December 2007 issue

Variable-Rate Vs. Fixed-Rate Financing--
Providers Need to Know The Ramifications And The Rules
As the senior health and housing market has matured, variable-rate financings have become widely accepted. To make the best decision, providers should understand the variable-rate and fixed-rate ramifications and rules.
...
Alternative Ownership Structures--
Jewish Home For The Elderly Is Taking An Innovative Approach
The Jewish Home for the Elderly in Fairfield, Connecticut, needs to expand, but real estate prices and availability are prohibitive. After reviewing alternative ownership structures, the organization selected the most innovative option.
...
Q&A With Larry Laird
Laird, who has been involved in the development and management of retirement communities since 1965, shares his perspectives on the industry.
...
Recent Not-For-Profit Transactions
We detail some deals that closed in the last few weeks.
....
Newsmaker
Pamela B. Morris is named Entrepreneur of the Year® by Ernst & Young.
...

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Alternative Ownership Structures--
Jewish Home For The Elderly Is Taking An Innovative Approach

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The financing environment for senior living projects has changed dramatically over the past decade. Alternative real estate financing/ownership strategies have impacted commercial and hospitality businesses, as well as the for-profit side of the senior living and long-term care industries, and are opening up new opportunities for not-for-profit senior care providers, as well. Case in point: The Jewish Home for the Elderly, a 360-bed skilled nursing facility in Fairfield, Connecticut.
The Jewish Home, established in 1973, sits on a 15.6-acre site of prime real estate about an hour northeast of New York City. In addition to its skilled nursing services, the organization provides a broad mix of community services, including one of the oldest adult day-care programs in the state (which began in 1977), a geriatric assessment program, a non-medical home-care service, outpatient physical therapy, outpatient geriatric physician services, and geriatric case management. “The scope and magnitude of our community services programs has expanded dramatically in recent years,” says Andrew Banoff, president and CEO. “We’re almost at the point where, on a daily basis, we serve more people in the community than in our housing facility setting — truly one of our long-term goals.”
The organization is looking to expand in order to offer the full continuum of facility-based services — independent living, assisted living, and skilled nursing — along with its community-based services. “As a not-for-profit organization, our true mission is to meet the needs of the community at whatever level of care they need either in their homes or ours,” says Banoff. “We currently offer the most acute care and a full program of home-based services, so we’re now trying to fill in the middle. And while we’re fortunate to be sitting on a piece of property that’s a very valuable asset, we’re maxed out in terms of zoning use. We need a lot more space to meet the needs of a growing service delivery system and, therefore, needed to look for a new site.”
The problem for The Jewish Home, though, is that real estate in Connecticut’s Fairfield County is prohibitively expensive — more than $1 million per acre — and scarce in that few parcels of significant size were even available nearby. So the board began to look at alternative ownership structures (see box, right).

Scenario #1: Own Land and Improvements
Buying a new site and developing a new facility on the acquired land is the traditional ownership structure. The organization retains full control over the site and the construction schedule, and the asset appreciates over time. In terms of marketing, communication with future residents is more accurate with regard to timing and availability, and feedback from potential residents during the marketing process can be reflected in the design and construction of the facility and/or community.
“We certainly considered both an integrated- and a split-campus model,” says Banoff. “The preference was to have an integrated campus on one site if we could find an appropriate site to do that, but we never found a big enough site in Fairfield County that was on the market for sale.”

Scenario #2: Lease Land and Own Improvements
The hospitality industry, the hotel industry in particular, very often opts for this model, whereby the business leases the land and then builds its own improvements. This option offers less control over the organization’s future destiny. Moreover, leasing the land can dilute involvement during the land use and town entitlement process, so the organization must take extra care to assure that the needs of the community are factored in during the approval process. The marketing implications of this type of arrangement are limited, as the market acceptance of this type of structure is widespread.
The Jewish Home actually considered building a facility on land leased from a synagogue in a nearby town, but the competition between missions and the prospect of having to deal with two not-for-profit boards of directors were determined to be too risky over the long term.

