Can I get finance to build a new childcare centre?

A childcare centre with no operator is a purpose-built empty building. That is why lenders treat a pre-committed operator as the equivalent of presales on a residential project. An agreement for lease with a national or established multi-site operator, on a ten year plus term, gives the lender an income at completion and an end value to lend against. Most developers secure the operator before or during the approval process, and many operators will help with design because they need the layout to meet ratios and licensing.

Lenders look at loan to cost and loan to value together. Total cost is land, construction, consultants, fees, interest and contingency. Lenders typically fund 65 to 75 per cent of cost, and check that the loan is also within 60 to 70 per cent of the on-completion value, which is derived by capitalising the agreed rent. The developer funds the balance as equity, with land equity usually the biggest part. Interest is capitalised during construction.

Development approval for a childcare use, the service approval pathway with the state regulator, a fixed price building contract with a builder experienced in childcare, and a quantity surveyor's cost report are the standard conditions. Lenders also want the operator's design sign-off, because a centre built without the operator's input can fail licensing on ratios or outdoor space and the operator can walk.

At practical completion the operator takes occupation, the lease commences and rent starts. The developer either sells the completed centre to an investor, which is a strong market for leased childcare assets, or refinances the development loan into a long-term commercial investment loan at the LVRs that apply to established centres. Lenders want to see which exit is planned and that the numbers work at today's yields, not optimistic ones.