The Dealmakers Forum: Not-For-Profit Vs. For-Profit CCRC Models
The Differences, Though Few, Involve More Than Just Taking Profits
At the outset, it’s fair to say that there are many similarities—perhaps more than there are differences—between the not-for-profit and for-profit CCRC business models:
• Competitive market-rate communities charge similar rates for similar services regardless of whether they’re for-profits or not-for-profits.
• Both models incur similar operating expenses for major items such as labor, benefits, utilities, plant maintenance, raw food, insurance, and management fees.
• Recent industry research on operating expense benchmarks (The State of Seniors Housing 2011) indicates total expenses per resident day as being very similar: for-profits, $114.91; not-for-profits, $112.08.
• While a 501(c)3 tax-exempt organization may avoid some real estate taxes, municipalities and counties with strained budgets are putting increasing pressure on them to pay ad valorem real estate taxes or, in some cases, at least pay a “community services fee.”
So the basic premise that a not-for-profit operation is an entirely different business model due to its tax-exempt status is not entirely valid. And today’s financing costs have also narrowed the favorable gap between tax-exempt bond financing and more conventional financing from other sources—yet, from a financial perspective, several significant “technical” differences remain.
In the first place, profitability on an EBITDA basis tends to be greater for investor-owned for-profit organizations than for mission-driven not-for-profits. “For-profits are looking to maximize cash flow, EBITDA, and shareholder returns by increasing revenue and squeezing costs to the lowest level,” explained James M. Maloney, Head of Real Estate and Co-Head of Tax-Exempt M&A at Cain Brothers in San Francisco. “They’re run from a financial return perspective, as opposed to the mission-in-perpetuity perspective of the not-for-profits.”
Also, for-profits have a greater proclivity to take on debt than not-for-profits, because not-for-profits using tax-exempt debt can’t finance 100%—or even 80%—of the value of their whole portfolio. “Not-for-profits must generate a positive return, or their access to capital is diminished,” he said. “As a result, they’re less aggressive.”
In addition, for-profits are always on the lookout for deals well in advance of a property becoming distressed, whereas not-for-profits are more likely to respond to a competitive market process such as an auction. Not-for-profits won’t generally stretch for deals that don’t make “mission” sense, whereas investor-owned entities stretch for deals that make pure economic sense. “The for-profit environment is also more likely to reward management for taking risks, “but it’s very hard for a not-for-profit to provide similar incentives,” Maloney added...Want to read more? Click here for a free trial to Senior Living Business and download the current issue today