The majority of daycare center owners, lease their facilities rather than own the underlying commercial real estate. Why? And, what are some ways that existing daycare centers can buy their existing building and enjoy the time tested benefits of owning? That’s what we discuss in this brief article.
First of all, many aspiring daycare center owners start off with the plan/desire to own their building. But often come to the conclusion that owning is just out of their reach financially, unfortunately. For example, say the daycare owner wanted to build a 8,000 square foot facility. And say the total project cost including land, construction, franchise fees, equipment and working capital totaled $1,500,000. If the daycare owner decided to own, they would be expected to shell out between 10% – 20% cash (depending on many factors such as if the daycare was a start up, risk tolerance of the bank, etc). At 15% the borrower would need to put $225,000 into the project.
If the daycare owner decide to lease the facility, on the same 8,000 square foot example above, they typically would only need to come out of pocket 10% -20% of the equipment, franchise costs, working capital and tenant improvement costs (space build out costs). These costs would normally be less than half the total project cost, or for this example approximately $600,000. The daycare owner would only need to come out of pocket $90,000 at 15% rather than $225,000 if they owned.
However, one of the easiest deals to get done, even in this credit crisis, is to buy the facility you are currently renting. Obviously you will need to come to an agreement with your landlord, but you might be surprised on how eager they are about talking to you about selling. Keep in mind, most landlords are constantly looking at new deals that requirement cash. So they may be very open minded to ripping up your lease and selling you the property.
As far as the down stroke on the purchase there is a little known guideline which can help reduce your out of pocket down payment to 5% or sometime less – It’s a form of rent concession. And NO you don’t already need it in place. From a conceptual standpoint it can be thought of as a lease to own type structure, where a portion of the monthly payment goes against the purchase price.
One of the keys here is that the value on the appraisal has to come in higher than the purchase price. For example, say you negotiate a $1,000,000 purchase price with the current owner. You have occupied the property for 2 years and paid $3,500 per month in rent or $42,000 per year. You could potentially attribute the $84,000 of this rent to go against the purchase price to cover your down payment. If the property appraised for $1,100,000 you could attribute the $84,000 of the rent you already paid. Your down stroke would be 15% of the $1,100,000 = $165,000 less the $84,000 of rent concession or total out of pocket of only $81,000. Versus a straight 15% of the $1,000,000 purchase price or $150,000 out of pocket.
If you lease your daycare center give this some serious consideration as the benefits of owning are substantial. Building long term wealth via depreciation, property appreciation and of course the chipping away of the mortgage with every payment you make, to name a few.