Senior Living Business: Making CCRC Projects ‘Affordable’--
Jewish Home Of San Francisco Gets Creative In Palo Alto
Seniors, like other age groups, seem to be moving back to urban areas in search of a vibrant lifestyle. That may or may not mean moving to downtown Chicago or San Francisco. It might mean a regional urban center such as Madison, Wisconsin, or Palo Alto, California. Given the cost of constructing a multi-story project in the urban core, how does a developer build a CCRC that people can afford?
Historically, “affordable” — in terms of determining the feasibility of a new CCRC — was defined by whether the average entrance fee equaled the average home value in the community. People could sell a home and comfortably roll the proceeds into the entrance fee.
“Then, two things happened,” says William R. Pomeranz, managing director at Cain Brothers, who did feasibility work for 20 years before moving into investment banking. “Home values went up, but construction costs went up even faster. So because developers were focusing on people with higher incomes, ‘affordable’ became the median value of the upper half of the homes in the community. Then, everyone became comfortable with that definition.”
Now, even that doesn’t work outside of the highest priced areas found on either coast. Particularly in the heartland, in places such as Cincinnati, Columbus, Indianapolis, Des Moines, and maybe parts of St. Louis, the cost of construction is bumping entrance fees to levels that exceed the upper-half median home value. “Despite their huge populations, which otherwise would be a gold mine, those areas have become very difficult for CCRC development,” says Pomeranz. “Although we’ve seen some CCRCs fill up with entrance fees at 120% to 125% of the upper-half median home value, the market becomes much thinner as you go higher up the scale.”
Cain Brothers did a recent market study, for example, where the development cost for a project in the heartland was about $375,000 per unit, but the upper-half median home value in the community was about $250,000. People would have had to make up the difference in order to buy in, which meant they’d need to invest a portion of their savings to be able to pull it off. “I’m hesitant about that type of scenario,” says Pomeranz.
A solution: break up the components
One way to bring down entrance fees and make these types of projects work is to break up the components. And that’s exactly what the Jewish Home of San Francisco did in Palo Alto, California. Building everything that residents would want or need within the planned CCRC would have created a facility similar to a deluxe CCRC six blocks away with an average entrance fee of $1.4 million. And while the Jewish Home wasn’t trying to build a low-income facility, the sponsor did want to build a CCRC that the average senior in the community could afford.
The average home value in Palo Alto, like much of California, is comparatively high, but seniors in the community do not necessarily have high incomes. Many are retired engineers, professors, or others who reached retirement prior to the era of Silicon Valley moguls. They are house rich but income poor.
So to keep the entrance fees at the average home value, the Jewish Home looked for ways to move the cost of construction on several thousand square feet of space out of the CCRC financing and into some sort of partnership. They broke down the project into major components. For example, building an on-site nursing home would replicate one that is nearby and available through an existing partnership, so the Jewish Home explored marketing the project with a regional skilled nursing partner instead of an on-site facility. Focus groups determined that people wouldn’t mind having the nursing home 20 minutes away from the CCRC if it could save them some money, if they would receive quality assisted living and home care, and if frequent van transportation during the day would allow them to visit a spouse or friend in the nursing home. So not building a 40-bed nursing home (which could cost $10-12 million in California) on a 193-unit project saved $50,000 to $60,000 in the average entrance fee.
Then, since Palo Alto is a sophisticated community, the Jewish Home figured that residents would want a swimming pool, a full-service gym, and a spa — requiring another 10,000 to 12,000 square feet of expensive space. Why not partner with the local Jewish Community Center (JCC), which is set up to provide those services for the larger community? Build a center adjacent to the CCRC and give each resident a full membership (as part of the monthly fees). The seniors would use the facility primarily between 8:30 a.m. and 4:30 p.m., while the rest of the community would be more inclined to use it before and after those hours.
Of course, partnering with the JCC would bring additional shared amenities, including a café where CCRC residents could use their meal plan vuochers, health and wellness classes sponsored by the Stanford Medical School and Hospital, a pre-school, and a 500-seat theater/auditorium suitable for concerts, lectures, and cultural or religious activities, as well as private functions such as weddings and bar mitzvahs. It would become a community hub.
“So that was another way to cut a significant chunk out of the CCRC financing,” says Pomeranz, “as it included the $32 million cost of four of five acres of land that will be shared with the JCC.”
Did these partnerships make the difference between making the project a go or a no go? “Absolutely,” he says. “By removing the skilled nursing and community spaces, the average entrance fee will be kept at $650,000 instead of $800,000 or $900,000. And while the project might have had a chance of making it with a higher entrance fee, the Jewish Home wouldn’t have felt it appropriate to sponsor such an expensive project in the community.
Break down the development, too
Another interesting tack taken by the Jewish Home of San Francisco for its Palo Alto project was to divide the development itself into pieces. Instead of hiring a full turnkey developer, they hired New Life Management & Development to do their marketing and a local developer to do the land use and construction planning. “That made sense,” says Pomeranz, “because land use is a big fight in most urban centers. In some pricey suburbs of major cities, for example, we sometimes find clients who have hired a national firm to be at a disadvantage. When you want to come into Palo Alto or, say, suburban Chicago or New York, you had better have a developer with a pretty good sense of the local situation.”
Cain Brothers also helped the Jewish Home develop its financials way in advance and later brought in the third parties. “Instead of paying the usual 5% or 6% fee, they probably paid, in all, about 3.5% of the development costs,” says Pomeranz. “That saved about $4 million to $5 million.”
That strategy worked because the Jewish Home had some strong board members who were local developers with construction experience, and they were able to package the project. That will not hold true for most projects, of course, but self-assessment did help in this case. The board saw what they could handle. An organization without the specific talent required should opt for the full turnkey approach.
Financing the Palo Alto campus
The Taube-Koret Campus for Jewish Life, Palo Alto, will combine a 193-unit CCRC, called 899 Charleston, and the 80,000 square foot Oshman Family Jewish Community Center. Cain Brothers secured $300,720,000 in tax-exempt bonds for the Jewish Home of San Francisco— $165,806,000 for construction of the CCRC and $134,915.000 for the JCC.
“Through a competitive bid, we were able to secure 100% all-variable rate letter of credit (LOC) debt and lock in interest at 4.9%,” says Pomeranz, “the lowest CCRC start-up financing debt service in the country this year or last. Investors loved the innovative structure of the project and could see the synergy right away. We had no shortage of bidders.”
The bond issue, completed in August 2007, was one of the largest not-for-profit LOC financings in the United States and the largest Jewish-sponsored financing. The $165.8 million CCRC financing is both the largest CCRC financing and the largest 100% all-variable deal in California history.
“And despite the climate this summer, the LOC fee may have been the lowest ever for a startup,” Pomeranz notes. “Part of that was because the sponsor has a good track record, solid board members, and a good balance sheet.” The Jewish Home of San Francisco has been involved in the community for more than 100 years.
Another reason why the capital markets loved the idea was that entrance fees will cover about 75% of the development costs. CCRC projects generally have become so expensive that entrance fees usually cover only 60% to 65% of development costs. So because the Jewish Home separated out some expensive components, the entrance fees are not only lower for the residents but can cover more of the project costs and retire much more of the debt.