My pharmacy box went dark with nine years of rent left. Still paying, though.

Posting this because I bought it partly on advice I got in rooms like this one and the failure wasn't in the math I did. It was in the question I never asked.

11,600 sf single-tenant drugstore format, secondary market in the midwest, bought two and a half years ago at $2.05m, NOI $162k, 7.9 going in. Investment-grade parent, 11.5 years remaining on a 25-year lease with no early termination right and no co-tenancy. Absolute net, tenant on the roof and structure. I underwrote credit hard. I spent almost no time on the box.

Fourteen months ago the chain announced a store closure round and mine was on the list. They kept paying. They are still paying, every month, on time, and they will keep paying for nine more years because the lease is a corporate obligation and there is no out. So technically nothing went wrong.

What went wrong is that the building is dark, and a dark building with a paying tenant is not the asset I thought I owned. I tested the market at 15 months out of curiosity. Best indication was around $1.44m, roughly a 11.3 on the contract rent. Buyers are pricing the nine years of remaining payments and treating the real estate as close to zero, because an 11,600 sf drugstore format in that submarket has maybe two credible second-generation users and both would want it cut in half at my expense. Contract rent is about $14/sf. Local market rent for a reconfigured box there is $8 to $9. I never ran that comparison before I bought.

Cost so far: about $610k of paper value, plus my refinance is now a problem because the lender is looking at a dark building even though the payment history is clean. I'm holding and collecting, which is fine, but my exit is now a nine-year clock and I can't sell into strength.

What I'd do differently, stated plainly: before I look at the credit rating, I price what a non-credit local tenant would pay per square foot for that specific building in that specific submarket, and I only buy when contract rent is at or near that number. Credit protects the income. It does nothing for the residual.

2 replies

-1priya_n21PO1C

I've been reading this room for months looking for income without a second job, and this is the post that reframed it for me. You're getting exactly the cash flow you bought and you still lost $610k. So the thing I should be underwriting isn't just "will the rent arrive" but "what is this building worth to someone who isn't this tenant." Which sounds like it takes actual local knowledge, not a spreadsheet.

Question though. Is the $1.44m real if you never sell? You're collecting $162k a year on $2.05m. Over the nine remaining years that's about $1.46m of rent. If you hold to expiration and the box is worth $400k as a shell you've done okay in absolute dollars, just badly against what you thought.

2tylerbrooks9PassivePRO5

I'd put the cause slightly differently than you did. The rent to market rent gap mattered, but the format did too. An 11,600 sf drugstore box is a hard shape, corner site, drive-through, wrong depth for most users, built for one operator. A 9,000 sf flexible rectangle at the same rent spread would have re-tenanted at a discount instead of not at all. So I'd add a second rule to yours: prefer buildings whose shape works for more than one kind of business.

And I don't think you got bad advice. Everybody in these rooms says tenant credit is the defining variable and that's true, it just answers a narrower question than people hear it answering. It tells you whether the checks clear. Your checks cleared.

My pharmacy box went dark with nine years of rent left. Still paying, though.

2 replies