Why people would buy Walgreens for zero cash flow? the rent won't go up and you can't resell for higher price.

I am looking at buying triple net lease property, but I am confused that why people would love to buy walgreens property? with cap rate around 5.5%, you can't have any positive cash, and every year you would have shorter term remaining on the lease, without escalation in rental, so your property' price will be going down, and when the tenant goes dark after initial lease, you property has maybe 15000 sq.ft, and you can't find another tenant would pay 500,000 per year for it.
In Buying Property - Asked by Xiuyuan W. - Jan 3, 2015
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Answer(s)

Margaret B.
Broker/Agent
Glen Ellyn, IL

It depends on how
much cash you have. If you have the cash to purchase an investment property, then it's worth it in the long run. No one is out there buying Walgreens with 5% down and financing the rest. No one is out there buying into leases with no escalations without figuring the net income over the term of the lease into the purchase price. If you pay cash, you're making 5.5% on it, which is better than any bank out there. Maybe don't look at Walgreens as an investment, the right broker will find you a solid investment that generates income. Get someone who knows what they're doing to work for you. As a buyer, you should always have a commercial broker.

Jan 3, 2015
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Adam B.
Broker/Agent
La Grange, IL

Great investment group property. The location holds the value for future development. Also, the risk is very low. You get what you pay for. The taxes saddle NNN property so if you have a vacancy in a multi- tenant center, your return may diminish to 5% anyway especially if the market continues to see expected concessions upon retenanting. $33 psf is not out of line for the right location. Redevelopment may provide opportunity. Adam Butusov (708)415-1432 LeaseLaGrange.com.

Jan 4, 2015
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Ron Miranda .
Broker/Agent
Houston, TX

As a Tax Deferment strategy- that is one reason. A zero coupon transaction makes sense when you have a signficant tax liability from the sale of an upstream transaction. You could then, perform a 1031 exchange into a the "Walgreens" and continue the deferment. There are other reasons individual to the investor, but these types of transactions, do a have a place and occur frequently.

Jan 5, 2015
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albert c.
Tenant
Corryton, TN

Zero cash flow,hard to get another tenant to pay rent or lease that you need,evedently in a bad loc.,can't sell for a higher price because of the lease u have with leasor.

Jan 8, 2015
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CAROL J.
Broker/Agent
Henrico, VA

Wang X, you are asking all of the right questions up front. Believe it or not, people do purchase non-income producing properties thinking they can turn it around and do not take into consideration the economy and what they will do if their main tenant vacates. I would personally not purchase a non-income producing property unless the economy in that area was on the upswing.

Jan 14, 2015
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Tony H.
Broker/Agent
Chicago, IL

Hi Wang, each deal is different and investors have multiple objectives. We've traded similar deals. Was zero cash flow however, the internal rate of return could be high. Also, some of my clients have done it for legacy reasons, just making sure there family would be set up down the road. If you'd like to discuss further give me a call. Also, I have a couple deals in inventory that may be a better fit for you.

Feb 25, 2015
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Drew R.
Owner/Investor
Austin, TX

Ron Miranda is correct - zeros are popular options when an investor is in a 1031 exchange and needs a high LTV to balance the exchange (you must match or exceeds both equity and debt in order for 100% tax deferral). Walgreens and other properties with investment-grade tenants, long-term leases, and NNN or "bondable" lease structures are often able to receive higher LTVs than other investment properties.
Taking a closer look at a "zero" - the investment typically includes Credit Tenant Lease (CTL) financing. With a CTL, the mortgage payments are set to match the lease term - that is debt service coverage can come in much tighter (down to 1.0x in some cases) and hence LTV much higher. This allows an investor to purchase the asset with a minimal, or relatively small amount of equity. With all rent going towards mortgage payments, the outstanding principal is reduced at a faster rate than a traditional mortgage. Repayment of principal is not taxable whereas (unsheltered) cash flow is taxable at ordinary income rates. A CTL is either fully amortizing, or close to, over the lease period. So, while you don't benefit from any cash flow during the holding period, you are able to acquire an asset with minimal equity and then have building paid off by an investment-grade tenant (i.e. low risk) and you end up with a building you own free and clear (or low debt balance) at the end of the term.
Please note, however, that CTL and "zero" structures do create some tax issue, namely "phantom income" - investors are advised to consult with their financial advisors and tax professionals prior to investing in such vehicles.

Nov 1, 2016
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