Commercial loans for aged care facilities
Read our tips on getting approved for a loan to open an aged care facility.
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If you're ready to take the step of opening your own aged care facility, you'll need finance. Here's what you need to know about aged care facility commercial loans.
Australia's ageing population has caused a number of unprecedented changes in this country's social and economic landscape, not the least of which is the growing demand for aged care facilities. Currently a multi-billion-dollar industry and one that is set to increase and reach peak demand in the coming decades, the aged care industry is popular with commercial investors and savvy entrepreneurs alike.
If you're interested in starting a new aged care facility, or purchasing, upgrading or extending an existing business, read on. We’ve compiled some information to help you find out more about the industry and how to get approved for an aged care facility commercial loan.
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Buying an aged care facility
How to choose an aged care facility
If you’re thinking of purchasing an existing aged care facility, many of the same rules apply as when purchasing any other kind of business. The first important steps include:
- Completing a thorough inspection of the business's recent financial documents
- Considering practical factors such as the location of the business and its proximity to competitors
- Gathering comprehensive advice from independent legal and financial experts
Unique to this industry, however, is the issue of occupancy. A sign of a solid, well-run aged care facility is a high occupancy rate – ideally more than 95% occupancy year-round. When considered in conjunction with financial documents and other practical matters, a facility's occupancy rates will give you a good indication as to its overall relative success and profitability.
Choosing a location
The location of an aged care facility is an important factor to take into account. Facilities located in areas zoned R2 low-density residential are unlikely to be large facilities, but can attract wealthier clients because of their location. Consider the distance from major hospitals, as well as the availability of public transport and the facility's proximity to shopping centres and outdoor entertainment areas. A cautionary note is that your application for development approval or finance is unlikely to be successful in an area renowned for flooding, bushfires or other natural disasters.
Costs and profitability
What kind of revenue does an aged care facility bring in?
An aged care facility has two major sources of revenue:
- Residential accommodation deposits (RADs), also known as accommodation bonds, that are paid by the clients themselves
- Government grants and funding
Generally, clients fund their RADs by selling their former residential home, however in some circumstances a family member will fund the RAD, or take out finance to pay for it. The RAD is held in an interest-bearing account, and the aged care facility owner has the benefit of the interest from the deposit on an ongoing basis, in addition to a regulated amount deducted annually.
Once the client passes away, the remaining amount of the RAD is released and forms part of the client's estate. At that point, accommodation becomes available for a new client to provide their own RAD, replacing that of the first client.
The amount of the RAD varies depending on the median house prices in the area of the aged care facility. Government regulations require that the amount of the bond not be so high that the client is left with less than $44,000 in assets.
The Australian Government’s Department of Health provides a range of grants and other sources of funding to assist with the costs of aged care in Australia. Aged care providers can apply for a grant to fund the construction, upgrade or maintenance of an aged care facility in certain circumstances. Additionally, the Department provides a scale of subsidies and supplements to aged care providers based on the number of residents in the facility and the level of care required for each resident.
The costs of an aged care facility
An aged care facility is no small investment. Part of the high price of aged care facilities results from the fact that they are in short supply, and construction of new facilities all but ground to a halt during Australia's recent economic downturn. Any expenditure that was made on aged care facilities tended to be in refurbishing or increasing the number of beds in existing buildings rather than constructing new ones.
The following aged care facilities in Australia that are currently listed for sale or have recently sold will give a guide as to market rates at the time of writing in July 2018.
- A fully occupied, 35 bed purpose-built aged care facility in New South Wales for $3,450,000. The facility is located on a 3 acre property and has an annual turnover of over $1.4 million.
- A 30 bed facility near full capacity in Victoria for $1.1 million.
- A 45 bed aged care facility in and out of eastern suburb of Victoria for just over $1.1 million.
- A 60 bed facility with 93% occupancy that boasts impressive on-site facilities and easy access to the centre of Adelaide for over $5.2 million.
- As for larger properties, a well-positioned facility with 100 beds could cost between 15 and $20 million.
In addition to the initial costs of purchasing or constructing an aged care facility, ongoing costs must also be considered. Aged care facilities tend to have high staffing requirements, making wages one of the greatest expenses in the industry. Also, you’ll have to purchase and maintain equipment and supplies, as well as meet the inevitable ongoing expenses that come with housing and caring for a large number of people – many of whom will have high care needs – 24-hours a day.
Getting finance for an aged care facility
How much can I borrow?
As with any type of loan, the amount and terms of the loan will depend to a large extent on your individual circumstances and borrowing capacity, along with the financial status of the facility if you’re purchasing an existing business.
As a guide, you can expect to get a loan for up to 65% of the value of the property if purchasing an existing freehold or leasehold facility. If seeking funding to construct a new aged care facility, you could conceivably borrow up to 75% of the construction costs.
The term of the loan will typically be between 15 and 25 years, and could include a fixed interest rate for part or all of the loan term.
In general, lenders are keen to extend funding for aged care facilities to strong applicants. If you have a good financial history, suitable experience in the aged care industry and meet other loan criteria, lenders may try to win your business by offering interest rate discounts.
Securing your loan
A business loan for an aged care facility will typically be secured by a registered mortgage over the property itself. However, since aged care facilities are usually purpose-built and the industry is experiencing strong demand that’s unlikely to decrease in the coming decades, lenders are more likely to consider extending funding on the strength of the business itself even if a freehold mortgage is not available – for example, in the case of a leasehold property.
This puts loans for aged care facilities in a unique position, as most loans for business or commercial purposes require some kind of freehold property as security.
Choosing between different loans and lenders
Gone are days where the big banks were the only options available to finance a large commercial purchase such as an aged care facility. With increasingly more alternative lenders entering the finance market, banks are being forced to be more competitive to keep up with the sometimes unique offerings of other lenders. This puts borrowers in the position of being able to compare various loan products and choose the lender that best suits their circumstances.
When choosing between different loan products and lenders, consider the following:
- How does the lender value the facility?
- What interest rates and loan amounts are on offer? Keep in mind that lenders typically don't advertise their interest rates on business or commercial loans, giving those lenders a degree of leeway when it comes to making loan offers.
- How flexible are the terms of the loan?
- For kind of security is required for the loan? Will the lender consider lending against the value of the commercial freehold property or even the aged care business itself? Does the lender require residential property to put up security for the loan?
How to get approved for finance
Assuming you’re purchasing an existing business, you may increase your chances of being approved for finance by taking the following steps:
- Gather appropriate evidence to prove that the aged care facility is licensed and accredited, and holds all relevant permits in accordance with Australian government standards.
- Make sure you have a liquidity management strategy in place with respect to the working capital requirements, since this is a legal requirement for aged care facilities. Have the appropriate paperwork ready to present to the lender during the application process.
- Compile all current client agreements and a schedule of RADs and the interest they bear.
- Provide details as to your personal financial standing, including your personal tax returns for at least the last two years, along with the financial information of other businesses you run or are involved with in a managerial role. Include clear evidence as to the deposit you are able to provide for the loan.
- Ensure your CV includes all relevant experience in the aged care industry, particularly experience in a managerial or business operations role.
- Write a comprehensive business plan including cash flow forecasting.
- Provide a current snapshot of the aged care facility, including its occupancy rates and cash flow status. Since the success of an aged care facility relies to a large extent on its staff, include an indication as to which staff members are willing to stay on in the business should the purchase be successful.
- Collate and provide full audited financial documents pertaining to the facility for at least the past two years of operations.
Frequently asked questions
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