SESSION A-1 REATING MODERATELY-PRICED COMMUNITIES UTDATED INTERIORS. Aaron Rulnick HJ Sims. Mike Martin RLPS Architects

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1 SESSION A-1 RIDGING REPOSITIONING THE HASM UTDATED INTERIORS B C : C O REATING MODERATELY-PRICED COMMUNITIES Aaron Rulnick HJ Sims Mike Martin RLPS Architects

2 Outline I. Framing the Issue II. Key Development Levers III.Design / Construction Considerations IV.Moving Forward V. Q & A 1 Framing the Issue Understanding the Need for Moderately Priced Senior Housing Options 1

3 Cost of Senior Housing (Average Monthly Rent by Care Segment) Implications of Growing Income Disparity (Real Median Income by Age Cohort) Stratification of Median Income (Share of 65+ Households by Income Group) Source: Center for Housing Policy tabulations of 2009 American Housing Survey 2

4 Housing Costs as a Percent of Income Reliance on Social Security Average Social Security Benefit January 2013 = $1,155/month Percentage of Beneficiary Unit 65+ with Income from Social Security, % 65% 62% 70% 51% 45% 50% or more 36% 33% 38% 90% or more 100% 24% 26% 23% 24% 29% 18% Source: Social Security Administration, Income of the Population 55 or Older, 2010 Defining the Market Financial Assets of Older Adults Median per capita retirement and financial assets (excluding home ownership): $105,000 in 2015 Median financial assets range from ~ $24,000 to ~ $337,000 Nearly 40% of people age 62+ are projected to have financial assets < $25,000 over next 20 years Median Income of Older Adults Median income: $53,657 in 2015 Middle-income market for older adults = range of household incomes between $36,000 and $107,000 Who is Middle Income Pew Research Center defines middle-income adults as household incomes between two-thirds and twice the national median income 47% of today s older adults 44% in % in 1971 Source: The Urban Institute and LeadingAge White Paper, Addressing the Gap in Senior Housing Today: Creating Opportunities in the Mid Market 3

5 What is our challenge...and opportunity? How do we broaden access to quality senior housing to the middle income? Gap exits between highend and affordable / subsidized products Must be interdisciplinary Architects Contractors/Builders Developers Lenders Operators What is our challenge...and opportunity? What are key metrics that define moderate / middle income market? Targeted median income Home values Cost / sq. foot Other considerations What other models exist that could more moderate pricing Hub and Spoke Modest entrance fee to lower monthly fee Concept of Middle Income Senior Campus Development 1 bedroom, 800 SF, $1,700/month 2 bedroom, 1,538 SF, $3,250/month Full support amenities and common space Modest refundable but in $50,000-$75,000, amount is deducted by rent based on cost of capital adjustment thereby reducing rent $200-$300 per month 4

6 2 Key Development Levers Key Development Levers Project Size & Configuration Pricing Operating Margin Project Costs Plan of Finance Project Size & Configuration Demand Viable Funding Site Availability PROJECT Local Presence & Support Managerial Efficiency Competition Operational CPI Visibility Key Community Partners Supportive Regulatory Environment 5

7 Project Size & Configuration Considerations o o o o o o Economies of Scale Mix of Units Land Availability & Zoning Market Depth Speed to Market Organizational Risk Tolerance Operating Margin Considerations Monthly/Daily Service Fees Monthly fees can often be a bigger financial hurdle than entrance fees for prospects Independent Living residents typically spend about 60% of their income on monthly fees Operating Margin Considerations Staffing & Other Operating Expenses Personnel related generally range between 50% 60% of total operating expenses Non profits typically staff higher than statutory minimums and their for profit competitors 6

