Can my SMSF buy a childcare centre?

Superannuation law restricts what an SMSF can buy from related parties and what it can lease to them, but business real property is the exception. A childcare centre used wholly and exclusively in a business is business real property, so the fund can buy it from a member, from a member's company or from anyone else, and can lease it to the member's operating company. The rent must be market rent supported by a valuation, paid on time, under a written lease.

This is the structure many owner-operators use: the operating company runs the centre and pays rent to the SMSF, which owns the freehold. The rent builds the fund and the business gets a landlord that is not going to sell out from under it.

The fund borrows under a limited recourse borrowing arrangement. The property is held in a separate holding trust until the loan is repaid, and the lender's recourse is limited to that asset. Because of that, lenders price SMSF commercial loans higher and cap LVR lower than a direct purchase: 60 to 70 per cent is typical for a childcare centre, sometimes 75 per cent for a strong national tenant on a long lease. Rates are above standard commercial rates and lender choice is limited.

The single acquirable asset rule matters. The fund can borrow to buy the centre, but it cannot use borrowed money to build a new centre, extend it or substantially change it. Repairs and maintenance from borrowed funds are fine; improvements are not.

The fund needs a corporate trustee, a compliant deed that allows borrowing, a bare trust for the holding, and enough liquidity to service the loan from rent plus contributions. Lenders assess the lease, the operator's financials and licence, and the fund's contribution history. A centre leased to a member's business will be assessed on that business as the tenant, so its financials matter as much as the fund's.