This presentation describes the steps and techniques to mass appraise drugstores in the United States.

1. Introduction A Prescription for Assessing Drugstores TIM WILMATH, MAI DIRECTOR OF VALUATION HILLSBOROUGH COUNTY PROPERTY APPRAISER’S OFFICE

2. “ There is a neighborhood drug store within five miles of nearly every American.” Craig Fuller, former president and CEO National Association of Chain Drugstores Introduction

3. “ There is a neighborhood drug store within five miles of nearly every American.” Craig Fuller, former president and CEO National Association of Chain Drugstores Introduction

4. VALUE IN USE VALUE IN EXCHANGE LEASED FEE FEE SIMPLE NNN LEASED MARKET VALUE BUSINESS VALUE GOING CONCERN SPECIAL PURPOSE CONTRACT RENT MARKET RENT ABOVE-MARKET LAND PRICES SECOND GENERATION USERS Introduction

5. Introduction BEFORE DRUGSTORES, ENTREPRENEURS (SOMETIMES CALLED “ SNAKE OIL SALESMEN”) SOLD REMEDIES OUT OF COVERED WAGONS.

6. Introduction DURING THE CIVIL WAR DRUGSTORES BECAME MORE COMMON WHEN BATTLEFIELD DISPENSARIES WERE NEEDED.

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25. Introduction Source: IMS National Sales Perspectives

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27. Introduction Grocery Store and big-box stores don’t offer the quick shopping experience that drugstores do.

28. Introduction “ Our business strategy is to be the easiest pharmacy retailer for customers to use. We believe ease of use means convenience for the time-starved customer.” Source: CVS 2009 Form 10-K

29. Introduction STARTING IN THE MID 1980 S , FOUR DRUGSTORE CHAINS EMERGED AND EVENTUALLY DOMINATED THE MARKET.

30. Introduction A snapshot of the Top-10 Drug chains by store count

31. Introduction MODERN DRUGSTORE PROPERTY CHARACTERISTICS LOCATION: SIGNALIZED HIGH PROFILE/HIGH TRAFFIC CORNER STYLE: ONE-STORY ATTRACTIVE ARCHITECTURAL DESIGN SITE SIZE: APPROXIMATELY 1.5 ACRES BUILDING SIZE: 12,000 - 15,000 SQUARE FEET FEATURES: DRIVE-THROUGH WINDOW PARKING : WRAP-AROUND STYLE WITH 50-80 SPACES ACCESS: EASY INGRESS/EGRESS

32. Introduction Moving to a freestanding location can increase sales by as much as 35%. Gary Ralston former President Commercial Net Lease Realty

34. Introduction BECAUSE DRUGSTORE CHAINS ARE SO SUCCESSFUL, INVESTORS ARE ATTRACTED TO THESE PROPERTIES. INVESTORS GAIN BOTH PRIME REAL ESTATE AND A HIGH-QUALITY TENANT.

36. Valuation

37. Value in Use versus Value in Exchange Use value and exchange value are the same unless the current use is not the highest and best use.

38. Special Purpose Property? Modern drugstores have a very specific design that is ideal for drugstore use. Does that mean they are Special Purpose properties?

39. When Eckerd was sold in 2004, most of its stores became CVS. This conversion was relatively easy and inexpensive. Special Purpose Property?

40. Other stores not needed by CVS were converted to other uses (second generation). Special Purpose Property?

41. Drugstores can easily be converted to other uses. They are not special purpose properties. Special Purpose Property?

43. Cost Approach 1. Replacement Cost 2. Depreciation 3. Land Value

44. IN MAY 2009, WALGREENS BOUGHT THIS CORNER FOR $2,900,000, OR $95.54 PER SQUARE FOOT FOR 30,353 FEET ( ¾ ACRE) Cost Approach

45. ¾ OF AN ACRE IS NOT ENOUGH LAND FOR A MODERN DRUGSTORE. BUT THERE WAS ANOTHER ACRE OF LAND SURROUNDING THE SITE – UNFORTUNATELY, IT IS A RETENTION POND FOR THE ADJOINING SHOPPING CENTER. Cost Approach

46. WALGREENS PURCHASED THIS SEPARATE RETENTION POND, WHICH GAVE THEM ENOUGH LAND FOR THE WALGREENS STORE. BUT HOW DO YOU BUILD ON A RETENTION POND? Cost Approach

