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Triple Net Lease Tenant Profile: CVS Pharmacy

Triple Net Lease Tenant Profile: CVS Pharmacy

CVS is the largest pharmacy operator in the US from Rhode Island. Originally called The Consumer Goods Store, it was founded in Lowell, Massachusetts in 1963. The company is deeply rooted in the American healthcare system. The business model includes operating the largest American pharmacy network with approximately 10,000 pharmacies, negotiating drug prices for millions of insured Americans and providing health insurance for millions of Americans.

Many investors know CVS Health as a pharmacy chain. The CVS Pharmacies are spread all over the USA and provide Americans with medicines, cosmetics and drugstore items. Patients can now be diagnosed and treated in the branches. In recent years, the group has undergone a transformation into a full-service healthcare provider. With the acquisition of health insurer Aetna, CVS Health is transforming itself into a vertically integrated part of the American healthcare system.

In a few words, this pharmacy chain came up with an innovative idea that appeared to be one of the most profitable and sustainable retail investments of the century. In essence, they decided to sell beauty and health supplies tapped into the underserved pharmaceutical retail market.

Overview of a net lease tenant profile: CVS

It comes as no surprise that the founders (Hoagland, Sidney and Stanley Goldstein) succeeded in the shortest time. In 1969, a retail holding conglomerate Melville Corporation bought CVS, which had already grown to forty stores regionally at that time. Later, in 1996, the Melville Corporation was reorganized into CVS Health.

Currently, CVS Health can boast around 10,000 pharmacies (which makes up 11% of all US pharmacies) and approximately 300,000 employees. In 2021, CVS posted $292.111B worth of revenue and a Net Income of $7.9 billion, so their indicators increase every year. CVS Health is a publicly listed company on the NYSE and trades under the ticker $CVS.

Concerning the average cap rates, it is lower for all transactions regardless of the term if we compare it to its competitors. In addition, CVS is the only business in this niche with an excellent credit rating of “A.”

What you should know

The designation Triple Net Lease can be found in the business premises rent. It means three times the net rent and is present if the renter bears the costs for maintenance/repairs on the roof and compartment in addition to taxes and duties, insurance, and operating payments. This is not a legal but an economic term.

If the Triple Net Lease Tenant CVS bears the above-mentioned costs except for the costs for repairs/maintenance on the roof and compartment, this is also referred to as a double-net rent.

Maintenance and repairs of the roof and compartment describe repairs to the structural parts of the building (roof, facade, load-bearing parts, etc.). These can only be transferred to the tenant in business premises rental agreement by means of an individual agreement, i.e., such a clause would be ineffective in general terms and conditions.

Since there is extensive freedom of contract in a business premises tenancy and rental price regulations from residential rents do not apply, the contracting parties can agree on other rental arrangements. For example, it is not uncommon for sales-related rents to be agreed upon, in which the rent is made dependent on the tenant’s sales. Linking the rent to a price clause is also common. A distinction must be made here between clauses that require approval (value retention clause) and clauses that do not require approval (voltage clause, cost element clause, retention of service clause). The Federal Office of Economics and Export Control (BAFA) is responsible for such approval, but value retention clauses in business premises leases are automatically approved under certain conditions. A triple-net rent only describes the scope of the rent and can, therefore, also be linked to a price clause in its development.

But that’s not to say that the additional rent is limited to these things. The tenant effectively assumes all financial responsibility for operating expenses, both those that arise from his business and those that maintain the building.

Disadvantages of Triple Net Leases

When you enter into a triple net lease, you are effectively paying the costs of owning a property that you don’t actually own. You will pay real estate taxes on someone else’s real estate. You will pay to insure its property against fire or other damage, and you will pay to keep it safe and secure for you, your customers, and your customers.

Meanwhile, the owner is the only one who benefits from the appreciation or increase in the value of the building. This can be an excellent situation for an investor who wants to buy commercial property and rent it out. It’s largely passive ownership that could lead to substantial passive growth if you hold on long enough.

The bottom line

Triple net rents almost always favor the owner and must be carefully negotiated to limit how much the owner can raise NNN taxes each year. You will also need to make sure that any such fees and terms for an increase are clearly stated in your lease. If you make a mistake, you may be stuck for some time because net leases are typically 10 to 15 years. Pay attention to terms like “turnkey” in leasing deals. This often means that the lease is triple net. If you are unsure, ask a real estate attorney to let them know.

More transparency for more trust

If we take a closer look at the profession of an investor, it is a question of buying assets, renting them, and managing them as well as possible to one-day exit the market with a profit. As for the tenant, he must focus his attention on his business: operating costs, purchases, inventory management, competition, etc. He is not asked to know how to value and maintain the heritage of his lessor! Yet today, he does. So I think that the new regulations will just allow everyone to see things more clearly. Both small traders and large investors will finally be able to know what they will pay at the end of the year. This law will also prevent business failures linked to incidental expenses during a bad season. Concerning investors, once they have found the tempo and that it will have passed into practice, they will also win because they will regain the confidence of tenants. This system is already working with our neighbors. As proof, a Swiss real estate company is developing an economic model that goes as far as including the energy bill in the annual rent. A rent certainly higher but without surprise in the end!

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