If you have decided to open a senior living community in response to the growing need of senior care brought on by the aging “Baby Boomer” generation, the first step of your journey is figuring out your financing options and putting a plan in place to make the most out of your investment. Regardless of the type of business being started, new business owners should understand what the fundamentals of financing that business look like. The following topics provide building blocks by shedding light on important subjects related to financing your new senior living investment.
Establishing a corporate structure and recognizing the costs of acquiring permits
The first step to planning the structure of your new venture is filing articles of incorporation or organization based on the corporate structure you’d like your company to have. Once you’re established, you can secure a federal tax identification number, which registers your business with the federal government for tax filing purposes. Forbes.com offers an overview of optional corporate structures for a senior living facility.
Certain states require proof that the area where you wish to establish your senior living community has a need for it before they will grant you a permit. Visit NCSL.org for a list of states that require new senior care communities to file a “certificate of need.” Once you’ve successfully filed this certificate (if necessary), the next step is meeting local zoning rules. According to Jim Moore, author of Assisted Living Strategies for Changing Markets, meeting zoning rules involves costs for engineers, architects and land-use lawyers before you ever break ground. It is important to recognize that it may take up to a year to secure all the permits you’ll need for your community, and the costs may be a great financial encumbrance during this time as you are making no profit on your investment.
Understanding the expenses associated with a senior living community
According to the National Investment Center for Seniors Housing and Care, property development costs for senior housing follow similar trends of other major real estate classes, such as multifamily residential and 3-star hotels. The range of construction costs is wide between different types of senior housing and care properties based on:
- The target market
- The amount of common area space
- Quality of the build out (i.e. the process of finishing your raw space with improvements such as Silversphere’s Emergency Call System, which increases your residents’ safety, security, and quality of care and provides your new community with a strong differentiator from other communities.)
- Different building code requirements
Expert Jim Moore’s estimates of the costs for senior living comunities (cited on Forbes.com) approximate that the two highest senior living expenses were caregiving staffers and food. According to Moore’s studies, an average 80-unit facility pulling in $2.75 million in annual revenues spends 17% of that income on staffers and 15% on food, respectively. 9% goes to sales liability insurance, property taxes and utility bills. About 8% of revenue goes to pay top-level administrators, accountants and lawyers. Security and maintenance takes about 7%, marketing efforts expend about 5%, housekeeping and laundry services use 5%, and an activities director will take 2% of the revenue. Transportation costs take up about 1%. This leaves an operating profit margin of about 30%.
Choosing the best financing options to meet your needs
Capital for senior housing and care properties comes from three primary sources – debt, equity, and lease capital. Traditional sources of debt capital include government sponsored enterprises (GSEs), such as Fannie Mae, Freddie Mac and HUD, commercial banks, commercial finance companies, and FHA and tax‐exempt bonds. Silversphere’s eBook on senior living investments expands on these different types of capital.
HUD financing has become the most common source for lending due to the FHA LEAN Program. It continues to be a long-term, nonrecourse low-cost fixed rate financing option. However, maximum leverage allowance have been reduced due to lower quality assets or weaker markets.
Underwriting standards in general have become more conservative for senior housing properties. Historically, commercial bank financing was the largest source of construction financing in the senior living industry. However, large scale syndicated financing remains difficult to attain, except for credit lines extended to solid credit investors, after the recent credit crisis.
Bonds, or tax-exempt financing, have been limited with fewer banks providing letters of credit, a doubling or tripling of LOC fees, and a lack of bond insurance. Since the credit crisis, the cost of tax-exempt debt has increased considerably and refinancing existing debt on stabilized properties has been easier than obtaining financing for new construction. Visit NIC.org to learn more about trends for lending and loan performance to help you choose the financing options that are right for you.
From our experience in the senior living sector, Silversphere understands that senior care requires a passion for the aging population coupled with a good financial strategy to make that passion a successful business where seniors thrive in a healthy environment. As you plan your strategy, utilize the topics above as building blocks to give you a head start on taking the first critical steps on your journey in the sector of senior living facilities.