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March 2007 issue
What’s Happening With Cap Rates?
What are the nuances of cap rates, what factors influence them and how do
they affect the playing field?
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Novel Renovation, Novel Financing
Good Samaritan Home restructured its existing debt, financed a unique new
project, and saved money, too.
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Q&A With Stan Thurston
The former CEO of Life Care Services comments on his early days in the
industry, the Return of Capital™ plan, and changes he’s observed over the
years.
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SNF Beds Hit Record,
IL Price/Unit Strong
SNF price per bed hit a record in 2006, and IL price per unit as strong as
2005.
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NFP Financing Parity
Bill Sims comments on the new age of financing for not-for-profit providers
and the senior living sector overall.
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Not-for-Profit
Acquisitions in 2006
Who acquired what facility, where, for how much, and more.
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Articles Archive
Steve's BLOG on Senior Care
Companies Mentioned in this issue:
March 2007
American Seniors Housing Association p2
Cain Brothers p4
HealthTrust, LLC p1
Lancaster Pollard & Co. p1
Life Care Services LLC p2
Sunrise Senior Living p5
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Q&A With Stan Thurston, CEO (ret.), Life
Care Services
Email Editor
Stan Thurston was with Life Care
Services LLC, the Des Moines, Iowa-based developer, marketer, and
manager of senior living communities, for nearly 30 years before retiring
as its CEO at the close of 2006. Just days after retiring, he received the
first-ever lifetime achievement award from the American Seniors Housing
Association (ASHA) in recognition of his contributions to the senior
housing industry. His pioneering role in the CCRC industry and authorship
of the Return of Capital™ plan — now a standard in the industry — are
among his most notable achievements. We caught up with Mr. Thurston to
talk about those topics, as well as changes in the not-for-profit sector
that he has observed over the years.
How did Life Care Services evolve over your tenure?
For the first ten years, we were more involved in development,
although we did manage 20 or so communities. Back then, I did project
development work, all of which was for not-for-profits. Some were already
created projects that we joined. In other cases, where we saw a good
market opportunity, we assisted in creating the local 501(c)3 owner. Over
the years, we were developing two, three, or four communities at a time –
always in multi-phases. At one point in the mid-1980s, we figured out how
to model CCRC development on a for-profit basis. From then on, we did some
of each — not-for-profit and for-profit. On the management side, though,
we remained heavily involved in not-for-profits.
Why did you devise the Return of Capital plan?
It grew out of the economic environment in the market at the time. Since
our very first development, our approach was to presell a percentage of
the units in a particular phase (70-80% back then) before financing and
starting construction in order to ensure that the project would be
successful. In those days, the Federal Reserve tended to regulate the
economy by dramatically changing interest rates. The housing market
thrived in a low-interest rate environment and was completely cut off when
interest rates were high. In high-interest rate periods, people couldn’t
easily sell their homes and put off the decision about a life-care or
senior-care purchase. We had a very difficult time making the economics
work in that environment.
At that time, too, all units of a new community were typically sold on
what we now call the traditional plan. People paid a front-end entrance
fee, and monthly service fees would be adjusted over time, based on
operating costs. Entrance-fee refunds were nonexistent — or very limited.
We had a good run-up in the housing market before interest rates rose
again, so people had built up a lot more equity in their homes. At the
same time, interest rates were high again, so we couldn’t really borrow
and meet our pro formas. Rather than going to the marketplace for
long-term financing, we figured out a way for buyers to become, in effect,
long-term lenders. They would get a high return and also get almost all
their money back. After fairly extensive testing, we determined that a 90%
Return of Capital plan would be optimal.
How does the Return of Capital plan
affect the debt structure of not-for-profits?
The original concept was that the plan would totally replace the permanent
debt of a community or at least replace it substantially. For example, in
a traditional entrance-fee plan where the apartment costs $50,000, the
resident would get no refund unless he or she moved out in very short
order. We would offer that same unit for, let’s say, $85,000, but 90% of
that amount would be returned to the resident or the resident’s estate
when the unit is resold. Also, monthly services fees would be lower, since
they wouldn’t be affected by third-party debt.
As the developer, the Return of Capital plan made the difference between
projects going forward or not. We still needed to borrow money to get the
community constructed and finish the development, so it took a fair amount
of our equity or guarantees to get a substantial interim loan with no take
out. The take out came when the resident moved in and paid the balance of
the entrance fee.
In the beginning, traditional construction lenders wondered whether this
plan would really work. In fact, it worked great...and the Return of
Capital plan is now very much a standard.
How have you seen the not-for-profit sector change over the years?
Developers and owners today seem to be comfortable using a lot more
permanent debt than we did 20 or so years ago. Today, things are more
predictable, and lenders are pretty straightforward about how the
financing will be underwritten and how much the lender is willing to loan.
In fact, particularly with not-for-profits, there’s strong enough demand
in the marketplace to sell tax-exempt bonds to investors through funds or
even to individuals. Underwriters are comfortable placing that amount of
long-term debt, as long as the project has plenty of reserves to get
through a dry spell if the project should stumble. So the net result has
been a significantly higher leverage in new projects today than 20 years
ago. That’s true for both sectors but definitely for not-for-profits.
Probably the biggest change, though, at least in my time, has been the
explosion in the professionalism that is now evident in this marketplace.
With so many people involved for quite awhile and the amount of research
and statistical understanding and so forth that we have available –
particularly in terms of financing – I think the process is much more
straightforward now. The underwriting guidelines are fairly consistent and
well accepted. And with several underwriters pretty much dominating the
industry, that helps with consistency, as well.
I don’t see any major changes on the horizon. Senior living really is a
burgeoning industry, and I believe it will only get bigger and better.
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