Dollar General Plans 600 New Stores in 2010

The CoStar Group reported last week that Dollar General Stores intends to add 600 new stores in 2010. The discount chain currently boasts over 8,700 properties and has thrived in the current recessionary environment.

Dollar General reported net income figures for the first 9 months of 2009 were almost 300% higher than for the same period in 2008. Total net income for the 2009 period was posted at $63.7 Million.

A particularly noteworthy metric was Dollar General's same-store sales growth of 10.3% over last year. Same-store sales growth provides an excellent picture of the chain's core performance as it eliminates growth measurements attributed to new store development, thus providing a better snapshot of what type of growth is occurring in existing markets.

To view the CoStar article in its entirety, follow this link: http://www.costar.com/News/Article.aspx?id=91BB9984AD97B16AE0F5CDCEF7A53996

For investors, Dollar General Stores provide a stable tenant with relatively long-term leases at excellent price points (under $1 Million--often under $750,000) at outstanding costs per square foot (usually under $100).  In 2010 Dollar General began to introduce 15 year primary lease terms and is rumored to be moving from NN leases toward absolute NNN leases.

Sperry Van Ness/Fiducia Properties has assisted several investors with the acquisition and disposition of Dollar General investment properties. We also attempt to keep abreast of other brokers' inventories so that we can identify the best opportunities for our clients and customers.

Please contact Greg Finley at 888.879.2083 or greg.finley@svn.com for a more thorough discussion of available Dollar General and other commercial real estate investment opportunities.

Dollar Generals and Ground Chuck

The overall market for net leased retail properties remains sluggish. However, one tenant has commanded respectable demand among investors because of its recession-resistant business model. The tenant? Dollar General Stores.

Dollar General seems to do well in good times but even better in poor times. The Goodlettsville, Tennessee-based retailer has seemed to thrive in the current economic climate as the company's discounted price-points have attracted penny-wise consumers. If you were awake during Econ. 101, you might loosely connect these dots to an economic concept called "substitute goods." Think buying ground chuck when you can't afford filet mignon.

The real estate investor community has taken notice of DG's business model. The model, coupled with attractive price points (often under $1,000,000) and lower costs per square foot (often under $100), have enhanced the attractiveness of this once ho-hum investment.

But we've noticed an interesting phenomenon in the current marketplace. There is little, if any, adjustment in capitalization rates among Dollar General stores being offered in communities with differing demographic profiles.

As an example, we looked at two Dollar General stores being offered in Missouri. One in Garden City, a small, "exurban" location about 50 miles south/southeast of Kansas City. The other in Rolla, a medium-sized community located in south-central Missouri.

Both of these stores are new or under construction and possess 15 year leases with Dollar General (the 15 year leases are a relatively new phenomenon for DG investors as most previous leases did not exceed 10 years). Both are being offered at capitalization rates of 8.75% despite two drastically different demographic profiles.

We recognize that many believe an investment is an investment and Dollar General credit is Dollar General credit whether the asset is located in Katmandu or Tucumcari. True enough in one sense, but we're somewhat surprised that at least minor adjustments in price aren't factored into varying demographic community profiles.

After all, at some point in the future--perhaps 15, perhaps 50 years--Dollar General will no longer desire or be able to lease the particular building which the investor might be evaluating today. At that point the investor/landlord will have some decisions to make. At that point the asset’s "residual value" will come into play.

The residual value of a leased asset essentially answers the question: What is the building worth when my current tenant is no longer paying me rent? Other questions stem from this one. Is the rent I'm getting from Dollar General today achievable in 15 years, if vacated, given various supply and demand factors in the particular community? Can I sell the building as a warehouse to a local business? What other types of tenants are likely to desire this property? Did I pay too much per square foot to ever sell to any reasonable buyer in the future? Did I pay too much per square foot to be able to realize a reasonable ROI from “Tenant B?”

In the case of our two DG examples, we see identical offering cap rates (8.75%). However, the Garden City store has access to only 1,733 persons within a five mile radius while the Rolla store has access to almost 14,000 persons within a similar concentric five mile radius. At first glance this phenomenon could be attributed to the fact that these two stores are being offered by the same brokerage company on behalf of the same owner. After all, this is very common when offering a portfolio of properties. Often similar asking prices are offered for multiple properties with the assumption that the market will take care of differences among the individual properties when final prices are negotiated.

The 8.75% cap rate, however, appears to be somewhat of the asking norm when evaluating other similar Dollar Generals around the country and is not specific to one owner or broker. Indeed, a new, 15-year leased Dollar General in Amarillo, Texas was observed with an asking cap rate of 8.75% as well. This is so despite the whopping 76,837 persons located within five miles of this store. This offering is by a different brokerage company and owner than those of the Missouri stores.

