Two growing problems in the senior care industry, aging inventory and a lack of middle-income/affordable seniors housing options, may actually be solved (at least, partially) with one initiative. That has been on the mind of Bill Pomeranz, Managing Director at Cain Brothers, who with the help of David Johnson, CEO of 4SightHealth, recently published his thoughts on converting aging senior living properties to affordable housing. Their main point is that the industry will have to be adaptable: adaptable to aging physical plants; adaptable to a large portion of the population that cannot comfortably afford what is being built now; adaptable providing more services and utility in a cost-efficient way; and adaptable to use all of the loopholes and tax-credits available to them.
Hold, Sell, Renovate or Convert?
Owners of older senior care properties are really faced with few choices. Pay to renovate it, but that can only do so much to compete with the brand-new properties. Close it and transfer the beds if you’re in a CON state. Or, you could continue with business as usual as your offering gets less competitive and your maintenance costs go up every year. With occupancy stubbornly low across the country, which facilities would likely be the last to recover? Usually, the older ones, but then they can compete at lower price points.
Converting the property to another use, like affordable senior apartments, is another option. Investing in a full building rehabilitation is usually cheaper than ground-up construction, and if you can reopen as an affordable community with the full benefit of tax credits and low-cost financing, the financials start to make more sense. Potential conversion properties don’t have to stop at senior care facilities, they could be an old Masonic building, or a veterans meeting house that has experienced declining use and rising maintenance costs. These properties tend to be located in more urban lots, which could help attract seniors to the community, and conversion to senior apartments could still further the organization’s “mission” in the community.
The trick will be to get the property appraised for its salvage value, sell that skeleton value to a low-income housing developer and then have developers bid for the low-income housing tax credits. Those tax credits, supplemental grants and low-interest or tax-exempt debt all combine to lower the cost of capital and make the venture more profitable. There is also the possibility of receiving historic tax credits: a benefit for those really-old buildings. In addition, local and state governments usually allow higher unit density allocations for affordable seniors housing projects and expedite the approvals process. In addition, if senior living developers are at all worried about fill-up risk in today’s low-occupancy environment, they typically won’t have those worries in affordable housing.
Adding Healthcare Services
With an aging population, providing affordable or middle-market housing for seniors will only be part of the solution. What about the care component that new assisted living, memory care and even some independent living communities will provide? Medicare Advantage can now reimburse supportive services in a non-skilled nursing facility setting, such as in a resident’s apartment. Along that same line, senior apartment communities can also add a PACE (Programs of All-Inclusive Care for the Elderly) floor to allow residents on Medicare or Medicaid, or both, to receive skilled nursing care at the community. Of course, home health care will be part of the solution to provide assistance to these residents as they age.
Finally, to improve cash flow and add care services, these communities can lease out space to adult day care programs or a clinic from a local primary care provider. If these added services can allow seniors to age in place at a lower cost, everyone from the payors to the residents themselves would theoretically benefit. We know there will be demand for affordable seniors housing, and we know that there are thousands of senior care buildings that have seen better days. Why not kill two birds with one stone?