8 Revenue & Expenses Per Unit Medians Per Resident Day IL IL/AL IL/AL/ALZ AL AL/ALZ CCRC Total Revenues $ $ $ $ $ Total Operating Expenses $ $88.47 $83.72 $ $ Net Operating Income Operating Margin Average Annual Occupancy $40.03 $40.35 $50.07 $41.54 $52.24 $ % 35.8% 36.1% 33.2% 28.7% 27.0% 92.2% 93.7% 93.5% 92.4% 88.2% 92.7% Source: The State of Seniors Housing 2016 Project Costs Considerations Construction & Other Hard Costs Soft Costs Design & Engineering FF&E Sales & Marketing Planning & Zoning Developer Fees Contingency Timing & Phasing Duration & staging of construction Occupancy declines Breakdown of Project Uses of Funds Category Low High Median Construction 39% 64% 52% Land & Related 0% 12% 4% Design & Engineering 1% 7% 2% FF&E 1% 9% 3% Contingency 1% 7% 3% Marketing 1% 8% 4% Development Fees 0% 11% 4% Prefinance Capital Return 0% 7% 2% Other 0% 5% 2% Total Project Related 64% 87% 76% Funded Interest & Fees 6% 17% 12% Debt Service Reserve Funds 2% 9% 6% Working Capital & Operating Reserves 0% 24% 3% Costs of Issuance 2% 4% 3% Total Financing & Other Costs 13% 36% 24% 7

9 Driving Down Costs to Provide Greater Value What opportunities exist to reduce project costs & provide greatest consumer value? Project Design & Construction geared towards consumer demands and willingness/ ability to pay? Professional Fees developer, marketer, architect, contractor, banker, etc. Cost of Capital seed capital, short and long term financing alternatives Driving Down Costs to Provide Greater Value Time = Money Can lowering price point increase speed to market? o Length of presales period for entrance fee communities o No pre sales required for rental communities o Length of fill up time to break even and stabilization How much money can be saved by shortening time frames? Can savings be passed on to the consumer to achieve quicker results? Driving Down Costs to Provide Greater Value Interest Reserves Debt Service Reserve Fund Not Required in Bank Financing Capitalized Interest During Construction 1. Utilize Draw Down Financing Interest paid as Funds Advanced (Drawn Down) rather than from entire issue at closing Bank & some investment funds offer draw down structure 2. Step Up Coupon Interest rate low during construction; steps up to agreed upon rates at pre-determined intervals Applicable to Municipal Bonds 8

10 Plan of Finance Considerations Debt Structures Bonds, Bank Placement, HUD Fixed vs. Floating Other Sources of Funds Capital Campaign Equity Finance Related Costs Cost of Issuance Funded Interest & Debt Service Reserve Funds Financing Options Cash/Donations (i.e. Equity) Bank Financing (i.e. Construction and Direct Placement) Draw-Down Bonds (Banks and RIAs) Fixed Rate Bonds Private/Direct Placement HUD / FHA Programs HUD Allocations of HOME, NSP, CDBG, and Other Soft Loans Fannie Mae/ Freddie Mac USDA - Farmers Home Loan LIHTC, Historical TC, etc. Bond Insurance EB-5 Subordinate debt/mezzanine loans/equity Financing Options HUD Financing Bank Financing Municipal Bond Financing Publicly Issued Tax Exempt Bonds 35 Year Term Fixed Rate to Maturity No LTV Requirement Capitalized Interest Funded at Closing Debt Service Reserve Fund Required Less Restrictive Covenants Equity Private Placement Fixed Rate Up to 40 year term 80% LTV Requirement No Capitalized Interest Funded at Closing No Debt Service Reserve Fund Required Restrictive Covenants (i.e. 1.45x DSCR) Taxable Loan or Direct Purchase of Tax Exempt Bonds 10+ Year Hold Period Floating Rate Swapped to Fixed Year Amortization 70 80% LTV Requirement No Capitalized Interest Funded at Closing No Debt Service Reserve Fund Required Restrictive Covenants No Impact on Debt Service Coverage Ratio Negative Impact on Days Cash on Hand and Reserve Ratio Loss of Investment Income 9

