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Anchored Center vs. Strip Mall

LC — Sun, 02 Mar 2008 05:31:56 +0000

Tenants like anchored malls because they’re told they are better. That’s not always the case, because other factors such as exposure, ingress and egress, and intersection positioning are critical for convenience tenants. Read how we helped this fast food franchisee make a decision.
ripsy asks…I’m a franchisee of a top sandwich food chain who has an opportunity to build out a new store on a busy intersection. Here’s my problem…I have the option to choose between one of two centers that are being built on the intersection.

In Center 1, Ican get into an endcap not on the hard corner but on a pad 50 yards or so from the light. Visibility is excellent as is parking. It is a small sized center and is anchored by a CVS/Pharmacy store and Jack in the Box Drive thru. Occupancy is around 50% currently (with more tenants
promised)
Center two is a larger center anchored by a grocery chain as well as Starbucks, Carl’s Jr. Dental office, Bank, clothing store, etc. The problem is that my location is inline (4th in a pad of 6 spaces). Visibility is very poor, the Starbucks pad and a Carl’s Jr drive thru are in front of my pad and it cannot really be seen easily from the main street. LL has offered space on the monument sign for a fee of course. In front of the space offered there are 2 disability parking spaces. In general parking is very poor for my location.

Assuming Rent and CAM are similar for both locations…what is the optimum location for me to get into?
I know Center 1 is smaller and not anchored by a major, but I get a great location endcap on main street with great access and parking. Center 2 is much larger with more draw and daily traffic, however visibility and parking is very poor.
PLEASE HELP!

Ripsy, you’ve come to the right place and I’ve got your answer;-)

Now remember, I have a bias as I’m a strip mall developer, and we only have one anchored center. BUT, this site is about you, not I, and I think I can be objective. I like to list a rank order of preferred locations for convenience tenants, and your sandwich shop is a classic example. Here would be my choices as a tenant:

First Choice: Hard corner, endcap, anchored (assuming great exposure)
Second Choice: Hard corner, endcap, unanchored, (assuming great exposure)
Third Choice: Inline, anchored with great exposure
Fourth Choice: Inline strip mall, with great exposure
Fifth Choice: Inline anchored with marginal exposure

Sixth Choice: You were expecting inline strip mall with marginal exposure, right? Wrong. That is NOT an option. Strip malls work because of the 100% street exposure. Without an anchor to draw the customers in, poor exposure in a strip mall should be a pass for both tenant and developer.

Ripsy, you’re in a numbers game, and I don’t care how people see you as long as they DO see you. I favor big traffic numbers over small slow drive bys or walk bys, because even though you get a better kill rate with those, the numbers are often too small. If you have a traffic count of at least 30,000 cpd going by your strip mall, and I’m sure you do with Jack and CVS there, you have numbers on your side.

As Professor of Marketing at CSUS years ago, I used to tell my students that they were subjected to 40,000 impressions daily, and it was up to them as marketers to be a part of that and to stand out. Imagine the number today. Why keep your store a secret in center 2? I’m going for the proven concept, Ripsy, and that’s Center #1. Good luck and let is know what you decide.

Your comments in agreement or disagreement are welcome!

How To Calculate Rent For a Freestanding Fast Food Drive-Thru

LC — Wed, 16 Jan 2008 09:07:28 +0000

Higher Sales Volume and Costs Justify Higher Rent for a Freestanding Drive-Thru As Opposed to a Strip Center Endcap or Inline Shop Space–But How Much Higher?

From Lyle in Illinois

Q :We are looking to open our first fast food franchise location. We have found a location which is an ex-fast food location with existing drive through and the building size also fits what we need.
The location is in anchored strip mall with a grocery store and a few other brands. Asking price for the inline strip shops is $24-$25 psf (NNN) per year, but the freestanding building landlord is asking about $50 psf for the 2,400 SF building. My questions are:
1. Does this make sense?
2. What can we do to bring the rent down?
3. How can we estimate sales from the demographics or traffic count?
4. Any other ideas?

