Question

Based on the following data Investors would certainly prefer an investment in a property that is leased by Dunkin Donuts than by Starbucks’.

Dunkin' Donuts

Average Property & Lease

Average Sale Price	$1,400,000
CAP Rate (12mo avg)	5.77%
NOI	$100,875
$/Square Foot	$339.82
Building Size	2,000 - 5,000 sf
Lot Size	0.52 acres
Lease Term	10 - 15 Years
Escalations	In Option Periods
CREDIT RATING B2 Moody's B+ S&P

Starbucks

Average Property & Lease

Average Sale Price	$1,817,235
CAP Rate (12mo avg)	5.74%
NOI	$123,000
$/Square Foot	$500 - $1,000
Building Size	1,700 - 2,700 sf
Lot Size	0.50 - 1.00 acres
Lease Term	20 yrs (10 yr cancel opt.)
Escalations	10% every five years
CREDIT RATING A2 Moody's A- S&P

True or False

Answer 1

Let's do an ROE analysis for an investor based on the given data> Please see the table below. Linkage column will help you understand how each item has been calculated.

Parameter	Linkage	DD	Star bucks
NOI		100,875	123,000
Cap rate		5.77%	5.74%
Capitalized Value, CV	NOI / Cap rate	1,748,267	2,142,857
Credit Rating		B2/B+	A2/A-
Loan to Value ratio corresponding to credit rating	Assumption based on trends	80.0%	85.0%
Contribution by Investor	1-LTV	20.0%	15.0%
Loan Amount	CV x LTV	1,398,614	1,821,429
Investor's investment	CV - Loan amount	349,653	321,429
Interest rate spread corresponding to credit rating	Assumption based on trends	2.50%	1.25%
Long term government bond rate	Current bond rate	2.92%	2.92%
Applicable interest rate	Spread + long term bond rate	5.42%	4.17%
Annual interest	Interest rate x Loan amount	75,805	75,954
Net income before taxes	NOI - Interest	25,070	47,046
Pre tax ROE	Net income before taxes / Investor's amount	7.17%	14.64%

From the investor's perspective, investment into Star buck's property is better because:

1. It offers higher pre tax ROE to the investor
2. The cap rate is lower (investor prefers lower cap rate) and
3. The credit rating is better.

So the statement that "Investors would certainly prefer an investment in a property that is leased by Dunkin Donuts than by Starbucks’.." is FALSE