The SeniorCare Investor: Profitable, Affordable Housing
Affordable Assisted Living In Illinois Shows Promise
We all know that times are tough and that capital of any type is in limited supply. The pace of acquisitions in 2008 was the slowest in about six years, and most companies, especially the large ones, pretty much shut down their development operations, and in some cases laid off the entire development team. With the cost to fill each unit these days going up, whether because of increased marketing expenses or rent discounts (and usually both), it is difficult to justify to investors, lenders and even senior management the capital outlay necessary to begin the long development process in this turbulent market, especially with the future so uncertain. There are, however, some exceptions.
The seniors housing and care industry has been a little on edge with the Obama election victory because of his past support of the so-called card check legislation, officially known as the "Employee Free Choice Act," which is a huge misnomer because if passed, employees would no longer have the free choice to have a private-ballot union election. We hear that because of the economic crisis and the fact that this would further harm businesses at a time they least can afford it, this may be on Mr. Obama’s backburner for the time being. One thing that will not be on the backburner, however, is increased support and services for lower income people, including the elderly.
The seniors housing industry has done a wonderful job in creating new product at the very high end, and a pretty good job for the middle market and above. But where it has fallen short is for the low to low-middle income elderly population, mostly because it just isn’t economical. It is very difficult to make money at the low end of the income spectrum, with the cost of land and construction so high over the past decade, not to mention that once a building is up and running, the management fee income is much lower on a much lower revenue base. This has obviously got to change, simply because the demand from this segment of the elderly population will be so great in the next 20 years. While not-for-profit providers have long been associated with the "affordable" side of the seniors housing business, there is certainly room for for-profit companies.
One state that has one of the worst reputations with regard to Medicaid reimbursement for skilled nursing facilities, Illinois, has developed an affordable assisted living program that is actually working quite well, for not-for-profits and for-profits alike. Several years ago, the state estimated that up to 30% of its nursing facility residents did not need skilled nursing care, and came to the common sense conclusion that those residents funded by Medicaid could live in assisted living facilities at a much cheaper cost to the state. While not rocket science, and a conclusion that many had arrived at, for some reason the Medicaid waiver program in Illinois is working much better than in other states.
The largest affordable assisted living company in Illinois is BMA Management, Ltd., founded by Blair Minton, and it also happens to be a for-profit company. The company currently operates 28 campuses with 2,492 units in Illinois, and 2,121 of the units are affordable senior living units. Of the total, 16 of the campuses have opened in the past three years, and all have opened since May 2000. What may be more remarkable, especially in this market, is that the company has six additional affordable senior living campuses with 556 units under construction and scheduled to open this year, and two additional communities that are planned for 2009—all in Illinois. Most of these will operate through the Illinois Supportive Living program and will cater to adults 65 and older of all income levels, but especially those who can’t afford private pay assisted living. We can’t think of another company that has this many projects under construction and development in one state.
The second largest affordable assisted living company in the state is another for-profit company, Pathway Senior Living, LLC. The company has developed 19 affordable seniors housing communities, 10 of which are affordable assisted living and the rest senior apartments. It currently manages a total of 17 communities, all but one of which are in Illinois. Pathway’s typical all-in cost to build one of their affordable assisted living projects averages between $180,000 and $220,000 per unit, although it can be higher, which was the case with one that just opened last month.
The way the program works in Illinois is that the state pays the facility a Medicaid rate that is equal to 60% of the skilled nursing rate in that region of the state, which could end up being just over $70 per day. On top of that the facility receives the SSI rent payment, minus about $90 for personal expenses of the resident. When food stamps are added, the total monthly payment comes to about $2,800, which may be about $1,000 less than a comparable market rate assisted living facility. But this rate is significantly higher than most of the Medicaid waiver rates we have seen in most states, where only a certain portion of the units are set aside for lower income residents, as opposed to the entire community.
Until the economy gets better, one of the issues going forward is that the Low Income Housing Tax Credit program, which for-profits can access, may have lost up to half its usual amount of capital as banks, insurance companies (and Fannie Mae and Freddie Mac) are no longer in the market to buy tax credits, since it may be a while before they pay taxes again. These tax credits fund the equity portion and up to 40% of the entire project cost. If the tax credit market does not come back, another source of capital will have to be found. As the market grows—and we hear that Indiana is actively looking into the Illinois model—other sources of capital will also need to be found, and this is where we think the Obama administration will take the lead.
While Illinois may be ahead of the curve on the affordable assisted living front, other states are beginning to see the merits, as well as the demand. We hear that James Kraft of Kraft Development is working on obtaining a $20 million HUD financing commitment to convert a to-be renovated hospital into a 300-unit affordable assisted living facility in Florida. We assume that would be one of the largest of its type in the country if the financing gets approved and the renovations are completed. The future residents would be funded by Medicaid and the VA.
We understand he is also in discussions with other states to develop affordable assisted living communities, although perhaps not as large as the one contemplated in Florida. With limited development elsewhere, and a growing need from the lower income segment of the population, this should be a growing business for for-profit and not-for-profit providers alike, and in most cases the pent-up demand is so strong, the fill-up time is much less than for traditional assisted living. And the poor state of the housing market is not as much of a factor in filling them up.