Retail box

Underwriting a Vacant Rite Aid Box

CREMODEL · underwriting notes

Rite Aid went from roughly 2,000 stores to none. What is left is a 7,000 to 14,000 square foot box with no tenant, and a deal that is a development wearing an acquisition’s clothes.

A dark drugstore is not priced on a cap rate, because there is no income to apply one to. It is priced on what it costs to get open and what it yields once it is. Everything between those two points, the demising, the landlord work, the allowances, the months of carry, is the deal.

The four numbers that decide it

What you can demise it into. A 13,000 square foot box rarely re-lets whole. It gets cut into two or three suites, and each new suite needs its own walls, its own restrooms, its own meters and its own storefront. Budget that per suite beyond the first, not as a lump.

Who actually takes the space. The users backfilling these boxes are discount retail, medical and thrift, not another pharmacy. Discount variety anchor alone has taken more than 300 former Walgreens sites. Plasma centers, dental chains, dialysis, urgent care, Goodwill and independent grocers are the rest of the list. Each pays a different rent and needs a different allowance: a discount box takes the space close to as-is at $10 a foot of allowance, while medical turns a shell into a fit-out closer to $45.

When the rent starts. Permits, construction and delivery all slip, and the loan does not wait. The model carries each suite on its own commencement month and its own free rent, so a suite that opens in month 16 is sixteen months of carry, not an annualized assumption.

The spread. Stabilized net operating income over total project cost, against the cap rate you expect to sell at. Under about 100 basis points there is no room for the schedule to slip, and it always slips.

Where these deals actually go wrong

Two places. The first is treating the allowance as a number per square foot of building rather than per square foot of the suite being fitted out, a tenant already in occupancy took its allowance from whoever built it out, and its next one falls due at rollover, not on your settlement statement. The second is selling in the year a lease expires. A buyer prices rollover risk into the cap, and a ten-year hold on a ten-year lease hands them the argument.

What the model does with it

Each suite carries its own size, rent, commencement month, free rent, term, steps, allowance and renewal probability. The demising cost applies per suite beyond the first. The recoveries are calculated per lease, so a gross tenant pays nothing into the pool and you absorb its share. The loan sizes to cost the way a bridge lender quotes it, or against the three tests a permanent lender runs. The answer at the top is the levered IRR and the equity multiple; the number that matters most is the development spread, and it is on the page.

What the template loads with