Case Study 5

We recently appraised a brand new, build-to-suit, single-tenant NNN CVS drugstore in Sacramento. The lease is for 25 years and the tenant has four, five-year renewal options. CVS Pharmacy has a high credit rating. It was a pending sale of the property for $4.2 million, which equated to 6.0% cap rate.

A local commercial appraisal firm was contracted to appraise the property. The appraised value came in at $3.7 million. This was much lower and the bankers, brokers, buyers, and sellers were perplexed and wanted to have the property appraised by another commercial appraisal firm. We were hired to conduct an appraisal of this property. We are the foremost experts in single-tenant net leased (NNN) properties across the nation. We reviewed the prior appraisal. It was clear that the appraiser did not have experience with net-leased NNN properties. The appraiser concluded a vacancy and collection loss of 15% along with a market expenses.

We examined over 500 sales of single-tenant NNN properties across the nation confirmed with several different brokers that specialize in sales of net leased developments. None of the sales had a vacancy factor or any expenses built in by the buyer or seller when calculating the net operating income and corresponding capitalization rate.  Any risk associated with the tenant vacating is reflected in the capitalization rate.

There was plenty of support for the pending sale.