47. WALGREENS IS BUILDING AN UNDERGROUND DRAINAGE “VAULT” FOR RETENTION, WITH THE PARKING LOT ON TOP Cost Approach

48. But does this cost equal value? Cost Approach

49. Cost Approach Why would Walgreens go to all this trouble to build on this site?

50. DOES THE PRICE WALGREENS PAID AND THE MONEY THEY SPENT TO BUILD THE VAULT REPRESENT “MARKET VALUE”? Cost Approach

51. Cost Approach Marshall & Swift has a specific section for drugstores.

52. Cost Approach Depreciation Does a drugstore suffer from functional obsolescence due to Superadequacy?

53. Cost Approach Depreciation Does a drugstore suffer from functional obsolescence due to Superadequacy? Yes it might… but only if occupied by a non-drugstore use.

54. Cost Approach Depreciation Does a drugstore suffer from functional obsolescence due to Superadequacy? Not if the improvements are used as intended – a drugstore.

55. Sales Comparison Approach

56. Occasionally drugstores sell directly from developer to drugstore chain. These are the very best sales because they are not leased fee. Sales Comparison Approach

57. Drugstore Sales are almost always “leased fee”, meaning the buyer purchases the real estate and the income stream. Sales Comparison Approach

58. Some argue that investors overpay for drugstores in order to obtain a highly-rated creditworthy tenant. Sales Comparison Approach

59. Compare CAP rates from leased fee drugstore sales to sales of other high quality retail. Sales Comparison Approach

60. Non-Drugstore sales at corners? Other property types typically found at traffic-light intersections are not very similar to drugstores. Sales Comparison Approach

61. Non-Drugstore sales at inferior locations? Other single-occupant retail stores are not similar in location and other features. Plus, they have their own issues. Sales Comparison Approach

62. Sales Comparison Approach When a store is abandoned by a drugstore chain, it no longer functions at its H&B use Second Generation drugstore sales

63. Second Generation drugstore sales “ Further, Grantee covenants and agrees that the Subject Property shall not be used for the operation of a pharmacy, drug store, health and beauty aid business, a vitamin store and/or a mail order drug store or pharmacy until January 1, 2016. This restriction will run with title to the Subject Property and shall be binding upon the successors or assigns of Grantee.” Sales Comparison Approach

64. Of the 3 options, I think drugstore sales are the best comps (with consideration for land prices and leased fee property rights). Sales Comparison Approach

65. Income Approach RENT: $25-$40 SF TERMS: 20-25 YEARS, WITH OPTIONS LEASE: TRIPLE NET

66. Income Approach THE ANNUAL RENT ORIGINATES FROM THE ORIGINAL TOTAL DEVELOPMENT COSTS.

67. Income Approach Rent Calculation Example Store Size 15,000 sf Total Development Costs $4,000,000 x Rent Factor x 10% Annual Rent = $400,000 Rent/SF = $26.67 sf

68. Income Approach IF THE SITE ACQUISITION COSTS WERE ABOVE MARKET – THEN THE RENT MIGHT ALSO BE ABOVE-MARKET.

69. Income Approach MOST DRUGSTORE LEASES ARE BASED ON FIXED RENTAL AMOUNT OVER 20-30 YEARS. A TIME ADJUSTMENT SHOULD BE CONSIDERED WHEN USING OLDER DRUGSTORE RENT COMPS.

70. Income Approach JUST LIKE THE SALES COMPARISON APPROACH, AN ALTERNATIVE TO DRUGSTORE RENT COMPS IS NON-DRUGSTORE PROPERTIES. THE SAME PROBLEMS EXIST FOR THESE PROPERTIES AS DID IN THE SALES COMPARISON APPROACH.

72. Just like the Sales Comparison Approach, of the 3 options, I think drugstores are the best rent comps, with adjustments for time and potential above-market land prices. Income Approach

73. CAP rates from Drugstore sales reflect investors’ desires for both quality real estate and dependable income stream from a highly rated tenant. Income Approach

74. All 3 approaches can be automated to arrive at an estimate of fee simple market value. Cost Approach – avoid using land sales where prices were inflated or above-market. Sales Comparison Approach – ensure drugstore sales are adjusted for property rights to account for any premium paid by investors for highly-rated tenant and above-market land cost. Income Approach – Adjust contract rent to market, and consider using CAP rates from high quality retail properties. Mass Appraisal

77. The Future

79. Conclusion THANK YOU! [email_address]