Funding a Greenfield Childcare Centre
We recently arranged the funding for a greenfield childcare centre in a regional location, with debt servicing reliant upon forecast trade-up. These clients were “non-active operators,” contracting a third-party management company to set up and operate the business. This was the group’s second childcare centre, bringing their total debt to $6.7 million. They also have a third centre in the pipeline—and we suspect rapid further expansion beyond that, a journey we’re excited to take them on!
Early Engagement with the Valuer
As we always do at STAC, we directly engaged the valuer early in the process. (For reasons we’ve mentioned before, we very rarely allow lenders to engage valuers!)
Furthermore, the builder initially proposed a contract where only about 25% of costs were fixed. To mitigate risks, STAC’s Mark Trayner worked closely with the clients to renegotiate contract terms with the builder while also engaging and managing the quantity surveyor (QS) to support the debt proposal. Ultimately, we secured a build contract that both the QS and bank were happy to support.
LVRs & Childcare Valuations: The Real Numbers
Now for the juicy bit—LVRs and “how should I value a childcare centre?”
We’ve heard of experienced developers attempting to retain the operating business and structure related-party leases at high rents to drive up valuations and reduce equity requirements. But here’s a real-life example of why that math often doesn’t add up:
- Freehold-only valuation: $4.75M
- Loan amount: $3.95M
- LVR on freehold-only valuation: 83%
The valuer’s key assumptions in arriving at the $4.75M valuation:
- $3,200 per place rent
- 88 places = $282K market rent
- Capitalisation rate: 5.9% → $4.75M valuation
Instead, we structured a deal at “only” 58% LVR—but that was on the Going-Concern Valuation of $6.85M!
Crunching the Numbers: Why the Going-Concern Valuation Works Better
Let’s say a bank was willing to lend at 65% LVR on freehold value.
- To secure a $3.95M loan, the freehold-only valuation would need to be $6.07M.
- In the current market, valuers won’t assign a cap rate below 5.5% for a regional location.
- $6.07M @ 5.5% cap rate = $334K rent required → $3,800 per place rent.
While metro and major regional centres can command $4,000 – $4,300 per place rents, the highest comparable regional location evidence was $3,400 per place—10% short of what’s needed for a lease-based valuation to match our deal.
Even if a valuer stretched to accept $3,400 per place x 88 places at a 5.5% cap rate, that would result in:
- $5.44M valuation @ 65% LVR = $3.54M loan
- That’s about $400K short of what we secured for our client.
The Future of Childcare Development: Owning the Operations
More and more developers are recognising the significant upside in owning both the property and the business operations of childcare centres.
Is it child’s play? No—there’s a lot more involved in achieving better financial outcomes. But that’s reality, right?
What we will say is that to be successful in childcare business operations, you must:
- Have a genuine interest in running a people-centric business.
- Understand that passionate childcare workers aren’t highly paid—so leadership matters.
- Be willing to put in the effort to create a high-quality childcare experience.
If that’s you, and you’re wondering how to take the next step in your childcare journey, you know who to get in touch with…
