What is a Good Cap Rate for Starbucks?
Starbucks: Tenant Profile
Starbucks is perhaps the most famous coffee brand in the world. Starting as a narrow storefront in Seattle’s Pike Place Market, today, the coffee chain has over 30,000 stores worldwide, operating in 75 countries. Americano, espresso, latte, and many other drinks, both cold and hot, with or without added syrup, are just a few of the product names in Starbucks. In addition to coffee, cakes, pastries, and other sweets are also available, but more attention is paid to the range of coffee because this is where people come to drink delicious coffee. Some people want to drink coffee in the restaurant and enjoy the atmosphere; others want to take coffee with them and go about their business. Starbucks also offers its services under other brands, for example, Tazo, Seattle’s Best Coffee, Ethos, Evolution Fresh, La Boulange.
Starbucks Net Lease Outline
The fundamentals of Starbucks, real estate leases, are very strong and inspire confidence. The brand cafes are typically in high-traffic locations visible to thousands of people. The format store varies widely from one place to another to benefit most from the space available. Another stakeholder of Starbucks leases is the solid corporate guarantee. Take into account that Starbucks is given A and A2 by Standard & Poors and Moody’s, correspondingly, both investment grades.
Usually, Starbucks has a boost during the primary and option periods. Commonly, Starbucks rent increases by 10% every 5 years. It allows investors to see higher returns over time and provides a hedge against inflation. Starbucks prefers a ten-year double net lease, leaving the investor accountable for the roof and structure. Newer buildings often come with a roof warranty for a period of time, which actually transforms the contract into a triple net lease. Combined with the strong real estate and an investment-grade guarantee, the mentioned factors push the average Starbucks cap rate down to 4.96%. Starbucks is looking to continue expanding, particularly in its drive-thru concept. The latest adds value to the premises and might be a significant draw for a new tenant if Starbucks were to vacate the property.
Thus, Starbucks tends to trade at a low cap rate. Analyzing the last 12 months, you can see that more than 75% of the Starbucks comps had 9+ years on the lease. This means the average cap rate is more of a reflection of the average cap rate of a new Starbucks.
Tip on commercial real estate investing
Today we are talking of triple net leases: what does this triple net lease mean, why do you care, why would you want one, and what it basically is. A triple net lease is almost always for commercial real estate, not residential real estate. And remember, when we touch on commercial real estate, we are talking about retail, office, and light industrial, not apartment buildings. So keep in mind that triple net leases do not work in an apartment building; they only work in an office, retail, and light industrial.
So what is a triple net lease? A triple net lease is when you sign a lease with your tenant in a commercial building, and they pay a base rental rate (usually per square foot, so let’s say 10 dollars per square foot of the area you are using in the building). But then they also pay a portion of the operating expenses. And those operating fees comprise taxes, insurance for the building, the property tax on the building, general repairs and maintenance of this building, landscaping, and snow removal (most parts of Canada, of course, need that, while other territories may require other specific maintenance), etc. It also includes property management fees, which is huge. Isn’t it wonderful that your tenants pay to be managed?
You can’t do that in residential, so it is a considerable advantage of triple net leases. Thus, your tenants actually have to pay for their prorated share of those various expenses. If those increase with inflation, which they always do, your tenants have to absorb that and pay that cost next year and the year after, however long your lease is. It is wonderful since, once again, you cannot do that in a residential area. The only thing you can try to help yourself out with is increasing your rent when the tenant moves out. Or depending on what province you’re in, you might be allowed to increase your rent once per year; usually, it’s limited to about 2-2.9 percent.
So that’s not even really keeping up with the ever-increasing sums of insurance, taxes, potentially property management – all of those things. That’s where a triple net lease help. It breaks it out, so the tenants pay a base rent plus their prorated share of the operating expenses. And by prorated share, we mean the prorated share of the building. So say there are five tenants in one commercial building, and they each have a thousand square feet – they would each have 20 percent share of those operating expenses that they would have to pay. You don’t have to pay for that; they do.
As the owner, you have to pay for anything structural generally. That is when something happens with a roof; some happens with any plumbing, like the internal plumbing: the heating or cooling units (a large HVAC unit or cooling unit). You would have to pay for the repairs of fixing or replacement of those sorts of things. Basically, we are talking about anything with the building itself.
Concerning the exterior of the building, say you want to upgrade it and put Hardiplank on, or you need to fix it if it’s cracking the foundation – you’re accountable for that. Your tenants aren’t. Overall speaking of a triple net lease, they are responsible for general maintenance items and repairs, so say the stop-start doorknob stops working within their unit – they’re responsible for that, not you. Because that’s general wear and tear that they are using. If it’s for a door that is potentially a common room area, then you might be responsible for it. But they would have to pay for it if it’s within their unit. It’s one of the reasons why many investors prefer triple net leases, and commercial real estate shows off advantages over residential.
We wanted to fill you in on what a triple net lease is, how it works and how it profits you as a commercial real estate investor.