Strategic Planning To Meet Your Capital Needs
One Valuable Tool: Going Through A Facility Condition Assessment
 As in any other industry, planning for capital needs is all about the consumer. The inability to formulate a strategic capital plan implies that the facility today will meetthe consumer wants or needs of tomorrow. But if health-care reform moves the senior careindustry towards accountable care organizations—and as the market shifts to, say, more household models, more (or fewer) private pay or Medicaid consumers, more focus on short-term or rehab units, more focus on home care—organizations will have to think about aligning their spaces to meet future consumer needs. And that requires strategic capital planning.
 Strategic capital planning is defined as the process of linking capital financing to an organization’s strategic, operational, and repositioning plans, according to Mario Mckenzie, Principal at LarsonAllen LLP in Charlotte, North Carolina. It is performed by understanding the organization’s strategic initiatives, clarifying key issues required to build performance targets, driving change throughout the organization, and preparing a financial analysis of goals and outcomes.
Tackling strategic capital planning
 “We’ve seen many organizations undertake strategic reviews to find ways to bridge gaps and position themselves for the future,” said Mckenzie. “If you don’t know how the bricks and mortar support your strategies, then you won’t have a sense of what needs to be accomplished in the organization. And for every program or strategy, you must know its financial impact.”
 Going through an effective strategic capital planning process is critical to knowing where the organization is headed. “In the short term, we advise organizations to focus on operations,” Mckenzie added. “This is a time to be diligent about reviewing every expense and trying to gain financial strength through operational efficiencies. In the long term, make sure those short-term strategies position the organization to access capital at anticipated rates.” 
 From a strategic perspective, the idea is to understand the capability of the organization to resolve issues, access capital, and remain competitive. But for either plan, short- or long-term, the depth of reserves is likely to be one of the biggest constraints. Many organizations don’t even have reserve funds.
 The cornerstone of strategic planning is how you view your organization relative to the marketplace, both now and in future years. If you feel that the consumer will continue to look for bricks and mortar, you may plan an expansion. If you think the market will be different—perhaps more rehab, home care, or day care—you may deploy your capital differently or prioritize your strategies differently.

