THE WALL STREET JOURNAL AGREES
I have been preaching my belief in dollar stores as a very good real estate investment for many months. Now, read this headline from the Wall Street Journal of 12/30/08 about Family Dollar Store stock: Family Dollar Stores Set to Top 2008 List of Best S&P 500 Stocks. The article states that Family Dollar was the best performer in the S&P 500 stock index with a year-to-date rise of 33%. The company operates more than 6,000 retail discount stores in 44 states. As people try to save money, Family Dollar becomes a more attractive shopping option by improving the assortment, quality of merchandise categories and store appearance in order to attract low-to-middle income consumers struggling with their budgets.
For real estate investors, these are very affordable properties which can be purchased at attractive cap rates with corporately guaranteed leases of 10 to 15 years. Most of the locations are either in high growth markets or situated in areas where their shopper demographics are extremely strong.
A slowing economy is bad news for most retailers, but not the dollar-store market. Dollar-store sales have risen while other traditional retailers saw stagnant sales. Family Dollar states its same-store sales jumped 3.6% in August and 5.6% in September. Dollar Tree posted second-quarter profits of 15%, largely due to a 6.5% rise in same-store sales.
Dollar Stores as a Real Estate Investment
The dollar store chains, the biggest being Family Dollar, Dollar Tree and Dollar General are here to stay for all the above reasons. Most of the freestanding stores are constructed on a contract basis for the tenant by a few developers over a geographic area. Because these developers are building several stores every year and are required to undertake all the up-front costs these newly constructed properties are placed on the market for sale. The investor purchases the real estate, land and building, on a fee simple basis, along with the lease which has been agreed to between the developer and tenant. Most dollar store leases are for an initial 10 years with two or three 5 year option periods. The rent can be set for the initial term with rental increases in each of the option periods or there can be rent increases in the initial term as well as option periods. This varies with the tenant and the location.
Most dollar store leases are on a double-net basis. That is, the tenant pays for the real estate taxes, building insurance and common area maintenance such as snow removal, grass cutting, and other costs associated with occupying the premises. The landlord/owner is responsible for the replacement of the roof and parking lot and structural integrity of the building. A close reading of every lease during a due diligence period is a must when purchasing any investment property.
Dollar stores can be an excellent vehicle for the conservative investor looking for a monthly income with very little, if any, management responsibilities. Many net leased real estate properties qualify as passive income investments which means tax benefits such as depreciation and interest deductions can be off-set against income. It is always recommended to consult a tax advisor/consultant to see if these rules apply.
Ned Coyle, CCIM, is an Investment Specialist with concentrated emphasis in the practice of representing buyers of single tenant, net leased properties. These assets are located throughout the U.S. He has three decades of commercial real estate experience and has extensive understanding of valuation analysis and enhancement and has worked on behalf of local, regional and national corporations and banks as well as high net worth individuals and REIT's.
Ned publishes a monthly newsletter on Investing in Net-Leased Real Estate with timely insights on financing and trends in this asset class. Just email Ned at below address to receive complimentary newsletters.