Acquiring an Aged Care Facility: Commercial Loan Insights 

Overview of Aged Care Facility Commercial Loans 

A Lucrative Investment Opportunity Aged care facility commercial loans offer professional investors entry into the booming aged care industry, projected to triple by 2050. The sector, catering to the over-65 demographic, presents a substantial and relatively stable business opportunity. 

Loan Terms and Conditions 

Loan Amounts and Conditions 

• Freehold Purchase: Borrow up to 65% of the property value. 
• Leasehold Purchase: Borrow up to 65% of the business value (going concern). 
• Construction: Up to 75% of the cost and 70% of the net amount of uncollected accommodation bonds. 
• Maximum Loan Terms: 
• Principal and interest repayment: 5 years (minimum 50% amortization required). 
• Interest-only: 3 years (subject to review). 
• Low Doc Options: Generally not available. 
• Interest Rate Discounts: Vary based on application strength. 
• Security for the Loan: Registered mortgage over the aged care home, fixed and floating charge, and Directors’ Guarantees. A Tripartite Agreement may be used for construction as security. 

Valuation Methods for Aged Care Facilities 

How Banks Value Nursing Homes Commercial valuers often employ two methods: 

• Earnings Before Tax, Depreciation, and Amortization (EBITDA): Evaluates the facility’s financial performance. 
• Value of Residential Accommodation Deposits (RADs): Considers occupancy levels. 

Approval Process and Requirements 

Key Approval Criteria 

• Specialist Valuation: A specialist bank valuer assesses the going concern aspect, emphasizing the need for accreditation and relevant licenses as per the Aged Care Act 1997. 
• Accreditation and Licenses: The aged care facility must be accredited, holding necessary licenses from the Department of Health and Ageing (DoHA). 
• Liquidity Management Strategy (LMS): Evidence of an appropriate LMS to cover working capital requirements, meeting legal obligations. 
• Business Requirements: Provide a schedule of current accommodation bonds and/or resident agreements. 

Securing Approval Based on Business Alone Aged care facility commercial loans allow borrowing against the business alone, recognizing the demand for such properties. Accreditation, financial stability, and meeting elderly care requirements increase approval chances. 

Qualifying for Aged Care Facility Commercial Loans 

• Experience: Demonstrated managerial experience in aged care. 
• Documentation: Submit a business plan, financial forecasts, and a SWOT analysis. 
• Additional Security: Offering a standard residential or commercial property as extra security enhances approval prospects. 

Navigating Commercial Loan Negotiations 

Optimizing Deals with Mortgage Brokers 

• Lender Variability: Each lender’s appetite for aged care homes differs. 
• Maximum LVR Borrowing: Securing the maximum Loan to Value Ratio (LVR) necessitates choosing the right lender. 
• Expert Negotiation: Expert negotiators with strong relationships navigate commercial interest rates, typically undisclosed to the public. 

Insights and Tips for Buying Aged Care Facilities 

Investment Considerations 

• Contributing to Social Housing: Aged care facilities contribute to social housing, aligning investment with societal needs. 
• Government Spending: Anticipate significant government spending in response to Australia’s aging population, making private investment crucial. 
• Major Operators: Acknowledge major operators like Japara, BUPA, Invocare, Regis Healthcare, and Estia Health dominating the market. 

Choosing a Provider: Key Factors 

• Strong Cashflow: Look for providers with consistently high occupancy rates (95% or more). 
• Corporate Level Criteria: Larger operators with three or more centers showing good revenue or EBITDA are preferable. 
• Location Considerations: Evaluate the facility’s location, considering zoning and proximity to hospitals and town centers. 

Revenue Model and Financial Considerations 

• Accommodation Bonds (RADs): Residents pay through RADs, providing consistent revenue. 
• Setting Bond Charges: Charge bonds relative to local house prices, adapting to market conditions. 
• Government Funding: Around two-thirds of operating revenue comes from the government, with RADs serving as a revenue stream. 

Licensing Requirements 

Essential Licenses Under Aged Care Act 1997 

• Approved Provider Status: Approval by the Department of Social Services (DSS) as an accredited provider. 
• Bed Licenses: Necessary for Commonwealth-funded aged care services. Lack of licenses results in no government funding or operation capability. 
• Liquidity Arrangements: Annual arrangements approved by the Commonwealth Department of Health and Aged Care, ensuring financial stability. 

Successfully venturing into aged care facility investment requires in-depth market understanding, compliance with regulatory frameworks, and strategic financial planning. Engaging with experienced mortgage brokers and considering the demographic and social impact enhances the potential for a successful investment in this lucrative sector.