White Paper:Own a Walgreens
A triple-net (Net, Net, Net or NNN) leased property, by definition, provides a real estate owner with the freedom of "hands-off" ownership.
Investors acquiring properties NNN leased to “investment grade credit” tenants are uniquely safeguarding their equity in real estate. These properties have high residual values and are liquid investments. The safety, stability and passive nature of these investments can resemble the ownership of corporate bonds.
 Financial Snapshot |
|
| 2009 Fiscal year-End | August 31 |
| 2009 Revenue: | $63.3 Billion |
| 2009 Net Income: | $2.0 Billion |
| 2009 Total Assests | $25.1 Billion |
| 2009 Net Worth | $12.9 Billion |
| Company Type: | Public (NYSE: WAG) |
| S&P Credit Rating | A+ |
| Founded | 1901 |
| Headquarters | Deerfield, IL |
| source: www.walgreens.com | |
Below are some reasons to consider acquiring a property NNN leased to an investment grade credit tenant for your 1031 exchange:
Security: Walgreens had 2009 sales of $63 Billion and earnings of $2.0 Billion. Their net worth is $12.9 Billion. They have a Standard & Poor’s rating of A+. Walgreens has been in business since 1901.
Term: The primary term of a Walgreens’ lease is 25 years. Walgreens’ lease obligates themselves pay the rental amount every month for the entire time of the 25 year lease regardless of whether they are occupying the property or not.
Location: Walgreens selects what are known as “Main Street & Main Street" sites for its stores. Their sites usually have the highest traffic counts and are among the most sought after locations in the subject retail areas.
Passivity: The landlord has no maintenance responsibilities. Walgreens administers all aspects of property including paying the property taxes directly to the governing authority on behalf of the landlord. The landlord is sent their rent every month for the remaining term of the 25 year lease. 
All-in Investment: Walgreens’ NNN leases are "absolute net" NNN and there are no ongoing property related maintenance expenses for the landlord during the entire 25 year term of the Walgreens’ lease.
Financing: Walgreens’ leased properties are desired by lenders and borrowers and are offered some of the most favorable terms available for commercial properties.
Deal Size for a Triple Net Lease property
For newly built properties, deal size generally starts at $750,000 for dollar stores (Family Dollar, Dollar General), $1.5 to $3 million for restaurants (Denny’s, IHOP, Burger King), $4 to $7 million for drugstores (Walgreens, CVS, Eckerds), $8 to $12 million for “big box” retailers (Best Buy, Barnes & Noble, Bed Bath & Beyond) and $15+ million a handful of retailers such as Home Depot and Target. Individuals, real estate investment trusts (“REITS”), pension funds, and institutions all invest heavily in quality NNN leased properties because of the perceived low risk and the passive nature of the investments. More than 50 percent of people who invest in NNN properties purchase properties outside their home state.
Deal Size and Cap Rates for an NNN Walgreens
The bulk of the Walgreens are between $4.5 million and $6.5 million due to annual lease rates being between $375,000 and $475,000 for newly built stores.
For locations throughout the country, the asking capitalization (“cap”) rates for newly built 25 year, NNN "absolute-net" leased Walgreens are generally between 7.50% and 8.00%. California, Florida and select cites are an exception as they command lower cap rates. Due to taxation laws in Florida, few stores built in that state become available for sale to investors.
The Difference with a Double Net (NN), Triple Net (NNN) and an Absolute Triple Net (NNN) Lease
To simplify matters, think of it this way: the more net, the less the expense and the less the management for the landlord.
Under a "double-net" NN lease the landlord is responsible for the structural integrity of the building and the roof. Commonly referred to as “roof and structure” responsibility, this can also include some parking lot responsibility. The tenant is responsible for all maintenance and operating expenses, including real estate taxes and insurance. The landlord may pay some operating expenses directly (e.g. property taxes or insurance) and subsequently be reimbursed by the tenant.
Under a "triple-net" NNN lease, the tenant is responsible for the roof, structure and all operating expenses including real estate taxes and insurance. The landlord may pay some operating expenses directly and subsequently be reimbursed by the tenant.
Under an "absolute triple-net NNN lease, for example a Walgreens lease, Walgreens is responsible for all expenses related to maintaining the property including the roof and structure, all operating expenses, real estate taxes and insurance. The landlord does not pay any operating expenses directly, and does not need to seek reimbursement from Walgreens. The landlord does not have financial or management responsibilities related to the tenant’s occupancy of the building. The landlord is, of course, responsible for their own expenses incurred due to ownership of the property including mortgage payments, personal income tax, etc.
