In September 2015, a listing agent marketed this Arby's in Price, UT. Price is in the heart of coal country in Eastern UT so the town grows slowly and steadily. The entire trade area's population if you look regionally is 15k-18k people. The building is old, tired, and a little drab, so the listing sits without much attention.
The listing agent starts calling me because he knows my insatiable appetite to pursue drive-thru properties and Arby's more specifically. From the activity on the listing, I can easily see that I am the only potential buyer he has lined up so it is a tough pitch for him. Plus on top of the small trade area issue, a large portion of the rent is percent rent which is based on the performance of the Arby's sales.
The property is listed at a 7.49% cap. That is a base rent of $44,550 + Last year's percent rent ($15,394) which totals $59,994. At a 7.49% cap that would make the purchase price $800,000. I thought using the last year % rent factor was not a large enough sample size to come up with a future projected percent rent.
Looking into the past few years of percent rent gave a little more insight:
2011: | $6,991 |
2012: | $9,251 |
2013: | $11,109 |
2014: | $15,394 |
My driving question to the listing agent was why cap just last year's percent rent. In the last 4 years that was the highest amount of percent rent. Seems like the asset was priced incorrectly. After all the percent rent could easily go down in the first year of ownership if for some reason Arby's sales dipped.
After a few weeks of back and forth, we settled: That the number that should be used in calculating the sale price should be the average of the last three years which brings our annual rent to $55,236. That change in annual rent brought the purchase price down to $750k. INSIDE BASEBALL: This was the 8th Arby's I would own. I knew 2014 percent rent was high, but I knew 2015 and 2016 were likely to be higher still.
The amazing part of this deal came when the listing agent didn't call the tenant about the lease even though it was expiring fairly soon. It is a fairly simple call and would have given him the info that made all the difference to me. I knew that Arby's was upgrading every store in Utah with a goal of finishing by the end of 2016. I knew that this unit was getting a full gut and renovation but the listing agent had no idea.
We closed on the Arby's in February of 2016, Arby's reached out in the first week and asked if they could extend the lease as they are planning a major upgrade. Surprise, surprise... We hammer it out for a bit but they grow tired of my approach on value versus theirs so they pull the trigger and remodel without an extension. They put $500,000 into the building that I just bought for $750,000. The building looked absolutely phenomenal once the renovation was complete.
In the Fall of 2019, Arby's reached out as they are getting close to having 6 total years of lease + options remaining. Most single-tenant net lease operators do not like this, and Arby's is no exception. They are much more intent on signing something. They also have a new RE manager who wants to get this job off his plate so he doesn't have to worry. The lease extension negotiation is brutal. Between the percent rent, shrinking cap rates (giving Arby's an angle to argue base rent down), and Arby's not wanting to pay what I felt like they should in total rent made it drag on for a few years and a couple of different Real Estate Managers.
In January of 2021, We finally signed a lease extension for a 10-year primary term with two 5-year options at a base rent of $58,000 and no percent rent. Arby's knows sales are going up and wants to get rid of the percent rent to take advantage of the growth. Meanwhile, I want base rent as high as possible in order to better facilitate a future sale.
We sold the Arby's in August of 2021 at a 4.75% cap rate! That calculates out to a $1,220,000 purchase price and a 35.40% deal level IRR. This is why I love buying, leasing, and developing drive-thru fast food deals!
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