Financing property that only suits one use
When a building was designed for one thing, the lender's first question is what happens if that thing stops.
The short answer
A church, a daycare, a funeral home or a private recreation facility is financed on a different logic from an office or a warehouse, because the lender has to ask who else could use the building if you stopped. The narrower that answer, the lower the leverage and the shorter the list of lenders.
- The lender is underwriting the alternative use, not just yours.
- Leverage is lower than on a conventional asset class because the resale market is thinner.
- The occupier's covenant matters more than usual, because the building alone is weak security.
- Many of these files are really owner occupied files, so the organisation's finances carry the deal.
What makes a property special purpose
Three things, and most of these buildings have all three. The layout is purpose built and expensive to convert, so a new occupier is buying a renovation as well as a building. The use depends on a licence or a specific zoning permission, so not every buyer could operate there even if they wanted to. And the pool of possible buyers is small, which is what a lender means when it says the asset is illiquid.
The examples are ordinary enough. Places of worship. Daycares and childcare centres. Funeral homes. Private schools. Clinics with heavy medical fit out. Recreation facilities such as gyms, climbing centres and indoor sports buildings. None of these is unfinanceable. All of them are underwritten differently from a leased warehouse.
How lenders get comfortable anyway
A strong occupier covenant does most of the work. If the organisation using the building has reliable revenue, an operating surplus and financial statements a lender can read, the file stops being a bet on the property and starts being a credit decision about the occupier.
A meaningful equity position does the rest. More equity means the loan sits well inside whatever the building would realise in a slow sale, which is exactly the scenario the lender is pricing. Expect that requirement to be higher here than on a conventional asset class.
Beyond that, most lenders will want a personal or corporate guarantee from the people or the parent organisation behind the occupier. That is not a sign of doubt, it is standard where the building alone is weak security. In substance most of these are owner occupied files, and they are underwritten with the same mixture of property and business review.
Licences and permissions are part of the security
For a licensed use such as a childcare centre, the licence is part of what makes the building worth what it is worth. A room with the right dimensions, the right outdoor space and a current licence is a childcare centre. The same room without one is space. So lenders look at whether the licence is current, whether it is transferable, and whether it attaches to the premises or to the operator.
Say the obvious thing out loud. Those are questions for the regulator and for the operator's lawyer, not for a mortgage broker. What we can do is tell you how a lender will read the answer once you have it, and structure the file around what the licence actually supports.
Where these files usually land
Credit unions carry a lot of this business in British Columbia. Community lending is part of how they are set up, they know the organisations in their own regions, and they are willing to spend time on a file that does not fit a template.
The rest goes to private capital, usually where speed matters, where the structure is unusual, or where the organisation needs to complete a purchase before its conventional financing can be arranged. Private money is more expensive and should be short, with a defined path off it.
If the asset is unusual for reasons beyond its use, our page on hard to finance property covers how lenders underwrite the exit when the buyer pool is thin.
Special purpose questions.
Financing a building built for one use?
Send the property and two years of the organisation's statements. We will tell you which lenders will look at it and on what terms.