What lease terms do lenders want on a childcare centre?

Lenders want the lease to outlast the loan or at least to run well past the first review date. A ten year initial term with two five year options is common for national operators and is what lenders like to see. A three year lease with no options on a purpose-built centre worries a lender because the property has very few alternative uses if the tenant walks. Where the lease is short, expect a lower LVR and a shorter loan term.

Rent should be at market, evidenced by a rental valuation if the parties are related. Fixed annual increases of three to four per cent, or CPI, give the lender a predictable income line. Market reviews only, or ratchet-free reviews that can go down, are weaker. Lenders also check whether the rent is sustainable for the operator: rent above roughly 12 to 15 per cent of the centre's revenue is a flag that the tenant may not be able to keep paying it.

A net lease where the tenant pays council rates, land tax where recoverable, insurance and maintenance is the norm for childcare and is what lenders expect. Structural repairs usually remain with the landlord. Make-good clauses matter because a centre stripped of its fit-out is expensive to re-let; lenders prefer the tenant to be obliged to leave the fit-out in place.

A lease is only as strong as the tenant. Lenders will want the operator's financials if it is a private company, and will look at whether the lease is with the operating entity or a shell. A parent company guarantee or a bank guarantee equal to six to twelve months rent strengthens the file. For an owner-operator, the lender assesses your own business as the tenant, and a lease between you and your own SMSF or trust must be genuinely arm's length.