Care home development finance for new builds and extensions

• A new purpose-built home on a cleared or greenfield site, usually designed around single en-suite rooms, small households of residents and wide circulation for hoists and wheelchairs.
• An extension to a trading home, adding bedrooms to an established business so central costs such as the kitchen, laundry and management are spread across more residents.
• Remodelling to replace shared rooms and shared bathrooms, which commissioners and self-funders increasingly avoid, often with a temporary loss of beds while work is done.
• Conversion of another building, such as a former hotel or office, into a registered home, which requires a change of use to Class C2 residential institutions under the planning use classes.

Retirement flats and other homes sold to individuals on long leases are residential development and outside our scope; this page deals with registered care homes owned and run as businesses.

Development facilities are drawn in stages. A first tranche typically goes towards the land or existing building, and the build money is released after a monitoring surveyor appointed by the lender confirms each stage of work. Interest is usually rolled up and repaid at the end rather than paid monthly, because the site has no income during construction. Our main property development finance page explains these mechanics in general terms.

The care-specific difference lies in the exit. A completed block of flats can be sold or let as soon as it is built; a completed care home has to be registered, recruit a full staff team and admit residents gradually. For months it will run at a loss while occupancy builds. Lenders therefore look at two values: the value on completion before trading, which is often modest, and the stabilised value once the home is full and trading at its expected profit. The gap between them is the fill-up risk, and somebody has to fund it.

Three regulatory threads run alongside the build, and lenders will want each one mapped onto the timetable.

Registration. A new home is a new location that must be registered with the Care Quality Commission in England, or the regulator for Wales, Scotland or Northern Ireland, before any resident moves in. Existing providers add a location by applying to vary their registration; a new company must apply as a provider, as CQC sets out in its guidance on applying as a new provider. The registered manager should be recruited well before completion. Homes for autistic people and people with a learning disability face particular scrutiny of size and setting, covered on our specialist care finance page.

Planning. Consent should be in place before a lender commits build funds. Expect conditions on parking, landscaping, construction hours and sometimes on the type of care to be provided.

VAT. Because care is generally exempt, operators cannot reclaim VAT on most costs. Construction of a new building used for a relevant residential purpose, which can include a care home, may be zero-rated if the conditions in HMRC's VAT Notice 708 on buildings and construction are met and a certificate is given to the contractor. Extensions to an existing home generally do not qualify unless strict conditions are met. Take specialist advice before contracts are signed, and budget on a VAT-inclusive basis if relief is uncertain.

Cost inflation and contractor failure are the obvious risks, but in care the bigger risk often sits after completion. A home that cannot recruit a manager and nurses, or that opens into a market where councils pay low fees, can burn through cash for far longer than forecast while rolled-up interest grows. Extending a trading home avoids much of the fill-up problem but means building around existing residents, with disruption, temporary bed losses and inspection risk. Personal guarantees are common on smaller schemes. If a scheme only works with optimistic occupancy, building a smaller first phase or delaying until trading elsewhere is stronger is often the better decision.