Kum & Go LLC announced several sale-leaseback deals to assist in the construction of new stores. Since the West Des Moines, Iowa-based company adopted the strategy three years ago, it has sold and leased back 45 of its 431 stores, Chief Financial Officer Craig Bergstrom said.
Up to 75% of new and remodeled stores will be sold and leased back as they come online in the next few years, Bergstrom told The Des Moines Register.
The arrangements are a win-win deal for investors and the company, said Todd Millang, a commercial real estate broker with CB Richard Ellis/Hubbell, who has handled several of the transactions. The benefits are that investors get to own a piece of property with a secure tenant who takes care of virtually all the responsibilities, including maintenance, taxes and upkeep, while Kum & Go gets back capital that it can invest to build additional stores.
Companies such as Walgreens and some fast-food chains have moved to the leasing concept in recent years for similar reasons, Millang said. The model appeals to a strong retail business such as Kum & Go that is in an expansion mode. Kum & Go is using the lease-back strategy for new stores and for stores that it remodels and enlarges, the report said.
The chief advantage of a sale/lease-back deal, Millang said, is that it releases capital that is otherwise tied up in a low-returning asset. That allows the company to invest in its higher-return core business, or to repay existing debt.
In Kum & Go’s case, after a new store has opened, the company finds real estate investors who purchase the property at market value and lease it back to Kum & Go on a 15- or 20-year lease, Bergstrom said. Typical sales have ranged from $1.8 million to $2.3 million, Millang said, with one store selling for as much as $2.8 million.
The leases provide protections for the investor owner if Kum & Go moves to a different site during the lease period, the report said. Recent leases have provided owners the equivalent of a 7.5 percent return on their investment, with options for 1.5 percent annual increases every five years. Any appreciation in the value of the property goes to the investor owners, who also can depreciate the property for tax purposes, Millang said.
So far, about a third of the investors who have purchased store sites are Iowans, like Stapleton. The other owners are individuals or investment groups based outside Iowa. Kum & Go’s 431 stores are spread over 12 states. Kum & Go’s new stores range in size from six to 12 gasoline pumps.