Child Care Centre Commercial Loans
Does my bank approve child care centre commercial loans?
If you’re thinking about getting into the day care or preschool industry by investing in a freehold or going concern child care centre, it’s a great time to take the leap.
Banks have a strong appetite for these types of commercial properties at the moment because of the demand for these services and government benefits and support that these businesses receive.
How can you borrow at the highest Loan to Value Ratio (LVR) and get a great commercial interest to buy your dream child care facility?
How do banks approve child care centre commercial loans?
Although there is strong demand for preschool facilities, banks will still assess child care centre commercial loans like they’re investing in the business themselves.
That means showing them strong fundamentals of the current business owners, that there is a strong lease in place as well as a good business plan.
How much can I borrow?
- Freehold purchase (residential): Borrow up to 80% of the property value if the property is residential or up to 100% with a guarantor.
- Freehold purchase (commercial): Borrow up to 70% of the property value for purpose-built child care facilities.
- Leasehold purchase: Borrow up to 50% of the business value (going concern). Dependent on location.
- Max loan term for principal and interest repayments: 10 years (purpose-built) or 15 years (residential converted).
- Max loan term for interest only: 1 year.
- No max loan limit (depends on lender).
- Low doc options not available.
- Strong applications attract significant interest rate discounts.
Some lenders are better than others!
Call us on 1300 889 743 or complete our free assessment form and we can match you with child care centre commercial loans that meet your needs.
How can we help?
Home Loan Experts are experts at child care centre commercial loans.
A number of our senior mortgage brokers have worked in the credit departments of the commercial arms of major banks and lenders, so they exactly how to get an application approved.
It’s mitigating the bank’s concerns with strong evidence of your financial situation and credit history as well as the strengths of the child care business your want to buy.
With strong relationships with the decision makers at almost 40 lenders, getting approved is only part of the story.
In that way, you can buy the day care centre you want with the child care centre commercial loan that meets your needs and budget.
What do banks assess?
As a bare minimum, some major lenders require the following child care centre commercial loans:
- More than 25 child care places for the facility.
- Occupancy levels above 80%.
- A least 2 times the amount of income to proposed interest expenses (interest coverage ratio or ICR).
- Wages and salaries (on costs) should be less than 60% of total or proposed income.
There are other requirements regarding income per full time child care place but these earning requirements vary from lender to lender.
All of the other requirements mentioned above are also negotiable depending on your overall situation.
Fill in our online enquiry form and one of our specialist brokers will get back to you to discuss your situation.
What else will they look at?
Is the child care centre government-approved?
It must be an approved Long Day Child Care Centre and be receiving the Commonwealth Government Child Care Benefit (CGCCB).
Is the property council-approved?
The includes DA (development application) and BA (building application) approval to prove that it meets national child care centre facility requirements.
Is the property purpose-built or converted residential?
This can have a huge affect on how much you can borrow and interest rates.
If it can be easily converted back to a residential property, then banks will be more flexible in approving your loan.
Experience of the operators
You or the operators of the business need at least 3 years experience in the child care industry or similar industry.
On top of that, borrowers planning to buy multiple sites must have significant business management experience and/or qualifications, particularly operating multi-site businesses.
Location of the property
The bank needs to know that there is a market for both clients and therefore buyers should they need to sell the property in the event of you defaulting on the mortgage.
All of these are general requirements for child care centre commercial loans.
Finding a lender that takes a common sense approach to your situation and property is key.
How are day care businesses valued?
There are generally two ways the banks do this when assessing child care centre commercial loans.
The cap rate
The first way is the same method used for most commercial properties: the capitalisation rate.
The cap rate is used to work out the potential return on investment (ROI) for the daycare centre based on the average net operating income (NOI) over the past two years.
The cap rate also takes into account comparable child care centre sales for the area.
For example, if the child care centre generated an average profit of $100,000 annually and comparable sales in the area are around $700,000, the cap rate for the property would be 14.29%.
If the NOI for the particular child care business you want to buy is $80,000 and is being sold for $800,000, the bank may only place a value on the business of around $560,000.
Rate per licensed childcare place
Although some centres will be licensed for additional places to meet the demand for Outside School Hours Care (OSHC), the bank will generally only consider licences for long day care places.
The reason the bank takes these licences into account is that the number of licences should effectively match the value drawn from the cap rate.
So for a 29-place childcare centre valued at $700,000, each licence should be worth around $24,138.
The licence rate will vary depending on aspects like the centre’s performance and the location of the property.
What if I’m just buying the freehold?
