Understanding the Economics & Financing Structures of Moderately Priced Life Plan Communities 2
Today s Presenters Wayne Olson, Executive Vice President, Volunteers of America National Services Steve Kuhns, Partner; Essential Decisions Inc. Mark Landreville, Executive Vice President, HJ Sims 3
Outline I. Framing / Defining the Issue II. Why Target the Moderate / Middle Income Population III. Understanding the Development Discipline IV. Design & Construction Solutions V. Open Discussion 4
Defining the Issue Social Security will be major source of income for 59% of seniors* Average Social Security monthly payment is $1,341 for all retired workers and $2,212 for couples (2016) Approximately 30% of households aged 55+ have no retirement account The remaining 70% of households have a median retirement account balance of $104,000. * Time Magazine April 2016 5
Defining the Issue Average Baby Boomer goal is $45,500 in annual retirement income. Average retirement portfolio of $136,200 will generate $9,129 annually (Blackrock) The median average retirement savings account balance is $105,000 6
Defining the Issue 7
Defining the Issue How do we broaden access to quality senior housing to the middle income resident? Gap exits between high-end and affordable / subsidized products Must be interdisciplinary Architects Contractors/Builders Developers Lenders Operators 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 8
What is Moderate Income? Tier Income House Value/Equity Assets Very Low-income <10K N/A <25K Low-income 10K-36K <100K or N/A 25K-100K avg. 50K Mid-income 36K 60K 150K 400K 150K 300K avg. 250K High-income 60K+ >500 >500K avg. 650K 9
Considerations Viable Funding Site Availability Demand Project Local Presence & Support Managerial Efficiency Competition Operational CPI Visibility Key Community Partners Supportive Regulatory Environment 10
Know Your Market Any entry fee should be (well) below the median single home value in market area Penetration Rates Independent Living ideally less than 5.0% for the project Assisted Living ideally less than 10.0% for the project If using a numerical unit demand number, stay below 50% Don t forget common sense Market Study confirmation must be confirmed with common sense. Just because demand numbers indicate a rent level is marketable does not translate to occupancy. Value is key 11
Key Considerations for Moderate Cost Projects 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 12
Key Considerations for Moderate Cost Projects Land Costs Ideally $25,000 -$30,000 per unit but land cost varies significantly by region. Other site development cost considerations Water and Sewer access costs Soils and site preparation Design & Construction Costs Keep hard construction costs to $140 - $160 per square foot or lower whenever possible (cost vary by region) Minimize construction period to 12-14 months Financing Costs Leverage vs cost of capital Bank Financing < 3.0% for 10 years but 25-30% equity required Non Rated Bond Financing 5.0-6.0% for 35 years, 5-10% equity required 13
Concept of Middle Income Senior Campus Development: Middle Income Affordable Project 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 14
Design Considerations Don t expect to be featured in Architectural Digest! Check your ego Focus on fundamental efficiencies Common Space / Circulation not to exceed 35% Multiple story construction maximize foundation and roof Frame construction when possible not to exceed four floors Duplicate your design if doing multiple projects 15
Design Considerations Emphasize rental/moderate entry fee model If deposits, keep small and 100% refundable Broadens market Focuses value proposition Less administrative costs Easier to market Place risk on market & fill, not on interest rates, construction prices or similar 16
Design Considerations Standardize selected design areas Standardize apartment design Framework for culinary, e.g. prep kitchen surrounded by serving areas Town center amenities & program definitions Book of Knowledge parameters Encourage variability in other design areas External expressions Look and feel of building 17
Design Considerations With standardization, reduce consultant costs architect, engineer, legal, etc. Encourage fast fills Optimize Capital Structure 18
