Another idea for Theo's bed is a fold away bed. This beautiful Danish designed ottoman by Softline, folds out into a full size foam floor mat. It's definitely longer than a 3 year old needs but I love how small the footprint is when it's folded up (25.5" x 25.5" x 25.5"). The soft felt and foam is ideal for a kids room and I was hoping it could a be a little reading corner in the day. Later we could use it in another room or as a guest bed.
The only downside I can see right now is having to put a sheet on the bed each night and having somewhere to store the bedding and pillow.