For a first retail purchase, does a nearby three-bay strip beat a distant single-tenant net lease box.

Question

A useful comparison for a first retail purchase is a small local strip against a distant single tenant box priced almost identically. Deal A: a three-bay strip twenty minutes from home, 4,800 sf, 640k, asking cap 7.4 percent, tenants a hair salon, a dog groomer and a sandwich shop, all on three year leases with staggered expirations, gross leases so the owner covers taxes, insurance and the parking lot, self-managed. Deal B: a 9,300 sf single tenant box in a small out of state town, 655k, asking cap 7.1 percent, eleven years left on a corporate lease, triple net so the tenant carries taxes, insurance and maintenance, effectively a one check asset the owner may never see in person. The tradeoff is real. Deal A pays a bit more and teaches more about leasing and tenant relationships, at the cost of constant rollover, three leases across three years. Deal B trades yield and hands-on learning for a single rollover event eleven years out that decides the outcome, with silence in between. For a first purchase, proximity and control generally serve a new owner better than distance and a single long lease, mainly because the operating lessons from Deal A compound for every future purchase, while Deal B's simplicity teaches comparatively little until year eleven arrives.

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

The gross lease eating the spread on Deal A is worth weighing seriously, and Deal B deserves more scrutiny than eleven years of quiet suggests. That 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 the real question becomes what that dirt is worth to somebody else. Pulling the parcel up on the county GIS, checking zoning, and looking at what else has traded on that road matters. 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, the buyer is paying for eleven years of income and a question mark after that.

megan_doyle15 · Answer

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

For a first retail purchase, does a nearby three-bay strip beat a distant single-tenant net lease box.

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