What is Your Approach to Investing in Fast Food Real Estate?

Did you know that the real estate of fast food brands like Taco Bell, Popeye's, Wendy's and Burger King is often owned by a third party real estate investor? These buildings are usually custom-built for the single tenant's use, located on pad sites in front of shopping centers and then sold to a real estate investor for ten or twenty year leases. Often there are annual rent escalations or escalations every five years. In many cases the tenant then has four five-year options to renew their lease at the expiration of the original term. The buyers of these asset types usually fall into one of the following categories:

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the "coupon clipper." A coupon clipper buys the building when new and the lease has just started. There's nothing to think about: both the tenant and landlord are locked into the lease for decades. The tenant maintains the building in what is called an absolute NNN lease and pays all expenses while the landlord simply collects the rent. When the initial term nears and end, the coupon clipper wants out. The possibility that the tenant will not renew is too risky and negotiating with them is a headache.
the arbitrager: the coupon clipper wants to sell for a discount because the lease is coming up for expiration. The arbitrager wants to buy because they are willing to take on the risk of negotiating a lease extension. If the tenant extends for a long term, the value automatically increases in a big way. With the newly extended lease, the arbitrager sells for a big profit and moves on to the next one.
the speculator: All parties know the tenant is moving out but the land's highest and best use is now something entirely different. Perhaps the coupon clipper doesn't realize this. The speculator buys the real estate from the coupon clipper, demolishes the building and sells for a big profit to the real estate developer.

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Contact REC to have a detailed discussion about whether fast food buildings are the right tool to help you achieve your commercial real estate investing goals.

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the "coupon clipper." A coupon clipper buys the building when new and the lease has just started. There's nothing to think about: both the tenant and landlord are locked into the lease for decades. The tenant maintains the building in what is called an absolute NNN lease and pays all expenses while the landlord simply collects the rent. When the initial term nears and end, the coupon clipper wants out. The possibility that the tenant will not renew is too risky and negotiating with them is a headache.
the arbitrager: the coupon clipper wants to sell for a discount because the lease is coming up for expiration. The arbitrager wants to buy because they are willing to take on the risk of negotiating a lease extension. If the tenant extends for a long term, the value automatically increases in a big way. With the newly extended lease, the arbitrager sells for a big profit and moves on to the next one.
the speculator: All parties know the tenant is moving out but the land's highest and best use is now something entirely different. Perhaps the coupon clipper doesn't realize this. The speculator buys the real estate from the coupon clipper, demolishes the building and sells for a big profit to the real estate developer.

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Contact REC to have a detailed discussion about whether fast food buildings are the right tool to help you achieve your commercial real estate investing goals.