Starbucks NNN For Sale
Starbucks retail locations have become popular single tenant net lease investments over the past few years. This development has been driven as much by the high-quality coffee and the boutique Starbucks experience due to their service offering focused to more affluent consumers in areas with great real estate.
What started in 1971 as a singular storefront in Seattle has blossomed into an international giant with over 35,000 stores worldwide today – and now with a strong balance sheet and credit profile as a publicly traded company provides a great opportunity for investing in commercial real estate.
Tenant Overview
One of the reasons that Starbucks has done so well in dominating the upmarket coffee industry is its high-quality real estate locations. The business has a variety of criteria that they look for in picking a successful location.
By branding its coffee as gourmet and upscale, and identifying more affluent locations, Starbucks has enabled itself to set higher prices – which also means that it caters to a higher-income clientele. For local stores (i.e., those not in major city business districts), Starbucks looks for areas with a median household income of $60,000 or more.
The company also prefers placing stores in strong retail corridors and busy employment districts in proximity to other businesses. Starbucks likes their stores to have multiple access points, to have dedicated parking lots, and to be on the morning commute side of the street (as opposed to the side with more traffic during the evening commute, given that coffee is generally a morning drink).
When you’re looking into a Starbucks single tenant NNN investment for sale, you may want to consider some of the factors outlined in the table below.
| Starbucks NNN Lease Overview | |
| Average sale price | $2,500,000 |
| Average NOI (net operating income) | $118,000 monthly |
| Average square feet | 1,500 - 2,000 |
| Average lot size | 0.5 - 1.0 acres |
| Typical lease term | 10 years |
| Escalators | 10% every 5 years |
| Typical location | Urban and suburban locations with median household income over $60,000 |
| Ticker symbol | NASDAQ: SBUX |
Starbucks Lease Structure
Starbucks franchises typically sign a 10-year net lease, during which the rent prices will be scheduled to increase every five years. Most Starbucks locations operate as NNN leases, meaning that the property owner is not responsible for the maintenance of the property. Some locations, however, operate as double-net (NN) leases, which require minimal landlord responsibilities, such as, roof and the structure of the building. These additional landlord responsibilities can be covered with additional insurance policies.
The average cap rate, or capitalization rate, for a Starbucks single tenant net lease investment for sale is approximately 5.25%. The cap rate is an assessment of a Starbucks locations profitability and return potential. Generally, cap rates of 5% to 10% are considered good. Lower cap rates within, like Starbucks’ average cap rate, tend to mean that the investment is priced to have lower risk.
It’s also important to note that the NNN lease contracts for a Starbucks tenant normally have options for termination with the appropriate legal notice. While that might seem risky from the investment side, as long as Starbucks is making money at the location, they’re likely to continue the lease. Starbucks has a formula for long term successful locations that other retailers will seek in the event they terminate the lease providing a strong hedge against a vacancy.
Why Choose a Net Lease Over a Gross Lease When Investing in Commercial Real Estate?
When it comes to commercial real estate, there are many benefits for an investor who chooses to use a net lease instead of a gross lease. These two types of leases are opposites.
A gross lease is a predetermined amount that a tenant pays in order to use a space. It does not change based on operating expenses, as the landlord generally covers those costs. On the flip side, a net lease allows the landlord to pass operating expenses onto the tenant.
There are three tiers of net leases: single, double, and triple. These are also referred to as N, NN, and NNN leases. Each tier passes more additional expenses onto the tenant, absolving the property owner of risk as the tiers increase.
Single net leases, or “N” leases, pass property taxes onto the tenant in addition to the cost of rent, but the landlord is still responsible for insurance, maintenance, repairs, and utilities. N leases are not as common in the world of commercial real estate. Double net leases, or NN leases, and triple net leases, or NNN leases, are much more common options.
What Types of Net Leases Does Starbucks Operate Under?
Starbucks generally uses NNN leases, which are the most attractive type of lease for property owners. NNN leases involve the tenant paying all of the operating expenses and costs related to the property, including insurance premiums, property taxes, and even structural maintenance and repair costs.
Some Starbucks locations do use NN leases, however. These leases are a slightly less attractive option because the tenant is responsible for only rent, insurance, and property taxes – meaning that the property owner is on the hook for structural maintenance and repairs. These repairs can be pricey, especially big-ticket improvements like roofing.
With an NNN lease, the tenant will generally pay a lower base rent because they’re responsible for all of the other operating costs. But NNN leases also reduce the burden of property management because they pass so many responsibilities onto the tenant.
How to Evaluate a Starbucks Net Lease
It’s important to look at the value of the property as well as the strength of the tenant when considering an NNN lease. Especially when considering single-tenant properties, like the ones many new Starbucks locations are operating in, your tenant concentration will be either 100% or 0% – in other words, you’ll be generating great cash flow or none at all.
So to ensure that your Starbucks NNN lease works out, you’ll want to ensure that the property you’re investing in meets the qualifications that Starbucks prefers in its locations. That will help ensure that your property stays occupied and you keep generating revenue. This is especially important because of the termination option in most Starbucks NNN leases.
On the plus side, NNN lease tenants like Starbucks are generally widely known companies with strong balance sheets, meaning that you should be able to count on your payments coming on time and you won’t be chasing down your tenant for the next check.
What Makes Starbucks an Attractive NNN Tenant?
In November, Starbucks released its fourth quarter and full-year fiscal 2022 results. In the fourth quarter, it opened 763 new stores. Currently, it has over 15,000 stores in the U.S. alone. Its consolidated net revenue was up 11% year over year, rising to a record $32.3 billion. Starbucks’ financials appear to be in a stable position with continuing growth.
The company also just announced that it will start paying a cash dividend on shares of its common stock, a sure sign that it’s optimistic about the future. Overall, Starbucks is a high-quality investment-grade tenant that’s an attractive option for an NNN lease.
