Many investors are seeking out Dollar General NNN for 1031 Exchange. They seek the long term leases of 15 years, S&P rated “investment grade” tenant and the absolute NNN lease with no responsibilities.
Dollar General Corp is a chain of variety stores. As of early 2016, Dollar General operates over 12,400 stores.
Dollar General often serves communities that are too small for Walmart stores, although many locations are in relatively close driving distance to a Walmart store or in the same communities that Walmart is located. It competes in the dollar store format with national chains Family Dollar and Dollar Tree, regional chains such as Fred's in the Southeast, and numerous independently owned stores.
Since 2000, Dollar General has experimented with stores that carry a greater selection of grocery items. These stores, (similar to the Walmart Supercenter, but much smaller), operate under the name "Dollar General Market".
1031 Exchange investors looking for NNN Dollar Generals need to be careful of which location to buy for their Dollar General 1031 exchange.
With 12,400 Dollar General 1031 exchange locations available, investors need to watch out for a few things. Not all Dollar General NNN deals are created equally.
5 things to watch out for when purchasing a NNN Dollar General 1031 Exchange:
how big is the area? Many Dollar General’s are in very small towns or no town at all. Many “town” signs read population "228" or "881" etc. While this makes sense for DG’s business strategy to serve underserved areas it may not make sense for you as an investor. If something were to happen to DG or they were not to renew, what can you do with the building? Who can you rent it to? At what rate? If DG is paying $75,000 per year NNN for a 9,000 sf building who can you rent it to for $8.33 psf? In most of these towns you can’t. Maybe $5.00 psf? This lowers your NOI to $45,000. This is 40% reduction in income not to mention the affect it has on building value.
What are the other retailers nearby? Is there another Dollar Store? What about Grocery? Or Walmart? Are there chances of new competition coming in? In most cases, there is plenty of cheap land for competitors to build on. A good way to assess this is to look at where all the competitors are in a 25 mile radius. If they have other stores nearby chances are they will not attrition their own stores.
Relevant to #1 above, what is DG paying in rent? Are other retailers paying $10 psf or $4 psf? Is Dollar General paying $12 psf NNN in a $6 NNN market. This would raise red flags for me.
What is the retail supply and demand in the area? Is the area already over served or is Dollar General filling a need due to excess retail demand? We pull marketplace reports for all of our clients to make sure the area is undersupplied in the retail segment. This way you know the tenant will most likely do well, succeed and therefore renew the lease.
As when buying any NNN property for 1031 exchange, make sure to look at the underlying real estate fundamentals. Yes, you are buying an investment grade credit tenant for your Dollar General 1031 exchange but you have to look at land size, building size and the psf prices of each, the traffic counts, easements, title work, environmental, road access and general market health such as unemployment and population growth. Don't throw real estate basics to the wayside just because of a long lease and no landlord responsibilities.
Let us know if you would like us to find you a great Dollar General for your 1031 or if you would like our opinion on a Dollar General NNN location for sale.
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