The scenario
“With specialty assets, the lease and the tenant covenant do the heavy lifting.”
— The Australian Property Development Handbook
A developer is building a 110-place early learning centre on a $6.2m cost base, pre-committed to an established operator on a long lease. Unlike a for-sale project, leverage is set against the completed value implied by the operator rent — about $9.0m capitalised at market yield.
How we structured it
Because the asset is valued on capitalised rent, senior debt is sized against that completed value and the total cost — no mezzanine is needed. The operator covenant and lease term are what the lender underwrites, so submission quality is about the tenant and the lease, not presales.
| Layer | Amount | % of cost |
|---|---|---|
| Senior debt @ 8.50% | $4.30m | 65% |
| Developer equity | $2.31m | 35% |
| Total development cost | $6.61m | 100% |
| Senior rate | 8.50% |
|---|---|
| Cost of debt | 8.50% |
| Loan to value (LVR) | 47.7% |
| Loan to cost (LTC) | 65.0% |
| Finance cost (interest) | $365,095 |
| Brokerage — BluCow (indic.) | $42,952 + GST |
| Development margin | $2.26m |
| Margin on cost (RoC) | 34.2% |
| Return on equity (RoE) | 98% |
| Equity multiple | 1.98x |
This case study is hypothetical and illustrative — figures depend on the project, security, presales and lender.
The outcome
Senior debt covers roughly two-thirds of value, leaving a single equity cheque. On completion the facility refinances onto a held-investment loan against the leased asset, or the centre is sold to a passive investor at the capitalised value. The strength of the operator covenant is what makes the leverage available.