Seniors Get an Assist

Developers and Investors Score with Assisted Living Expansion.

After the ups and downs of the early 1990s, the seniors housing market has settled on a winning concept to meet the diverse needs of the growing seniors population. After experimenting with independent living, continuing care, and congregate care retirement community models, many developers have found assisted living facilities (ALFs) to be the most marketable and profitable type of seniors housing. Many investors consider ALFs to be an attractive investment vehicle in light of an aging population that’s spurring continued demand for these services.

What Is Assisted Living?
Assisted living combines "housing, supportive services, personalized assistance, and health care designed to respond to the individual requirements of residents needing help with activities of daily living [ADL]," according to the Assisted Living Federation of America (ALFA).

In addition to providing room and board, ALFs offer residents a wide array of care and services, which may include:

  • three daily meals served in a common dining area;
  • assistance with ADL such as bathing, dressing, grooming, eating, and walking;
  • emergency call systems and 24-hour security;
  • management and administration of medication;
  • personal laundry and housekeeping;
  • social and recreational activities; and
  • transportation to medical services and stores.

Why Invest in Assisted Living?
The nation’s aging population’s continued demand for services has made assisted living development an attractive investment vehicle. The fastest-growing age group in the United States, the over-85 population segment is expected to increase 39 percent by 2000 and 33 percent between 2000 and 2010, according to the U.S. Census Bureau. ALFA predicts that assisted living—today a $12 billion to $15 billion industry—will double by 2000.

The increasing net worth of seniors also contributes to the growth of this industry. By the year 2000, more than 53 percent of people over 80 years old will have incomes of $15,000, and almost 35 percent will have incomes of at least $25,000, according to Claritas, Inc., a demographics research company. This is an important factor because most assisted living is funded through private income such as residents’ financial resources.

Another factor contributing to demand is the lack of available nursing home beds. Due to limitations on Medicaid funding, the primary source of nursing home revenue, many states have issued moratoriums on authorizing the new development of nursing home beds, attempting to control their Medicaid budgets by limiting the number of beds on the market. This, in combination with high occupancy rates for nursing homes and increased concentration on higher-acuity patients, has resulted in a lack of available beds for low-acuity residents.

Impact of Hotel/Multifamily Developers. As the multifamily and hospitality markets move toward saturation, developers from these arenas are entering the assisted living market. Marriott and Hyatt are two hospitality-related companies that have made a strong entry into ALFs. On an operations basis, hotels are most similar to assisted living development due to their service package (offering food service, concierge, and other amenities). Hotels do, however, lack the health-care component that is essential to ALF operation. Multifamily developments, while similar in construction features, lack both the service package and the health-care component.

With demand still exceeding supply in many markets, assisted living development is an investment on par with hospitality and multifamily projects. Further, lenders have not reached their saturation point; money still is readily available for experienced operators.

Development Trends
The assisted living market is one of rapid change. Several of the following trends currently are shaping the industry’s development landscape.

Alzheimer’s Care. An increasing number of ALFs offer specialized Alzheimer’s or dementia-care programs designed to better meet these individuals’ more demanding needs. Specialized Alzheimer’s programs typically are housed within a separate wing or in a dedicated freestanding facility.

Larger Developments. Today, 24 to 28 units is the minimum facility size at which operators can realize economies of scale and maximize profit margins. Currently, most developers and operators are constructing facilities ranging in size from 40 to 90 units. These larger facilities can maintain their own staffing and provide the level of care required to carry residents as they age. Depending on location and revenue generated, well-managed facilities of this size typically realize profit margins ranging from 30 percent to 40 percent. Effective and efficient management is, of course, a necessity for maintaining high profit margins.

Increasing Levels of Care. ALFs now are catering to a higher level of care and many are beginning to meet the needs of traditional long-term care residents. There is also a trend toward multiple levels of care through which facilities can provide more extensive services and realize increased revenues.