A: This is a great question,Lyle, and involves some time and basic math. Let’s get into it.

Let’s assume for now that the landlord is firm, and we’re working to determine sustainable occupancy cost for your fast food franchise. Here are some factors:

1. Replacement Cost for a Fast Food Drive-Thru

2,400 SF of building will need about 24,000 SF of land to self-park and meet code which is probably about 1 space for every 3 seats. You didn’t say if it was a hard corner (on the intersection, no setback), so let’s assume it’s an outparcel in the center, and for a small piece we will give the land a value of $14 psf, or about $336,000.

The construction cost for strip mall with a basic interior finish runs about $125 psf (I’m guessing again, it’s more in California, what isn’t ) , and as we have a very small building we’ll say $200 psf, or about $480,000 to reach the same level as a strip mall buildout. BUT, I’m going to add $100 psf Lyle, because you probably have a 400 amp panel, floor drains, lots of plumbing and wiring, fixtures, etc. That’s another $240,000 and that includes permits and fees. So far…

Land: $336,000
Building: $$480,000
Extra Restaurant Improvements: $240,00
Total Estimate Drive Thru Building Replacement Cost: $1,050,000+/-

Landlord ROI= 10%=$105,000 per annum= $43.75 psf. So, we’re close, Lyle, depending on the condition and age. We’re on the edge but not off the radar from the cost approach.

2. Calculating Break Even Rent with the Market Approach

I’d like to see you pay no more than 10% of gross sales in rent for a freestanding drive-thru in the suburbs. Your retail shopping center lease form probably calls for percentage rent of 6%-7% of gross as we discussed this article on estimating sustainable rent, but while we talked about in our article about how to estimate sustainable rents, 12% for a sit down restaurant, your margins are thinner and a10% rent factor on stabilized volume is where you need to be.

$50sf rent x 2,400 SF= $120,000 annual rent/.10= $1,200,000 annual sales volume. That’s $100,000 per month, $25,000 per week and $500 psf in sales volume.

Here’s where your franchisor needs to help you. That’s a lot of volume for a Starbucks, low for McDonald’s, about right for a Church’s, on the low side for Chick-Fil-A and the list goes on BUT, other than Starbucks those stores are about double the size of yours.

I don’t like it, Lyle, this is why we fix a rent point first and work backwards. What 2,400 SF operation could do that volume? Why did the past tenant leave? I’m feeling like the deal-killing attorney here

I think your question is answered, if my estimate from 2,000 miles away without knowing your specifics are even close to being accurate, I think you need to meet with the landlord, tell him it’s a great location and he’s the greatest guy in the mid-west, but the numbers don’t fly, and could he help you understand how you can make money here??

I am visualizing a B to B+ location, not on a hard corner, dark store, and am estimating volume at $750,000 a year. Sounds like a $33 deal to me. Let us know how you deal works out, Lyle! ~LC

Shortcuts for Estimating Sustainable Shop Rent Levels

LC — Sat, 12 Jan 2008 06:49:37 +0000

From Kathy in Athens, GA

Q: I have been approved for [xx] franchise, and have found a strip mall in a good location. The landlord is not moving on the rent. How do I know how much rent I can pay?

A. Kathy, I’m deleting the franchise name and will send you a complete percentage rent table, and I will explain how to use it. For this discussion, I found a short version of a percentage rent table here.

Here are some steps to take which aren’t a substitute for a sophisticated income model (which this franchisor doesn’t typically use), but will give you an estimate that’s fairly close to the maximum sustainable rent you can pay.

1. Shop around in comparable locations. Yours is a common use so you won’t be able to get in to some places as the use will be taken, but ask the leasing agents and even the shop owners what they are paying. You should be able to determine if your landlord’s rent is in the right range.

a. Don’t forget to ask the triple net rents, or CAM. They can vary widely between centers, especially if the property has been reassessed upon a sale. Here in California the CAM can increase dramatically after a sale is closed, from the property tax increase.

