Starbucks Continues to Shutter Stores

I neglected to post this when the news first hit, but for those of you that missed it, Starbucks, the once darling of the NNN world has announced another round of shutters. We wonder when the hemorrhaging will stop. Starbucks continues to make money, so we are not talking about a bankruptcy situation here. No, they are projected to Net over $300 million this year. They just got a little sloppy on site selection. The good news is most of these leases are for 10+ years, so Starbucks is legally obligated to pay the rent. The issue comes if your financing balloon is a lessor term than the lease contract and when the original commitment on the lease from Starbucks comes to an end. Investors should be interested in at least negotiating out of the lease with Starbucks, if they feel they can line up another tenant....easier said than done in this environment, I know.

Here is a piece from the Tampa Bay Business Journal about stores that will be affected in the Tampa Bay Area.

CMBS Set Up for Failure

Unfortunately, the world of commercial real estate seems unlikely to avoid very turbulent waters ahead. The epicenter will undoubtedly lie in the mountains of loans that were written in the go-go market and are to begin renewals in the next 2-3 years. Most of these loans are performing today, but how does one renew these loans? Lenders have tightened their credit requirements. Loans that were written at 70% LTV's interest only, non-recourse will now be required to be written at 50-60% LTV's, fully amortized with some form of recourse . And, if this development were not bad enough, add the fact that the some markets have deteriorated by upwards of 30 to 35% and you can understand why there is a problem. In a world were liquidity has dried up for many in the commercial real estate investment arena, where will investors find the capital to pay these loans down to bring them in to compliance with the new standards and avoid repossesion by creditors?

No where is this issue more of a challenge than in the Commercial Mortgage Backed Securities (CMBS) market. These loans are traditional loans that were packaged and resold in the debt market as securities to third party, passive investors that have no relationship with the borrowers. The chance of a negotiated settlement in a distressed renewal situation is less promising with CMBS loans, when compared to bank held debt in which the borrower can visit the office of a banker in which they have relationship and hammer out a deal in which neither party looses their shirt.

The government understands that a spiraling commercial real estate market could send the economy on another downward leg already has CMBS on its radar for TALF bailout. How the market deals with this situation in the coming years will be interesting to say the least.

According to Boulder....NNN Deals SURGED in 1st Quarter

"At least one category of commercial real estate investment is enjoying a surge in activity, though not in pricing. Net lease transactions rose several hundred percent for all three major net lease property sectors during the first quarter compared to the last three months of 2008, according to a study by Boulder Net Lease Funds L.L.C. (...More )"

The news has been mostly gloomy over the past 9 months, but we are starting to see sprouts of life in various sectors. Residential sales in our area have picked up markedly in the last 2 to 3 months. Realtors and Mortgage Brokers alike are reporting high levels of activity. I would not expect a straight-line recovery, but any good news at this point is.....well, good news.

Sale-Leaseback as Alternative Financing?

With the crunch on capital placing constraints on business expansion, some businesses may turn to an old tool, sale-leasebacks, to help their businesses grow.

In a sale-leaseback, businesses sell their real estate assets to investors and lease them back under long term arrangements, typically between 10-20 years, with extension options. The leases are typcially under some form of net lease arrangement and can generate cap rates in excess of 300 basis points over the 10 year Treasury yields for investors.

Sellers are able to move the real estate asset off of their balance sheets, receive predictable long term lease rates and usually obain obtain tax advantages, writing off the entire lease amount, as opposed to only the interest portion of their mortgage payments under the ownership scenario. The mst obvious advantage, however, is the cash the business will receive from the sale that can be plowed back into the business to supply necessary funds for growth or to pay down debt.

Stay tuned, because we will take a closer look at this strategy in the coming days.

Closed Starbucks Properties

This is an interesting site geared to the owners of shuttered Starbucks stores. It is being built out as we speak, but should add some value to those owners and developers lost in the woods right now with the their stores closing.

http://www.starbucksproperties.com/

Property Taxes - Florida versus California

I was reading the Wall Street Journal (Personal Finance, D8) this morning and came across some residential properties for sale in California. The sale price, description of the property and notable items were all listed in the recap. Also listed were the property taxes, the values of which grabbed my attention.

