Protect Your Drive-Thru Investment | Monetize Appreciation & Reinforce Your Equity

California’s evolving business landscape has given rise to uncertainties that might directly impact drive-thru properties and the sustainability of their cash flow. Despite the state’s advantages, significant shifts in the commercial real estate sector require asset holders to adopt a proactive approach. Exploring the option of a 1031 exchange to transition to a property outside California could offer benefits that secure and enhance investments.

Emergent Business Challenges in California

AB 257, also known as the Fast Recovery Act, establishes a unique council comprising workers, corporate representatives, franchisees, and state officials, intending to set basic industry standards such as minimum wages, working hours, and other employment conditions for fast food workers throughout the state.

This bill has officially passed and will go into effect on April 1, 2024. The passing of this bill indicates that the minimum wage for fast-food workers in California is now $20. McDonald’s has mentioned closing 600+ stores due to the Fast Recovery Act passing in California, as employers are burdened with increasing wages and payroll taxes. To quantify the impact on restaurant operators, they are now expecting to pay an estimated $250,000 that they didn’t expect nor have budgeted on increasing sales and wages and ensuing payroll taxes per NOA, (National Owners Association). Advocates view this innovative approach as empowering workers with limited avenues to address widespread issues like wage theft and substandard, hazardous working environments. Those opposed feel that the law unfairly singles out California fast-food companies and would result in much higher food prices.

With the passing of this bill, it has the potential to disrupt commercial tenants’ profitability and ability to meet rental obligations. This concern is amplified by the escalating expenses tied to property insurance and the state’s labor and payroll taxes. The result is an environment marked by volatility. Notable corporations, ranging from Tesla to Oracle, have already executed their departure from California. Furthermore, tech giant Google is actively contemplating a shift of its campus away from Silicon Valley. These relocations highlight the mounting expenses and complications associated with conducting business within the state.

What Does The Fast Act Recovery Bill Man For California Drive-Thru Landlords?

The passing of this bill means less profitable tenants and negative rent growth for California fast-food restaurants. Data has proven that California drive-thru pricing peaked in Q4 2021 – Q3 2022, but the good news is that investors can plan accordingly today.

McDonald’s

AB 257 has garnered opposition from several restaurant lobbying groups, most prominently McDonald’s USA president Joe Erlinger. Joe Erlinger stated, “California’s approach targets some workplaces and not others. This lopsided, hypocritical, and ill-considered legislation hurts everyone.” If passed, the minimum wage for fast-food workers would be $22 per hour, resulting in a 20% increase in fast-food prices. McDonald’s will close more than 1,000 restaurants in California if AB 257 passes.

Starbucks

Starbucks has permanently closed several Southern California locations, citing safety concerns for both its employees and customers. Over 16 U.S. stores on the West Coast closed by the end of July, six being in the Greater Los Angeles area. The decision to shut down these locations follows reports from Starbucks employees regarding various crime-related worries. These concerns encompass instances of public drug use, prompting the company to take this step.

California’s Fast Food Industry

According to the Bureau of Labor Statistics, California remains nearly 20% below its pre-pandemic level – representing a loss of more than 75,000 jobs. Even more disturbing is that industry employment continued to decline even after the height of the pandemic, losing another 25,000 jobs between the spring of 2020 and the spring of 2021.

California Insurance Premiums

In addition to the passing of the Fast Act, it’s worth noting that California property insurance premiums increased by 8% in Q1 2023 alone. This has significant implications for NNN Tenants, as they are responsible not only for their operational costs but also for rising property taxes and insurance premiums. While it may seem like tenants are currently covering rent, it’s crucial to consider the future. What happens when leases expire, especially in a situation where large corporations like McDonald’s are expanding their brands out of state? Short answer: rent reductions and millions of dollars in property losses in addition to less investor demand for these properties, resulting in increased cap rates and, inversely, lower property values.

Solution

California investors must reposition their equity in real estate in business-friendly states, promoting greater tenant profitability and, in turn, greater rent growth for Landlords. In brief, higher rent equals higher property values. The great news is that minimal landlord responsibilities of NNN properties make them convenient to own across the nation, so why not invest your equity into an appreciating market such as Phoenix, Austin, Nashville, Dallas-Fort Worth, Fort Lauderdale, Orlando, Charlotte, or Atlanta, among others.

Safeguarding Your Cashflow

The current trajectory indicates a potential risk where tenants might either renegotiate rents or consider alternatives like ghost kitchens to combat their rising operational expenses. The primary objective isn’t merely to ‘sell’ but to exchange your asset to ensure the protection and growth of your rent cash flow streams. By transitioning to a NNN property in business-friendly states such as Arizona, Texas, Tennessee, Florida, or Nevada, you’re aligning with an environment poised for revenue growth and tenant profitability. This, in turn, bolsters tenants’ capability to pay a premium rent per square foot.

Monetizing Appreciated Equity

Your property, having appreciated over time, holds substantial equity. Liquidating this asset now and leveraging a 1031 exchange allows you to capitalize on its current value and channel the funds into markets that promote a 20% annual increase in cash flow.

Consider the following benefits of a strategic 1031 exchange to an out-of-state property:

• Tax Deferment: A significant reduction in capital gains tax, ensuring more funds for reinvestment.
• Stabilized Cash Flow: Investing in states with more promising business growth can lead to consistent and potentially increased rent.
• Diversification: Exposure to different markets can reduce regional risks.
• Asset Upgradation: The chance to own a newer property with fewer maintenance demands.
• Enhanced ROI: Targeting high-growth areas can lead to better returns on investment.
• Risk Mitigation: Alleviate concerns related to regional policy changes or economic downturns.
• Economic Vibrancy: Investing in states with booming economies ensures tenant demand.
• Higher Appreciation Potential: Certain out-of-state markets may offer better appreciation prospects.
• Flexibility: Tailor your investment to match your financial and personal goals.
• Peace of Mind: A secured and stable asset ensures long-term mental and financial tranquility.

Remember

Timing is everything in the world of commercial real estate. Given the shifts we are observing, now might be an opportune moment to reinforce your asset portfolio.