12.5% Rent to Sales for a National Restaurant - is it worth it?
I came across a national chain restaurant for close to 3M. The CAP rateis about 7.25 and has about 10 years of lease remaining. The Cap rate becomes 8% on purchase price in two years due to price escalation. From a return perspective, this all seems dandy but the sales are low for the rent they are collecting. The rent is around 11.25% of sales right now, and with increased rent in two years, if the sales don't improve, the rent to sales will be 12.5%. This seems very high for casual dining segment and my worry is, at the end of 10 years, either the tenant will leave or renegotiate the rent. There's always the possibility that the inflation will save the day by racking up the sales even though foot prints don't change.

What would your advice be for this? Is this worth investing? 
[{"id": "if7v691", "text": "Personal pet peeve but that \u20188%\u2019 isn\u2019t really a cap rate unless the market value of the property doesn\u2019t change between now and then. 10% increases every 5 years is typical and is inherent in the current cap rate. \n\nWith only knowing the information provided, that seems like a favorable cap rate for a national chain but  the sales ratio is high, likely factoring in the higher cap. Is there a longer sales history available? Might help to know if sales are up/down/flat. You should definitely consider the potential costs to retenant at the end of the term.", "replies": [{"id": "if8cbn9", "text": "Sales are increasing - slower pace but increasing. I will be almost 60 at the end of the lease term. I am considering retiring two to four years from now - and hopefully when I am 60, I am probably still okay if there is a rent reduction or find a new tenant at lower rent.", "replies": [], "depth": 2}], "depth": 1}, {"id": "if7wsy4", "text": "Corporate guarantee? How are the demographics of the area?", "replies": [{"id": "if8b4t7", "text": "Midwestern city on a corridor adjacent to freeways. The reason sales are low is because it is at the end of the through-fare that connects the city to the freeway and there are so many similar restaurant chains along the way. So either someone has to get off the freeway, come a few hundred meters inside into a mall complex or someone coming from the city must pass through a gazillion restaurants to finally find this. \n\nAnyway, the demographics are good and growing but I am not sure if 12% rent to sales justifying worth.", "replies": [{"id": "if8kan1", "text": "Plenty of national chains operate at RTS ratios over 10% (not typically the average, but specific units) particularly if they have fully amortized their investment in the space.   The 12% RTS is not ideal, but it would not scare me if the guarantee was strong (or at least the same guarantor for the entire chain).    What would scare me is your description of the location as inferior to your competition.    You can always adjust a tenants rent to keep their sales ratio healthy (and still have a decent yield), but if you can\u2019t backfill a space your in trouble, and I wouldn\u2019t assume any tenant last forever!", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "if8uip4", "text": "So you are willing to pay $13.75 for a dollar of NOI that will be worth $12.50 in a couple of years?  Does not make sense.", "replies": [{"id": "if8zn0c", "text": "I am sorry, I don't think I follow. Can you explain?", "replies": [{"id": "if9qm95", "text": "Sure!  Cap rates come from an income approach to value.  The formula is V=i/r.    If you buy at a 7.25% cap rate you are paying $13.79=$1/7.25%.   \n\nIf the cap rate changes to 8% your dollar of NOI LOST VALUE !\n\nIt is now only worth $12.50=$1/8%.", "replies": [{"id": "if9yo4k", "text": "That\u2019s based on the purchase price right now and not the future appreciation. Assuming it\u2019s a NNN, they\u2019re usually assessed on a cap rate bases for the most part since you\u2019re buying the income. If all Taco Bell\u2019s are selling at a 4.5% cap then that\u2019s what most will be valued at (depending on location and other factors). As rents rise, the value of the building will too. It\u2019s all dependent on the renewal of the lease though since that guarantees the income. When a lease is newer, it\u2019ll trade closer to the national cap rate. As it gets farther into its term, the cap rate will increase since there\u2019s less years remaining. Once the tenant confirms they\u2019ll renew then the building value will, for lack of a better term, reset based on the national cap rate average. There\u2019s other factors but that\u2019s the gist.", "replies": [{"id": "ifa07te", "text": "The cap rate is based on the purchase price today based on 12 months of financials. \n\n The anticipation of future rent growth and change in cap rates are baked into today's cap rate.  That is why NOI sells for $10 in some markets and $20 in others.  \n\nToday's NOI divided by a 10 year old purchase price is not a cap rate.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "ifwjx5l", "text": "https://m.youtube.com/watch?v=vJXsW1ER5hw&amp;t=1910s\n\nHope this helps.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "if9v4oz", "text": "Lmao my cousin bought a joint with 30% rent to sales ratio. Dude is sinking", "replies": [], "depth": 1}, {"id": "ifegpbb", "text": "how long have they been there for? historical sales? any comps nearby to go off of? would it cost a lot to re lease it? i\u2019d also look at the guaranty.", "replies": [], "depth": 1}]