A Net Lease Riddle: Which Is Better, A Strong Guarantor or Strong Location?

HERNDON, VA—As net lease deals go, it was a fairly routine transaction. Calkain Cos. was marketing seven Burger King locations in Ashburn, Centreville, Woodbridge, Manassas and Springfield, VA. The guarantor was a local owner with 25 years experience who owned about 16 other locations.

The marketing materials were circulating and offers were coming in, Calkain's Betty Friant, who was handling the deal along with Rick Fernandez and Teal Henderson, tells GlobeSt.com.

Then, the guarantor decided to sell his operations as well, Friant says. This particular businessperson was retiring and, while the sales at the locations were above average for a typical Burger King, but with a rent to sales ratio of 8.5%, they could have been better, Friant diplomatically explains.

Enter the buyer of the business, TOMS King, an Ohio-based company that owns 75 Burger King franchises across Illinois, Pennsylvania and Virginia. It recognized there was upside to be had from the lagging operations and snapped up the business operations and became the franchisee in those properties.

"The buyer recognized that, with the low rent in place he could knock sales out of the park with his new systems," Friant says.

Some of the properties were in the due diligence stage of being acquired while this happened and the changes buyers made to their underwriting was interesting to watch, Friant says. The end result was also telling for anyone who has ever wondered, 'if you could pick just one factor to control, would it be a strong guarantor or strong location?'

This is how it ended: The underwriting was adjusted to reflect a stronger guarantor but it didn't make a difference to the offer prices, which were the best the buyers could proffer, Friant says. At most, the stronger guarantor closed the deals a little bit faster.

It should also be noted that the leases are only five years long. Despite all that, the locations won out.

Six of the properties sold quickly at cap rates ranging from 5% to 5.35%. The seventh, in Manassas, is still on the market. "The real estate is so strong," Friant says. "It speaks for itself."