Analyzing a Drive-Thru Restaurant Investment Property: A Few Thoughts from the Dirt Dog

When evaluating a drive-thru restaurant investment property for your client, the process is really a balance of four key disciplines: leasing, asset management, property management, and investment thesis. Each lens matters, and skipping any one of them can cost you or your client dearly.

Leasing Perspective

So you have the offering memorandum in hand. It's a household brand you recognize, the cap rate is something your client can live with, and things are looking promising. Before you go any further, before you analyze the deal in depth or present it to your client, put it in front of someone who actively does leasing for that type of product in that market.

I say it constantly, and I'll say it again: leasing brokers are the most underpaid part of this process. They rarely touch net lease assets, maybe once every 20 to 50 years on any given property, but their impact is massive. If the in-place rent is $100,000/year and the market is actually $175,000/year, these are the people who help you unlock that value.

For some reason, investors are almost always hesitant to call a leasing broker, which honestly baffles me. Landlord leasing brokers rarely have aggressive fee expectations on a consulting call like this. In 99% of cases involving a currently occupied asset, they're not asking for a commission just to share their opinion. What they want is the listing when the property eventually goes vacant. So they'll give you their perspective for free in exchange for the opportunity to work with you as the new owner down the road.

Key questions to ask your leasing broker:

• How does the current rent compare to market rent?

• What would it cost in tenant allowance (TA) to get a new tenant in, and what's the realistic lease-up timeline?

• What are the surrounding grocery stores and competing QSRs doing in volume?

• Would you buy this asset if it were going vacant tomorrow?

It's critical that you're only bringing assets to potential buyers that have been vetted by a leasing professional. That way, if the property ever goes dark, you can backfill it quickly and ideally with a stronger tenant than before. Those are the best kinds of assets to sell.

Asset Management Perspective

This perspective is the hardest to pin down because it's fundamentally asking: why buy this over anything else in the world? How does the yield compare to other asset classes in commercial real estate, or other investment types entirely?

One step that is non-negotiable once you go under LOI or under contract: meet with the city. Schedule time with a planner and ask the straightforward questions that give you enormous insight into your future business plan:

• What's happening in the surrounding area?

• Are there any planned road widenings or traffic pattern changes?

• Are there upcoming municipal utility upgrades?

• Is anything on the horizon that could trigger a special assessment?

• What is the city's appetite for approving new drive-thru restaurant projects?

• What is the current zoning, and how would it affect the asset if it sat vacant for a period of time?

These are simple questions, but the answers tell you a great deal about whether your plan to buy a hands-off net lease building and clipping a coupon for the next 10 years is actually viable.

Speaking of hands-off: most net lease buyers want exactly that, but not all leases are created equal. Many are NN leases, meaning the parking lot, roof, and structural responsibilities remain with the landlord. Some leases contain clauses that cap increases in management fees over time, which may not keep pace with the actual cost of running the asset. The nuances go on and on, and you need to understand exactly what this specific lease says and how it will affect future cash flows.

Getting sharp on asset management is honestly a function of being an owner of commercial real estate and time. I encourage every single person in our office to get into ownership as soon as possible. You understand the process on a completely different level when you're regularly receiving property reports on something you have a stake in. In the early years of your career, lean heavily on the people around you who have been doing this for 20 to 25+ years. Maintain those relationships. They are invaluable when these questions come up.

Good habits for due diligence:

• Get a roof inspection on any building 10+ years old

• Get an HVAC inspection on any building 10+ years old

• Always meet with a city planner

Property Management Perspective

Most net lease buyers don't hire a property manager, and that's often fine. But it's still a smart idea to get an experienced manager's eyes on the asset and have them carefully review the lease alongside you, as well as any existing property-level expenses.

Most drive-thru QSR properties are located either within a shopping center or as part of a multi-parcel development that functions as a center. Because of this, there are frequently shared ongoing operating expenses and potentially shared capital improvement obligations that you need to fully understand before closing.

Find a seasoned property management professional, someone with 10+ years of experience is ideal, and sit down with them. Ask them to walk through the lease with you, line by line. Pay them a portion of your commission for their time. It's worth every dollar.

Investment Thesis

Finally, tie it all together with a clear, well-documented investment thesis.

Key steps:

• Run a current investment analysis. What does the deal look like today?

• Run 7, 10, and 15-year IRR projections based on realistic assumptions for a planned exit

• Read the lease thoroughly, both personally and with your attorney

The goal here is to be crystal clear on what you are doing and why. A useful exercise: build a case study as if you were presenting the opportunity to an outside investor, even if no outside capital is involved. Walking through that exercise forces you to articulate your reasoning, stress-test your assumptions, and arrive at a conviction or walk away before you should have bought in the first place.

The Dirt Dog - Chris