A la Carte Services. Operators have found that bundling or packaging services often is financially inefficient and fails to adequately address residents’ individual needs. Providing services a la carte corrects these shortcomings and also allows for increased revenues since bundling the services normally results in discounting.

Less Institutional Design and Feel. In contrast to early ALFs that were modeled after nursing homes, developments today are moving away from long corridors and small semiprivate units. Especially in more affluent markets, residents are demanding more luxury and privacy. Private apartment units of 400 to 600 or more square feet increasingly are more common.

Increased Concentration in Secondary Markets. As large metropolitan areas such as Atlanta begin to reach potential saturation points, developers are turning towards secondary markets. For example, Alternative Living Services, one of the largest national ALF providers, recently built ALFs in Gainesville and Palm Coast, Florida.

ALF Market Analysis
Real estate professionals who are considering entering the ALF market need to study the market carefully because many experienced players have extensive expansion plans for this segment. A market analysis based on qualitative and quantitative factors often is the first step to determine the need for a facility. For the analysis of any seniors housing project, income and demographics typically are confined to the over-75 population base.

The overall process for evaluating a potential ALF market should include the following key components.

Site Evaluation. Determining the feasibility of an ALF development must incorporate the micro and macro aspects of a community. For instance, site determination may be limited by restrictive zoning, excessive rock formation, and/or state planning lists. Initial research into local and state planning parameters, as well as a site survey, may save time and money prior to developing a full market analysis.

Neighborhood Economic Factors. Local economic factors may have a great impact on the decision-making process. For instance, small communities that are dependent on one or two major employers may be subject to either downsizings or expansions that could change the size and economic viability of the population of adult children. This could be critical because adult children often are the primary decision-makers in the fill-up process. Larger cities boast a more diverse employment base, although they too can be affected by the actions of large employers.

The age of community residents also is important—ALFs are more successful in areas with an older adult children population base (aged 45 to 64) than a community that attracts a younger age group (aged 35 to 44 years).

A community’s economic development office is a good source for defining area economics and is a good starting point for determining movement and traffic patterns within the community, which influence the exposure and accessibility of a project.

Competitive Factors. As the industry continues to evolve, many competitive factors have emerged. Through the early ‘90s, independent living facilities concentrated on the active adult. During the last five years, many operators have added either home health care and/or assisted living wings to their centers. This has retained residents for a longer period of time, preventing the movement of residents from a retirement facility to a full-service ALF.

In addition, home health agencies have become much more active, servicing frail seniors in their own homes. While sometimes an expensive and not completely adequate alternative, home health services and, to a lesser degree, community-based services do maintain frail seniors in their own homes, which prevents them from having to move into full-service ALFs.

Nursing homes are a competitive factor for the low-acuity assisted living resident. Many national nursing home companies, such as Life Care Centers of America, Beverly Enterprises, and Integrated Health Services, as well as local operators, either have developed stand-alone licensed Alzheimer’s facilities, added assisted living wings to existing nursing homes, or have developed stand-alone assisted living centers on nursing home campuses. This allows a smooth transition from an assisted living setting to a nursing home setting without disrupting residents. Furthermore, such settings give the appearance of a continuum-of-care to the adult child of the resident.

Survey of Market Trends. Survey all competitive facilities within the proposed primary market area (PMA) to determine occupancy levels, level of care, movement within the community, adult children’s influence, area economic factors, and the percentage of residents that are from outside the PMA. Frequently, seniors housing marketing directors track residents’ prior living situation. This information can be insightful in determining the percentage of residents the subject property can expect to draw from inside and outside the PMA. Further, marketing directors are a good source of information on absorption and occupancy rates as well as any impending economic factors that may affect the area. Area managers also have good insight into traffic patterns and adult children’s movement from areas of residence to workplaces.

Determining the PMA. Combining these factors should provide a reasonably clear picture of movement within the community. At this point, the PMA, from which the subject can expect to draw the majority of its residents, should be determined.

