CVS leases, when they were initially signed, were usually 20 or 25 years in firm lease term before the option periods. CVS does restructure leases for stores that are nearing their next option period, and extends them out another 5 to 15 years. Lease option periods are usually 5 years and there could be rental increases of 3% to 5% at each option.

CVS leases can be absolute net (whereby the tenant is responsible for all costs related to the property), or double net (whereby the tenant is responsible for two of the primary property expenses), and can vary in landlord responsibilities and expenses. CVS for sale that have true absolute net leases are preferred by investors, since all management and property expenses are handled by CVS directly. CVS double net leases may have the landlord responsible for roof and structure or other capital expenses in the parking lot. Certain leases may have the landlord paying property taxes and insurance upfront, to be reimbursed by CVS. There are some CVS leases that were assumed during an acquisition of a pharmacy chain, such as Eckerd, and lease language may vary from the traditional CVS corporate lease.

The Value of NNN Real Estate Quality for Drugstores

Drugstore net leased real estate has been an investment vehicle for investors since the ‘90s, and has held up well through a number of different market cycles. Drugstore net leased properties available include Walgreens, Rite Aid and CVS for sale. The real estate quality is typically strong, as drugstores have positioned themselves on some of the best retail corners in the country. Roughly 80% of the U.S. population lives within 5 miles of a CVS, Walgreens or Rite Aid, giving these chains unique value with their real estate positioning.

Most drugstores have buildings ranging from 10,000 square feet to 16,000 square feet; however, there are new store formats with building square footages under 3,000 square feet and there are some drugstores with inline or anchor spaces that go up to 25,000 square feet. The typical land square footage for a single tenant freestanding drugstore is in the 60,000 square feet to 120,000 square feet range, and most drugstore locations have a drive-thru pharmacy. The value of NNN real estate occupied by drugstores is also tied heavily to the lease terms and rent schedule. Drugstores are mostly passive investments, and leases with little or no landlord expenses or management sell at a premium.

Corporate Guarantees and Understanding CAP Rates

Most Walgreens, Rite Aid and CVS for sale have corporate guarantees backing the rental income. Some leases may have the rent guarantee of a subsidiary, but none have leases with franchisee guarantees. CAP rates for Walgreens, Rite Aid and CVS generally remain consistent regardless if it’s a corporate guarantee or a subsidiary; however, the buyer pool may be smaller or the drugstore disposition may take longer if there is a subsidiary guarantee in place, as some buyers may question the specific entity backing the lease. CAP rates for drugstores have generally varied from 4% to 9% during the last 30 years, depending on interest rate levels and buyer demand in each market.

Walgreens and CVS net leased properties usually trade at a premium, versus Rite Aid leased properties because of their credit strength and financial health outlook. CAP rates also vary greatly on a specific drugstore lease length before the options, and whether the lease is absolute net or double net. Absolute net drugstore properties trade at lower CAP rates, since there is a larger buyer pool for drugstore leases with zero landlord management. Drugstores with double net leases in place also trade frequently, as certain investors are fine with management responsibilities, if they are getting a higher CAP rate in return.

An Exclusive Focus on CVS

Pharma Property Group (PPG) is one of the few national commercial real estate brokerage companies that has an exclusive focus on buildings occupied by CVS, Walgreens and Rite Aid. PPG’s specialization gives them a superior understanding of the drugstore marketplace, giving their clients an advantage when it comes to their existing drugstore portfolio or representing buyers with their first drugstore acquisition. Pharma Property Group has established relationships with drugstore landlords all across the country, which allows them to be aware of upcoming drugstore dispositions and be at the forefront of drugstore net leased market trends.

Many CVS for sale vary is their lease structure and may have existing financing in place, which is different than most Walgreens or Rite Aid for sale. It’s important to work with an experienced drugstore broker who understands the aspects of CVS zero cash flow properties and how rent holidays, defeasance costs or debt assumptions influence a possible CVS acquisition. Depending on how much time is remaining before loan maturity on a zero cash flow property is in place, financing will be a main factor in determining the value of the CVS property and how the sale is executed. There are a number of CVS net leased properties that also can be sold free and clear of debt; and, PPG understands how these properties are financed and what lenders are active in the drugstore market during the time of the acquisition.

Large Inventory of CVS for Sale

Pharma Property Group (PPG) carries an inventory of CVS for sale that is both off market and exclusively listed, where the current landlord has given PPG the exclusive rights to sell the property. Since PPG has such a strong presence in the drugstore marketplace, they have access to a number of CVS properties that are coming up for sale from both their clients and other outside brokers that they work with on a regular basis. Any buyer looking to acquire a CVS property should consider engaging a specialized drugstore net leased broker, such as PPG, to locate them the best CVS net leased opportunities for sale.

There are strong CVS properties listed on the open market but they usually sell quickly. Many other CVS properties for sale that have been sitting on the market may have negatives or are priced too aggressively. Working with a drugstore broker will save a buyer time and money during their acquisition process, as a good broker will know specific CVS stores available for sale and any issues related to those assets. Pharma Property Group qualifies each CVS property before sending the opportunity to their buyers, to avoid any upfront issues relating to the property’s environmental history, lease, profitability or other surrounding factors to any given market.

