The clients are qualified nurses who have worked in similar homes in the past but have never run their own business before. The business had accounts available showing net profits for the last year in excess of £50,000. The underlying value of the property being purchased is £340,000, with the balance of the purchase price being made up by the goodwill of the business. The care home is an older style property with 12 beds. What are their options?
Alan Lakey is a senior partner at Highclere Financial Services.
Alan answers: “Not every commercial mortgage lender is willing to involve itself with residential care homes. Those that do usually require a 25 per cent or 30 per cent deposit, although Norwich Union can go to 80 per cent and one or two other lenders will stretch to 85 per cent for bricks and mortar value.
In this instance, a loan of around £255,000 is likely with the £85,000 differential, the fees and goodwill coming from the remortgaged residential property, which will help.
Smaller care homes, of less than 40 beds are less attractive to lenders and additionally not every lender will be happy with first-time commercial buyers. But the clients’ experience in the profession and the worthwhile net profits involved should mean that the loan is agreed without too much difficulty.
However it needs to be recognised that the fees involved can be substantial, compared to a similar residential loan, with £2,550 (1 per cent of the loan) being typical. Additionally the legal fees and property valuations fees are likely to be higher, with some lenders insisting on a Pinder report before they agree to the loan.
I would expect the loan to be at around Bank Base Rate plus 2 per cent and a 20 and 25-year repayment terms should be available to the borrowers, if required.
In a situation such as this, a proper cash flow analysis is essential from the buyer’s perspective – this also assists the lender in establishing that the borrower is fully aware of the logistics involved.”
Andy Young is managing director of The Business Mortgage Company (TBMC)
Andy answers: “There are a number of issues to consider with such a proposal. Firstly, there is a significant amount of goodwill within the purchase price. Many mortgage lenders will only lend against the bricks and mortar value of the property and for a proposition such as this, the amount available would then be substantially reduced.
For this type of business there are, however, a number of lenders who will look at up to 75 per cent or even sometimes 80 per cent of the business valuation including goodwill, provided the amount lent does not exceed 100 per cent of the underlying property value. The valuation figures will be assessed by a specialist valuer, who will produce a detailed report covering all aspects of the business. The client should be aware, however, that such a report is more expensive than a normal commercial valuation, so this has to be taken into account.
The second main issue is the type of property. Smaller nursing homes are not attractive to all lenders, but there are lenders who will potentially help. As an older property, which is not purpose built to current regulations, it is also important to ensure that it does comply with current legislation. The best way to do this is to obtain a copy of the latest local authority inspection report, which will highlight any shortcomings that the property might have, and also to highlight any changes that may have to be made to the property.
In this particular instance, with a good profitable business and clients with some experience in the field, we were able to find a loan of £340,000, being 77 per cent of purchase price and 100 per cent of the property value. The interest rate was a reasonable 2.25 per cent over Base Rate to reflect the loan to value and the size of the deal.”