2. Look at the percentage rent tables; in your case the typical percentage rent is 7%. Although most strip mall leases do not require percentage rent clauses or the landlord often will waive them, we should understand what they mean. Let’s say the minimum base rent is $24.00 or $2.00 per square foot per month. Divide the annual base rent by the stipulated percentage rent figure, and we arrive at $343.00($24/.07). Remember, we’re discussing square footage, not absolute rents. Multiply your space square footage, let’s assume 1,2000 s.f., by $343.00 and our product is $411,600. When you have a percentage rent clause, that figure of $411,600 is known as the “break point.” If your annual sales are above that figure, you will pay the greater of 7% of your gross sales, or the minimum base rent of $24.00 psf. So, if you did $40,000 per month, or $480,000 per year, your adjusted rent would be (7% x$480,000)= $33,600, whereas as if you did less than your breakpoint of $411,600, your rent would be $28,800.

The significance of hitting a break point is that your rent has dropped to a highly favorable( read low) percentage of gross sales. In the past two decades CPI increases (which our legal contributor Dave Durrett does not recommend) or fixed annual increases have all but replaced percentage rents in strip mall leases, but the calculation is significant for calculating commercially reasonable rent levels for each category of business.

3. Take the table percentage and double it. In your case, that means you can pay around 14% of your sales volume in base rent and sustain operations. This is a very rough estimate, but sometimes close enough for a go/no-go decision.

4. Divide the quoted minimum base rent ($24) by the doubled percentage figure (14%) and we arrive at $171. Multiply by the square footage of 1,200 and we arrive at the lowest volume needed to keep the base rent at 14% of gross sales, or $205,200 annual sales volume. If your sales volumes are at that level or better you should be fine (in your business; rent levels differ for each category) but with volumes below that figure you might have trouble breaking even as your rent would exceed 14% of your sales.

5. Divide and Conquer. $205,000/ 12 months = $17,083/4 weeks = $4,271 per week volume to pay the bills.

Can you do that, Kathy? Looking at a recent aerial photo, your location in Athens doesn’t appear to be in the newest growth area, but if it’s stable I think you can do those volumes with that franchise.

Capsule Notes-Estimating Maximum Base Rent Payable

Ascertain average vicinity rent levels

Find the appropriate percentage rent factor

Double that factor

Divide the annual base rent by the doubled factor

Reduce to monthly or weekly as needed

Your decision is now can you produce the minimum sales volumes to sustain operations?

Rich Dad Poor Dad Seminar Review

LC — Fri, 04 Jan 2008 09:01:48 +0000

This was pitch night for the Rich Dad Poor Dad three day seminar, and I decided to take my 17 year old daughter to the free “basic training class.”

Of all the wealth building schemes, I think Robert Kiyosaki’s Rich Dad Poor Dad makes the most sense. Speaking as one who has done several “no money down” deals, one of which has yielded me value of over $20,000,000 in less than 10 years, I believe his simple principles are generally valid.

I counted 100 attendees. The pitchman was friendly, and the presentation was relatively low key. I believe he had at least two shills that I could identify but that’s expected for the Get Rich Quick business. The overriding principles of achieving cash flow in Kiyosaki’s world are:

Opportunity
Knowledge
Action

The seminar, known as the “Rich Dad Poor Dad Academy” is a 3-day affair, and the price (discounted 50% of course for tonight) was $495. He compared it to Robert Allen’s $1,500 and Trump’s $3000. The Academy is purported to 1) present methods of discovering opportunity with reference books and guides, and 2) teach some procedures for buying properties for no money down. Nothing unique here. Carleton Sheets is yawning.

He showed a video example of a young couple who bought a house for no money down, and re-sold it 6 weeks later for a gross profit of about $26,800. Here are the numbers, by memory:

Asking Price $240,000
Purchase Price $210,00
Flip Sales Price $258,000
Gross Profit $48,000

The couple reportedly obtained a hard money loan (individual investor loan) for $210,000. Now, let’s look at the cost of goods sold beyond the purchase price:

-$ 4,200 loan fees (2 pts)

-$9,800Upgrades/remodel

-$1,200 closing costs

Reported net profit $26,800

So, this previously pennyless, young couple living off the husband’s pizza delivery income put $26,800 in their pocket in 6 weeks?