Design Considerations Rectilinear footprint Wood-frame construction Single elevator Simple roof construction Balconies under main roof structure or eliminated RLPS Architects 19
Moderate Cost Project Configurations 20
Development Considerations Minimal to no pre-marketing Start marketing with construction start Reduces marketing costs to approximately $4K/apartment Reduces amount of remarketing the same apartment Engage with contractor process Achieve construction start to CO in 12 months The value of a 3 month shorter construction timeframe is approx. $85/resident/month 21
Financing Options Non Rated Bonds Pros: Ability to leverage to 90% or higher Limited Burn Off guaranty or Liquidity Support Agreement More favorable covenants especially for additional debt No Loan to Value restrictions No refinancing risks Cons: Higher cost of capital (5.5% - 6.5% up to 35 years) Higher negative arbitrage as all proceeds drawn at closing Debt Service Reserve Requirement 22
Financing Options Bank Financing Pros: Lowest cost of capital ( 3.0% fixed for 10 years) Generally no debt service reserve fund requirement Ability to draw down debt as necessary reducing funded interest requirements Cons: May require guaranty or liquidity support Leverage restrictions; LTV requirements 65% - 75% Additional debt and Sub-debt may be restricted Borrower assumes refinancing risk More restrictive covenants 23
Financing Options HUD Pros: Very low cost of capital (3.00% up to 40 years) Non-recourse Cons: Up to one year to complete HUD not overly interested in new construction Restrictive Loan to Value (based on HUD appraised value) May have Davis-Bacon requirements Low Income set aside requirements 24
Financing Considerations Funded Interest $4,400,000 Funded Interest Period Debt Impact $3,900,000 $3,400,000 $2,900,000 $2,400,000 $1,900,000 $1,400,000 12 Months 18 Months 24 Months 30 Months 36 Months Key Assumptions: Bond Par Amount $32,785,000; 35 year maturity; Average Interest Rate 4.95% 25
Financing Consideration- Funded Interest An increase in funded interest from 24 months to 30 months results in an increased requirement of $748,000 or $48.00 per month to residents An increase in funded interest from 24 months to 36 months results in an increased requirement of $1,496,000 or $78.80 per month to residents 26
Understanding Operational Costs Fluid Proforma Scenario planning Understand local and regional labor markets Holding to staff ratios to patients to residents to square footage Design to operational efficiency Benchmarking costs against similar product lines 27
Understanding Operational Costs Keep an eye on revenue / non-revenue ratios Don t oversize common spaces Design without an ego put $ where it will get most bang for the buck Design for long term operational expense value Plan for growth 28
Understanding Operational Costs Operating Expense Goal of 50%-55% for Independent Living (varies with services provided) Operating Expense Goal of 65% - 70% for Assisted Living (varies with services provided) Utilize property tax abatement where possible 29
Hypothetical Case Study 125 Independent Congregate Living project 30
Hypothetical Case Study Number of Units 125 Average Monthly Rent (NIC Data 2015) 2,985 Monthly Income Requirement 60% 4,975 Annual Income Requirement 59,700 Total Annual Rent Revenues 12 4,477,500 Vacancy Factor 93% Adjusted Rent Revenue 4,164,075 Operating Expense Ratio 45% Total Annual Net Operating Income (Cash Flow) 2,290,241 Debt Service Coverage Ratio Requirement 1.35 Cash Flow Available for Debt Service 1,696,475 31
Hypothetical Case Study Interest Rate Assumption 5.75% Number of Years 35 Debt Capacity Less Land Costs Per Unit $ 25,000 Total Land Costs Less Funded Interest (Months) 24 Less Financing Expenses 5% Less Reserve Fund Remaining Debt Capacity Owners Costs (Soft Costs, Architect, FF&E) 20.00% Add Owners Equity 7.50% Owners Equity Per Square Ft. Hard Construction Costs Capacity 34,201,685 3,125,000 3,392,950 1,710,084 3,420,168 22,553,482 4,510,696 2,565,126 17.245 20,607,912 32
Hypothetical Case Study Average Unit Size 850 Number of Units 125 106,250 Common Area Adjustment 1.4 Total Project Square Footage 148,750 Implied Construction Debt Capacity Per Square Ft. 138.54 Actual Construction Cost Per Square Ft. 160.00 Adjustment 21.46 Total Square Ft. 148,750 Additional Equity Requirement or 3,192,088 Entry Fee Requirement Per Unit Advance 75% 34,049 33
Questions & Thank You 34