The 1.3ha Eglinton Rd complex consisting of more than 60 rooms was sold in mid-2004 to Fox and Hammer Investments, a partnership involving United Kingdom investor Mike Wood and Dunedin farmer and businessman Andy Nailard.
Mr Nailard said this week the buildings were leased to a tenant, who had been preparing to open budget accommodation.
A potential purchaser had begun negotiations to buy the property, but the sale was conditional on the relationship with the tenant and that relationship had "not matured" for financial reasons.
Mr Nailard said the tenant had "smartened up" the buildings and grounds and was disappointed the project would not proceed.
But he said he was "not surprised".
"These things are not straightforward."
While the former veterans' home and a four-bedroom manager's house on an adjacent site were never off the market, they were being marketed again, Mr Nailard said.
They are up for tender, with a real estate advertisement saying the overseas owner had given explicit instructions to dispose of the "very significant parcel of land".
The manager's residence, which is tenanted, could be bought separately.
Potential uses for the site were a retirement village, residential development or large private estate, the advertisement said. Earlier advertisements said the larger property could be subdivided into 26 residential lots, subject to council consent.
The main property has a rateable value of $2.55 million - $2.1 million for the buildings and $425,000 for the land - while the manager's house has a rateable value of $295,000.
The previous owners, the Montecillo Trust, built a new facility for war veterans in Bay View Rd, South Dunedin, which opened in 2006.
