You may have already gone into escrow on your purchase, but when purchasing a free standing building with a franchise tenant there are several things to check out. Most of them are obvious.
1. The most important is the CAP rate. That is the rough rate of return. It is calculated by dividing the net income by the purchase price. Franchisee properties like McDonalds offer very low CAP rates usually around 4.5%. A primary, high demand, market can also influence CAP rate. So if you are looking for a high CAP rate you may need to go to a secondary market with a "lesser" brand name.
2. Who is the franchisee? Is the franchisee a corporation with a corporate guarantee or is it a "mom and pop" single unit operator? This will effect the risk and CAP rate.
3.is the free standing building at a signalized intersection or mid block? Does it have a drive-thru?
4. How long is the lease? If short term the CAP rate should be higher.
5. What is the market area like? If the tenant fails or moves when the lease is up, how easy will it be to re-rent the building. I have seen some properties where the rent is way to high for the market so if the building goes vacant to re-rent it one would have to offer it at a much lower rent, thereby reducing the CAP rate and value.
6. Finally, how strong and well known is the franchise?
7. All of these need to be taken into account to come up with the right mix for your investment portfolio depending on the amount of risk you are willing to take and your long term investment goals.
I hope this helped, If you need any other information, and you are not already working with a real estate agent, feel free to contact me.
Dec 12, 2015