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.

Rental Property Investing - Medical Properties

An attractive sub-group within the office category, are medical office properties.  Medical office properties can involve ‘single user’ formats, as well as ‘multi-tenant’ developments.  Multi-tenant properties are able to bring a variety of medical practioners under one roof, as well as offer various related services - such as pharmacy, laboratory/diagosotic, and physio/chiropractic, to name a few.  Locationally, they can be in established or growing residential neighbourhoods, busy commercial areas, or near primary care hospitals in a city.

Medical office properties have typically been characterized as being stable from both a tenancy and cash-flow perspective. Physicians do not generally move around, and at minimum can stay in one location for 5-10+ years.  Lease rates on comparable buildings, would likely fall in a narrower and more predictable range within any given market.

All of the same discussion points in evaluating retail and office properties would apply here. Economic performance would consider applicable cap rates for other medical property sales in the area, as well as a diligent review of the tenant summary to assess its overall stability.

Being a landlord of a medical office property presents some different challenges than you might see with other commercial centres. Firstly, parking availability is critical for medical users, and often commands a much higher ratio per square foot, in comparision with retail or business office uses.  A busy medical specialist occupying 1500’, can utilitze 15-20 parking spaces during his normal office hours.  This may be 3-4 times the need of a business office use (ie. insurance office).  Pay particular attention to the area of parking, because it must be adequate for all tenants and their patients/clients.  Best practice here, is to observe the site at busy times and get a good sense of how it functions on a daily basis. In addition, pay close attention to the standards of accessibility for elderly/handicapped, sound proofing needs, and restrictive convenants which preclude competing uses.

The best medical office buyers should be ‘physician-owners’, who are likely setting up practices for the long haul and would effectively pay the building off over a 10-20 year stay.  In today’s market, traditional real estate investors/landlords are drawn to well-tenanted medical properties across North America – and why wouldn’t they be?  With aging populations, health care spending on the rise, and the field of medicine expanding continually, it would seem to be a ‘sweet spot’ for real estate investment.

   

As always, seek out experienced commercial realtors within your market to assist in finding suitable Medical Property investments.

Rental Property Investing - Office Properties

Now let’s look at Office properties. Again, they come in many shapes, sizes, design styles, and for a variety of user types. Specifically on users, they can be categorized as follows: business office, institutional/government, medical or commercial service.

Multi-tenant office developments may be located near residential neighbourhoods, within business parks, or in established commercial districts within a city.  Tenant rosters could include accounting firms, law offices, personnel agencies, mortgage brokers, insurance offices, and chiropractors.  As in the case of retail, a development can be designed for a single user and within a freestanding building.    

In looking at successful office properties – same advice as with retail -- pay particular attention to not only the property’s current vacancy status, but what its historical pattern has been. Are current rentals on a per ft. basis, at or above/below the prevailing office rates within the area. It’s all about supply & demand, and lease rates are mostly dependent based on the realities of your particular marketplace.

As with other commercial properties, the value of an office building is very much tied to the amount of rent collected. Review applicable Cap Rates for recent office building sales, to give you a benchmark as to how your subject building relates. Also in studying the tenant summary, how dependent is the landlord on 1 or 2 units in order to sustain an adequate cashflow?  It’s the ‘What-If’ analysis – so if a tenant occupies 50% of your building (representing 50% of your rental income), what happens when they leave and how easily can the unit be re-tenanted and at what cost?  It is as we’ve said many times before, all about good Due Diligence.

Just a final word, on evaluating a property to see how it performs on a daily basis.  Visit the site during busy times and see how it functions – Is there really enough parking?  Is there a good/compatible tenant mix? Ease in visitors accessing the site?  Does it appear to be an operational success for tenants, their employees and visitors?  On site observations are always well worth the effort and can tell you a lot about the viability of the property.

As always, seek out experienced commercial realtors within your market to assist in reviewing viable Office Properties as investments.