SENIOR HOUSING FOR THE MIDDLE CLASS
In less than a decade, every Baby Boomer will be 65 or older. This creates demand for a broad array of services for seniors, ranging from companionship aides to all-inclusive retirement communities.
“When we look at this from an affordability standpoint, there’s a squeeze within the middle market,” says Mike Mason, Senior Vice President of Healthcare Finance at First Midwest Bank. “This is also driving an increase in so-called home- and community-based services.”
Middle class seniors represent a major opportunity: Seniors who can afford robust solutions can usually choose among several luxury options; seniors who need assistance through non-profit organizations or Medicaid can find assisted living facilities or options designed for them. But seniors who fall somewhere in the middle are currently underserved.
Independent Living Options for the Middle Market
One area of business opportunity is within the Continuing Care Retirement Community (CCRC) space. These facilities provide residents with accommodations that evolve as residents’ needs expand.
For example, seniors who are healthy and independent can move into independent living apartments or townhouses at a CCRC, only receiving medical or emergency care as needed by on-site staff. If their condition worsens, they can move into a more hands-on portion of the CCRC campus, such as the assisted living, memory care, or nursing home facility located on site.
These living facilities are hot commodities with long waiting lists, particularly for upper income and middle-market consumers. In many parts of the United States, demand is outpacing supply.
“You’ll see waitlists for some of these communities of up to a year. I've seen as high as an eight-year waiting list for an age-restricted independent living community,” said Mason.
This gives businesses unique opportunities in the middle market space — middle class seniors are finding themselves particularly short of appealing options.
Financing Options with First Midwest
Assisted Living Growth Opportunities
Most middle-market Continuing Care Retirement Communities charge anywhere between $50,000 to $550,000 as part of an entrance fee model. Rental model CCRCs can charge monthly rents that range between $3,000 to $8,000 per month, depending on the level of care, age, amenities and quality of the community.
“More supply will ultimately bring down the price, but the demand for these options will persist for some time,” Mason said. “There’s a genuine shortage of affordable private pay options for the average family.”
Mason is seeing an increase in adaptive reuse of former hospitality and retail buildings as an affordable senior living option.
“Oftentimes these locations have large parking lots; the footprint of a hotel is much larger than what is needed for a true senior community,” he explained. “This additional space gives the developer some ability to expand with a new wing, kitchen, community services, or other recreational facilities.”
Senior Housing Construction: How Much Does It Cost to Start?
Although there is a large demand for senior living options, developing and operating a senior living community is not without significant financial challenges. Startup costs can be substantial. Present estimates put the average cost of constructing a medium-sized facility of 100 units anywhere from $12.5 million to $30 million.
Prepare for expansion. Most developments — whether within repurposed buildings or new construction — must factor in the likely need for expansion within a few years of opening, as well as the ongoing capital expenditures to ensure that the facility looks new and fresh.
“You need to make sure that you are built for growth. This means being built with extra infrastructure, and the liquidity to support future growth” Mason said.
Reinvest revenue. Keeping facilities modern also requires businesses to put aside some significant revenue every year. Mason estimates that providers should reinvest a minimum of $350 per unit back into the facility yearly for ongoing maintenance capital expenditures. These include new carpeting, fresh paint and periodic replacement of furniture and fixtures. This reinvestment will be increasingly important as more, newer facilities and new competition arise in any market.
Know the local market. Senior living developers should partner with local senior living operators who know the area’s nuances, demographics, and staffing challenges — and the reimbursement timing of the state Medicare and Medicaid providers. This partnership should include local, in-market legal and accounting expertise.
“If it's a new build, lenders need to know that the borrowers have experience, particularly experience in the local market,” he said. “Many great operators have struggled when entering a new market because they didn’t pull in partners that know that specific local market.”
A line of credit is key. Senior living providers that are more dependent on government reimbursement such as Medicare and Medicaid may also face cash flow challenges due to lengthy Medicaid pay-out terms, depending on the state. Medicaid payment amounts and timing can vary significantly. Some states may pay within 30 to 45 days, while other states can take six months or more to reimburse providers.
This highlights the importance of maintaining liquidity and a working capital line of credit. Even operators who receive payments from private insurance can find the reimbursement structure cumbersome and slow.
“We can help fund operations through working capital lines of credit to help with accounts receivable timing differences,” said Mason.
Learn More About Lines of Credit
Financing for the Senior Housing Business
Financing plays a significant role in helping operators address startup costs as well as general operating costs, especially in the first year, while the community is stabilizing.
“This is not a cheap business to get into: there are high barriers to entry for any new operation,” Mason said.
One of the largest challenges for any senior living operator is finding sufficient staff with industry experience. Often times, operators are forced to staff their buildings with agency or temporary nursing staff. This comes at a materially higher cost than hiring employees directly. However, operators often have no choice if they cannot find and hire enough qualified staff when their residents require care. This is one reason Mason recommends entering new markets with knowledgeable local partners, who may better be able to source permanent staff.
Many providers can expect to generate losses during the first 12 to 24 months of operations when opening and filling a new facility. This highlights the importance of maintaining sufficient equity capital to fund start-up costs. Equity capital or construction loan reserves should help support start-up costs, not a working capital line of credit.
“Operators have to plan to lose money at first, and they need to have the cash to support operations and initial operating losses,” said Mason.
Profitability Within the Senior Care Business
The middle market will be the largest segment of the senior population for the foreseeable future, with demand set to rise in the next decade. The key to profitability is riding out the initial years of operation.
Also, keep in mind that today’s senior citizen wants an experience unlike that of their parents. Residents usually want amenities that reflect their active lifestyles and independence — even in their later years. And residents are getting older: they are more likely to be in their mid to upper 80s when they decide to move into senior living community than in previous generations.
The challenge is in balancing the cost of operating a facility with affordable pricing structures that capture this consumer. For providers, this means focusing on offering private rooms while also keeping their facilities well-apportioned and frequently renovated.
The opportunity to expand into the underserved middle market is vast, despite the startup challenges. Operators with liquidity and the patience to weather the initial bumpiness will ultimately be successful — provided they can accommodate the growing and changing needs of seniors.