The bank will still want to see that the current operators are running a successful business, have made their rental repayments on time over the past two years and that there is a long lease in place.
Remaining or existing lease terms of 10 years plus one or two 5 year options are highly sought after from commercial investors but will also put the creditor’s mind at rest when assessing your application.
How to build a strong case?
Beat the bank’s SWOT (strengths, weakness, opportunities and threats) test by having a solid business plan and tangible forecasting for predicted revenue.
Provide the bank with the owner’s last two years profit and loss statements and any other relevant business financials to prove that they are running a profitable business.
If you’re running the business yourself, provide evidence of your strong track record and experience in managing a child care centre of a similar size.
Think of it like putting together a resume for a job interview.
What is a SWOT analysis?
It’s a common method used by banks and professional commercial investors when analysing the strengths and weaknesses of a business.
Strengths: The child care centre has strong occupancy levels (above 90%).
Weaknesses: The business is understaffed and poor management that has let operating costs run rampant.
Opportunities: The property is located in an area with new suburbs opening up and the day care operator is charging rates that are way below market standards.
Threats: The property is within 5km of a newly-built child care centre.
Tips for buying a child care centre
Getting pulled into the emotion of buying a childcare centre can often see even seasoned commercial property investors pay way more than they should.
By following some basic fundamentals from the banks as well as other due diligence, you make an educated choice on a day care facility.
Why buy a child care centre?
Giving back to the community is a big reason why mum and dad investors choose to purchase a preschool.
They may have worked in the industry before and have a passion to run their centre their own way.
From a commercial opportunity perspective, the fact is that Australians are working more often and for longer hours of the day.
On top of that, new mums and dads are returning to work a lot sooner than they were in the past just to meet their financial responsibilities and the high cost of living in Australia.
The need for daytime child care and OSHC is at a hot point right now.
Despite this, and the government benefits that come with it, the average child care in Australia doesn’t actually generate large profits.
This is despite what appears to be a lack of facilities in some areas and centres charging exorbitant fees.
In fact, the average preschool net profit before tax (NPBT) will be less than $100,000.
The big opportunity comes with buying at scale.
What should I look out for in the business?
So you’ve found a lender that offers great deals on child care centre commercial loans: what next?
One of the first steps you should take is to ask the vendors a lot of questions and one of the most important is to ask why are they selling the daycare centre in the first place.
If they’re cagey and are unwilling to provide financials of the business, it could be sign that the business is failing. Be strong enough to walk away from a bad deal.
How long has management been in place?
Long-term management is a plus but so it staff turnover for the carers/teachers.
Parents prefer consistency of care and children are happier with familiar faces.
Are staff trained up?
This is a legal requirement as much as it’s good for business.
All staff must have a Certificate III in Children’s Services while each centre requires a degree-qualified teacher.
Make sure that all criminal history and working with children checks are provided to you by the owner and that they check out.
Reputation is difficult to maintain in the child care industry so doing your due diligence is essential.
What is capacity like?
Centres with a capacity of 50 or more places are highly sought after because they have the potential to return a strong return on investment (ROI) versus the inherent costs of running a centre.
When looking at an existing business though, look at the number of places that are actually filled: is it at 100% operating capacity?
Centres with a waiting list are even better!
Keeping in mind that banks usually require occupancy levels at more than 80%, anything under this could either mean an opportunity to turn the business around with your own experience and put you in a strong position to negotiate the sale price.
Of course, a bad location or bad management could mean that you don’t proceed at all.
What services or extras is the childcare centre currently offering?
Meals, nappies, linen, internet for older children: all of this will affect your charging structure and daily rates.
Of course, it will also add to your cashflow requirements.
Safety is a massive consideration
- Are locks on doors and windows adequate?
- Is fencing extensive and does it meet national safety standards?
- Are fire safety and evacuation requirements being met?
Can I buy multiple sites?
Yes, you can. Unlike some other industries within the commercial property space, child care centres are a fragmented industry.
There just isn’t one large operator or even a handful so there is a big opportunity for the right investor to plant their flag.
If you have the experience and the financial backing, the right lender will support your plans to buy centres at scale for a long and successful business venture.
How many should I buy?
Obviously, it all comes down to your financial position and you should speak to your financial adviser before making a decision.
However, 3 or more centres under an well-established group (strong track record) is generally considered good scale by commercial investors in this space.
Child Care Centre Commercial Loans FAQs
What else should you know about child care centre commercial loans and building a strong business?
