Simple hacks to fund an aged care facility purchase

Why aged care facility purchases need specialist commercial finance

Aged care facilities are business acquisitions wrapped in property transactions. Lenders evaluate these purchases as going concerns, which means they assess both the property value and the operational performance of the business. Unlike buying an office building or warehouse where rental income is relatively predictable, aged care facilities depend on occupancy rates, staffing costs, accreditation status, and government funding arrangements. Most lenders will want to see at least 85% occupancy before they'll consider the loan, and they'll require detailed financials covering the past two to three years of operation.

Consider a buyer looking at a 60-bed facility in regional New South Wales. The lender will review the current operator's financial statements, focusing on earnings before interest, tax, depreciation, and amortisation. They'll also check whether the facility holds current accreditation with the Aged Care Quality and Safety Commission and whether there are any compliance issues on record. If occupancy has dropped below 80% in the past year or if there's been staff turnover affecting service delivery, the lender may decline or reduce the loan amount. The buyer in this scenario secured finance at 65% LVR with a variable interest rate, but only after providing a business plan showing how they intended to improve occupancy within six months of settlement.

The role of operational cashflow in loan approval

Operational cashflow determines how much you can borrow. Lenders structure aged care loans based on debt serviceability, which is the facility's ability to cover loan repayments from its operating income. They'll typically apply a debt service coverage ratio of at least 1.25, meaning the facility needs to generate $1.25 in net operating income for every dollar of loan repayment. If the facility generates $500,000 annually after expenses, the lender will calculate the maximum loan repayment at $400,000 per year, which translates to a borrowing capacity that depends on the interest rate and loan term.

Your existing income as a PAYG professional may support part of the serviceability assessment, but most lenders will weight the facility's cashflow more heavily. If you're transitioning from a corporate role into aged care management, some lenders will allow you to include your salary from the business in the serviceability calculation, but only if you can demonstrate relevant experience in healthcare or facility management. This is where a commercial mortgage broker who understands aged care lending can help structure the application to present both your personal capacity and the business income in the most favourable way.

How lenders value aged care properties differently

Valuations for aged care facilities include both the real estate and the business goodwill. A commercial property valuer will assess the land and buildings using a combination of capitalisation rate and depreciated replacement cost, but they'll also factor in the facility's bed license value and its operational performance. In metro areas with high demand for aged care beds, the goodwill component can represent 30% to 40% of the total purchase price. Lenders usually cap the LVR at 60% to 70% of the combined property and business value, which means you'll need a deposit of at least 30% to 40% of the purchase price.

If the facility includes specialised infrastructure such as dementia-specific wings or high-care medical equipment, the valuer may apply a lower rate to those components because they have limited alternative use if the business fails. A facility with purpose-built dementia care units might be valued lower on a per-bed basis than a standard residential aged care facility, even though it commands higher fees from residents. This affects your borrowing capacity and often requires a larger deposit than you'd expect based on the purchase price alone.

Structuring the loan to match your operational needs

Most aged care facility loans are structured with a combination of principal and interest repayments on a 15 to 25-year term. Some lenders offer interest-only periods of up to two years if you're planning capital improvements or occupancy growth, but they'll want to see a clear plan for how you'll increase revenue during that period. Variable interest rates are more common than fixed rates in this sector because lenders prefer the flexibility to adjust pricing as the business performance changes, though some will offer a fixed rate on part of the loan if you request it.

If you're buying a facility that needs refurbishment or compliance upgrades, you might structure the loan with a progressive drawdown component. This allows you to access funds in stages as the work is completed, similar to a construction loan. The lender will hold back a portion of the approved loan amount and release it against invoices and progress reports. This approach reduces the interest you pay upfront, but it requires you to fund the purchase price in full at settlement and then draw down the refurbishment funds separately.

What happens when the facility is part of a larger portfolio

Some aged care purchases involve buying multiple facilities from a single operator. Lenders treat these as portfolio acquisitions and may offer slightly higher LVRs if the combined cashflow is strong and the facilities are geographically diversified. A buyer acquiring three facilities across different regions might secure 70% LVR if the portfolio shows stable occupancy and consistent revenue, compared to 65% LVR for a single facility. The trade-off is that the lender will require cross-collateralisation, meaning all three properties secure the one loan. If one facility underperforms, it affects your ability to refinance or sell the others without the lender's approval.

Portfolio lending also opens up options for mezzanine financing, where a second-tier lender provides an additional 10% to 15% of the purchase price as subordinated debt. This sits behind the primary loan and carries a higher interest rate, often 2% to 4% above the senior debt rate. It's useful if you're short on deposit but confident in the facilities' ability to generate strong cashflow. The mezzanine lender takes more risk, so they'll want equity participation or a share of future profits as part of the arrangement.

Using your existing property as additional security

If you own residential or commercial property with available equity, some lenders will allow you to use it as additional security to reduce the LVR on the aged care facility. This can help you access better interest rates or borrow a higher percentage of the purchase price. A buyer with a residential property in Sydney worth $2 million with a $600,000 mortgage could use $400,000 of that equity toward the aged care purchase, reducing the amount they need to borrow against the facility itself. The downside is that your home or investment property becomes part of the security pool, so if the aged care business runs into trouble, both assets are at risk.

Lenders will assess the combined LVR across all properties. If you're borrowing 65% against the aged care facility and 70% against your residential property, the lender will want the weighted average LVR to stay below their maximum threshold, usually around 70%. This requires careful structuring to make sure you're not over-leveraged across your entire portfolio. A broker who works with commercial finance can model different scenarios to find the structure that gives you the most borrowing capacity without putting too much security at risk.

The importance of licensing and accreditation in funding approval

Lenders won't approve a loan if the facility's accreditation is under review or if there are unresolved compliance issues. The Aged Care Quality and Safety Commission conducts regular audits, and any serious non-compliance can trigger sanctions or even license suspension. If the facility you're buying has been flagged for quality concerns in the past two years, most lenders will either decline the application or require you to address the issues before settlement. This can delay the purchase or require you to negotiate a lower price to account for the remediation costs.

Your solicitor should conduct thorough due diligence on the facility's accreditation history and any outstanding complaints or audit findings. If the current operator has been issued a notice to remedy specific issues, you'll need to confirm whether those issues have been resolved and whether the resolution has been accepted by the regulator. Lenders will request a copy of the most recent accreditation report as part of the loan assessment, and if that report shows significant deficiencies, the loan will likely be declined regardless of the property's value or the business's cashflow.

Call one of our team or book an appointment at a time that works for you to discuss how we can structure a commercial property loan that fits the specific cashflow and compliance profile of the aged care facility you're looking to purchase.

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