Who buys CVS NNN properties?

Net leased property owners throughout the country typically buy CVS for sale, and occasionally buyers may be first-time net leased investors that are attracted to the healthcare space. Many buyers of CVS properties also own other CVS or Walgreens net leased properties. Buyers that are first-time drugstore buyers need to work with a broker experienced in drugstore property sales, as the buyer pool for drugstore assets can be sophisticated. Experienced net leased buyers and brokers can put seller friendly language in their letter of intents to win a deal.

Some buyers of CVS properties are all cash, others may have financing. Maximum leverage to get the best interest rate and loan terms is usually 65% loan-to-value; however, there are financing options available up to 70% loan-to-value, or possibly higher, depending on the loan collateral and buyer strength. Buyers that are all cash can close on a property quicker making them more competitive, but the reputation of the buyer and their broker can also make the difference based on their ability to assure the seller of the closing. There are certain performance milestones that a buyer can put into their offer letter, if obtaining financing can make the offer more competitive against cash offers.

Can I own a CVS store?

To purchase a CVS for sale any buyer should plan to have a minimum of 35% cash down of the purchase price. Sellers typically will want to see proof of funds and get a general background on a buyer before entering into a contract to sell the CVS. If financing is involved, then a seller will usually want to see a lender term sheet and may require the buyer to place their deposit with the lender for transaction expenses by a certain date. Any CVS buyer should also have a real estate attorney, and if possible, also use a broker experienced in drugstore net leased property sales. Owners of CVS properties are primarily U.S.-based, but there are international investors that purchase these investments, as well.

Investors can also own a fractional piece of CVS properties if they are investing with institutions such as REIT’s, DST’s or with other investment companies. Buyers do not have ultimate control over the investment, and there are usually management fees associated with owning net leased properties with these different institutions. Some of these institutions offer options for investors to satisfy smaller 1031 trades. Buyers should speak with their 1031 accommodator prior to investing their proceeds.

How do NNN lease owners make money?

Owners of NNN leases make money by getting rental income from their net leased investments. Owners can also make a profit by timing a sale of their net leased property in a good market, or by selling their net leased property strategically when there is a recent option renewal or lease restructure. If owners have a good investment plan for each of their net leased investments, then a good profit can be made during the hold period with rent payments and upon the ultimate exit of the property.

Drugstore net leased investments, in particular CVS for sale, are popular among investors because they have a strong credit backing the rental income, and usually have longer lease term commitments from the tenants. Some national retailers on good performing locations will extend their leases out longer as the location nears an option period, if there are certain concessions from a landlord. These concessions could be cash payments or property improvements, and any of these expenses should be taken into account for not only the owners return, but also how they will effect a future sale of the investment. Net rental income for any double net lease should consider any landlord expenses, such as roof, structure, parking lot, property management or any other non-reimbursed expenses paid by the landlord over the term of the lease.

What’s the return on investment for owning a CVS for sale?

The return on investment for buying a CVS for sale varies based on the quality of the lease in place and the real estate; however, generally CAP rates for CVS properties are in the 4 CAP to 8 CAP range, depending on the interest rate environment and buyer demand at the time of acquisition. If there is financing involved in the CVS acquisition, then cash on cash return typically ranges from 3% to 8%. The longer the lease term remaining before the options on a CVS lease is, plays a large role in the return a landlord can expect. Longer leases with 15 years remaining, leases with 10-12 years remaining and leases under 10 years of term remaining, all have a certain return level depending on the market.

The spread on CAP rates between a 15 year CVS lease and a 5 year CVS lease could be as much as 200 basis points, depending on the lease renewal likelihood, landlord responsibilities and real estate quality. CVS properties that have absolute net leases trade at lower returns than stores that have double net leases, as buyers expect a discount for properties with more management. The buyer pool is smaller for double net leases, as some buyers won’t consider taking on any management whatsoever.

How can a real estate broker help me?

An experienced commercial real estate broker that has handled drugstore property sales in the past is important for buyers, when acquiring any drugstore net lease property. There are certain nuances to leases for Walgreens, Rite Aid and CVS for sale that need to be understood by the buyer. A broker familiar with drugstore transactions, such as Pharma Property Group, can save a buyer time and money by disclosing to their buyers any upfront concerns in relation to the lease, or overall health of the investment. Buyers will want their broker to make sure there are no issues with a potential acquisition relating to the environmental history, title or lease documentation. Other factors to consider also include the surrounding area rental rates, employment, traffic, population, and other demographic information.

Drugstore net leased brokers can also bring value by sourcing potential acquisition opportunities, both on- and off-market. Due to its specialization, Pharma Property Group has relationships with drugstore owners throughout the country that are considering drugstores dispositions. They also have relationships with other outside brokers that have upcoming pipelines of drugstore properties for sale. With so many drugstore properties on the market for sale, a good drugstore broker will also be able to save a buyer time by knowing which investments to avoid because of property issues or listings that are overpriced.