Scenario #3: Lease Land and Improvements
A third model, whereby the provider enters into a lease arrangement for both the land and the buildings, is the most innovative option for a not-for-profit organization but also a more complicated ownership structure and business model. The organization enters into a long-term partnership with a developer and, as a result, gives up a certain amount of control and any possible appreciation. Trust and confidence between owner and lessee must be established with extreme care, as leasing the improvements has significant implications on the following:
• Project team structure and chain of accountability: For
whom do the architect, engineers, and contractor work?
• Control of schedules and budgets: Timing implications
and cost overruns can impact community credibility
and financial viability.
• Communications: Lack of ultimate control of land use,
design, and the construction process can lead to
a disconnect with the marketing team and the
marketplace.
• Alignment of interests: The landowner’s motivation
is profit; the sponsor organization’s motivation is
resident satisfaction and long-term viability.

And the choice is...
After careful consideration, The Jewish Home located a developer-owned parcel of land in the nearby town of Monroe, Connecticut, and chose alternative ownership scenario #3 for two basic reasons: (1) Reality — the owner/developer (Robert D. Scinto of Scinto Properties in Shelton, Connecticut) was willing and able to provide both the construction and the financing; and (2) Cost — The Jewish Home would save a tremendous amount of money compared to a traditional acquisition and financing model.
“The developer felt strongly that this model would be the most cost-effective way to deliver our product,” says Banoff. And while for-profit operations have used this structure, it’s an unusual model for a not-for-profit organization. “As far as I’m aware, we’re the only not-for-profit operator [so far] to opt for this type of structure,” Banoff adds, “but integrating both the construction and the financing in a lease arrangement is actually a financial advantage for us. Our board may have preferred to buy land if it were available or even buy this piece of land outright,but that wasn’t an option.”
The new 40-acre site in Monroe is about 6.5 miles from the current location of The Jewish Home. As proposed and designed, the project is expected to cost about $220 million and incorporate about 700,000 square feet of physical structure, including 210 independent living apartments and villas, 40 assisted living units, and 280 skilled nursing beds. The Jewish Home’s current operation will move to the new location.

Division of responsibilities
According to the agreement, the owner/developer is responsible for the zoning and related land-use approvals for the new facility, and The Jewish Home is responsible for the regulatory and licensure approvals. The owner/developer is also responsible for all the financing.
The Jewish Home is also responsible for all marketing and sales for the independent living community. “We are already beginning to pre-market the community so people are aware of it,” says Banoff, “but we won’t take money from anyone until we get all the necessary regulatory approvals. Once those approvals are in hand, we will pre-sell 70 percent of the independent living units before construction starts. Over the next year we should have a really good sense of where we stand with all of the approvals. Obviously, the owner/developer won’t do the financing until we get close to the pre-sale number.”
The cost of construction will be borne by the developer, who will retain ownership of both the land and the buildings. The Jewish Home will lease the land and buildings and own the business that operates out of that space just as any other type of business would operate when it leases space in, say, an office building.
”The lease will be long term – 98 years – with a variety of natural break points along the way,” says Banoff. “The initial term is actually 40 years, followed by a number of 10-year renewals and a host of points where we can buy the property from the developer. It’s a fairly complex structure but really not that unusual.”
So for The Jewish Home, the investment is minimal. “At this point, our only expenses are the marketing costs and some legal fees on the regulatory side,” says Banoff. “With regard to the building, we’ll have some outlay for certain things such as furniture, fixtures, and so forth — but those expenses would be the same regardless of the ownership structure.”
Plans are to name the new independent living part of the project “The Dogwoods,” after the flowering tree that is indigenous to the region. “We’re going to plant lots of dogwood trees throughout the property,” promises Banoff. The health center – the skilled nursing facility — will continue to be known as The Jewish Home for the Elderly.
Meanwhile, the organization’s board of directors has no plans to divest itself of the valuable property it owns and is currently using in Fairfield. “We have not at all contemplated the future of this site,” says Banoff. “It could certainly be redeveloped into an additional senior living project that we would own or operate. Or it could be sold or leased to another party for development or other use such as by our neighbor, Sacred Heart University. But we really have not addressed what will happen here and won’t until we start construction elsewhere.”

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Alternative Ownership Structures-- Jewish Home For The Elderly Is Taking An Innovative Approach

Alternative Ownership Structures--
Jewish Home For The Elderly Is Taking An Innovative Approach