A care home's debt capacity is set by its trading cash flow, not by bricks, and the same occupancy that sizes the loan decides how close it sits to its covenant.
Size the loan on the cash flow available for debt service, EBITDARM less a management charge and maintenance capex, at the lender's DSCR, then cap it by leverage and loan-to-value. On an illustrative freehold 70-bed home at 90 per cent occupancy, 859,712 of cash flow supports 5,059,190 of debt at 1.50x on a 15-year annuity at 7.5 per cent, 72,274 a bed. The catch is the covenant: at 1.25x it breaks at 85.7 per cent occupancy, three residents away.
Worked in full in Senior Living and Healthcare Real Estate by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A freehold care home that its owner operates has no lease and no rent roll. The bricks only earn what the trade earns, and a lender knows that if the trade fails the building is worth little more as an empty home. So the loan is sized on trading cash flow and the value used for loan-to-value is itself a multiple of earnings. The three tests below are the usual ones; the levels are illustrative and vary by lender and market.
| Input | Value |
|---|---|
| Beds; occupancy | 70; 90%, 63 residents |
| Average weekly fee | 1,150 |
| Fixed operating costs a year (staff, utilities, overheads) | 2,000,000 |
| Variable costs per resident-week | 190 |
| Management charge, % of revenue | 5% |
| Maintenance capex per bed a year | 1,500 |
| Loan: rate; amortisation | 7.5%; 15 years, annuity |
| Lender tests: DSCR; debt to EBITDA; LTV | 1.50x; 5.5x; 60% |
| Valuation multiple of EBITDA | 9.0x |
| DSCR covenant after drawdown | 1.25x |
1. Revenue = 63 × 1,150 × 52.143 weeks = 3,777,750.
2. EBITDARM = 3,777,750 − 2,000,000 fixed − 624,150 variable = 1,153,600, a 30.5 per cent margin.
3. EBITDA = EBITDARM − 5% management charge of 188,888 = 964,712. There is no rent: the home is freehold.
4. Cash flow available for debt service = 964,712 − 105,000 of maintenance capex = 859,712.
5. DSCR test: maximum debt service = 859,712 / 1.50 = 573,142. The annuity factor at 7.5 per cent over 15 years is 0.11329, so the loan = 573,142 / 0.11329 = 5,059,190.
6. Leverage test: 5.5 × 964,712 = 5,305,919. LTV test: 60% × (9.0 × 964,712 = 8,682,412) = 5,209,448.
7. The loan is the lowest of the three: 5,059,190, set by the DSCR.
Excel: =MIN(859712/1.5/PMT(7.5%,15,-1), 5.5*964712, 0.6*9*964712)
At that size the loan is 58.3 per cent of value and 5.24 times EBITDA, and first-year interest is 379,439. All three tests land within 5 per cent of each other, which is typical of a well-run home: the binding test changes with small moves in rate or occupancy.
A loan sized at 1.50x leaves 0.25x of room to a 1.25x covenant. In a care home that room is measured in residents. Each resident lost takes the fee less variable costs and the management charge out of cash flow, 47,059 a year, and almost nothing else falls with them. Debt service of 573,142 at 1.25x needs 716,427 of cash flow.
Occupancy at the 1.25x covenant = 85.7 per cent, 60.0 residents: 4.3 points and 3.0 residents below the 90 per cent the loan was sized on.
Occupancy at which cash flow just covers debt service (1.00x) = 81.3 per cent, 56.9 residents.
Three residents out of 63 is a small move: one bad winter or one difficult inspection can take them. That is the real measure of how much debt the home can support: not the maximum a lender will offer at the underwriting occupancy, but the amount that still clears the covenant at the occupancy the home can reasonably fall to.
| Case | EBITDA | By DSCR | By leverage | By LTV | Maximum loan | Binding |
|---|---|---|---|---|---|---|
| Occupancy 85% | 800,006 | 4,089,936 | 4,400,034 | 4,320,034 | 4,089,936 | DSCR |
| Occupancy 90% | 964,712 | 5,059,190 | 5,305,919 | 5,209,448 | 5,059,190 | DSCR |
| Occupancy 95% | 1,129,419 | 6,028,445 | 6,211,803 | 6,098,861 | 6,028,445 | DSCR |
| Rate 6.0%, occupancy 90% | 964,712 | 5,566,495 | 5,305,919 | 5,209,448 | 5,209,448 | LTV |
| Rate 9.0%, occupancy 90% | 964,712 | 4,619,916 | 5,305,919 | 5,209,448 | 4,619,916 | DSCR |
Five points of occupancy move the loan by about 970,000 either way, because operating leverage is high: fixed costs are 53 per cent of revenue. A lower rate lifts the DSCR capacity but the LTV test, which does not care about rates, takes over. Which is why sponsors who model only one test are regularly surprised by the term sheet.
The book's own home, with its debt sheet giving break-even and covenant occupancies, is in the free workbook for this case. For the earnings line the loan is sized on, see how to calculate EBITDARM for a care home, and for the same three tests on an investment property, how to calculate the maximum loan on a commercial property.
Not if they are careful. EBITDARM is before the management charge and before the capex a home needs to stay registrable. Sizing the illustrative home on its 1,153,600 of EBITDARM at 1.50x would support 6,788,644, 34 per cent more than the 5,059,190 its real cash flow of 859,712 supports after a 5 per cent management charge and 1,500 a bed of maintenance capex.
It depends on how the loan was sized. On the illustrative 70-bed home, a loan sized at 1.50x DSCR at 90 per cent occupancy breaches a 1.25x covenant at 85.7 per cent, 60.0 residents, and stops covering debt service altogether at 81.3 per cent. Each resident lost takes 47,059 a year out of cash flow.
There is no rule per bed: the loan follows cash flow. The illustrative 70-bed home supports 5,059,190, or 72,274 a bed, at 90 per cent occupancy and a 7.5 per cent rate. At 85 per cent occupancy the same tests give 4,089,936; at a 6.0 per cent rate the LTV limit binds instead at 5,209,448.
This article is one calculation from Senior Living and Healthcare Real Estate. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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