CVS Pharmacy Store, at 7740 N Cortaro Road in Marana, at the southwest corner of Silverbell Road and Cortaro Road, sold for $6 million ($414 PSF). The ±14,419 SF building (built 2003) on 2 acres, was fully leased to CVS Pharmacy Store #8420 and sold with a twenty-five year absolute triple-net lease backed by a corporate guarantee.
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[mepr-show rules="58038"] The transaction sold in a “Zero Cash Flow” or “Zero” sale as it is sometimes called, one of the least understood types of real estate structure in the net lease market today. So we’re going to take a stab at explaining it, and the best way to do that, is to jump right into the fire with this transaction.
A few things stand out as unusual with this sale and “zero” sales in general, besides the odd numbers. First, the financing loan to value is high! A $5,206,865 loan on a purchase price of $5,967,280 is an 85% LTV. These "highly leveraged" LTVs cannot be achieved by just going out and buying any property on the market.
This kind of leverage in zero deals requires a strong tenant such as a CVS. Typically, tenants must have a strong S&P rating of at least BBB and be strong bond net leases. CVS (NYSE:CVS) has an S&P rating of BBB+.
A second unusual feature is that the financing of zero properties is assumable, fixed rate, non-recourse, and often full amortization. At the end of the loan term, the property is owned free and clear of debt. With the financing already in place, the loan is easily and quickly assumable at a low cost to buyers, attractive for 1031 Exchange buyers.
Third, and here’s the basis as to why it’s called “zero cash flow,” or “zero” - all of the property’s net operating income goes directly to service the underlying loan, with none remaining for distribution to the owner. Wells Fargo is the lender of our CVS deal in Marana. This might not sound attractive to all investors, but this real estate structure does have its benefits.
One of the key features of zero sales is called "Paydown/Readvance". This is usually a one-time option that allows the property owner to pull out a large amount of cash from the property. This feature is perhaps the number one reason why zeros are so popular for 1031 Exchange buyers. Use the pulled out cash for whatever reason you want - without any fear of violating the exchange rule (since all the exchange requirements have already been satisfied). Use the money to go out and buy another property (you get to start all over again on depreciable basis), use the money for working capital, use it to go to Vegas, or whatever. The point is, you can use it for whatever you want.
Further, the more seasoned that zeros become (older) the more valuable they tend to get, as the owner gets closer to the day of owning it free and clear.
Remember, there are no landlord responsibilities with a zero. Investors may buy zero properties to put into their 401K or for the grand-kids who won’t need the cash for awhile.
So how does one calculate the cap rate on a zero property? Values for zero cash flow properties are usually expressed as a percentage over the debt. Or to value the property as any other NNN property by applying a cap rate to the NOI. It should be noted that both of these methods determine “gross” values and not a “net” value. That is to say that the net value (Gross Value minus the Debt) is the actual out of pocket cost to do the deal.
“The attractiveness of zeros is a function of equity over debt and the assumption of leverage,” Steve Underwood of Phoenix Commercial Advisors summed up to us. “And the tax benefits to the owner, something only an accountant can calculate.”
The seller, SCP Capital of Utah has been selling CVS Pharmacies in this manner since 2001 when Staubach of Texas acquired 10,000 active CVS store leases in a major sale/leaseback deal for $288 Million. The buyer was Marana Zero I, LLC; Marana Zero II, LLC; and Marana Zero III, LLC of Sandy, UT (Scott Beynon, managing member).
Steve Underwood and Chad Tiedeman of Phoenix Commercial Advisors in Phoenix handled the transaction for buyer and seller.
Underwood should be reached at (602) 288-3477 while Tiedeman can be contacted at (602) 288-3472 for more information.[/mepr-show]
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[ismember]Sale date was 8/2/2013. Exact sale price was $5,967,280. Broker reported cap rate of 8.97% based on NOI. Market time was 242 days. This was the buyers' upleg in a 1031 exchange. [/ismember]