Is Dollar General a Credit Tenant?
Is Dollar General a credit tenant?
In fact, the purchase of a commercial property can be a problem if you do not have the right amount to invest. For this reason, there are different solutions for properties that are not for residential use; among the best known are unsecured or mortgage loans, although unlike mortgages for residential properties, the loan for the purchase of a commercial property has greater limitations and specific release conditions. Precisely for this reason, today, the best solution for the purchase of a property for non-residential use is commercial real estate leasing which offers various advantages for both businesses and self-employed entrepreneurs.
Commercial real estate leasing is a type of financing stipulated for the purchase, construction, or renovation of industrial or professional properties for all holders of a VAT number for investment purposes.
What does real estate leasing consist of?
When we talk about commercial real estate leasing, we refer to a lease agreement stipulated between the tenant and the bank or another credit institution in which a periodic fee and a specific deadline are established. The tenant will rent the property by paying a monthly fee; at the end of the established period, arriving at the specified deadline, the tenant will have the possibility to choose whether to redeem it by acquiring the property or return it. The tenant will have the opportunity to purchase the commercial property against payment of the difference between the rents already paid during the lease years and the total value of the property.
Advantages of commercial real estate leasing
In addition to the convenience in itself of the formula that allows you to try for a period and then decide whether to buy the property, there are other advantages that lead more and more investors to choose commercial real estate leasing.
Among the first positive aspects of commercial leasing, we certainly find the formula of the leasing installments: the tenant can choose to pay a monthly, bimonthly, or quarterly installment in a period ranging from 8 years to 20 years and combine, together with the installment, also solution insurance; you can also include renovation and adaptation works in the loan. The initial installment will vary between 10% and 30%, but the higher the initial installment, the cheaper the rates and amortization will be.
As far as the taxes are taken into account, the choice of commercial real estate leasing is advantageous. In the event that the lease lasts 8 or more years, it will be possible to deduct the entire rent. In the case of self-employed workers, instead, they will be able to deduct only the cadastral value of the asset from the total income.
In addition to these advantages, it is also important to remember that commercial real estate leasing also has much shorter lead times than a traditional mortgage. Precisely for all these reasons, commercial real estate leasing has been very successful, guaranteeing low-interest rates and easy and fast delivery.
The substantial difference between mortgage and leasing is that in the first option, the property immediately becomes the property of the tenant, while in the case of commercial real estate leasing, the property will be owned by third parties until the end of the installments and the payment of the ransom.
Triple net lease: which properties can be rented
Any object can be in pure rent (net lease), including retail space, office space, industrial warehouses, medical facilities, and casinos. However, in most cases, it will be a stand-alone property with a single tenant, such as Dollar General stores, Chevron gas stations, Taco Bell restaurants, and so on. Unlike other types of properties, net rent properties are leased on either NN or NNN terms, which means that the tenant is directly responsible for all costs of the property, including taxes, insurance, and maintenance. Leases are very long, with an initial term of ten to twenty years, and include automatic rent increases, typically 2% per year or 10% every five years.
Plus: a defensive asset combined with a predictable cash flow. The asset class is the most recession-resistant. Long lease terms and automatic rent increases.
Minus: over the past ten years, capitalization rates have strongly
declined (and continue to decline). Even in times of rapid economic growth, potential growth is limited to fixed rents. In case the tenant fails to fulfill its obligations, it is difficult to quickly repurpose the object since it is most often intended for only one specific type of business (for example, pharmacies).
Bottom line: triple net lease is one of our favorite investments in real estate. REIT of this class is stable during the entire market cycle and generates excellent risk-adjusted returns.
Dollar General as an example of a successful, promising investment
The company makes prudent investments related to store infrastructure, store openings, expansion, refurbishment and relocation, and construction and improvement of distribution centers to increase revenue.
The success of the trading model of Dollar General is dictated by its relative simplicity. The discounter is a very clear business model: clear, standardized stores with a stable range of products. Discounters are focused on the maximum reduction in the cost of opening new locations in comparison with other operators, the volume of investments in the opening is lower by 20-30%, and sometimes by 50%. This allows such networks to more densely cover residential areas in order to be closer to the end consumer. They rent old premises, often on the site of former grocery stores and haberdasheries, where several generations of townspeople are used to shopping. The range has an average of 7,000 SKUs. These are usually everyday goods (hygiene products, detergents, cleaners, etc.), but the shelves often also contain toys for children, stationery, as well as snacks, spices, and inexpensive brands of tea and coffee. The share of food in such stores will grow. They also work well with seasonality, selling Christmas decorations on the eve of the holidays or increasing the supply of goods for the school in August.
In addition, consistently good indicators of Dollar General’s development confirm that this investment practically eliminates risks and guarantees development and profit.
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