Daycare Center: How do I market it, price it, lease it, etc?

Question

Hello there.  So it looks like I just bought a daycare center in Charlotte NC.  Being strictly a residential investor, this foray into the commercial side of things is a little scary to me.  I could use any help I can get.

It's a unique property, as it is in a older, established neighborhood.  However, I have verified (in writing) with zoning that it is grandfathered in as a daycare/childcare center, so I'm safe.

It is a legitimate daycare, and was run as such by the previous owners/tenants.  It has been modified such that it would not qualify as a habitable dwelling (i.e., residential use)--that's how nicely it's already set up.  County records indicate that it passed its last inspections/requirements for daycare use.  So that's good.

Here are my questions:

• How do I price it?  My research tells me that I can rent out a daycare for $12/sq.ft., conservatively.  
• How/where do I market this?  The realtor who brought me the deal wants to list it for lease for me, but this agent has no commercial property experience.  Neither do I!
• What important items do I need in the lease?  Does anyone already have a solid lease they use for such a tenant?
• Insurance:  My next call is to my insurance agency, but I'd like any input y'all may have on this issue.
• How do I screen a daycare tenant?  Again, I'm used to renting houses to people.  What should I require of a tenant who will be running a daycare business?

Any help would be greatly appreciated.  Thanks!!!

Jimmy Klein · Answer

Also, given that this is a daycare, get an insurance policy that covers negligence. If I were you, I would maybe get the tenant to baby proof the area and get a certificate saying the property is safe to operate. The last thing you want is something goes wrong and you take a hit for negligence, even if a tenant is at fault. If something happens, you can always say to a court you did everything within your powers to maintain a safe environment.

People have to be very careful when dealing with CRE in the healthcare space (I am lumping this into that). There are a lot more variables you need to consider.

Bill Gulley · Answer

Yes, I'd suggest you do that. Also, don't partner in anyway with her business or profit share, just be a landlord. Rents can be adjusted by an addendum as to profits, but that is complicated for such a small operation, a set minimal amount might be fine. Good luck :)

Jai Reddy · Answer

@Terri Pour-Rastegar, Thank you for responding. I am in just the sniffing stage of an existing daycare business + property sale. I will reach out of I have more questions.

Bill Gulley · Answer

You have two issues here, one is zoning which defines the use of the building and the other is the requirement for residential occupancy, so the primary use is residential and the fact that a business operation may take place is secondary, a business doesn't have to be operated, it may be operated.

So, what you have, regardless of lease terms, is a residential lease.

Your primary concern is to treat the occupant as a residential tenant.

Now, as to maintenance, as long as there is a business concern operated that means the tenant's accounting allows for business deductions and depreciation to applied in their tax returns. If they deduct expenses that's fine but you can't unless you actually have that expense.

Since there is a business operation, this is an exception to the rule under the IRS as to depreciation and expenses by a property owner as the tenant has the authority or means to account for expenses and improvements as a leasehold interest. If there were no business operation then a residential tenant can not account for such costs and they must be accounted for by the landlord.

There is no issue with taxes and insurance as these are generally in the lease payments anyway as the owner's costs being paid in the rents and they are not depreciated costs.

In the lease, I would cover maintenance accomplished by the tenant so long as the tenant has an ongoing business concern, that will cover you as to tax requirements being responsible for costs as the owner.

Double check as to your insurance exposure, I'm sure you will. Other than that you should  have no unique problems as the owner. Good luck :)

Jonathan Wilks · Answer

In a commercial property you can do a lease but i would make it triple net so that you make your rent and have no additional cost. the tenant pays for all services, and care of the property.  however at 12 dollars a sqft. that might already be  in the price.  The client you market the property could potentially be more sophisticated, so for instance with that realtor. I would want them to partner with a commercial agent.

Terri Pour-Rastegar · Answer

Bill Gulley Great information, Bill.  I understand completely.  Sounds like I need to use my residential lease, and simply include a strong, detailed addendum permitting the daycare use and outlining each party's responsibilities. Thanks a million!

Terri Pour-Rastegar · Answer

Bill Gulley, I'm not sure if zoning cares whether my lease says residential or commercial at the top.  I just have to make sure the lease is in line with residential landlord-tenant laws, I think.  Maybe I'm wrong.  But my residential leases do not allow for businesses to be operated; nor do they allow for the tenant to make any changes to the building.  So really, I have modified a 'commercial' lease to cover all of these bases.  I found it was much easier than modifying my residential lease.

Again, as I said, I'm new to this, so I'm sure I have much more to learn.  Hopefully, I won't learn it the hard way.  So please feel free to correct me.

Bill Gulley · Answer

As to zoning, actually you have a residential lease, not a commercial lease, the residence has a special use permit for a resident. You can't have a NNN Really.

In a sale, I wouldn't use the income approach so much as the cost with depreciation of improvements as to the building. Services are very hard to value as they are personal as to the service provider, they like the babysitter. Good luck with it! :)

Terri Pour-Rastegar · Answer

@Mav Larson, Yes, in a true NNN commercial lease, tenant would pay for everything.  But I don't need to make a killing on this property, and I'm trying to help out a fledgling business.  Given the 12-child limit for this unit, she's going to make only so much each month--not enough to support a NNN lease.  So I've modified things considerably to make it a win-win situation for both of us.  She's getting a gorgeous building that LOOKS like a commercial daycare that's move-in ready, with rent and utilities that she can handle from day one; and I'm getting a steady stream of income from a little business venture that is more likely to succeed long-term.

Terri Pour-Rastegar · Answer

@Jai Reddy, Hello!  I am currently working with an interested party who will be renting my 1900+sf daycare at $1200/mo + utilities.  This daycare is not a commercial property.  Zoning will allow only for a "Daycare Facility in a Residence," which means the daycare operator must 'live' in the property and can have up to 12 children (versus 50 I think if the property is zoned commercial).  So we have opted to use a commercial lease with modifications.  For example, Tenant pays rent and all utilities and routine maintenance and small repairs.  However, we pay taxes and our insurance.  Tenant is required to carry a certain amount of insurance, per lease.  Tenant has already gotten everything she needs from DHHS, and has begun the process of obtaining a new Certificate of Occupancy from city zoning--she must pay for all of these fees.

I am new to this sort of rental (all other properties are strictly residential and I do not allow for any businesses on site without prior written approval and possible renegotiation of the lease).  And I am dealing with potential tenants who are starting up a new or bigger business venture--so their success is my success--so I'm working closely with this woman to help her along the way.  And I'm learning as I go.

Like I said, I'm a newbie in this realm, but I'm happy to share my experience with you.  Feel free to PM me.

Daycare Center: How do I market it, price it, lease it, etc?

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