Senior Living Business: An Internal Developer Arm Keeps Fees In-House--
June 1, 2008
Suppose you were to build a brand-new $230 million CCRC and could retain millions of dollars in developer fees. That’s pretty much the scenario for the Franciscan Sisters of Chicago Services Corporation (FSCSC), which is in the final stages of development on The Clare at Water Tower, a high-rise retirement community in Chicago, Illinois.
FSCSC is a full-service, not-for-profit corporation that the Franciscan Sisters of Chicago formed to assist with its senior living operation. FSCSC provides management services for Franciscan Sisters of Chicago-sponsored organizations. It is the parent company of Franciscan Communities, which operates CCRCs, independent retirement communities, assisted living facilities, skilled nursing facilities, memory support programs, rehabilitation and therapy services, and hospice services. The organization operates in Illinois, Indiana, Iowa, Ohio, Kentucky and Texas.
FSCSC has had an internal Project Developer Division since 2000. So far, the group has completed two replacement communities and one brand-new CCRC, added an independent living apartment building to an existing community, and opened its first community in the state of Texas. The Clare at Water Tower, a 53-story CCRC in the heart of Chicago, is its sixth project to be completed and will open this fall (see page 6). Seven affordable housing communities are also on the drawing board or in various stages of development.
"Our emphasis on development has grown over the years," said Stephen J. Bardoczi, FSCSC’s Senior Vice President of Planning & Real Estate, "and it continues to evolve. Our sponsors [Franciscan Sisters of Chicago] had a desire to continue to grow the ministry, and part of that growth was to have a developer resource in-house. Over the last nine years, our developer division has evolved to the point where we have the expertise to not only continue to coordinate and oversee projects for our own growth needs but for other select groups, as well. So now we also do fee-for-service development for other not-for-profit groups that don’t have this resource."
The client organizations are generally, but not necessarily, faith-based not-for-profits small enough that they would not have their own developer arm or that need the services of a huge national development organization.
"Our niche is more the smaller, middle-of-the-road organizations in terms of our fee-for-service business," Bardoczi explained. "I’m certified as a counselor of real estate (CRE), so we may simply consult or even direct them to other resources if we don’t have the expertise for a particular situation. A good example of that might be a religious group that is considering senior housing in a location where there’s no market for senior housing but there might be for a retail development on the site. So on a consulting basis, we might make recommendations that would be more viable or advise them to look for resources that more mirror their market. We’re not limited to senior housing; we get to play a broader role."
Developer fees range from three to five percent of the project cost, depending on whether a co-developer is involved. Five percent is the usual developer fee for FCSCS projects that do not involve a co-developer. In any case, the developer (or co-developer) fees go directly into the organization’s ministry development fund to provide resources for other ministerial work or for new or existing projects or initiatives.
Depending on the size and magnitude of the project and where the organization stands with its resources, FSCSC might share co-developing responsibilities on certain projects. "For example," Bardoczi said, "we might have two, three, or four opportunities on the table, half our own and the rest where it might make sense to partner with another developer. It’s really a resource allocation decision." On The Clare project, for example, FSCSC worked with Greystone Communities as a strategic partner responsible for areas such as the marketing and financial pro forma work. The two developer entities negotiated a shared fee. Greystone has worked with FSCSC as co-developer on two other properties.
"For us, the most important benefit of having a developer arm is that we’re keeping fees for our own projects in-house," Bardoczi said. "We’re paying ourselves for cash flow, as opposed to having those revenue sources going outside the organization. And the money goes right to FSCSC’s bottom line."
Benefits and challenges
Having completed several projects in the last nine years, with seven more in the hopper, FSCSC has gained a broad perspective on what is good and what is not so good with regard to senior living development, expansions and enhancements. "Having done this over and over helps us avoid pitfalls," Bardoczi said. "And because we can do a broad range of development, from affordable housing to expansions — whether redevelopment projects for others or additions to our own units — having an internal developer arm saves us money across the board."
The affordable communities that FSCSC currently has in various stages of development are, in fact, the first affordable housing projects that its Project Development Division has undertaken. "All projects have challenges that are unique to their particular financing structure or marketing," said Bardoczi. "I would say that the challenge for these affordable housing projects is the competitive process for the tax credits."
When seeking investor financing for its projects, having a proven track record of startup success is definitely a benefit for FSCSC. However, Bardoczi noted, "That benefit is dependent on achieving stabilized occupancy." Of course, any developer seeking financing for a new senior living project would need to do the same.
Furthermore, getting any development off the ground depnds on the financial history of the parent organization. The strong and honest relationships built up over time with banks and investors, and the clear communications established between the organization and those entities are the first steps to success in getting attractive financing for the project. "Having good letter-of-credit support doesn’t hurt, but you can only do that once if the project goes bad," Bardoczi quipped.
And a caution
For organizations inclined to start their own internal developer arms, Bardoczi offers an important piece of advice. "Like creating any department," he cautions, "I would advise organizations not to overdo the staffing that is dedicated to the new department. You don’t want to ramp up your staff to the point where you have to do 10 projects a year to cover your overhead — or get into a situation where you have to take the next deal, whether it’s good or bad, to cover the cost of running the department. It might make more sense to take on co-development opportunities with other developers." He added, "Appropriate staffing is really more art than science. It’s an ‘artful balance.’"