Senior Living Business: Comparing Rental and Entry-Fee Communities
Is One Or The Other A Smarter Approach In Today’s Economy?
Current economic problems and hesitant housing stabilization has, in many cases, hit entry-fee CCRCs harder than communities with a rental model. For projects on the drawing board today, which model is the most prudent choice? Does one model offer more or less financial stability for providers? More or less value for residents?
“An entry-fee model was a very seductive financing mechanism when the basics of the economy supported it,” according to Steve Ordahl, Senior Vice President of Business Development at Ecumen in Shoreview, Minnesota. Ecumen owns and/or manages about 4,500 units on nine continuum-care campuses, along with a number of stand-alone properties. All are rental products.
“In the entry-fee model, people put down a large deposit and pay the balance when they move in,” Ordahl explained. “Typically in a new development, 70% of the units had to be presold before doing the financing, which provided some guarantee to the underwriters and the bondholders.” Projects would be 90%-or-so occupied upon or shortly after opening, which generated a lot of cash to use to retire the short-term construction bonds. Those revenues also provided equity when refinancing the project with a longer term product.
“So the entry-fee model has been a very convenient and effective way to finance projects,” he continued, “provided two critical elements (aside from lots of age- and income-qualified people) are present: a healthy real estate market and a healthy bond market.” Both of those elements are not present at the moment, so the financing advantage has pretty much evaporated.
Entry-fee products that are stabilized and running appear to be doing all right in the current economic environment; it’s the startups or projects still in development that seem to be having difficulties. “Back in the day, we would do much of our development with a high percentage of debt financing—nothing down and up to 30 years to pay,” said Ordahl. “The pendulum has certainly swung to a much more conservative approach.”
Rentals, at least those in Ecumen’s portfolio, continue to be strong. Its buildings are all full, and a property expansion that opened last spring filled up in a couple of weeks. “We have a project under construction in a rural part of Minnesota that we expect to open about March 1,” said Ordahl. “We know that it will open more than 50% full. Again, that’s a rental project with rents scaled to the economic realities of the market in which it’s located—but that approach should be taken anyway.”
Ordahl concedes, however, that the entry-fee model provides its residents with predictability, flexibility, and financial security. “It’s a life-care product,” he said. “If or when residents need to go into the nursing home or an assisted living or memory care situation, they know what it will cost on the day they move into the community. And that is a great financial planning tool. The entrance fee also can be considered an asset in the resident’s portfolio, because a large percentage of that fee—in some cases 95%—may be returned to the resident or his or her estate.”
On the other hand, a rental property such as those that Ecumen operates is easy to afford. “You just pay your first month’s rent, and you’re in,” said Ordahl. And except for the life-care component, there’s little difference between the amenities included in the entry-fee and rental products. Every community is scaled to the market, so the monthly rents can be similar to the monthly fees paid in an entry-fee community with similar amenities.
So why has Ecumen chosen the all-rental route? “Divine providence,” Ordahl quipped, given the current economy. Also, the entry-fee product is a “scarce bird” in Minnesota. “We seem to be the last state to embrace the entry-fee model,” he added, “and now the market has imploded. The Twin Cities area was about ready to move toward the entry-fee product in a much larger way than in the past until the economic doldrums hit. In fact, Ecumen was seriously considering doing an upper-end entry fee product—but thank God we didn’t.”
Embracing entry fees
“Whether the rental or entry-fee model is better—whether there really is a difference and which direction would be better financially—are conversations that regularly come up when our sales consultants are talking with prospects,” according to Howard Braxton, Vice President - Sales & Marketing at ACTS Retirement-Life Communities in West Point, Pennsylvania. The 19 properties that ACTS currently owns and operates in Pennsylvania and several states in the South are all entry-fee model CCRCs.
“The entrance fee and part of the monthly fees are an investment in life care,” said Braxton, “so it’s really the customer’s decision as to whether future health care is a concern. But not having to worry about the financial risk and gauging the cost in today’s dollars is truly the value that seniors get with an entry-fee product.”
In terms of lifestyle amenities, the models are pretty much the same, except that the health-care component is included in the entry-fee model. Some rental communities offer onsite health care on a fee-for-service basis, where residents pay current published rates for care. The cost for long-term care, however, can easily add up to the equivalent of an entry fee—perhaps $50,000 per year, according to Braxton.
Interestingly, in communities that provide the full continuum of care, the lifestyle component continues to be a huge attraction for residents even as their level of care changes. “People moving into assisted living don’t necessarily see themselves as needing significant care—even if they do need it,” he says. “They still want the upgraded amenities, access to the health club and swimming pool, and so forth, as their level of care changes.In today’s market, seniors are looking to mirror their current lifestyle or better it, so there’s really no way that a community—whether rental or entry-fee, for-profit or not-for-profit—can step back from providing the lifestyle amenities that people are seeking.”
Just different niches
Whether an organization chooses to operate a rental or an entry-fee model, its status as a for-profit or not-for-profit entity makes little difference. Today’s economic realities are about the same for either type of business, the prospective residents come from the same market, and the amenities are comparable—although life-care contracts are rare at rental properties.
“Rental and entry-fee are just different niches in the market,” according to Andrew Plant, CEO at Westmont Living in La Jolla, California. Westmont Living is a privately held, for-profit organization that manages six rental communities in California and Oregon, four of which it owns. Most have an assisted living and memory care component, and some offer independent living. One campus in Chico, California, has skilled nursing, as well, but that operation is leased out to a nursing home company. A new campus, Morgan Hill in Santa Clara, California, is scheduled to open in April.
From Plant’s perspective, the difference in the two models is the value proposition that each offers the customer. “Often the impetus for a move to a senior rental facility,” he suggested, “is a health need or the death of a spouse; then the adult children are looking for a safe place for their parent. We view the adult child as our customer and the senior using the service as the consumer.
“Most of our customers aren’t so focused on buying for appreciation,” he continued. “It’s really a matter of the services we offer and how the customer perceives the value of our program. On the other hand, people who move into entry-fee CCRCs are typically pre-planners. They might move in after a health event, but often they are couples anticipating health issues down the road.”
Whether to go with the rental or entry-fee model, given the brutal economy we’ve experienced over the last year or two, depends on each submarket, according to Plant, because it all depends on the local or regional business options and the competitive landscape. Nevertheless, the depressed housing market has had less of an impact on the rental model, because people don’t necessarily have to sell a home before moving in. “Therefore, I think there has been less downside in this economy for rentals,” he said. “But in a good economy, there might be more financial upside for the entry-fee model.”
Who’s moving in?
The typical age where people move into independent living at an entry-fee property may be slightly, but not significantly, younger than those moving into a rental property. They’re also likely to be healthier and often are a couple. They’re choosing an environment and a lifestyle where they can age gracefully and predictably.
Those who move into a rental product—housing with services or assisted living—may be older and not quite as spry as they once were, and there will be fewer couples. They may be unable to afford an entry-fee community or choose to leave that money to their families rather than to the community, since entry fees under a traditional Type A contract are amortized over time. And they may be willing or able to find other ways and means to take care of their health needs when that becomes an issue.
“The decision to choose a rental or entry-fee community hinges upon a lot of things, but the affluence of the prospective market doesn’t seem to be one of them,” suggested Ordahl. “You can scale an entry-fee CCRC to any market. The amenities and the size of the units will differ, but both products can be effective if you do the proper research and scale the project to the market. In either case [rental or entry-fee], the product will only work if it is appropriate to the market in which it exists.”