Some of these questions have been answered but surrounding yourself with professionals and business mentors is essential to being successful.
What is considered to be a childcare centre?
Although it varies slightly from state to state, a child care centre is generally defined as a building or place used for the supervision and care of children.
They provide long day care, pre-school care, occasional child care or OSHC but not overnight accommodation.
Family day care is a support service involve carers who provide in-home care for other people’s children,which is totally different to buying a child care centre.
What regulations and licences should I know about?
Either yourself or the operators will need to have:
- Provider approval based on history of compliance with current education and care service law, criminal history and working with history check.
- Service approval for anyone actually managing the service as well as public liability insurance.
Whoever is operating the business will need to be approved by the Australian Children’s Education and Care Quality Authority.
Without this approval, you can’t begin operating.
Set yourself apart from the competition
The preschool industry may be fragmented but that doesn’t mean there is no competition.
Find yourself a niche to set your offering apart from others.
Some of the things you could do or provide include:
- Offering after hour care (you may need a permit or meet further regulations which can drive up costs).
- Only target a specific age group such as child above 6 (requires more toys and play equipment to keep them entertained) or nursery care (requires more monitoring and possibly more staff).
- Holding play groups for parents.
How do I qualify for a government grant?
In order to get approved for the government’s Children Care Benefit, the child care centre operator must:
- Operate for at least 8 hours per day for a minimum of 48 hours per week.
- Hold valid accreditation/licence(s) from your state/territory government regulatory authority or agency including a state Department of Community Services licence.
- Preferably be a member of a state-based child care association.
The Australian Childcare Alliance has chapters in Queensland, New South Wales, Victoria, South Australia and Western Australia.
Can I convert my residential property into a child care centre?
Although it sounds a lot easier than building a day care facility from scratch, you still have to meet fairly strict development application (DA) requirements and the cost can be high.
Depending on the council and your own state government, your development plan should include:
- A playground plan detailing fencing and potential exposure to mobile phone towers, power lines or other electromagnetic radiation.
- Hazardous materials report detailing a lead and asbestos assessment of all building materials including painted areas, the rood and carpets.
- A soil contamination report.
- A shaded areas report (shade requirements are extensive).
- Emergency Evacuation Plan, particularly as they relate to fires and flooding.
Child care centres are only permitted in the following zones for New South Wales:
- RU2, RU5 and RU6 Rural zones.
- R1, R3 and R4 Residential zones.
- All Business zones.
- All Business zones.
- RE1 Public Recreation zones.
You should check with your local council for your state’s zoning requirements.
You can get a copy of a development control plan from your local council so you have some idea of what requirements you will need to meet.
Is it tough to run a childcare centre?
Obviously, having a passion for children and education is crucial.
On top of that, you have to be across first aid training as well as protocols on dealing with allergy emergencies such as anaphylaxis.
Other educational and supervision requirements under the National Quality Framework are extensive and regularly updated.
You have to constantly be across these requirements or risk being shut down.
Should I get financial advice?
Yes! Speak with your accountant or financial advisor about your plans to invest in a preschool and apply for a child care centre commercial loan.
They can advise you on how much you should be spending.
Next, get help from a commercial business broker to help you locate child care centres in locations you’re looking buy.
A commercial accountant can help you analyse the financials of the current operators while a business broker can help you negotiate on price.
Before signing the contract of sale though, speak with a specialist mortgage broker that has experience in child care centre commercial loans.
Well-structured child care centre commercial loans at a competitive interest rate can put you in a financially stable position to invest in or run your own day care facility.
Child care industry snapshot
A 2016 report by ommercial real estate services provider Colliers International found that the lease terms offered on child care centre sector are getting longer.
That’s great for business and increases your chance of getting approved for a child care centre commercial loan.
Today, 10 year terms are rare, with some terms up to 20 years with 20-year options.
Despite this, there is increased competition from large institutional platers re-entering the market so industry consolidation is a high possibility.
A lack of suitable land has meant that child care centre growth has dropped to 3% with investment yields as low as 3.90%.
For a strong return on investment, the money is in building a solid business, not through capital gains or rental income.
Should I speak to a mortgage broker?
Child care centre commercial loans are offered by some Australian lenders and they’re willing to offer great interest rates and terms just to get your business.
The trick is having a specialist mortgage broker to guide you along the way to find a loan that works for you.
With almost 40 lenders to choose from, Home Loan Experts has strong relationships to give you an excellent chance of getting approved the first time around.
Call us on 1300 889 743 or complete our free assessment form to speak with a mortgage broker today!