Three bays 20 minutes away, or a single tenant box three states over

Question

I've been saving toward one purchase for a while and two very different retail deals are in front of me at almost the same price.

Deal A is a three-bay strip about twenty minutes from my house, 4,800 sf, $640k, asking cap 7.4%. A hair salon, a dog groomer and a sandwich shop, all local, all on three year leases with staggered expirations. Gross leases, so I pay the taxes, the insurance and the parking lot. I'd manage it myself. I can drive past it any day I want.

Deal B is a 9,300 sf single tenant box in a small midwest town, $655k, asking cap 7.1%, eleven years left on a corporate lease, triple net so the tenant handles the taxes, insurance and maintenance. I'd never see it. One tenant, one check.

The part I keep circling is that Deal A pays more and teaches me more, and Deal B is the one where a bad year doesn't turn into forty phone calls. The rollover in A is constant, three leases in three years. The rollover in B is one event eleven years out that decides everything.

For a first retail purchase, does proximity and control beat one long lease and silence?

kevin_lombard · Answer

The caps are nearly identical here, 7.4 against 7.1, and the risks aren't remotely identical. In Deal A you're paying operating costs out of that 7.4, so whatever the parking lot and the taxes run, your actual number is lower than the headline. In Deal B the 7.1 is closer to what you keep, at least until the eleventh year. Quill, do you know what the tax bill and insurance are on the strip? Without those two lines I don't think the comparison means anything yet.

nicole_adeyemi · Answer

Juniper is right about the gross lease eating the spread, and I'd go further on Deal B. Eleven years of quiet is not the asset. The asset is a 9,300 sf building on a piece of dirt in a small town, and in year eleven either the tenant renews or you find out what that dirt is worth to somebody else. Pull the parcel up on the county GIS, look at the zoning, look at what else has traded on that road. If the land under the box has a second use, the lease expiry is a manageable event. If the box is the only thing that parcel will ever be, you're buying eleven years of income and a question mark.

megan_doyle15 · Answer

Twenty minutes away with three tenants sounds like a job, and all of this is new to me. Deal B.

Three bays 20 minutes away, or a single tenant box three states over

3 replies