Analysis of the Secondary Market Area. The secondary market area is all areas outside the PMA. The influence of the secondary market is determined through the impact of adult children and through discussions with area administrators. A larger adult child population usually is indicative of a market in which more residents will be pulled into the area and relocate into the facility from outside the PMA.

Analysis of Income and Demographics. After determining the PMA, compile demographics from reporting services. Analyze income and demographics on the basis of age, ethnic composition, care of residents with physical or mental disabilities, female population base, and household income.

Determining the Utilization Rate. Analyzing the various alternative services within a community will determine the PMA’s utilization rate, which is the likelihood that a potential resident will choose the assisted living setting over other available alternatives. In general, communities with few services should have a higher utilization rate (residents with fewer alternatives to choose from will be more likely to relocate to a new ALF).

Frailty/Care Modality. Care modality represents the number of residents who have either physical or mental limitations. Claritas, for example, reports the percentage of residents within a PMA that have a care need. This percentage represents the age-qualified residents who likely would benefit from assisted living services.

Determination of PMA Draw. The PMA draw represents the percentage of residents that a facility can expect to draw from within the PMA. This figure, which adjusts for in-migration from areas outside the market, typically is derived from analysis of historical fill-up of existing facilities as well as conversations with area operators and other local officials.

Supply Analysis. It is essential to survey all competitive supply, including independent living, nursing, and assisted living facilities, as well as the impact of home health services. All surveys should include the determination of the physical plant, mix of units, unit rates, service pricing format (tiered or a la carte), occupancy, and services offered. In addition, consider and survey all planned facilities.

A survey of competitive facilities close to the PMA is critical to determine their impact. In addition, account for turn-over of beds and vacancy factors within the market.

Determining Net Demand. Detailing the target population base and adjusting for such factors as utilization, care modality, supply (planned and existing), and income qualification determine the PMA’s net bed demand. (This figure is a measure of overall unmet demand and is not a forecast of penetration or facility fill-up.)

Determining Penetration. As a second check on the strength of a market, determine the penetration and/or capture rate of the area. This analysis estimates the percentage of qualified residents within the market area that the new facility needs to capture to reach stabilization and sheds light on the viability of the market.

Several different sources offer financing for the development and purchase of ALFs. These include the U.S. Department of Housing and Urban Development (HUD) Section 232 program, tax-exempt bonds, conventional banking, real estate investment trusts (REITs) specializing in health care, Small Business Administration loans, and Fannie Mae loans. The HUD 232 program and tax-exempt bonds both are nonrecourse lending sources. The majority of other available sources are recourse loans.

One of the newer developments in assisted living financing is the synthetic lease. Structured as an operating lease, a synthetic lease essentially is a loan that allows projects to keep mortgage interest and depreciation deductions off the balance sheet to improve earnings.

Though historically most assisted living lending has been for the purchase of existing projects, the past few years have brought a steady increase in new construction. Though financing parameters for new development remain stringent, developers are finding a limited amount of good existing product available to purchase. With profit margins remaining strong, assisted living should continue to be a popular venture for both new and established players, and the recent spurt of development is likely to continue over the short term.

The Future of Assisted Living
Given the growth projections of the market it serves, assisted living development is anticipated to remain strong in the coming years. Several companies have established themselves as specialists in this industry, both developing and running these management-intensive facilities. This, along with the potential of hospitality REITs to acquire ALFs as a hedge against a downturn in the hotel market, provides a continuing source of product and financing to keep the market growing to meet demand.