11 Financing Options Long Term Fixed RIA Direct Bond Bank Financing Rate Bonds Purchase HUD/FHA Lowest cost of capital X X No interest rate / market access risk X X X Fast and efficient closing X X Minimize negative arbitrage X X X Avoid debt service reserve requirement X X Avoid loan to value constraints X X Avoid ancillary business requirement X X X Maximize flexibility for future borrowing and covenants X Comparison of Financing Structures Compare the cumulative impact over a 10 year period for a $30 million project borrowing under the following four financing scenarios: 1. Traditional Fixed Rate Bonds Assuming a 5.5% interest rate on the bonds and a 1.0% interest earnings rate on the escrowed bond proceeds, which are assumed to all be borrowed at closing and drawn down ratably over a 20 month construction period. 2. Fixed Rate Draw Down Bonds The same assumptions as Scenario #1, but with bond proceeds borrowed as needed to pay construction costs over 20 months, similar to a construction loan. This scenario demonstrates the financial impact of eliminating negative arbitrage on borrowed funds. 3. Taxable Bank Loan Assumes the $30 million is drawn down ratably over 20 months under a taxable loan at an all in rate of 3.0%. 4. Tax Exempt Direct Bank Placement Same as Scenario #3, but assuming the borrowing is at a tax exempt all in rate of 2.0%. Comparison of Financing Structures 10

12 3 Design & Construction Nimble & Quick Considerations Construction Cost Impacts Construction Cost Impacts: Labor 11

13 Construction Cost Impacts: Labor Construction Cost Impacts: Land Construction Cost Impacts: Land Buy land, they re not making it anymore. Mark Twain 12

14 Construction Cost Impacts: Materials Construction Cost Impacts: Materials Construction Cost Impacts: Materials 13

15 Design & Construction Addressing the Challenges Keeping it moderately priced 1. Land acquisition costs 2. Square footage / size 3. Operational Costs 4. Materials / systems 5. Construction timeframe Design & Construction Addressing the Challenges Keeping it moderately priced 1. Land acquisition costs 2. Square footage / size 3. Operational Costs 4. Materials / systems 5. Construction timeframe 1. Land Acquisition Costs Density 5.5 Homes / Acre Single Story Cottages 14

16 1. Land Acquisition Costs Density 8 Homes / Acre Duplex Cottages 1. Land Acquisition Costs Density Homes / Acre Cluster Homes with Garages 1. Land Acquisition Costs Density 12 Homes / Acre Cluster Homes without Garages 15

17 1. Land Acquisition Costs Density Hybrid 1 12 Homes Hybrid 2 12 Homes 5.5 / Acre 24 Homes / Acre Hybrids with Under Building Parking (3 stories) 1. Land Acquisition Costs Density Hybrid 1 15 Homes Hybrid 2 15 Homes 30 Homes / Acre Hybrids with Under Building Parking (4 stories) 1. Land Acquisition Costs CASE STUDY Multiple Community Updates 16

18 1. Land Acquisition Costs Clustering Homes Four Communities Garden Villa Model 1. Land Acquisition Costs Clustering Homes Four Communities Garden Villa Model 1. Land Acquisition Costs Clustering Homes Four Communities Garden Villa Model 17

19 1. Land Acquisition Costs Hybrid Homes Cottage Amenities in an Apartment Setting Incremental Growth Higher Density 3:1 Ratio Increase Financing Options Pre-Sales / Timing A la carte Services 1. Land Acquisition Costs Hybrid Homes 1. Land Hybrid Acquisition Homes Costs Hybrid Homes Typical Hybrid Home Ground Level Podium garage Steel /concrete construction Wood above 18

20 1. Land Hybrid Acquisition Homes Costs Hybrid Homes Six Communities Hybrid Home Model Alternative Ground Level 1. Land Acquisition Costs Hybrid Homes Six Communities Hybrid Home Model 6 homes / floor 14 total / building 1. Land Acquisition Costs Repurposing Abandoned warehouses Underperforming retail properties Shopping centers Former corporate campuses 19

21 1. Land Acquisition Costs Repurposing 1. Land Acquisition Costs Repurposing 1. Land Acquisition Costs Repurposing 20

22 1. Land Acquisition Costs Repurposing 1. Land Acquisition Costs Repurposing 1. Land Acquisition Costs Community Partnerships Wellness Restaurant dining options Outside amenities Neighboring country club Recreation center / YMCA / JCC Library 21

23 Design & Construction Addressing the Challenges Keeping it moderately priced 1. Land acquisition costs 2. Square footage / size 3. Operational Costs 4. Materials / systems 5. Construction timeframe 2. Controlling SF Courtyard Homes 2. Controlling SF Courtyard Homes A A A Units 1BR + Den 1000 SF / Unit Connection to Commons B B B Units 2 BR 1150 SF / Unit 22

