Case Study: Going-Concern Childcare Centre Development

by | 5 Jul 2021 | Child Care, Commercial Property, Property, Property Development

Our client had solid experience in residential property development over the last 20 years and was looking to diversify into another sector – childcare.

The Challenge

This project was their foray into the childcare sector. In most cases, childcare developers will sign a long-term lease (10-15 years) with an established third-party operator. In this instance, however, our client sought to leverage our connections and experience to establish themselves as a successful operator as well as property owner, i.e. the full “going concern”.

How We Helped

As a part of our Advisory “more than just a finance broker” approach, STAC introduced and engaged one of the childcare industry’s most highly respected operators & advisors – one who only provides advisory services to a small handful of people with whom they genuinely like.

Although they identified that the catchment area was technically slightly over-supplied, they conceived an outstanding design and ideas for a new centre that would offer a genuinely superior early learning experience for young children in the area, versus those of its numerous competitors. Furthermore, they built the full business strategy for our client to retain ownership of the childcare business under a multi-year management agreement.

This strategy of owning the whole “going concern” did create finance challenges though. The developer’s existing bank of nearly 20 years was keen at first, however, credit then came in over the top of the excited banker, saying that they had a poor appetite for the sector and therefore would only provide terms that fell well short of our expectations.

The Outcome

STAC subsequently achieved terms with a bank at a 55% LVR – and while you may at first think that this sounds low, note that this was on the “Going-Concern value” of $5.5m, versus what would have been $4.0m as a Freehold-only value (i.e. if leased to a third party).

Furthermore, rather than securing a rent of around $240,000 pa (market rate assessed by the valuer), the forecast maintainable profit is over $600,000 pa.

Yes, there was additional cost, time and effort associated with planning and setting up the business operations, as well as some more ongoing management (although again noting that there will be an operations management agreement in place with a third party), the medium to long-term returns on invested equity were considered by the client to be more than worth the effort.