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]

James Gaulin has joined Richmond American Homes in Tucson as Director of Land Acquisition and Development. Gaulin replaces Michael Del Castillo who was promoted to Richmond American’s Seattle office, where Del Castillo grew up and still has family.

Gaulin is well-known and respected in the industry and came to Richmond American’s Tucson branch from Denver, where he was working with Lennar Homes in land development.

Gaulin’s extensive experience in land acquisition and planning began with Meritage Homes in Tucson and continued at Forest City Land Group from 2006-2012. During that time he managed all aspects of acquisition, entitlement, planning, development and construction for several master-planned communities in Arizona and Washington.

Prior to that, Gaulin was with Rick Engineering in Tucson where he worked as a Civil Engineering Designer, assisting subdivision and commercial planners with architectural designs, working closely with municipal and utility employees to ensure project success.

Gaulin says he’s very happy to be back in Tucson and could not resist the call to return when it came to him in Denver.

Richmond American is a wholly-owned subsidiary of M.D.C. Holdings, Inc., (NYSE:MDC) a Delaware Corporation based in Colorado since 1972. Richmond plans to maintain its market share in Pima County and ranked 11th in the top 100 Southwestern and National homebuilders for 25012, with 3,740 closings for the year.

Gaulin is at the Richmond American administrative office at 3091 West Ina Road, Tucson, AZ 85741 and can be reached at (520) 544-2700.

(API-August 22, 2013) Struggling retailer J.C. Penney is adopting a plan to prevent a takeover attempt just two days after reporting its sixth straight quarter of big losses and steep revenue declines. This is the second time in recent years that the company has put into place a so-called “poison pill” plan.

In October 2010 J.C. Penney enacted the defense after activist investor William Ackman of Pershing Square and Vornado Square Management, chaired by Steve Roth, snapped up large stakes. The company eventually put both men on its board, a decision that ended badly last week when Ackman resigned from the board after lashing out at other directors publicly. The two sides hammered out an agreement that will allow Ackman to unload his J.C. Penney stake. Roth is still on the board.

J.C. Penney said there is no current attempt to take over the company. However, the plan announced Thursday can be put into effect if an individual or an entity acquires 10 percent or more of the company’s outstanding stock. The corporate defense strategy allows existing shareholders to buy more shares at a very low price if that occurs.

J.C. Penney said that the plan does not include “certain affiliates of Pershing Square Capital Management, L.P. or certain affiliates of Vornado Realty Trust so long as such party’s beneficial ownership is permitted under such party’s letter of agreements with the company.”

The retailer is trying to survive a botched turnaround strategy by former CEO Ron Johnson. It brought Mike Ullman to the top post in April, after he had occupied the post from 2004 to 2011. Ullman has been bringing back coupons, frequent sales events and basic merchandise like khakis and jeans that Johnson eliminated in a failed attempt to attract hipper, more affluent shoppers.

J.C. Penney amassed nearly a billion dollars in losses and its revenue dropped 25 percent for the fiscal year that ended Feb. 2 in the first year of Johnson’s turnaround strategy.

Under Ullman’s leadership, J.C. Penney is bringing back store label brands like St. John’s Bay that were eliminated by Johnson. The company also is working to restage the home departments in the stores where new designers like Jonathan Adler and Michael Graves were added.

J.C. Penney said that its “poison pill” will be effective until Aug. 20, 2014, unless rights are redeemed or exchanged for shares of its common stock on an earlier date.

The retailer’s stock dropped 13 cents to close at $13.20 Thursday.