Securing Debt Against Care Homes: What to look out for

At Ortus, we see a lot of care homes. I suspect that this is symptomatic of three main factors.


1. Our population is ageing and the number of people who require care is growing. By 2070 there will be more than 20 million people over the age of 65 (there are currently 12 million).

2. Property investors and owner occupiers continue to view care homes as a strong business opportunity when operated to a high standard.

3. Not many short-term lenders are able to lend against care homes, so we are often the first port of call for many of our introducers.


Care homes can be complicated assets and I want to share some observations which will help introducers identify deals which will work for Ortus.

We look to take on care homes at all stages of their life cycle. Our bridging product is particularly attractive to borrowers who are establishing or expanding a business. We help them work towards improving trade to a point that will sustain a traditional term loan repayment profile. Here are some things to look out for.


Care Quality Commission (CQC)

CQC is the independent regulator of all health and social care services in England. The CQC monitors and regulates all care homes, hospitals, dentists and mental health facilities. Care homes are regularly inspected and given a rating ranging from ‘outstanding’ to ‘inadequate’. If a care home fails to achieve an acceptable rating over several years (or a shorter period for very serious breaches of standards), it can be forcibly closed.

At Ortus, we support experienced borrowers who have a proven track record  and/or the or have the right skillset to operate these specialist assets. Opportunities arise where investors/operators spot assets of unrealised potential and have the experience to make them work. For example, we recently completed a deal whereby a borrower purchased a care home which needed improvement and was badly underperforming.  However, he demonstrated a track-record of increasing the rating of a care home from “inadequate” to “Outstanding” and at the same time bringing trading levels up to FMT.  The borrower had duly secured mainstream finance over this asset and installed a management team, giving her time to focus on a new project.  We were delighted to give her our full support.


Market Value vs Vacant Possession value

Like many short-term lenders, we always keep in mind the vacant possession figure and we won’t exceed a certain threshold. The market value for a trading care home includes goodwill, meaning it is partly a function of profitability.  This means the market value can be up to double vacant possession value for well-performing assets.  This is something to keep in mind when predicting the achievable LTV for a borrower.

It is also worth asking borrowers whether they have a valuation report tucked away somewhere, because it can be incredibly useful for a lender – even if it’s a desktop report and/or a few years old.


Regulations and Legislation

The care sector is heavily regulated and standards are increasing all the time.  Many older care homes – especially those without en-suite facilities – are less popular when put on the market for sale and this can result in a lower vacant possession value.  It is also important that borrowers who own – or are buying – an older care home have a clear plan to keep up with regulations as they change and tighten.


EBITDA/R and Leases

The repayment strategy for a bridging loan over a care home is usually a loan from a high street bank.  Even where an asset is being sold, there is every chance the buyer will need to secure high street finance.  Therefore, it is important to remember that high street lenders will not exceed a certain multiple of EBITDA/R or the rental income (which itself will be a function of achievable EBITDA – or FMOP).

Getting hold of a set of accounts for the care home – even if they are historic – gives us an insight into the achievable or historic performance of the business.  If we are asked to lend against a care home where performance has historically been poor, we will need to get comfortable that the business is viable and the business plan will therefore be even more crucial.


Client Experience

Not all our clients have direct experience of owning a care home and, if they don’t, a strong level of sector experience – probably as a care home manager – is key. A client can also mitigate their lack of direct experience by keeping successful management teams in place or installing consultants and/or from advisors.

Whilst many of these factors are also applicable for other types of commercial asset, these are just a few of the nuances which impact the care sector. We are lucky to have a team that understands a wide variety of property types. I am always happy to speak to any introducer or client who wishes to explore the possibility of working with Ortus.


Jamie Russell

Business Development Manager for London & The South


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