Beginner's Guide to Buying an Aged Care Facility

Purchasing an aged care facility requires a different commercial finance approach than most property acquisitions.

The asset class combines healthcare regulation, ongoing care obligations, and property tenure considerations that shape how lenders assess risk and structure loan terms. For Brunswick-based investors or operators looking at aged care acquisitions, understanding these distinctions before approaching lenders will save months of back-and-forth.

How Commercial Lenders Value Aged Care Facilities

Aged care facilities are typically valued using both the income capitalisation method and the replacement cost approach. The income method assesses the sustainable net operating income from bed licences and ancillary services, then applies a capitalisation rate that reflects the facility's accreditation status, occupancy rates, and care mix. Replacement cost becomes relevant when the property includes purpose-built infrastructure that cannot be replicated economically.

Consider an operator purchasing a 60-bed facility near Brunswick's Merri-bek precinct. The facility generates income from both residential aged care bed licences and respite care services. The valuer assessed sustainable net operating income at $1.2 million annually and applied a capitalisation rate of 8.5%, reflecting the facility's strong Quality of Care ratings and stable occupancy above 92%. The resulting valuation of approximately $14.1 million was cross-checked against replacement cost, which would exceed $18 million given current construction costs for compliant aged care buildings. The lower income-based valuation prevailed because the facility's existing layout limits future expansion, a factor lenders weighted heavily when determining the loan-to-value ratio.

Loan Structure and Security Considerations

Most commercial property loans for aged care facilities are structured with principal and interest repayments over 15 to 20 years, shorter than typical commercial property terms. Lenders register security over both the land and buildings, but they also assess the transferability of bed licences and the operator's ongoing accreditation. If the facility operates under a lease arrangement rather than freehold ownership, lenders require assignment rights and often a longer remaining lease term than they would for standard commercial property.

The facility near Merri-bek was held on a 30-year lease with two 10-year options. The lender required the operator to secure written consent from the lessor allowing mortgage assignment and required a minimum of 20 years remaining on the primary term before advancing funds. The loan was structured at 65% LVR with a 20-year principal and interest term, and the lender imposed an ongoing covenant requiring the operator to maintain Quality of Care ratings above a specified threshold.

Pre-Settlement Finance and Bed Licence Transfers

Aged care acquisitions often involve a gap between contract exchange and settlement while the buyer obtains regulatory approval for bed licence transfers. This approval process, managed by the Aged Care Quality and Safety Commission, can take three to six months depending on the complexity of the application and the buyer's operating history. During this period, the seller continues operating the facility, and the buyer may need pre-settlement finance to cover initial deposits or transition costs.

Pre-settlement finance in this context functions similarly to bridging loans, but lenders structure it with specific milestones tied to the regulatory approval process. The loan is typically interest-only and converts to the main commercial facility loan once settlement occurs and bed licences transfer. Lenders require evidence that the buyer has submitted a complete application to the Commission and will often include a sunset clause requiring settlement within a defined period after approval is granted.

Fixed Versus Variable Interest Rates for Aged Care Property

Operators purchasing aged care facilities face a choice between fixed and variable interest rate structures, each carrying distinct implications given the sector's revenue model. Aged care income is partly government-funded through subsidies indexed annually, creating a degree of revenue predictability that may favour fixed rates. However, fixed rates on commercial loans typically carry break costs if the facility is refinanced or sold before the fixed term expires, and aged care facilities can change hands when operators consolidate or exit the sector.

Variable interest rates provide flexibility if the operator intends to refinance as the facility's occupancy or care mix improves, which can enhance income and support a lower interest rate or higher LVR on refinance. Some lenders offer split structures, fixing a portion of the loan to match the operator's revenue certainty while leaving a variable portion to allow for commercial refinance without prohibitive break costs.

For the Merri-bek facility, the operator chose a 60% fixed, 40% variable split over an initial five-year period. The fixed portion locked in certainty against rate rises during the facility's transition phase, while the variable portion allowed the operator to make additional repayments from surplus cash flow without penalty. The structure also provided flexibility to refinance the variable portion once occupancy stabilised above 95%, a target the operator expected to achieve within three years.

Loan Amount, Deposit Requirements, and Ongoing Covenants

Lenders typically offer aged care facility loans at 60% to 70% LVR, depending on the operator's financial strength, the facility's accreditation, and the property's location. A 65% LVR loan requires the buyer to contribute 35% of the purchase price plus settlement costs, which can include legal fees, valuation fees, and costs associated with bed licence transfer applications. For a facility valued at $14 million, the buyer would need to contribute approximately $4.9 million in equity plus settlement costs, which can add another $150,000 to $250,000 depending on the transaction's complexity.

Lenders impose ongoing covenants beyond the initial loan advance. These typically include maintaining minimum occupancy rates, preserving accreditation status, and meeting debt service coverage ratios calculated from the facility's net operating income. Breaching these covenants can trigger a review or, in some cases, an obligation to reduce the loan balance or provide additional security. Operators should budget for quarterly or annual reporting requirements, as lenders actively monitor aged care facilities more closely than passive commercial property investments like office or retail.

For Brunswick-based buyers, proximity to established healthcare precincts and public transport can influence both valuation and lender appetite. Facilities within 10 kilometres of Melbourne's CBD, including areas around Brunswick, Coburg, and Pascoe Vale, attract stronger lender interest due to the depth of the local healthcare workforce and the demographic profile of surrounding suburbs.

Call one of our team or book an appointment at a time that works for you to discuss how commercial finance structures apply to your aged care facility acquisition.

Frequently Asked Questions