24 2. Controlling SF Courtyard Homes 2. Controlling SF Courtyard Homes These homes live bigger than they are. Steven Dunn Resident 2. Controlling SF Courtyard Homes 23

25 2. Controlling SF Flexible Spaces Library Clubroom Meeting room Game room Pre-event Expanded event space 2. Controlling SF Flexible Spaces Lounge Game room Grab n Go breakfast & lunch Pre-dining 2. Controlling SF Working inside the box 585 SF 24

26 2. Controlling SF Working inside the box Moderate Size & Cost / Maximum Livability Open floor plan Monolithic flooring Pocket doors 585 SF 2. Controlling SF Working inside the box Before 2. Controlling SF Working inside the box After 25

27 2. Controlling SF Tiny House Movement 15% of people 55+ are interested or enthusiastic about the idea of living in a tiny house. (60% said No Way! ) 40% of tiny house owners are over age 50. Bette Presley, Age 72 Arroyo Grande, California seniorplanet.org / custommade.com Photo Gayle Cuddy/the Tribune 2. Controlling SF Tiny House Movement 2. Controlling SF Tiny House Movement 26

28 2. Controlling SF Tiny House Movement Design & Construction Addressing the Challenges Keeping it moderately priced 1. Land acquisition costs 2. Square footage / size 3. Operational Costs 4. Materials / systems 5. Construction timeframe 3. Operational Costs Smart Homes Tablet or ipad Stations Tablets or ipads integrate with K4 to become the control center for devices. 27

29 3. Operational Costs Smart Homes TV Controls Family & Friend Connection Video Chat Photo Sharing Community News Dining & Events Automation Thermostat Nest Light Control Door Entry Sensors Health Tracking 3. Operational Costs Smart Homes 3. Operational Costs Smart Homes 28

30 Design & Construction Addressing the Challenges Keeping it moderately priced 1. Land acquisition costs 2. Square footage / size 3. Operational Costs 4. Materials / systems 5. Construction timeframe 4. Materials / Systems Cost-Efficient Options Rectilinear footprint Wood-frame construction Single elevator Simple roof construction Balconies under main roof structure or eliminated Phasing Strategies 4. Materials / Systems Cost-Efficient Options System selection / payback Natural ventilation strategies Decentralized exhaust fans Generator LED lighting 29

31 Design & Construction Addressing the Challenges Keeping it moderately priced 1. Land acquisition costs 2. Square footage / size 3. Operational Costs 4. Materials / systems 5. Construction timeframe 5. Construction Timeframe Modular Construction Pros Cost: 10 20% less than traditional stick frame construction Time: up to 50% less start to completion Less in field errors Less trades involved / less coordination Few bad weather delays Quality control: easier to control in plant 5. Construction Timeframe Modular Construction Cons Perception: may negatively impact future home value Location: availability of local plants Creativity: tend to be less creative / more basic plans for ease of construction to keep costs down. 30

32 Design & Construction Considerations A simple state or quality, as a form of composition Freedom from complexity Design & Construction Considerations Our life is frittered away by detail... simplify, simplify. Henry David Thoreau Walden Walden Pond Cabin Replica; Concord, MA Design & Construction Considerations The greatest ideas are the simplest. William Golding Lord of the Flies 31

33 4 Moving Forward Open Discussion Challenges? Land Costs of Construction Financing Efficiency Opportunities Size of Market Lack of Product Demand Moderate / Middle Income Population is Underserved Few Organizations have Acquired Understanding / Discipline to Develop and Operate this Product 32

34 What does this product look like? Housing Types Services / Amenities Lessons learned from other sectors? Models? Approaches? Solutions? Action Steps Role of LeadingAge Maryland o LeadingAge has established task force to study issue and draft white paper o Other roles / initiatives for LeadingAge Maryland? LeadingAge White Paper: Senior%20Housing%20Today.pdf 33

35 Q UESTIONS / ADDITIONAL INFORMATION: Aaron Rulnick Managing Principal HJ Sims Mike Martin, AIA Managing Partner RLPS Architects ALL RIGHTS RESERVED