Over the past 7 years have developed 12 build-to-suit facilities for "Convenient Marts."These facilities are generally located on strip center out-parcels, are roughly 11,000 SF, and completely occupied by a Convenient Marts store.These properties have all been located along the main thoroughfares of suburban Philadelphia.

The typical lease terms on these deals have been:

A 10-year lease term

Rent is triple net ("NNN")

Rent has provided roughly a 350-basis point spread over the 10-year Treasury rate when the deal was signed

A 10-year renewal option

Convenient Marts may purchase the property (Convenient Marts has the option) at any time for "fair market value"

Convenient Marts may purchase the property in year 10 (and year 20 if lease option is renewed) at a 10% discount to "fair market value"

Convenient Marts has a right of first refusal ("ROFR") with respect to both lease and purchase as long as the lease is in effect.

The typical Convenient Marts store is a plain "box," and petroleum product sales are prohibited in the leases.

Over the past decade Convenient Marts has expanded in the suburban areas of the major mid-Atlantic state metropolitan areas.This publicly-traded company has been rated BBB+ (or better) for the past 7 years.

Convenient Marts has recently embarked upon an aggressive expansion campaign, targeting the suburban areas of secondary mid-Atlantic cities for new stores.As a result of this expansion effort, S&P has placed Convenient Mart's debt on a "credit watch," expressing concern that this effort may result in lower quality cash flows and an increased debt burden.

have sold 10 of the 12 Convenient Mart stores developed.In each case, sold them within 18 months of completion for an average cap ratethat has a spread over the 10-year Treasury of about 210 basis points.The two properties have not sold have been completed within the past 12 months. anticipate that these properties will each sell for a spread of about 200 basis points over the 10-year Treasury during the next year.Currently, the 10-year Treasury rate is 4.25%.

Development of a Convenient Mart requires 10-16 months to complete.Typically, it requires about 12 months to develop.

Convenient Marts has approached and asked to play a major development role in their expansion effort.Specifically, they have indicated that they would like to develop stores for them in the Allentown / Bethlehem, Pennsylvania area.They plan to add about 10 stores in this region over the next 3-4 years and want to be their developer in this effort.

Their first store site in this market is along the main suburban throughway in suburban Allentown.It is for a 10,000-SF store, with appropriate parking, ingress/egress, and signage requirements.Convenient Mart's real estate committee has approved the following non-negotiable (take it or walk) deal terms:

10-year lease

10-year renewal option

Option to purchase at any time at "fair market value"

Option to purchase in year 10 (and year 20 if lease in renewed) at 10% discount to "fair market value"

Right of first refusal with respect to both lease and purchase as long as the lease is in effect

Triple net rent lease

Rent for the first 10 years is $50,000 annually

Rent during the option years would be $65,000 annually

Certificate of Occupancy must be in place within 13 months

If the Certificate of Occupancy is not in place within 13 months, rent during the first 10 years is reduced to $40,000 annually

If Certificate of Occupancy is not in place within 14 months, Convenient Marts is released from the lease and must pay them a penalty of $60,000.

This project would represent first effort outside of the Philadelphia area. believe that can acquire the site for $120,000. believe that approval, planning, and design costs should run about $50,000, while hard construction costs are estimated at roughly $400,000.

have a term sheet on a loan which provides 3-year financing of $440,000 at LIBOR plus 300 basis points.3-Month LIBOR is currently 1.46% (a cyclical low).The loan adjusts the interest rate quarterly.The loan has no amortization and is pre-payable without penalty. also will receive a development fee of 5% of hard costs plus approval, planning, and design soft costs.

Initial discussions with lender and local planning officials lead to anticipate no unusual problems with the project.The equity required for this project is available but would absorb about 30% of equity capacity.

Should undertake this development?Develop business memo to the board, with no more than 2 supplemental pages of tables/charts/graphs, explaining to them the recommendation and rationale.