 “You can’t have an effective plan if you don’t know your role in the marketplace,” Mckenzie stressed. “And while organizations may understand that notion, their practices and governance don’t always reflect it at a meaningful enough level. Often, they’re more focused on putting out fires.” For some of the smaller single-site not-for-profits, though, it’s simply a lack of resources. They may not have a planning department or can just barely get the annual budget together or deal with census problems let alone think about whether to get into home health, the capabilities that would entail, how do go about it, etc.
 In those cases, strategic financial planning doesn’t have to be all that complicated. A team should go through every strategy the organization needs to accomplish and, most importantly, determine the impact of each strategy on revenue and expenses. “Think of a strategic dashboard that targets all your strategies with pluses or minuses that indicate the effect on revenue and expenses,” suggested Mckenzie, “Ultimately, you’ll see where you need to be financially and how much capital you’ll need to invest. And either you’ll have enough capital on hand or you’ve defined a financial gap.”
 That type of exercise allows the board and/or management team to clearly understand what’s required to accomplish the various strategies. Any financial gap can be narrowed through traditional operational improvements and efficiencies or by prioritizing the strategies.
 Short-term planning should be done every three-to-five years to deal with current stressors. For long-term planning, a 10-year horizon provides a broader framework for where the organization is headed. 
 Mckenzie also encourages organizations to do what he calls an annual or biennial “SWAT” analysis. Pick a factor—an environmental trend, an operational issue, a program—and determine its implication for the organization; then plan a strategy to avoid the issue  becoming a future problem. For example, a decrease in the replacement RN pool is expected to result in a shortfall. Shall we beef up our intake? Our training programs? Simply monitor the situation? 
 “The SWAT analysis should be done every couple of years,” Mckenzie advised. “It’s important to get to a point where the board expects a periodic update in order to understand what’s changed, what may change, and what is not expected to change.”
 He also tells boards to think of an annual budget as just the first year of the forecast, and the five- and 10-year plans as just five or 10 consecutive budgets strung together. He suggests they do a budget, then update their forecast to see how current conditions will impact the future. “Then, they can make up any shortfall in succeeding years or decide to deviate from the plan,” he said
Facility condition assessment
 A facility condition assessment tackles one big chunk of the strategic capital planning process—the condition of the bricks and mortar. It is a planning tool that evaluates how long a building can continue to function in the way it was designed. Integrating that assessment into a strategic capital plan creates a context in which to make sensible judgments. For example, a decision to replace an elevator might be different if the entire wing will replaced in five or 10 or 30 years.
 “Not having a facility condition assessment is like driving through foreign territory without a map,” remarked John zumBrunnen, President of zumBrunnen Inc., an independent building consulting firm based in Atlanta, Georgia. “Even the best maintenance staff will miss critical issues that a facility assessment specialist is attuned to identifying and resolving,” he said. “In a CCRC that is 10-15 years old, for example, we will typically find $300,000 to $400,000 in noncompliant construction details and deferred maintenance issues that aren’t on the provider’s radar screen—poorly installed windows, grading and drainage problems, roofing issues, and exterior finish issues that, if not fixed, will lead to costly repairs.”
 A facility condition assessment process should be conducted in accordance with national standards set by the American National Standards Institute (ANSI) per the ASTM International’s “Standard E2018-08,” which sets the scope and is the primary standard used by most independent consultants. This standard explains what an inspector will look at, as well as what he/she does not inspect (such as operating equipment). Since many variables are always involved, the cost of a facility condition assessment ranges from $10,000 to $100,000.
 After the inspection, zumBrunnen develops a report for the client that identifies immediate needs, including items to be repaired, renovated, overhauled, or replaced over a specified effective useful lifecycle, along with capital replacement budgets for the following 25, 30, or even 40 years. The budgetary detail also defines the recommended annual contribution to a capital reserve fund in order to meet those future needs, as identified during the assessment process and amortized over the years.
 “The key is to plan so you have money available when needed,” zumBrunnen explained. “Drawing from but also replenishing the reserve fund at a consistent rate is much easier for a community from a risk management perspective than trying to guess each year how much you’ll need in order to cover unexpected issues. You want to be in a strategic planning mode, not a reaction mode.”
 With the report in hand, it is then the management team’s responsibility to prioritize the projects and recommendations identified in the assessment and integrate them into the organization’s strategic plans. That exercise should be a collaborative effort that takes into consideration a number of factors; for example: What’s driving the action? Is it a safety issue? Is it market-driven? Is it to meet a need to reduce operating expenses, repair damage, or address obsolescence? What is the organization’s ability to execute the recommendations? Is an internal team available to do the work? Will it be necessary to hire professionals and contractors? How and when can the budget accommodate the work? Is enough money in the bank or will the organization need to raise capital?
 To help with those determinations, zumBrunnen recommends that organizations hire the best financial consultant they can afford—optimally, a regional or national company with a broad perspective—to integrate the facility analysis and make recommendations on repositioning. “That’s absolutely critical,” he says. “Senior living is a dynamic field. Organizations must always be aware of their options and be flexible enough to make timely strategic moves.”
 The frequency of repeating the assessment process will depend on the results of the initial study. An update a year or two later, for example, might be limited to addressing only certain targeted issues.
Moving right along…
Organizations that had planned for their capital needs—and were fortunate enough to have the wherewithal to implement some of those plans to protect or improve their market share­—have been strengthening their facilities by keeping them fresh and making improvements. But for many organizations, the last couple of years have been a retrenchment period—a time for focusing on operational efficiencies, getting capital structures aligned, and figuring out how to fund growth.
 For those that have been unable to keep up with their capital needs—yet their physical assets continue to age, and the market becomes more demanding—often the first response has been to defer improvements and upgrade initiatives in order to lower operating expenses. The next item dropped is usually something behind-the-scenes, such as deferring preventive maintenance on existing equipment for a year or so. The more visual discretionary items, such as fresh carpet and paint, are the last to go. So if you notice that a building’s carpet and paint are not fresh, imagine the other work that has been deferred!
 “Whether an organization is in catch-up mode or just motoring along,” said zumBrunnen, “every organization should have an initial facility assessment done by a professional to know what their issues are, to establish priorities, and to identify what needs to be done so it works best for the organization. That is my fundamental recommendation.”
 Having that data in hand is also beneficial when facing questions from residents, seeking accreditation, or dealing with bankers. After all, construction costs continue to be at the lowest levels in years. So in the short term, this may be a good time to get projects done. Even with financing at a higher interest rate, lower construction costs can offset the higher cost of capital.
 “You can always refinance when rates drop, but you can only build it once,” Mackenzie quipped. “So if your tea leaves are aligned, this might be the opportune time to build that expansion.” That depends on how it fits into your strategic capital plan, of course.

Questions To Ask Prior To Beginning
The Annual Budgeting Process

•Are any critical warranties provided by a developer, contractor, or major equipment or systems manufacturer set to expire during the next year?
•Have any significant environmental or geological events occurred on or near the property that may have a negative impact?
•Have any new mandated changes been made to the building codes?
•Have you received any building code citations?
•Have any significant building system components been added, overhauled, or replaced?
•Have any major systems or equipment become obsolete?
•Has there been any extreme wear and tear to major components?
•Is there any technological change or product development that may result in a change to a major component or system?
•Has any maintenance been deferred or lifecycles changed?
•Has local pricing/inflation been significantly impacted?
•Did reserve funding and expenses occur as planned?
•Have reserves deviated from the desired percent-funded goal?
•Has there been any significant change in demographics or competition?
•Has there been significant change in the board?
•Has there been any change in senior-level management?
•Is there a plan to refinance, complete a major renovation or expansion, apply for accreditation, or attempt a sale or merger?
•Have three or more years passed since an independent consultant updated your assessment and funding plan?
—zumBrunnen, Inc.

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