with rent of $112,500, so roughly an 8.4 cap. Town population about 1,800, and the store is the only general merchandise within 20 miles. The lease has 11 years left of an original 15 with three five-year options and a corporate guarantee, and the rent works out to about $12.40 a square foot on 9,100 square feet. Replacement cost on that shell out there is maybe $95 a foot, plus a 1.4 acre pad that trades for nearly nothing. The cap looks generous because everyone pricing it knows the exit is the problem. The hard part is pricing the residual honestly. If the tenant does not renew at year 11, what is the owner actually holding, and what does a defensible re-tenanting assumption look like at that rent level?

Rena Expert · Accepted Answer

Price it as two things at once. You own a bond-like coupon for 11 years and a piece of rural real estate afterwards, and the cap rate is the market blending them for you. At $12.40 a foot in a town of 1,800, the honest question is what the second-generation rent is. If a regional hardware operator or a church or a farm supply would take that box at $5 to $6 a foot, your post-lease value is somewhere around $450k to $550k before you spend on demo of the interior fit-out and a leasing commission. That's a 60% haircut to today's price, and it means most of what you're buying is the rent stream, so you should be amortizing the building toward that number in your own model rather than assuming a resale at a similar cap.

The assumption carrying the whole analysis is whether the store's sales support the rent. Ask for unit-level sales if the tenant will share them, and look at rent as a percentage of store revenue. Under roughly 8% is comfortable, over 12% and renewal gets decided by a real estate committee looking at a spreadsheet, not by the fact that it's the only store in town. Being the only store in the trade area helps only if the trade area itself isn't shrinking. Pull county population trend, not town.

The part that tends to bite in rural net lease is financing rather than tenancy. Small-town single tenant is a hard appraisal, local banks will want recourse and often a 10-year term with a 20-year amortization, and if your loan matures with two years of lease left you're refinancing into exactly the uncertainty you're trying to price. Confirm the actual term and recourse in writing before you get attached to the yield.

karen_whitfield · Answer

The 1.4 acre pad is worth more than nothing if it's on the main road with utilities in and a curb cut already permitted. Not $500k, but a highway-frontage commercial lot with power and sewer at the property line in a small town isn't a zero either. I'd get a local land broker to tell me what bare pads there have traded for. That's the floor under the whole deal and it costs a phone call.

sonia_alvarez · Answer

On the debt side the question lenders keep coming back to is lease term versus loan maturity. Eleven years of term is fine today. Structure a 10 year loan against it and it works on paper, but the exit refinance happens with 12 months of lease left and no lender prices that kindly. Shorter amortization or a real principal paydown schedule is how operators deal with it, which lowers the cash yield you are buying the deal for.

How to price year 13 on a small town dollar store with 11 years left on the lease

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