To committed Petro-Pros, the Parthenon in Athens or the Coliseum in Rome don’t hold a candle to the beauty and majesty of a new co-branded, multi-acre convenience store with a major quick-service restaurant (QSR) tenant. They look so good that we were compelled to feature two of our clients’ facilities in our new website. But like a high-maintenance girlfriend, sometimes looks can be deceiving. Careful research is essential before entering into a long-term relationship.
In these two high profile instances, after conducting a network rationalization study for each respective chain, we found that both stores ranked low in overall store performance and resultant cash flow value. They each scored so low that despite high developmental costs, we were ultimately retained to sell them to stop the bleeding. The QSRs at the facilities however, were doing a stellar business and in one instance delivering maximum potential rent based on sales. Neither one of these major brand hamburger operations delivered promised synergies to the store and fuel operations.
Based on this situation, we decided to poll various marketers across the country whom we knew had solid developmental and operational knowledge. We found that some had very good experiences and still seek appropriate co-development opportunities, while others were disenchanted and would never do another one. They felt that the risks for failure on the store side of the development were too high and the QSR lease requirements were too restrictive. This informal survey clearly indicates the necessity of taking extreme care when contemplating a co-development project. The following includes some thoughts that should prove helpful if one is intent on going in this direction.
No development should ever be based largely upon the opinion of the QSR partner. Nor should any “upside” synergies be factored into the store sales pro-forma. Even after the best professional minds in a marketer’s organization have signed off on the project, never go forward without a professional site study to verify fuel volume and inside store sales potentials. An investment of a few thousand dollars for the study could save a multimillion dollar mistake.
If the green light is still on at this point, a decision will be made whether to do a “build-to-suit” for the QSR tenant, whereby the marketer funds most of the project costs, or a simple ground lease, whereby the tenant funds their part of the development. Based upon our experience with the underperforming sites, the build-to-suit example delivered a consistent level of rental income, coupled with the credit value of the QSR tenant, enhanced the overall value of the facility. We couldn’t have sold the site in any other circumstance. For this reason, we recommend that if at all possible, marketers make the early investment versus entering into a long-term ground lease that will not significantly augment facility value into the future.
Careful consideration must also be made to the lease agreement prepared by the QSR. Once entered into, the marketer will have fee simple ownership in name only. Make no mistake about it, the QSR tenant will control the future disposition of the facility for as long as the lease is in effect, and don’t expect any sympathy if the store is not doing well. The lease agreement will generally provide the QSR a thirty day right-of-first-refusal on the sale of the facility. The bigger control contingency however, provides the QSR with the right to approve, or disapprove the transfer of the lease from the marketer to a buyer. In most instances whereby the store is underperforming, the buyer will probably be a dealer with a credit rating less than the current owner, so don’t expect the transfer to be a simple slam dunk exercise. Rest assured that the buyer will go through a rigorous financial and operational evaluation before a lease transfer is approved. The lease document will even take into consideration various remedies in the eventuality of a store closure. In this unfortunate situation, a marketer-owner will be prevented from pulling up stakes and simply walking out if the store turns out to be an unmitigated bust.
A large, new-to-market c-store and QSR facility is a quite a sight to behold. When everything clicks, they can provide years of long-term rental income, sales synergy and business success for a c-store operator. However, looks can be deceiving, and a rosy picture painted without proper due diligence could also saddle a marketer with years of financial misfortune and needless, never-ending aggravation.
Mark Radosevich is president and COO of PetroProperties & Finance, LLC, offering confidential mergers & acquisition representation and growth financing services exclusively to the wholesale petroleum sector. Contact him at 423-442-1327 or at firstname.lastname@example.org.