So what does this mean? Perhaps owning a Dollar General in the little berg of Garden City, Missouri is just as attractive as singing Amarillo by Mornin'. Perhaps there's no more difference in geographic ownership of a real estate investment "commodity" than there is receiving a company stock certificate from Edward Jones or Merrill Lynch.

Over the next few months we'll be doing some more sophisticated analyses in an attempt to evaluate whether or not the marketplace is rewarding the perceived benefits derived from more attractive demographics and other factors. We'll also attempt to see what else is going on with other metrics like cost per square foot, etc. In short, we'll try to determine what the market is saying about some of these factors and whether or not it should matter to buyers and sellers of these assets.

We'll probably release a little information at a time. This won't be a doctoral dissertation but hopefully a fluid investment advisory tool released in useful vignettes. In between blog posts on this topic, feel free to contact us at our toll free number (888.879.2083) if you have any questions or comments about Dollar General stores or any other topic pertaining to commercial investment real estate.

Kmart Sub-lease Opportunities

Sperry Van Ness/Fiducia Properties is participating with other SVN Brokers in the offering of excess Kmart space for sub-lease.  This effort is happening in conjunction with the Chicago office of Grubb and Ellis and is undertaken on behalf of Sears Holding Company.

Sperry Van Ness/Fiducia Properties is marketing seven properties in Missouri and Iowa. Each of these excess spaces are former automotive service centers and range from 4,000 to 10,0000 square feet in size.

The specific properties which are being marketed by SVN/Fiducia Properties include St. Joseph and Sedalia in  Missouri and Cedar Rapids (2 stores), Des Moines, Ames, and Dubuque in Iowa. The photo above displays the space available at the Kmart in Ames, Iowa. The Ames store is the largest Kmart in the state of Iowa.

Contact us toll free at 888.879.2083 to learn more about these properties.

Just Leased: Former RB Industries Facility in Harrisonville, Missouri

Sperry Van Ness/Fiducia Properties recently assisted with the leasing of the former RB Industries (RBI) facility located at 1801 Vine Street in Harrisonville, Missouri. The 35,500 SF building was leased October 1st to a start-up company which manufactures a variety of filters for industrial applications. The successful tenant was one of two businesses vying for the rights to lease the building, which had been on the market (for sale) for over 18 months.


The RBI property has been widely considered the most attractive facility in the Harrisonville Industrial Park. Located at the corner of Vine Street and Plaza Drive, it contains and excellent set of drive-in, dock high, and side-load (flatbed) doors. The building also boasts abundant electrical power and is fully air-conditioned—a critical feature for the successful tenant. Although the city of Harrisonville required the building to be retrofitted with a sprinkler system before it could be occupied, the city applied economic development funds to bring a six inch water main from the west side of Plaza Drive to the west side of the building to help accommodate the sprinkler requirement.

The RBI building was built in 1985 and housed RB Industries, a manufacturer of precision scroll saws, for over 20 years. Sperry Van Ness/Fiducia Properties represented the owner/landlord in the transaction.

Mid-America Graphics Property Available In Harrisonville Industrial Park

Although the RBI facility is now unavailable, SVN/Fiducia Properties can deliver an alternative in the Harrisonville Industrial Park. The Mid-America Graphics (MAG) building, located at 1501 Vine just to the east of RBI, continues to present another outstanding industrial user option in Harrisonville. The MAG facility includes approximately 41,541 SF throughout four buildings, the largest being almost 19,000 SF. The complex is housed on 5.45 acres and is being offered at an outstanding price of under $17 per square foot.

To learn more about the MAG facility, explore this link: http://sale.svn.com/HarrisonvilleMidAmericaGraphics or give us a call at 888.879.2083.

Alex Ruggieri Blog

Looking for a great read on commercial real estate? Check out http://blog.ruggieriteam.com/. This is a blog published by my good friend and colleague in Champaign, Illinois, Alex Ruggieri.

Alex and I worked together on some Dollar General deals in Central Illinois. I found him to be a real expert and the "go to guy" in Central Illinois. Alex is a CCIM and even hosts his own TV show.

Take a look at this blog. You won't be wasting your time. Alex is a real pro.

Considering the Sale-Leaseback Strategy

We're no doubt operating in some trying economic times, where cash is king and banks are often on the sidelines. So what if your company doesn't have a storehouse of excess cash? Before resorting to searching under your sofa cushions for spare change, why not consider a real  estate sale-leaseback transaction as a source of untapped capital?

