If you’re looking for a sound 1031 exchange property as your next commercial real estate investment, Dollar General stores may be an opportunity that you’ll want to explore. Pickett Sprouse brokers have found them to be low-risk investments with a reliable return for a healthy company that’s showing no signs of slowing down. That’s why we’re looking at Dollar General NNN investments (absolute NNN lease) as sound 1031 exchange options for commercial real estate investors.

Dollar General Development Strategy

Dollar General is a discount retailer based in Goodlettsville, Tennessee that is known for its low prices on a variety of products. It opened its 20,000th store in February 2024¹ and, according to Daily Trade Alert, operates more physical retail locations than any other retailer in the U.S. Most of these are located in "thinly populated rural areas" where there are "few, if any, competing retail choices²." The company's annual report shows that it operated 1,076 retail stores in North Carolina as of March 1, 2024. That's the third most of any state behind Texas and Georgia³.

The company's 2023 fourth quarter financial report shows that during fiscal year 2023, there were 987 new store openings and 105 store closings for 882 net new stores last year⁴. The company is also planning approximately 2,385 real estate projects in fiscal year 2024, including approximately 800 new store openings, 1,500 remodels, and 85 store relocations⁴.

In talking about growth projections for 2024, Todd Vasos, Dollar General’s chief executive officer, said, “This is a modest slowdown compared to the number of projects in recent years, which we believe is prudent in this environment. We are excited about the opportunities these projects provide to serve both new and existing customers, while also driving strong financial returns for the business and laying the foundation for future growth⁵."

Pickett Sprouse Commercial Broker Vernon Averett has experience in finding Dollar General stores as an investment property for clients. He says that the company bases its development strategy on working with preferred developers who understand the company’s market requirements. Since Dollar General prefers to invest in their business and not in real estate, the company relies on the developers to take the chosen sites through permitting, acquiring the property, and building Dollar General’s prototype stores. Dollar General leases the properties from its developers. While the developers may hold the stores, they also sell some of them.

Pickett Sprouse brokers say that there are several reasons why Dollar General is a sound low-risk, passive investment.

Steady growth

According to the company’s 2023 fourth-quarter financial report⁴, fiscal year net sales increased 2.2% to $38.7 billion. That's compared to $37.8 billion in fiscal 2022. Because of this growth, Pickett Sprouse REALTOR® and Commercial Broker Brad Gregory says, "While Dollar General's growth rate isn't as dramatic as it has been in some previous years, the company is still in a big expansion mode." This means that many of the buildings used for stores that are available for sale in the southeast are new construction or relatively new, which in turn, offers a bigger safety net for the owners of those properties.

Location

Brad’s experience with Dollar General comes from the location identification side. He knows firsthand that the company wants to be on “the best corner” with high visibility and traffic volume. Dollar General's Annual Report also says, "Approximately 80% of our stores are located in towns of 20,000 or fewer people³." As the company’s steady growth has shown, its formula for identifying these types of locations has been fairly accurate and very successful.

Absolute NNN Investment

According to Net Lease Advisor, new Dollar General stores typically have an absolute triple net lease⁶. This means that in addition to rent and utilities, Dollar General, as the tenant, is responsible for paying the building’s property taxes, building insurance, and the cost of any maintenance or repairs the building may need over the term of the lease. While that may mean the rent will be lower than with single net lease properties, it also results in a fairly low-risk steady stream of income for the investor.

Corporate guarantee

Dollar General does not franchise and operates all of its stores directly. Vernon cites this as a major advantage from an investment perspective because the company can guarantee its leases. This provides the landlord with peace of mind knowing that the rent will be paid on time and that the property will be taken care of.

Long Lease Terms

The standard lease term for new Dollar General properties is 15 years. A long lease term, built-in rent escalation, and a strong single tenant mean reliable payments coming in for the foreseeable future. It also means that the property owner doesn't have to worry about filling frequent vacancies.

Strong cap rate

According to Pickett Sprouse Commercial Real Estate broker Emilee Collins, CCIM, “the cap rate is the rate of return on the income that is expected on a property in the first year of holding.” It’s a metric that helps investors measure and compare the potential profitability and risk of different investments.

As Feldman Equities explains, it is expressed as a percentage and generally has an inverse relationship to the property value. “The lower the cap rate, the higher the purchase price and vice versa. Properties with higher cap rates tend to have more inherent risk, while those with lower cap rates tend to carry lower risks⁷.”

Anderson Legal, Business, and Tax Advisors says, "Cap rates between 4% and 12% are generally considered good⁸."

Since Vernon notes that most Dollar General returns are in the 6.5% range, they offer a strong rate that can mean a solid return on investment.

Dollar General NNN Investments as 1031 Exchange Option

A 1031 exchange is a tool that commercial real estate investors can use to defer capital gains tax when they sell an investment property and reinvest the proceeds from the sale in a property or properties of like kind and equal or greater value.

Vernon recognizes that investors looking to do a 1031 exchange want to put their money in as safe an investment as possible. For all of the reasons we've already outlined, he believes that “Dollar General answers that goal.” In fact, he helped one client sell their grocery store-anchored shopping center that had leases expiring in three to four years. The client decided to do a 1031 exchange so they could defer capital gains taxes. Vernon found them three Dollar Generals – two in North Carolina and one in Georgia - to fit their need.

Dollar General as a Sound Investment

In addition to Vernon’s involvement in Dollar General transactions and Brad’s work with the regional Dollar General developer, other Pickett Sprouse brokers also have experience with Dollar General transactions. That’s how we, as a company, can recommend them as a sound investment opportunity. Whether it is Dollar General or some other form of real estate investment, Pickett Sprouse’s experienced brokers can help you reach your goals.

Sources

Dollar General. Dollar General Opens 20,000th Store.
Daily Trade Alert. Undervalued Dividend Growth Stock of the Week: Dollar General (DG).
United States Securities and Exchange Commission. Dollar General Annual Report.
Dollar General. Dollar General Corporation Reports Fourth Quarter and Fiscal Year 2023 Results.
Dollar General. Dollar General Corporation Reports Third Quarter 2023 Results.
Net Lease Advisor. Dollar General Tenant Overview.
Feldman Equities. What is a Good Cap Rate in Commercial Property?
Anderson, Legal, Business, and Tax Advisors. How to Calculate Cap Rates for Rental Property.