Corbett Construction & Realty LLC

Walgreens just had its credit rating cut to junk status by Moody's. The implications on investors who "bought a Walgreens" are tremendous. This highlights the rule I focus on over and over: "Buy the real estate, not the tenant" Quick overview: Many become enamored with 2 ideas: 1) Yield 2) Zero Headache They want passive cashflow badly and study the tenant, but not the real estate. With Walgreens, they've achieved 5% - 6%, with a "NNN" lease structure that ensures the tenant takes care of all expenses. Roof leak? Tenant takes care of it. A car runs into the building? Not your issue. It's a great proposition, but misses an important point: You're buying real estate, not a lease. Nothing guarantees the tenant won't go out of business. Examples are endless: Blockbuster, etc. What happens when that tenant leaves? You're left with what you actually bought: A building. Not a yield. So, how do you protect yourself? Analyze the purchase based on the real estate, and ask THE question: What happens if they leave? If you're left w/ a 15k sf building and no tenant, what are your options? First thing is to look at the rent. If Walgreens was paying $20k/month, does that match the rents in the area for similar properties? Or is market rent actually $15k? It's a HUGE difference. $20k/month = $240k a year, worth $4M at a 6% cap. $15/month = $180k a year, worth $3M at a 6% cap. Your real estate is valued based on the MARKET rent at that point, not what Walgreens was paying. It's a $1M swing, and you'll be praying the tenant never leaves. If you focus on the real estate/verify market rents are $20k/month+, you'll have confidence you can maintain your value when you get the keys back. Even more important: Location. A building on a main intersection in Santa Monica's going to be worth much more than one on a side street in Fresno, no matter the tenant. Many chased yield the last few years, whether it was in Beverly Hills or off some highway in the middle of nowhere. The yield should be higher to reflect the higher risk of an inferior location. Another factor: building usability. If you can't lease the building as-is, can it be divided? Some buildings are configured in a way where dividing's impossible. There might not be enough frontage, or the building might face the wrong way. Retail footprints continue to shrink - the ability to divide buildings down to attractive spaces is the ultimate insurance policy and helps drive rents, as tenants pay more per foot for smaller spaces, on average. Another important question: What will it cost if the tenant leaves? Leasing commissions, TI allowances, carrying costs, etc. You need to cover these expenses, and they need to be justified by the market rents. Yes, the yield's a big factor in the NNN world, but there are more important things to look at. When considering a building to buy, photoshop those fancy logos off. That's what you're actually buying. Underwrite accordingly.

Happy Holidays from the Corbett Construction & Realty Team. We hope everyone had a great year. We expanded by bringing on Ben and Katie full time as well as securing office space downtown Appleton. We became licensed General Contractors as well as a licensed Real Estate Brokerage. We are now able to offer remodeling, new construction, realty services, and property management. We are looking forward to continued growth and being able to interact with you all in the coming year.