Special Purpose Industrial Properties are Risky Business for Real Estate Agents

Today you will as an agent come across all types of industrial properties from a listing viewpoint.  Some will be better than others when it comes to attracting buyers and tenants.

Be very careful when devoting time as an agent to listing ‘special purpose’ industrial properties.  That type of property is likely to have limited factors of attraction to the market place of tenants and buyers; you can waste a lot of time when marketing such investments.

By ‘special purpose’ I mean those properties that have been built or improved for a particular type of tenant or business as occupant.  When it comes to finding another occupant a landlord or property investor is likely to find it rather difficult, only to then be left with an empty property and the costs of remediating or returning the property to general use.

You see a lot of these properties coming into the market through a sale and lease back situation.  The original owner occupier as a business will typically be seeking to do one or all of the following:

  • To sell the property to get ‘cash’ that they can inject back into the business for a new project or phase of growth
  • Get money to pay off company debts and reposition the business for a better performance
  • To position the business for greater flexibility and potential relocation
  • To change company assets and investments as part of a refinancing package

If the company is a major ‘brand’, the sale and lease back can appear to be an attraction to some investors; however the nature of the ‘special purpose’ property is likely to bring with it considerable investment risk.  If the initial lease back is for a long initial lease term (say 20 years) then the risk is lessened by the spread of years for the investor, but there is still a problem with the tenant eventually leaving the property at lease end, and the improvements being reverted to ‘general industrial’ use or application.  If your investor client purchases such a ‘special purpose’ property then the possibility of sale to liquidate funds will be very limited.

Consider these thoughts:

  • Head leases are a good example of a situation where any property will have a shortened investment life.  From an investment perspective the head lease will restrict future investment due to the pending head lease expiry.
  • Properties that have unique improvements such as ‘cold rooms’ and special warehouse applications, have limited attraction to other businesses in any reletting situation.
  • Tenants that run businesses that are environmentally difficult and could involve site remediation at lease end are unattractive to the general investors in the property market today.
  • These ‘special use properties’ are harder to finance and balance in a property investment portfolio.  The loan value ratio is generally lower from a property refinancing perspective.

The message is that any ‘special purpose’ property involving a degree of risk through type of ownership title, location, layout or design, or specially installed improvements, should be avoided by your investor clients; perhaps the bias changes if they purchase the property at a very low price and the lease term is long.   That is an assessment for the individual investor to make.  From an agent perspective these unique properties are harder to market and sell when the time comes.

In any ‘risky’ property investment the inconvenience of the ‘risk’ should be offset for the client owner by a long lease term and a higher than normal rent to allow the investor to recoup reasonable returns.  The remedial make good at the end of lease term should also be designed in such a way to put the onus of property reinstatement back onto the tenant.  The high cost of bringing the property back to a more ‘general’ use is then a tenant responsibility.

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