California Sale/Leaseback Insanity

The buzz of the commercial real estate world has been over the offering of California State office buildings by CBRE. California Hires Broker to Sell Government Buildings

The real topic of discussion behind closed doors is - what are they worth?

Pricing of commercial real estate assets are based on multiple factors: existing income, age/condition of building, location and risk of tenant default and or relocation. Typically, the most basic measuring stick of price is the "cap (capitalization) rate" which is net operating income divided by sales price of asset.

Let's take a look at a low risk, retail investment opportunity in North Highlands, California: a 10 year NNN lease to Walgreens.

WALGREENS - 6% CAP RATE - NORTHERN CALIFORNIA !

6819 Watt Ave., North Highlands, CA 95660

• Price:
  N/A
• Building Size:
  14,490 SF
• Property Type:
  Retail
• Property Sub-type:
  Free Standing Bldg
• Additional Sub-types:
  Street Retail
  Retail Pad
  Anchor
• Property Use Type:
  Net Lease Investment with 10+ years left on lease
• Cap Rate:
  6%
• Occupancy:
  100%
• No. Stories:
  1
• Tenancy:
  Single
• Year Built:
  2008
• Lot Size:
  91,198 SF
• 
  

Last Verified 9/22/2008 Listing ID 15873656

Highlights

• "Fortune 50" National Credit Tenant.
• NO Landlord responsibilities
• Very high average datily traffic count.

• Brand new freestanding corner building.
• Fee simple land and building. Cert of Occupancy 3/28/08.
• Rated #1 drug store company. 30+ years of record profits.

Description

TRUE NNN Walgreens in NORTHERN California (SACRAMENTO COUNTY) and the perfect 1031 exchange property. Certificate of Occupancy March 28, 2008.

Founded in 1901, Walgreens is not only the nation' s largest retail pharmacy chain, it is considered the leader in innovative drugstore retailing. The Company has pioneered many modern store and pharmacy features, some of which have become standards in the industry. Walgreens is a publicly traded "FORTUNE 50" Company and is ranked #1 in sales in the United States with sales totaling over $50 billion. The Company is included in the Forbes Platinum 400 list of best performing big companies in the United States. Walgreens has a net worth of over $10 billion and held an A+ rating by Standard and Poor' s.

* $ 412,000 Annual Rent + % rents.
* Property delivered debt free.
* New 25 Year Lease plus options.
* + 14,490 sf Bldg. on + 91,198 sf lot. 64 parking stalls.
* NNN Lease - No landlord responsibilities.
* Price: $ 6,866,888 Cap Rate 6% or purchase a 50% Tenancy In Common Interest for $3,500,000.

Sacramento/North Highlands is a strong, vibrant community that is enriched with a vast history and a diverse, family-oriented and an active community that works together today for a better tomorrow. North Highlands is a community of over 38,000 residents that is located approximately 10 miles northeast of downtown Sacramento.

The community was formally established with the opening of the North Highlands post office in July of 1952 and the development of the McClellan Air Force Base (now known as McClellan Business Park). McClellan Business Park is one of the largest business parks in California and will ultimately employ over 30,000 individuals.

Doing a quick analysis, this investment has several flaws for the conservative investor including a short fuse of 10 years of guaranteed income, a flat rental rate, no tenant diversification (with multiple tenants leases typically end at different times...with one tenant cash flow can dissappear entirely if tenant leaves/goes out of business) and a secondary market location.
However, in comparison to other opportunities the level of risk that a default could occur is relatively small with a fortune 50 company selling basic products that will ALWAYS be in demand.

Unlike Walgreens, California is not profitable - not even remotely so. It's level of debt is unsustainable and it pays its employees in IOUs. The situation is so terrible that I simply cannot comprehend how you can measure the risk of default which I perceive to be 100%. The only comparison may be purchasing a retail building/mall that is full of bankrupt tenants (nobody buys them in their right mind without another tenant in place!!!!) Sure, the contracts which will be created from sale/leaseback will spell out rent to be paid in US dollars...however, there is no way an investor can outmaneuver creditors in positioning to be in line to at least get pennies on the dollar of guaranteed rent after a default. Like the Walgreens deal, if the California Government were to leave - cash flow ends immediately and entirely and the ownership is left with an asset that needs to be maintained, property taxes need to be paid and leasing/tenant improvement fees to be shelled out to find a new tenant.

The idea of buying any of these assets is absolutely insane.