REAL ESTATE NEWS

The fight over Salad and Go's shuttered locations is not really about salvaging a failed salad concept. It is about who gets control of a rare package of long-term drive-thru leases at rents that would be difficult to replicate today.

Dutch Bros and 7 Brew are competing for a portfolio reportedly including as many as 65 former Salad and Go sites, most in Arizona and Nevada. For landlords, the outcome could determine whether they get an unexpected second chance to preserve property value—or are left with small vacant buildings and limited replacement options.

Chris Rodriguez, co-founder of DealGround and a longtime retail investment-sales broker, sees the bankruptcy as a sharp reminder for net lease investors: A tenant's credit may shape an asset's value, but the land and its ability to attract the next tenant ultimately determine its downside protection.

"The land is the actual security in any real estate investment you make," Rodriguez tells GlobeSt.com. "Tenants come and go."

A Portfolio Of Below-Market Leases

Dutch Bros initially agreed to acquire at least 51 Salad and Go leases for about $105 million. 7 Brew later asked the bankruptcy court to open a competitive process, arguing it had submitted a superior proposal. The outcome will be decided in a Chapter 11 process designed to maximize recoveries for Salad and Go's creditors, not to protect the owners of the underlying real estate.

That distinction matters. Landlords whose leases are assumed may receive a new tenant with years of contractual rent remaining. But landlords do not get to choose the bidder based on tenant quality, resale value or their preferred credit profile.

Rodriguez's review of 65 Salad and Go locations in Arizona and Nevada found annual rents ranging from about $94,000 to $209,000, with an average near $120,000. Most leases have more than 10 years of initial term remaining, and the majority have roughly 13 to 14 years left, plus renewal options.

For Dutch Bros or 7 Brew, acquiring those leases offers a fast route into markets where entitled drive-thru sites are increasingly scarce and expensive. The existing rents are the real attraction. Rodriguez estimates that converting the former Salad and Go locations would cost either operator roughly $2.3 million to $2.4 million per site, a figure comparable to or slightly above a ground-up development basis. But building a new store is only part of the cost. Recreating a portfolio of dozens of long-term leases at an average rent of $120,000 would be far more difficult.

The bankruptcy has therefore turned old leases into a strategic asset. The buildings may be modest, generally ranging from about 650 to 1,000 square feet, but the leasehold rights offer both chains a chance to accelerate expansion without starting from scratch.

Credit Will Change The Calculation

For property owners, Dutch Bros and 7 Brew do not represent identical outcomes.

Dutch Bros no longer franchises new locations, meaning its assumed sites would likely be company-operated. 7 Brew, by contrast, is expected to assign many locations to franchisees under its existing territorial commitments. That does not necessarily mean a weak operator. Rodriguez pointed to Flynn Group, one of the country's largest restaurant franchise operators, as an example of a sophisticated franchisee that could provide confidence in operations.

Still, the lease structure matters to net lease buyers. A corporate lease from Dutch Bros could produce a different perceived credit profile, cap rate and resale market than a lease held by a special-purpose franchise entity. Even a strong franchise operator may offer a limited guaranty tied to a regional group or a small cluster of stores rather than the parent company's full balance sheet.

That distinction matters when an owner decides whether to hold or sell. A property's future value may change not just because the tenant changes, but because the market assigns a different level of risk to the lease guaranty.

Yet the bankruptcy court is unlikely to weigh those concerns heavily. The court's central task is to maximize value for the estate and its creditors. Landlords can object on issues such as adequate assurance of future performance, but they cannot simply insist that Dutch Bros take a lease because its corporate credit may make the asset more valuable.

For investors, the case illustrates the difference between a lease being operationally viable and being investment-grade in the resale market. Both bidders may be able to operate successfully from the sites. That does not mean every resulting lease will trade at the same price.

Competition Gives Landlords A Rare Opening

In most retail bankruptcies, landlords face a difficult negotiating position. A distressed tenant or prospective assignee may ask for lower rent, free rent, lease extensions or other concessions. Owners of specialized properties often have little choice but to negotiate, particularly when the alternative is vacancy.

The Salad and Go portfolio is unusual because at least two users are interested. That competition gives some landlords leverage that they would not normally have in a restaurant bankruptcy.

Rodriguez's view is that landlords should be cautious about granting concessions simply to secure an assumption. If Dutch Bros and 7 Brew are both seeking the same locations, each operator has an incentive to preserve access to sites that can speed its growth in Arizona and Nevada.

Still, the leverage is not evenly distributed. Some sites sit on larger parcels or in stronger trade areas, while others are constrained by their small buildings, limited land area or less compelling locations. In many cases, a former Salad and Go building is too small and too specialized to support a broad range of replacement users at rents sufficient to preserve the value the owner paid.

That leaves some landlords with a narrow path. A lease assumption on its existing terms could be a strong result. But rejecting a tenant's request for concessions carries real risk if the site has no other viable user waiting in the wings.

The question is not whether Dutch Bros or 7 Brew wants a drive-thru location in the abstract. It is whether either chain wants that particular site badly enough to take the lease as written.

The Asset Is Not The Building

The Salad and Go situation exposes a weakness in some net lease underwriting: the tendency to treat a long lease and a recognizable tenant as substitutes for strong real estate fundamentals.

A tenant can have a large store count, rapid growth and a long lease term, but those characteristics do not guarantee that a property will remain valuable if the operator leaves. That is particularly true for small-format, single-tenant assets where the building is tailored to a specific concept and the parcel may be too constrained for redevelopment.

Rodriguez argues that investors should assess these assets based on their real estate utility after vacancy. A site with strong access, traffic, population density, parcel size and alternative uses can retain leverage when a tenant fails. A more marginal property can leave the owner dependent on the existing tenant's survival.

That does not make every former Salad and Go location a poor piece of real estate. The interest from Dutch Bros and 7 Brew indicates that at least some have strategic value. But the portfolio should not be viewed as a uniform collection of interchangeable drive-thru pads. The best sites may attract competition and preserve value. The weaker ones could remain exposed if neither bidder assumes the lease.

Landlords whose locations are ultimately assumed should also temper expectations about lost rent. Even a successful assignment may not make an owner whole for the period between Salad and Go's closure and a new tenant's occupancy. Claims for unpaid pre-petition rent and rejection damages generally place landlords among unsecured creditors, leaving recoveries uncertain.

For owners who receive a new Dutch Bros or 7 Brew lease, Rodriguez offers a contrarian conclusion: Consider selling into the improved story rather than assuming the property has become a permanent hold.

The point is not that either coffee chain is a weak tenant. A favorable bankruptcy outcome can create liquidity and improve buyer interest in an asset that was previously tied to a failed operator. For owners of marginal real estate, that may be a chance to monetize a fortunate outcome rather than make a new long-term bet on a small-box drive-thru concept.

Salad and Go's bankruptcy may ultimately be remembered as a contest between two fast-growing beverage brands. For net lease investors, however, the more important lesson is simpler: The most valuable part of the deal may not be the tenant, the building or even the rent roll. It is the site that gives the next tenant a reason to compete for the lease.

Source: GlobeSt/ALM