Childcare centre yield

[Bradley]

We've been approached to build a new childcare centre on some freehold land we already own on the edge of the city. The net yield based upon the proposed construction cost (inc full use of the contingency fund) is 9%, while the ground-lease proportion was calculated at 5.5% subsequent to third party advice. The tenants are responsible for all opex.

In terms of a return for a new build with a 15 year lease with a 10 year ROR and rent reviews every 3 years, do you think that broadly stacks up?

Looking at similar newly built centres, based on the asking price yields at sale are around 6%. Presumably they're receiving a few percentage points above that during the initial period of ownership.

[Rosco]

Hi Bradley,

You have a few things to consider here and I would suggest going through with a professional.

I would start with

1). What is value now. What is value at end? Take off cost to build, so what is gain in equity to you?

2). What is your cashflow now, per year? What will be the cashflow if you borrow all the construction costs?

3). What are your long term aims and goals? Will this property help you with those?
For example, you might want passive income. So can the rent pay the expenses, plus principal, so that long term you have a debt free commercial building giving you passive income?

4). What other options do you have?
For example, can you build an office building? Would this be easy to rent and how would 1,2,3 compare?
Can you turn it into a lease hold property, and just lease the ground long term? How would that compare


Investors love childcare centres, so I would say that you have an opportunity here.
Maybe also get second opinions on cost to build and the fair market rent they will be paying, as those two items can greatly affect the project.

Plus you will get huge chattels depreciation, which can make the investment very tax effective.

Ross

[Bradley]

Thanks very much for you input Ross. Lots to think about.

The proposition is cashflow positive even at 100% of borrowing, and allowing for a 3% creep in interest rates over the period. The long-term goal of holding to provide a passive income stream.

The zoning of the area is residential, so options generally revolve around light service industries in keeping with the residential area. Childcare is definitely one that fits well and we're contemplating some others that have synergy. The other options we investigated previously haven't panned out, however these tenants who are established operators are very keen.

Definitely an opportunity worth exploring further.

Has anyone else in the forum been down this path and want to share some experiences? We have other commercial properties that we lease, however childcare centres are a first for us.

[cube]

No experience, but would there be good car access during the drop-off and pick-up times. That's the thing that pisses the neighbours off the most.

[Nick G]

It looks pretty good.

[Bradley]

No experience, but would there be good car access during the drop-off and pick-up times. That's the thing that pisses the neighbours off the most.

Yes, good point - there's a large 30 car carpark already on the site which will hopefully appease the neighbours on that side of things.

It looks pretty good.

Great, thanks for the feedback. This far everyone has been unanimous on the looks pretty good line (including the accountant) so it looks like we're on the right track. The devil is always in the detail though!

[artemis]

Is the centre stand alone or part of one of the bigger companies? If stand alone that is a much higher risk.

Have had recent experience with a one off centre, since sold. Many issues arose and there's a lot to learn and put into practice these days.

[Nick G]

Get a planner in front of council early. Nothing like a good session with them to alleviate any optimism.

[Davo36]

Get a planner in front of council early. Nothing like a good session with them to alleviate any optimism.

That's funny. But also you can't rely on a single thing they say. When you come to put in your resource consent, the decision and terms will be 100% different from what the duty planner says verbally.

[Bradley]

Is the centre stand alone or part of one of the bigger companies? If stand alone that is a much higher risk.

Have had recent experience with a one off centre, since sold. Many issues arose and there's a lot to learn and put into practice these days.

That's a very good point. They are not a major chain, however this is their fourth centre in 10 years and they've passed the background checks we've completed. Given this, and the fact that we have another potential tenant who'd take their place if they withdraw or falter, we are okay with accepting the residual risk.

That's funny. But also you can't rely on a single thing they say. When you come to put in your resource consent, the decision and terms will be 100% different from what the duty planner says verbally.

I've heard this story a few times unfortunately. Based on our initial meeting the planners like the proposal, but who knows what will come out from them when we make the formal submission. What concerns me the most is the ethereal nature of the affected parties list for the resource consent, and the potential demands they will make. A colleague, having gained approval from all parties on the original list for their development, subsequently had their list amended by the council and the party added placed a demand for $50k to compensate for potential noise related issues. Settling was cheaper than a hearing, and that party knew it.

[Davo36]

I've heard this story a few times unfortunately. Based on our initial meeting the planners like the proposal, but who knows what will come out from them when we make the formal submission. What concerns me the most is the ethereal nature of the affected parties list for the resource consent, and the potential demands they will make. A colleague, having gained approval from all parties on the original list for their development, subsequently had their list amended by the council and the party added placed a demand for $50k to compensate for potential noise related issues. Settling was cheaper than a hearing, and that party knew it.

Oh man, it looks like a corrupt system when things like that happen right?

Hope your one goes more smoothly.