They were as follows:

Kenwood, CA. Sale Price - $2.45m, Taxes - $28,500

Healdsburg, CA Sale Price - $3.495 million, Taxes - $23,797

Napa, CA Sale Price - $8.5 million, Taxes - $85,000

The reason I found them to be so interesting was because, although I have always been told that California possesses some of the heaviest property taxes in the country, they seemed a bargain to me, living in Florida. For kicks and giggles, I compared them to similar valued properties in the county that I live, Hillsborough County, Florida. I ran the tax estimates using our county's tax estimating calculator (quite a nice feature, I might add) and the calculated values were as follows, respectively (MOL) : $50,000, $72,000 and $170,000. WOW! Roughly twice what our California brothers and sisters pay.

Now, in fairness, these California taxes will in all likelihood increase at the time of sale, so the comparison is not 100% fair, but all things considered it was still a fairly shocking exercise for me. While the commercial market is still holding up fairly well in Florida, the residential market is really in the dumps. Call me crazy, but could this be one of the reasons Florida's residential market is doing so poorly? The State has always marketed itself as an inexpensive alternative to its more glamorous competitor, California and at first glance is the State really "inexpensive?" Florida tax coiffures and property values have swelled in the last 10 years, along with local and state expenditures to match. In fact, growth in local government expenditures over the past 10 years has FAR outpaced population growth. Let's watch the people of the State of Florida now futilely try to take those revenues away from their government. The absurdity of relying so heavily on variable property taxes to support a relatively fixed budget could not be more apparent. In the end, the State's officials, as always, will do nothing until there is some sort of accompanying crisis. What is sad is the the State may already be in a crisis, an economic one as businesses and migrating retirees appear to be spurning the State in large numbers (across the State, population and economic growth numbers have been dramatically reduced downward for the near and medium terms).

I know this diatribe has nothing to do with Triple Net Investments, but I found it to be an interesting fact (indictment?) of Florida's stuck-in-the-mud economy.

Starbucks: Do Not Forsake Me, Oh My Darling!

Fallout from Starbucks’ announcement of closure of 600+ stores

So a Starbucks is closing near you? Local baristas and competitors Dunkin’ Donuts and MacDonald’s (both of which just launched discount espresso products) are busy dancing in the streets. For many, though, namely employees, landlords and Starbucks regulars, the mood is considerably more somber, manifesting in some instances to outright protest.

How Starbucks decides to go from here will be watched carefully in the real estate world. Long the darling of investors and developers alike, the closing of some 600 stores has sent shock waves through the industry.

For developers, Starbucks meant a steady flow of work with a highly rated credit. In many cases, Starbucks serves as the mini-anchor for hoards of small strip centers. The stores create enormous amounts of traffic, allowing developers to demand top dollar from the surrounding tenants. Typically, these mini-centers were built and developed by small, independent builders and developers, giving them access to the extraordinarily, highly competitive national tenant market.

For investors, particularly Section 1031 exchangers, Starbucks proved to be a safe harbor, as 45 day identification periods loomed. Their net leased contracts were consistent, agents were familiar with the transactions and the investment offered owners a well known and respected national tenant.

In retrospect, it is not so surprising that all this has occurred. Starbucks barreled in to tertiary markets, guns blazing, much in the same way they conquered core markets, paying top dollar for key locations, potential cannibalization be damned. At $40-$50 per square foot leased rate, they were frequently paying 20-40% over market rates. Rising gas prices, market cannibalization and increased, lower priced competition, all took their toll.

While Starbucks remains a highly profitable company, it was not profitable enough for Wall Street and that means change….fast change… When the “Street” determines that your job as an executive is based on quarterly results, you do not wait for the other shoe to fall. Something had to give in their strategy.

How will they proceed? Time will tell. Most of these leases were just signed and have years remaining on them. Almost certainly, Starbucks will offer buyouts to owners of shuttered stores, but there is much anxiety over how “fair” their offers will be. It is unlikely that the replacement tenants will be willing to pay the amount of rent called for in the Starbucks leases. So, successfully replacing the tenants without financial loss will depend largely on the buyouts that Starbucks is willing to provide. Owners of Starbucks housed in mini-strip centers will probably be facing the most stress replacing lost income. Not only did they lose their primary tenant, but they lost bargaining power with the remaining tenants, now that the primary engine of traffic has been removed.

One thing for certain, it is in the best interests of the chain to negotiate in good faith with those investors and developers alike. Any other course of action could have long lasting and reaching implications on how easily and affordably they are able to expand down the road. The real estate industry tends to have amazingly long memories for stories that don't end so well.