Care Home Management

The Care Home Decision Makers’ Magazine

Insight & Analysis

Financing for acquisition and growth

What are the financing options available to care home owners looking to buy additional homes?
Leanne Lawrence, senior associate at law firm Lodders, shares some key considerations

Expanding your care home portfolio is a strategic decision that can be highly beneficial, particularly if your existing home or homes have built up a strong reputation. Provided your new home or homes can deliver the same high standard of care, having multiple homes in your portfolio can bolster your position in the market. Developing your own care home can allow you to create a purpose-built facility that is tailored to the needs of residents, whilst equipping staff to deliver the very best care.

What are your financing options?

There are several different ways to structure finances when developing a new care home, with each option having its own benefits and downsides. Here is a selection of those available:

Development finance

Where a new care home is being constructed, you may be able to access development loans. This kind of funding requires a specialist review.

In development finance agreements, provisions will be set out regarding approval of your choice of contractors and the terms of their respective contracts, timescales for practical completion and for other stages in between, project management, finance management, budget reviews, and progress reviews, all by a funder-approved monitoring surveyor. It is also important to consider that the provisions may dictate that any overspend may have to be absorbed by the borrower by way of a costs overrun guarantee, often secured against an owner or director’s personal assets. As development projects often run over budget, this is a cost to be factored in.

With development financing, it may be that the funding is staged, with tranches being released at different points in the build to protect the lender throughout. This is in addition to the usual provisions to monitor the activities of the borrower. Collateral warranties may also be required from the contractors, so it is advisable to enlist the support and expertise of an experienced solicitor.

Care home mortgages

Designed specifically for care home purposes, a care home mortgage is a commercial mortgage that can be used to buy an existing care home, refinance an existing care home mortgage that is expiring or is more expensive, or extract capital to invest elsewhere.

The mortgage lender will evaluate your current trading performance and CQC assessments to get a measure of the business and understand whether your overall affordability position is sufficient to support the loan.

Lenders will provide a percentage of the purchase price based on the property’s value (loan-to-value ratio). To calculate the property’s value, a combination of valuation methods may be used, including its value as a completed new build and its value when operating at full expected occupancy and charge rates. Care home occupancy levels are notoriously difficult to predict, particularly in the case of a new care home, which can take some time to become established. However, if you do not comply with care home occupancy levels, you may risk breaching the funding agreement, so a careful and realistic estimation of these levels is critical.

Partnerships with investors

Seeking external investment support is another way of expanding your care home portfolio. This method is often highly convenient, as cash can be provided as and when needed, but is based on the investors having significant control over the running of the business and its decision-making. Investors will generally require significant controls to be in place for the entire duration of their loan and will usually require the same level of financial reporting as a bank.

Compliance

The CQC must be notified if you are planning to purchase a care home from an existing provider, and any new location must be registered with the CQC. It is highly advisable to put in place a carefully drafted contract between a purchaser and the current care home owner, to enable the purchaser to get CQC consent, prior to completion of any purchase. Operating without a licence is against the law, whether you are an organisation, partnership, or individual.

In addition to the regulation set out by the CQC, you must also consider other relevant laws when setting up a new care home. Abiding by current building regulations is fundamental, whether this be in the construction of a new build home or the renovation of an existing building. You must also complete a fire safety risk assessment, following government guidance specific to residential care homes.

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