Carol Reynolds, CCIM, MAI, and Michael Kivov

Carol Reynolds, CCIM, MAI, is a principal of Province Valuation Group in Atlanta, which specializes in the valuation and market analysis of health-care facilities nationwide. Contact her at (404) 459-0066.Michael Kivov is research director or Province Valuation Group. Contact him at (404) 459-0066 or Living ConferencesSeveral key conferences provide information on industry financing, management, and operations. The conferences listed here provide opportunities for networking and education to those new or seasoned in the field.National Investment Conference (NIC). Held every October in Washington, D.C., this networking/educational conference attracts more than 1,200 registrants, including major lenders from across the country. While assisted living is the main focus, NIC also attracts nursing home, independent living, and continuing care community operators. NIC is the main finance networking conference in the industry.Assisted Living Federation of America (ALFA). ALFA holds two conferences each year—a spring event on the West Coast and a winter conference on the East Coast. Known for operations education and management, ALFA attracts between 1,000 and 1,500 registrants, mainly assisted living operators. As a federation, ALFA also has 25 active state chapters.National Association for Senior Living Industries (NASLI). Concentrating on operations education and management in all facets of seniors housing, NASLI holds two conferences each year, which each attract between 400 and 500 registrants.Up on the Roof: ALFs Tackle an Urban FrontierUntil recently, cities were considered one of the last frontiers for the development of seniors housing. Many obstacles—from state regulations to lack of available property—prevented developers from building in urban areas. This perpetuated the mass migration of retirees to the Sun Belt. However, increased demand has made the urban market too appealing to ignore. This is especially true in New York City—the "granddaddy" of demographics. According to the Urban Land Institute, for every person who moves to Florida, 19 remain in the Big Apple. And this sentiment is echoed in cities across the country, making urban housing one of assisted living’s newest—and hottest—markets.New York City-based Levine Builders, along with Kapson Senior Quarters, surmounted the many hurdles of city development to construct a luxury assisted living complex in the Bronx’s Riverdale section. From creating rooftop gardens to providing home health care, Riverdale presents viable answers to some of the questions facing urban ALF development.Room at the TopA major obstacle in the development of urban ALFs is the dearth of available land. Suburban ALFs often feature outside common areas such as patios or courtyards, a focal point for residents’ outdoor activities—from garden parties to bridge tournaments. Because suburban landscaping is so important in the marketing of the project, urban developers need to find acceptable substitutes.In the city, rooftops replace courtyards. Riverdale will feature a 2,800-square-foot garden on a second-floor roof that was created because of zoning regulations. Dining facilities located adjacent to the space permit outdoor functions, such as barbecues. In addition, Riverdale’s residents can take a 14-story elevator ride to a 12,000-square-foot rooftop garden. This garden includes "suburban" assets such as outside seating areas and flowering plants, with an additional highlight—views of the Manhattan skyline and the Hudson River.Urban ALFs also offer residents access to cultural activities. Because of the proximity to New York City, Riverdale’s residents will attend chauffeured van trips to plays on Broadway, exhibits at the Metropolitan Museum of Art, concerts and operas at Lincoln Center, and day trips to the Bronx Zoo.Riverdale "Digs" ParkingAs is always the case with urban development, when the availability of land is at a minimum, parking becomes an issue. Detached parking garages are out of the question, and because most urban zoning places limits on building height, constructing an attached parking garage at or above grade would take substantial space away from the property’s residential building. Levine Builders dug deep to alleviate this problem, excavating rock from the ground under the complex to create a below-grade parking garage. At 14 stories and 205 units, Riverdale maximizes its available space for residential use, while providing more than 140 parking spaces for its residents and visitors. Traversing the Regulatory MazeDevelopers often avoid building ALFs in urban areas because of regulations that prevent them from providing nursing services. Therefore, seniors who need help with day-to-day activities have no choice but to turn to total-care, state-licensed nursing homes. This can be problematic for intermediate care patients: when there is a shortage of beds, those with greater needs take precedence.To traverse this regulatory maze, Levine separates residential housing from health care to accommodate those who do not need constant care, but do need partial assistance. Because Riverdale is zoned residential under the apartment/hotel classification, it does not have to obtain the special permits and licenses needed for domiciliary health-care facilities. Riverdale stays true to the assisted living model by providing its residents with hotel-style services such as daily housekeeping help, three meals served in a dining room, and arranged social activities. And, as in any private residence, additional personal nursing care is contracted out to a licensed agency.— by Jeffrey E. Levine, president of Levine Builders in New York City. Contact him at (718) 224-7147.