What are the pros and cons of buying a typical long term NNN leased Walgreens?

In Buying Property - Asked by GARY G. - May 1, 2010
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Gregory G.
San Francisco, CA

There really are no cons other than minimal rent bumps, lengthy options to extend the lease, and moderate CAP rates. Walgreens standard leases ( which typically are truely absolute NNN ) are for 25 years with 50 years in options ( whether they are 10 5-year options, 50 1-year options, or 12 month termination rights beginning in year 26 ). The fact that Walgreens is an A+ credit tenant ( company's in this category have less than a .5% default rate ) and have such long leases make them essentially inflation-protected bonds with ironclad principal guarantees. Not only is this safe for the investor, but now you have the lender's attention. Think low interest, long term fixed loans... rates only have one direction to move and CAPs will follow. Check out this pdf for a more thorough explanation: http://nnnbrokersusa.com/nnn1031netleasedinvestments.pdf
Gregory Garver - Commercial Real Estate Broker
Broker License# 01716531

May 1, 2010
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Brad L. K.
Columbus, OH

You should look at the market rent for the property should the tenant go out of business and you have to lease the property again, plus the residual sale value with the new lease. If the price that you are paying for the property is greater than this value then the premium that you are paying is based on the tenants credit. Therefore, make sure that you are very comfortable that the tenant will stay in business long enough for you to be paid back the premium that you are paying for the tenants credit. Also, make sure that you are buying a building in a good location so that you can lease the building if the building goes dark. Make sure that the lease either provides you with the ability to hire a management company and charge the tenant for this cost, or your return analysis includes the cost for you to have the building checked at some regular interval to make sure that the tenant is properly maintaining it. Also, make sure that the tenant is the correct entity that you are expecting and not a shell company or worthless subsidiary, or make sure it is guaranteed by the parent company.
Bradford L. Kitchen, SIOR
Alterra Real Estate Advisors

May 1, 2010
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Ronnie G.
Irvine, CA

The main starting point to your questions are to find out where you are in your investment career and time frame for retirement. The main advantage to a Walgreens is that it is a financable asset that has a proven track record with very little risk to the investor. The main con is the (typical) Walgreens asset is a flat investment with no upside possibilities. They are typically extremely long terms as well which can be a pro or a con and again that depends on where you are as an investor.
Hope this helps,
Ronnie Givargis
Net Leased Properties Group
National Retail Group
Special Assets Services
Marcus & Millichap

May 1, 2010
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Jennifer D.
Danvers, MA

Advantage is companies like Walgreens are a proven solid investment and fairly easy to finance provided your credit worthiness is there. The return on your investment is solid. Disadvantage is there is not much growth potential on these investments. Long-term lease agreement are potentially dangerous as the the taxes can be difficult to predict over an extended term.

May 2, 2010
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M M.
Newark, NJ

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
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