The next consideration is to consider the stability of the local employment, where does everyone work, shop, play, educate themselves and live? If it happens to be in the same community add another positive checkmark to the list. Next step is to consider the actual location in the town, is the site located at Main & Main, or is it off the beaten path? Is there room to grow? Does the current site meet the most up-to-date store criteria for the retailer…e.g. store size, parking, visibility, accessibility and the like? As always, you have to consider any deferred maintenance issues for the facility, roof, HVAC, parking lot and the overall integrity of the facility.
The next step is the lease, of course, the first question normally asked is how many years remain on the lease. If the building is up-to-date and meets the current size requirement for the retailer, and the retailer has a long history in the same location the risk with a shorter term remaining on the original lease or option period is not as great as another site not meeting the required criteria. Yes, we would all rather purchase an investment with 10 years life in a lease or 20 would even be better, but many local investors have learned throughout the years, not to worry too much. I have met many investors who have gone five years at a time for over twenty-five years and realizing the safety of their investment. I sometimes think especially for out-of-town investors, too much weight is placed upon the initial length of the lease versus weighting out the extensions and when the dates when the extension agreements were executed.
Another great investment is small multi-tenant properties with national and regional tenants or medical offices. There are some very strong regional tenants which prefer to lease versus own property, and with good lease terms will make for a stable investment. Also, any medical office where the tenant has spent a significant amount of money in build-out is usually a good bet as well.
Opportunities where you should be more cautious include: companies in bankruptcy; retailers connecting to changing technologies have a higher risk; intensive management situations: e.g. multi-tenant properties with many local service providers, government offices, ect.; restaurants in some situations; and self-storage. Self-storage can be very management intensive and finding a good local manager can be tough, government related leases sometimes have clauses where the tenant can exit early out of the lease which is more risk than what some investors are willing to handle.
Bottomline, when evaluating opportunities in small town America, a great deal of the value proposition is based upon weighing out the risks. Usually there are fewer zoning laws which can be a double-edged sword; if demand is not great and the retailer moves, what is the real value of the property? Is there a retailer to replace the existing one, and what would be the fair market rent? On the other hand, less zoning if building a project is usually favorable, retailers as mentioned, do not make decisions in haste to move to small towns, and if they have chosen a site, it is normally with good reason and a fair bet they plan to stay for a long while.
The last point! Yes, you can always find investments that bring higher returns than others, however a 9% return on investment is not a bad return compared to 6.5%. The question is… are you okay acknowledging the investment for 9% is only guaranteed for 3-7 years in some cases versus a 6.5% return for twenty years. And how discriminating is the 20 year tenant versus a tenant who leases for five years at time? There are many variables to consider, and the length of the lease is only one factor.
There are many great opportunities in small town America and I hope this provides some insight as to how to evaluate investment decisions.