A sale-leaseback is a real estate transaction where the owner of a particular piece of commercial real estate becomes a seller and then tenant in his own property.  The owner's property is offered for sale with the understanding that he will sell it to a buyer who will in turn become his landlord. The buyer/landlord agrees to lease the property back to the seller/tenant for a specified period of time under pre-determined terms and conditions.

The advantages of this strategy to a seller/tenant are many--some obvious, some less so.  First and foremost the seller/tenant  converts his illiquid real estate asset into liquid cash. Although the real estate is serving a purpose when owned, the knock on real estate in general as an investment is its illiquidity. With the real estate off the books, its value is converted to cash and can now be put to work meeting some of the other needs of the business. Many companies, when establishing a new location, like the option leasing provides. In a new build-to-suit situation, valuable cash can be put to work other places when a company chooses to pay $100,000 annually for leased space rather than say, $1,000,000 for new construction.

Another advantage to the business owner is the flexibility leasing provides over owning. The tenant is only obligated to occupy the property through the base term of the lease. This may be 5, 10, 15, or in the case of Walgreen's and others, 20-25 years. Since no business can be sure how long its real estate will continue to enhance its bottom line, leasing provides a hedge against an outmoded location or other factors which might make a new location more attractive.

If the business owner/tenant is not sure what the future holds but wants to remain in the driver's seat at the end of the base lease term, he simply negotiates a series of options (usually in 3-5 year increments) which  allows him to stay in the real estate as long as it is still advantageous to do so. It is important to note that options are uni-lateral, meaning it's solely at the tenant's discretion whether or not it is exercised. The option conveys a right to occupy the property beyond the base lease term, but does not represent an obligation to do so. Some national tenants can effectively tie up property with the judicious use of options for as long as 75 years.

Another advantage of a sale-leaseback transaction is it allows the seller/tenant to effectively "write his own ticket." The seller often writes his own lease before putting the property up for sale. This practice allows the seller/tenant to better control his future costs and obligations.

Other sale-leaseback advantages are a function of timing. Many believe now is a good time to clear the books of real estate because of the pending threat of higher capital gains taxes which may be on the horizon. Another issue, simply put, is in this current market a new private investor/buyer/landlord may be more willing to buy a property than a bank would be to lend on it.

Investors like sale-leaseback transactions because they know the tenant already has some level of commitment to the property and will be less likely to move because of minor inconveniences. Further, investors like sale-leaseback deals because they often provide accessibility to smaller, more manageable (financially) properties. Since sale-leasebacks usually include triple net leases, landlords like the fact that the tenants continue to  pay taxes, insurance and maintenance and the investment virtually becomes a coupon-clipping, check-cashing machine.

Sale-leasebacks are not for everyone. Many would-be seller/tenants bristle at the notion of paying all the occupancy costs of the real estate without enjoying their ownership "bundle of rights." Also, an owner/tenant's lease payments will be a funciton of the buyer/landlord's capitalization rate and purchase price. Assuming a purchase at prevailing market cap rates, a higher purchase price will mean higher ongoing rent. If the tenant desires to keep rent low, the amount of cash generated at the sale will be proportionately lower and presumably of less benefit for other business operations.

On the investor/landlord side, some will be scared off by smaller tenants or the threat of non-payment that may go with a less creditworthy business. Or, given a perceived higher risk, the investor may demand a cap rate on the deal which exceeds those in the current marketplace.

An issue that should be addressed, both pro and con, from both the landlord and tenant perspectives is that of property apprecition/depreciation.  In a sale-leaseback transaction, the tenant is assuming the risk that the property will become much more valuable in the future. At the same time, however, he is freeing himself from the risk that the property will, dare we say it, depreciate in value in the future. And although this latter risk at one time seemed unthinkable, it has often been the reality in this past year's deflationary environment. The landlord obviously is dealing with these risks/rewards in a converse fashion.

Leasing vs. owning is a question many businesses weigh from time-to-time. Recognizable retail names such as Walgreen's, Wal-Mart, and Applebee's/IHOP have been committed to leasing rather than owning over the years. Some business like Wal-Mart have shifted their focus from leasing to owning and sometimes back again to leasing depending on the business climate and corporate philosophy at the time.

If the sale-leaseback transaction has not been on your company's radar screen, consider its benefits for freeing up valuable cash. It may be a lot less painful than arm wrestling your banker for a new loan.

If you're an investor, consider the sale-leaseback as a way of diversifying your real estate portfolio. It may be a great way of adding to a quality tenant mix and broadening your investment horizons. And, if you encounter the right seller/tenant at the right time, you may be rewarded with above market cap rates.

Please give us a call here at Sperry Van Ness/Fiducia Properties to discuss sale-leasebacks or any of your other commercial real estate needs. We can be reached toll free at 888.879.2083 or by email at greg.finley@svn.com.