Understanding the Basics of Aged Care Facility Loans

Buying an aged care facility requires a different approach to commercial property finance than most other investments. Lenders assess the business operations as much as the property itself, focusing on occupancy rates, care licences, and cash flow projections rather than just the building's value.

For investors or operators looking at facilities in Eltham, where the suburb's ageing demographic and established residential character create strong demand for aged care services, understanding how lenders structure these deals makes the difference between a viable acquisition and a declined application.

What Makes Aged Care Facility Loans Different From Standard Commercial Property Finance

Aged care facilities fall under specialised commercial finance because the property's income depends on regulatory compliance and operational performance. Lenders require evidence of current occupancy, approved care licences, and operational history before considering loan terms. The property itself may be worth several million dollars, but without stable income from residents and government funding arrangements, the security doesn't hold the same value.

Consider a buyer looking at a 40-bed facility in the Eltham area. The lender will want to see at least 12 months of audited financials showing occupancy above 85%, copies of all relevant state and federal care approvals, and evidence that staffing ratios meet regulatory requirements. The loan structure typically involves a lower loan-to-value ratio than other commercial properties, often capped at 65% to 70%, with the balance required as deposit and working capital.

How Lenders Assess the Income Component

Lenders calculate serviceability based on net operating income after deducting care costs, staffing, maintenance, and compliance expenses. They don't just look at gross revenue from residents. For aged care, the income streams include accommodation payments, daily care fees, and government subsidies, each treated differently in serviceability calculations.

In a scenario where a facility generates $2.8 million in annual revenue, the lender will apply a stress test to occupancy rates, typically modelling what happens if occupancy drops by 10% to 15%. They also factor in the time it takes to fill vacant beds, which in Eltham's market might be shorter than regional areas but still carries risk. The debt service coverage ratio needs to sit above 1.25, meaning the facility's income must cover loan repayments by at least 25% after all operating costs.

Deposit Requirements and Equity Structures

Most aged care facility purchases require a deposit between 30% and 35% of the purchase price, higher than standard commercial property loans. This is because lenders view the operational risk as significant. If the business fails, the property can't easily be repurposed or tenanted without substantial modification.

For a facility valued at $4.5 million, the buyer would need between $1.35 million and $1.6 million in cash or equity, plus another $200,000 to $300,000 set aside for settlement costs and initial working capital. Some buyers use equity from other commercial property or residential holdings to meet this requirement, but lenders will still assess whether the aged care business can service the debt independently.

Structuring the Loan for Operational Flexibility

Aged care loans are often structured with interest-only periods of two to five years to preserve cash flow during the establishment phase. This gives new operators time to stabilise occupancy and refine operations before principal repayments begin. Variable rates are more common than fixed, as the loan terms often include provisions for redraw or additional drawdowns if the facility requires capital improvements to meet changing compliance standards.

Some lenders offer split loan structures where part of the facility purchase is funded through a commercial mortgage secured against the property, and another portion is funded as business finance secured against the business income and assets. This allows buyers to access better rates on the property component while maintaining flexibility on the operational side.

Compliance and Licensing Considerations That Affect Approval

Lenders require confirmation that all care licences, building approvals, and fire safety certifications are current and transferable to the new owner. If any of these are under review or due for renewal, the application may be delayed or declined until resolved. For facilities in Eltham, local council requirements around zoning and building use must align with the aged care classification, particularly if the facility operates in a residential zone under a specific planning permit.

In practice, this means engaging a solicitor who specialises in aged care transactions before making an offer. They'll conduct due diligence on the licences and flag any issues that could affect settlement or ongoing operations. Lenders won't proceed without confirmation that the buyer can legally operate the facility from day one.

How to Prepare an Application That Lenders Will Consider

A strong application includes three years of financial statements for the facility, a transition plan showing how the buyer will maintain or improve occupancy, and evidence of the buyer's experience in aged care or health services management. Lenders want to see that the buyer understands the sector's challenges and has a realistic plan for managing staffing, compliance, and resident care.

For buyers entering aged care for the first time, demonstrating transferable skills from healthcare, property management, or business operations can strengthen the application. Some lenders require a management plan that outlines how the buyer will handle vacancies, staff turnover, and regulatory changes over the first 12 months. If the buyer plans to implement changes such as upgrading facilities or adjusting care levels, those plans need to be costed and included in the cash flow projections.

If you're looking at an aged care facility purchase in Eltham or the surrounding areas, having your finance structure worked out before making an offer gives you a clear view of what's achievable. Call one of our team or book an appointment at a time that works for you.

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