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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.
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:
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.
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.
An aged care facility has two major sources of revenue:
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.
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.
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.
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.
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.
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:
Assuming you’re purchasing an existing business, you may increase your chances of being approved for finance by taking the following steps:
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