Friday, March 22, 2013

Rental Property Investing - "Special Purpose Properties"

Is buying a ‘Special Purpose Property’ (SPP) as an investment a good idea.  If the cash flow is sound based on a long term lease, and it generates a good return, as an investment property, this might be the right move. But then again…maybe not.

Let’s first look at what a SPP is defined as – “a limited market property with unique design characteristics that may have been built with specialized construction materials or offers a layout that restricts its utility to the use for which it was originally built”. They often have limited conversion potential as built, without having to incur substantial retro-fit costs.  

Good examples of this type of property might include:
·        Bowling Alley
·        Church
·        Car Wash
·        Daycare (particularly larger centers)
·        Nursing Homes/Elderly Care Facilities
·        Marinas
·        Theaters

Basically – they are what they are. Should the use come to an end at some future point, can the building be re-purposed and at what cost?  For the investor, when the use ends, what are the implications regarding the lease and future cashflow. On the concept of re-purposing, in reality it is very much dependent on the calibre of the marketplace you are in and its future economic outlook.  It’s a clear risk and you do need to account for it, as a major part of your Due Diligence.

On a final note, lenders have their own criteria relative to the category of SPP, and best practice is to get their perspective on what sort terms are available, before proceeding on such an investment. Suffice it to say that the Tenant’s Covenant will be crucial to the Lender – as it should be to you.

As always, seek out experienced commercial realtors within your market to assist in reviewing potential SPP investments.

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