1. Turn-key investment. Walgreens is responsible for handling everthing but the mortgage payment.
2. Investors with no commercial experience can obtain financing.
3. Non-recourse financaing is available.
4. Cap rates are stronger now than in previous years.
5. Cap rates are still increasing in many instances.
6. There are Walgreens developers out there with properties on the market that were built and/or open for business in 2008 that are hurting right now, and may be more willing to negotiate a better sales price.
1. No rent increases during the base term of the lease, typically for 25 years. Inflation will take its toll over time.
2. Most properties have options for renewal of the lease for one year at a time. Landlord may be on pins and needles worring whether the lease will be renewed after the base lease expires; and needs to plan for the possibility of having a vacant building when in the option period.
3. After the base lease has expired, the insurance coverage that Walgreens is willing to pay for may change from replacement value to cash value.
The cons are manageable, however.
As with all investment properties, it is important to buy at the right price. If done so, the affects of inflation on the cash flow of the property won't take as much of a toll. Similarly, setting enough rental income aside for reserves now (even though the lender may not require any for these transactions) will assist in the changes that will come to the property when that base lease expires in a quarter century. Also, if purchasing a property that is only one to three years into its base lease, it is possible to own the building free and clear once you're in the option period, which cuts down on the carrying costs should you end up with a vacancy in 25 years or so.
May 2, 2010