Sweetgreen: A Fresh Dining Experience

Unbeknownst to many, an interesting new dining concept is springing forth in the Washington DC area. Sweetgreen is a modernly styled salad/yogurt restaurant, which caters to the ever-growing demand for healthier foods and is quickly spreading in popularity. It is headquartered in Washington DC and just opened its newest location in Logans Circle (DC) on the ground floor of the luxury Metropole residential condominium, across from the 15th and P Street Whole Foods. Currently it has four retail locations but its immediate success has encouraged plans for further store expansion.

The idea behind Sweetgreen is simple: a sustainable salad and yogurt bar with a chic atmosphere and unique dining experience. In the Washington DC area, this approach has established Sweetgreen as a leader in fast-casual dining by combining the convenience of fast food with healthy, high-quality menu options. Due to its favorable position, the owners think the new Logan location will be their best store yet.

The last twelve months have seen a surge in popularity of retail condominiums located in dense urban markets. Properties located in these areas, especially in the Washington DC urban core, are experiencing increased demand as they have prospered even in the face of the recession. Sweetgreen stands at the forefront of this trend, taking advantage of the current opportunities in the urban market to expand its presence. As highlighted by RE Business, many individual investors are drawn to urban retail because the size and price points often allows them entry to prime urban markets previously beyond their reach.

Retail condominiums are also a popular choice among many 1031 investors who are seeking suitable replacement property. The retail condo units are typically NNN meaning the tenant is responsible for all expenses associated with the property. The properties are actually easier for both the landlord and tenant to manage because the services required to maintain the property are already contracted by the condominium at large. The tenant simply pays the retail unit’s portion of the condo, management and maintenance fees.

Another potential benefit to investors lies in the assessed value of the property and the weight given to improvements and land. Since the improvements are a greater part of the overall value in a condominium it is possible to depreciate a significant portion of those improvements on a 15 year schedule through a detailed cost segregation study. That means a stronger return and more cash in your pocket at the end of the year. All of these factors make retail condominiums and some of their prime tenants such as Sweetgreen very attractive investments.

Net Leases Grow on Chains

It’s no secret that most net lease properties belong to nationally established retail chains. Among the more popular are McDonalds, Walgreens and 7-Eleven. Recently two more restaurant chains, Chipotle and Chick-fil-A, have shown they are poised for expansion. This should signify possible buying opportunities for net lease investors.

In the year ending on December 31, 2009, Chipotle experienced very positive results:

• Its revenue increased 14.0% to $1.518 billion


• Comparable restaurant sales rose 2.2%


• Net income increased 62% to $126.8 million


• Diluted earnings per share rose 67% to $3.95

For 2010, Chipotle expects its sales to remain steady and plans on opening 120-130 new stores. This expansion creates new investing opportunities with a highly successful tenant.

Chick-fil-A also had a successful year in 2009:

• Overall sales increased 8.6% to $3.217 billion.


• Same-store sales increase of 2.52%.


• Opened 83 new restaurants.

In 2010, Chick-fil-A plans on opening 78 new locations, also creating more investment opportunities.

Though many lament the current market, the steady expansion of many successful quick service restaurants has provided fuel for the net lease market. Chains like McDonalds, whose global same store sales rose 2.6% for January and Buffalo Wild Wings, who has experienced rapid growth, represent enticing opportunities for investment. Tenant growth and that of their applicable brands ensures products are widely dispersed and potentially adds the to staying power of those tenants. Those who have demonstrated steady, durable demand and will only attract more attention as they expand.

Urban Might

Wal-Mart and Target plan on developing smaller stores in order to penetrate the urban market. By decreasing square footage, entrance will be easier, allowing companies to take advantage of low prices in high traffic areas. This continues the recent trend of urban expansion, demonstrating the strong attractiveness of that market.

Typically, urban areas are associated with higher “real estate and fixed costs”, rendering big box stores somewhat ill-suited and clumsy. For retailers like Wal-Mart and Target, it was easier to move to locations more suitable for their gargantuan constructions. However, the wave of foreclosures which has washed over commercial real estate has forced prices down and tenants out, leaving many attractive properties in its wake. In order to take advantage of these opportunities, the traditional big box model has to be scaled down, with a focus on smaller, streamlined stores which will be able to enter the urban market.

This urban move would seem somewhat risky; can a model based on large stores and inventories really be shrunk? But the high traffic provided by these areas along with an increase in demand for value products, should ensure success. Furthermore, these developments lend credence to the notion that urban investments are at present some of the best and most secure. The net lease market has observed continued success in regard to its urban properties and expects the trend to continue.

Franchisee or Franchisor?

Currently there are around 1 million franchise outlets in the United States and over 40,000 international ones operated by U.S. based franchisors. Ownership and operation of these outlets can differ greatly depending upon their parent corporation. For instance Burger King franchises around 90% of their restaurants, McDonalds 80%, Wendy’s 79%, and Arby’s 69%. Conversely, large investor groups, such as Bain Capital, can also decide whether to license out the business model and make money off royalties or operate the franchises themselves, earning revenue directly. This decision is highly dependent upon the market in question and impacts future management of the property.

Typically, franchisors have three main sources of income, (1) retail sales at Company-operated restaurants; (2) franchise revenues, consisting of royalties; and (3) property income from restaurants that the parent company leases or subleases to franchisees. If a company were to engage in the first, it would necessarily negate the latter two and vice versa. In order for the first option to make sense, the specific franchise would need to operate with larger margins. For example, Bain Capital, which owns a 93% controlling economic interest in Dominos Pizza, chooses to sell the franchise rights of most of their stores (including U.S. based ones) but operates outlets based in Japan. This is because pizza delivery is considered a luxury item there, with people willing to pay up to $43.00 dollars for a single delivered pizza. Thus in Japan, it is more economical to operate rather than sell the franchise rights. Conversely, in the U.S., where pizza delivery is assuredly not a luxury item, it makes more sense to sell the franchises as margins are lower.

Should a parent company choose to own and operate a store, it can receive benefits related to its applicable real estate. A location operated by a parent company with investment grade credit, will instantly increase in value. This is because the locations returns are no longer guaranteed by an individual franchisee who has no credit rating but by a company which does. Furthermore, that company can still pull money out of the property through a sale-leaseback. This allows the company to take advantage of the properties increase in value and pull capital out for other uses. These factors are highly evident in net lease properties, where credit ratings are of high importance and sale leasebacks have always been very popular. A property which is corporate owned and guaranteed will typically fetch a much higher price than an individual franchisee due to the flight to quality in the current market.

The decision between owning/operating and franchising a property greatly impacts how it is valued. It also impacts the level of commitment and funds a franchisor dedicates to it. The applicable margins of the specific locale and the opportunity for greater profitability will then be the decisive factor.