Anchor grocer has fixed-rent options 30% under market for 20 years

Question

Looking at a 68,000 sf grocery-anchored center. Grocer occupies 45,000 sf at $9.25/sf NNN with six years remaining, then four five-year options at a flat $10.00/sf. Inline space is leasing at $27 to $32. Asking price works out to a 6.9% going-in cap.

Seller's model marks the anchor to $14/sf in year seven and shows a residual that carries most of the return. That looks wrong to me, because the tenant controls the options and will obviously exercise at $10. If I hold the anchor at option rent through year 26, my exit value drops a lot.

Separately, three inline leases have co-tenancy clauses dropping them to 50% rent if the grocer goes dark for more than 90 days. So the anchor rent is capped and the inline rent is contingent on the anchor staying open.

How do people on the capital side actually underwrite this combination? Is there a way to value the below-market anchor other than accepting it as a permanent haircut?

Rena Expert · Accepted Answer

Treat the fixed options as your rent forecast. The tenant holds the election and will exercise as long as the store performs, so anything above $10.00 in your model is a number you don't control. That also means your exit is being priced on a stream that barely grows for 20 years, and a buyer in year seven will discount it exactly the way you're doing now. The below-market anchor isn't recoverable through the lease. It gets recovered, if at all, through inline rent growth, pad development, or buying at a basis that already reflects the problem.

Sales performance is the number that decides everything else. Conventional supermarkets doing $450 to $650 per square foot annually with occupancy cost in the 2 to 3 percent range are stable. Under roughly $300 per foot, closure risk is live regardless of lease term, and the lease being cheap makes it more likely they keep the box and go dark rather than assign it. Check whether the lease requires sales reporting at all, because many anchor leases signed decades ago don't, and then you're reduced to third-party foot traffic data and store-level observation.

Read the co-tenancy language closely. What matters is the cure period, whether the standard for a replacement anchor is objective (square footage and use) or subjective ("comparable national grocer reasonably acceptable to tenant"), and whether the remedy escalates from rent reduction to termination after some months. Subjective replacement standards effectively hand the inline tenants a veto over your backfill.

Two things you haven't raised. The anchor lease almost certainly carries exclusive use provisions that will restrict what you can lease inline, and a prohibited use list that can rule out the highest-rent categories. And a lender may size debt off the option rent rather than your mark-to-market, which changes your proceeds assumption at refinance. Get the lender's underwriting rent in writing before you commit.

joe_delgado5 · Answer

You never get that $14. Model the $10 and stop arguing with the seller's spreadsheet, they know it too.

What I'd worry about more than the rent level is whether the grocer is actually doing volume. A $9.25 anchor rent that's 1.5% of sales is a tenant that stays 40 years. Same rent at 4% of sales is a store on somebody's closure list, and then your three co-tenancy leases go to half rent while you're trying to backfill 45,000 sf that nobody wants at $14 either.

tylerbrooks9 · Answer

Is sales reporting something you can even add? Or is it purely whatever the original lease said in 1994.

karen_whitfield · Answer

Look at the parking field. A 68,000 sf center with 380 stalls often has more asphalt than the code requires, and a pad on the front corner ground-leased to a coffee or bank user can carry $70k to $95k a year with no building cost to you.

Before getting excited, pull the anchor lease's parking covenant and any reciprocal easement agreement. Most grocers keep a minimum stall ratio and site plan approval rights, and that kills more pad deals than zoning does.

laurenkim53 · Answer

Different end of the market, but the anchors I look at are regional IGA and Piggly Wiggly operators with no reporting obligation and no corporate anything behind the lease. Those centers trade at 9 to 10 caps in my area, and the reason is precisely what @flint said, you have no way to see the store's health until the day the shelves empty out. Your 6.9 is buying you visibility you may not actually have. Check the reporting clause first.

paulgrant17 · Answer

If the lease has no reporting requirement, how does anyone verify sales? Do you just count cars?

Anchor grocer has fixed-rent options 30% under market for 20 years

6 replies