Please note that each lease will vary and the above are commonly used structures of net leases. Many tenants, landlords, developers, and brokers use slightly different definitions of net-leases. We strongly encourage you to seek the opinion of your legal counsel before signing a lease and purchasing a piece of property.
Walgreens Owning vs. Leasing Their Stores
Most large retailers and restaurant chains, including many Fortune 500 companies, prefer to use their capital for operations and growth rather than carrying hundreds of millions of dollars in non-performing real estate on their balance sheets. However, since their company name and logo are on the building, the retailer has a vested interest in making sure all the taxes are paid, the building is in good shape, and the grounds are clean and well maintained. When companies lease on a triple net basis they gain the control they need over the building and grounds without the capital commitment of ownership.
Developers of Walgreens’ Stores
Prominent retailers hand pick “merchant developers” to build stores across the country. It is not uncommon for a large retailer like Walgreens to utilize dozens of different developers. Developers build in accordance with the strict standards set by Walgreens covering every single aspect of the site plan, building design, construction materials and construction process. Additionally, there are many other state and city permitting, zoning and entitlement processes as well.
Walgreens’ Site Selection Process
Layers of corporate approvals, based on highly sophisticated cost, sales and profitability modeling are necessary before a location is selected by Walgreens. After all, Walgreens signs leases that obligate them to pay rent at the location for the next 25 years. Walgreens must be in well located, profitable locations for many years to follow. For investors, this translates into locations that may hold their real estate value and can be well positioned to benefit from any future development in the area.
During the construction process, from when the first shovel of dirt is moved --until Walgreens opens for business, Walgreens’ construction managers visit the sites and monitor every ongoing aspect of construction. Because Walgreens executes a lease obligating themselves to all aspects of building maintenance for the next 25 years, Walgreens wants their buildings constructed to their own high standards.
Sample NNN Walgreens Offering
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Understanding the Sample NNN Walgreens Terms
Address: This identifies the city, state and intersection at which the property is located. SWC or NWC means southwest corner or northwest corner of the intersection.
Tenant / Guarantor: All Walgreens' leases are corporate leases. Walgreens Company is both the tenant and the guarantor of the lease. Walgreens New York Stock Exchange (NYSE) Symbol is WAG. Standard & Poor’s (S&P) rates Walgreens as an (A+) credit.
Building Size: The 2008 prototype store is a 14,820 +/- square foot single story building. In dense (“infill”) urban areas where the prototype design store will not fit the building may have slightly less square footage.
Site Size: Sites are usually 1.5 + buildable acres, excluding drainage areas where required. In infill urban areas sites may be slightly smaller. New stores are generally built with drive-thru lanes.
Primary Term of the Lease: Walgreens’ leases have 25 year primary terms. The primary term is the period of time during which Walgreens cannot terminate the lease and is wholly responsible for all rental payments. Walgreens’ leases executed before 2002 are 20 year primary term, double-net NN leases. After 2002 Walgreens’ leases are 25 year, absolute triple-net NNN leases.
Options to Renew: Upon expiration of the 25 year primary term, Walgreens' leases have ten (5) year renewal options, at Walgreens’ option, or 12 month termination rights starting with year 26.
Lease Type: The Walgreens absolute triple-net lease is completely NNN with Walgreens responsible for taxes, insurance, utility costs and all maintenance required for the property including roof, structure and parking lot. Walgreens is the lease guarantor and remains solely responsible for the lease payments for the full 25 years of the primary term of the lease. Percentage Rent clauses: There are standard Walgreens percentage rent clauses in most leases which may, or may not, be activated during the 25 year primary term.
(Est.) Completion: The date the developer estimates that they will have finished constructing the store and will hand it over to Walgreens (‘Tenant Possession”) to fixturize, merchandize and prepare for the new store opening. The time from Tenant Possession to store opening is 60 days or less. In the event that the store being sold is an already operating location then the approximate date that the store opened will be listed here.
(Est.) Rent Commencement: The estimated date that primary term of the lease will commence if the store in not yet currently operating. This date can be from the date of Tenant Possession, or the date the store opens, depending on the lease, but in any event not greater than 60 days. In the event that the store being sold is an already operating location then the approximate date that the store opened will be listed here. The Rent Commencement date is an important date because it usually triggers the lender to fund a new investor's new loan on the property.
Annual Rent: The annual rent paid by Walgreens directly to the landlord, paid in monthly installments. The annual rent stays the same throughout the 25 year primary term of the lease, without increase.
Offering Price: The Seller's offering price.
Cap Rate: The Seller's offering cap rate. The cap rate is the unleveraged yield if the property were to be purchased all cash, without debt. Most investors purchase Walgreens using debt, so the return to the investor will be a function of the type of financing put in place.
Financing: : Newly constructed stores are usually offered without existing financing in place.