I don’t think so

The fallacy is the hard money loan. NO ONE is going to loan her essentially 95%-100% market value for 2 pts, and I guess that was an interest free loan for 6 weeks? I am always in the private loan business for good circumstances, and for that deal I probably would have nailed her for 5-10 pts. and half the deal. She had to have a partner, being inexperienced and with no cash or collateral. My guess is they got thrown $5,000, maybe even $10,000, which is fine for them, but not $26,000 to them.

I had a little problem with the Rich Dad pitchman’s next topic, himself. Probably LDS like so many of the no money down guru crowd, he said he worked for Robert G. Allen in college, then started flipping houses. That makes sense. But then, he told of us his latest “coup,” an area development agreement for “the ENTIRE states of Maine, New Hampshire, and Vermont” for a Mexican QSR franchise! His reasoning was that the cost was $450,000 per store, and that Qboda and Chipotle both do about $1,450,000 in volume, and that at 1xgross he would be making$1,000,000 per store and that was a “no brainer.”

My ass it’s a no-brainer! I have been a strip mall developer for 30 years and trust me, NO restaurant is a NO BRAINER! 1x gross valuation is accurate, but only on stabilized volumes and it’s highly unlikely that those stores will do those volumes in those areas, even if they are run perfectly. So, the limited credibility he had went out the casa with that one!

Finally, I was watching for conversions. I would guess it was pretty strong, possibly 25%. Do the math. 25 x $500 = $12,500 x 4 seminars = $50,000 gross for our area and that’s a very generous estimate.

For the past three days, you could not turn on the radio or TV without hearing a spot for these seminars, nor could you find a local website without RICH DAD plastered all over it. They used affiliate marketing on the net, and I’m speculating that the deal with Kiyosaki was licensing, not a vertically owned enterprise. It looks like Russ Whitney is involved as well, and he’s got quite a history. If interested in this no money down, get rich quick real estate seminar topic, here’s some recommended reading. I’m guessing there was an easy $25,000 in promotion. That leaves $25,000 left to pay the bills.

$25,000 less

License fees
Pitchman’s cut
Support staff
Hotel meeting room; 4 seminars, 2 hours each, plus a 3 day meeting (includes a lunch)
Materials

My guess is that if the promoters netted $10,000 from this deal they’d be lucky. As repetition is the engine of creating an annuity, one could argue that repeated twenty times a year there’s $200,000 in profit, and that’s probably the case, BUT….wouldn’t it be less risky and much less work to flip eight or ten houses, at $25,000 profit each??

You make the call. Is the Rich Dad Poor Dad 3 day seminar worth $500? Maybe, for some, it could be. I’m a huge proponent of education and training, and have spent that sum and more many times for legitimate seminars and conferences and have never felt like I was ripped. As a frequent speaker at regional and national shopping center seminars and conventions, I want to offer supreme value for the attendees’ time and money and I think we do. If you have no background whatsoever in real estate dealings, it’s probably not a bad deal, and at least Kiyosaki hasn’t gone bankrupt (to my knowledge) like so many of the “mega successful” gurus.

In reality, the “secret” to making money in real estate is no secret at all.

It’s exactly what Kiyosaki says in his original book, Rich Dad, Poor Dad: Opportunity, Knowledge, and Action. Where most people fail is not implementing the 3rd step–not taking action.

Subscribe to LocalCenters.com ,consider attending quality real estate seminars and conferences, and you’ll learn everything you need to know, and then some. Read the articles, ask your questions, even request articles on specific topics, and soon your ability to move forward with your retail or development goals will become greater than 95% of those who don’t invest their time as you are. While we don’t address residential properties to a great degree, the principles are the same as in commercial real estate.