Coming out of the pandemic-induced senior living financial fiasco, top on almost every provider’s mind is how to increase their census as soon as possible, and then how to do it without sacrificing operating margins. Help is on the way.
For most seniors and their families, making the move into senior living is a big decision, both emotionally as well as financially. Both can be significant hurdles, but the financial side is now going to be easier to deal with, especially if you don’t want to be rushed into selling your home or selling assets to come up with cash for a large entrance-fee payment for CCRCs, or your first several months of rent.
Readers may remember 20 years ago when Elias Papasavvas came out of nowhere and started a company he initially called GrannieMae.com. The Fannie’s and Freddie’s of the world took exception to that name as sort of an infringement on their domain, and while they really had little legal standing, they had more lawyers on retainer. The name was changed to Elderlife Financial, and it provided bridge financing for families with a parent moving into a senior living community, typically a CCRC.
A lot of water has flowed over the dam since those early days, and Mr. Papasavvas has emerged with his second act for consumer finance for the elderly, appropriately called Second Act Financial Services (SAFS or Second Act). SAFS is a division of Liberty Savings Bank, which offers up many advantages that he did not have when he founded Elderlife. Chief among them is a much lower cost of capital, which is basically the cost of bank deposits which, as we all know, is close to zero. Another advantage is they are starting out with an initial tranche of $500 million to lend out. They mean business.
So, here’s how it works. Mrs. Smith wants to move into a CCRC, but does not want to sell her house right now. Or does not want to sell securities to come up with the $300,000 entrance-fee funds she needs. In steps Second Act, which can provide her with a home equity line of credit at a relatively cheap cost of the Prime rate plus 199 to 299 basis points. With the Prime rate at 3.25%, that puts the range from about 5.25% to 6.25%, which is apparently much lower than other companies providing a similar service. Plus, the upfront fee can be as low as 1.99% with a maximum of 4.49%. The all-in cost is about 50% lower than alternatives in the market. That is huge.
That might cost the prospective resident about $1,250 per month. But for the provider, if they can get her to move in two, three or four months early, financially it makes sense to offer to pay the cost of that loan. If the monthly rent is $3,000, over three months they will net $5,250 that they would not have seen until she moved in by the fourth month, plus receive the $300,000 entrance fee three months earlier. If it is a rental community, it would just be that net $5,250 for those three months. While financially a no-brainer, it also locks the customer in, and you have taken away the initial financial headache. It is especially a no-brainer with so many empty units waiting for residents.
Speaking of residents, we all know that turnover rates are relatively high and very acuity dependent. This loan product is great for a new community when you have to fill up all of the units. But even a 100% full community has constant annual turnover, and you need to fill those units every month. It just makes the selling job that much easier for the sales staff if the initial financial transaction is simplified. And did we tell there is a tool for the sales staff to use to pre-approve a lead for the financing program? So, they can bundle that in with the proposal to the lead, whether the lead needs it or not, and it may just make it easier for the family to make a decision. Any advantage a sales team member has to close a sale is money in the bank.
For seniors housing, about 90% of leads have a house to sell, and about 5% to 10% of those might have a need for a lending program like this. This adds up for a 100-unit community, year in year out, even more so when you get to the 300-unit or larger size. And imagine if you operate 50 or 100 communities. We all know that discounting is rampant since the entire industry is in fill-up mode. Wouldn’t this be a nice alternative to discounting, as well as a way to get the customer to move in faster? Seniors housing has been in a defensive position for too long and it is time to put the offensive unit back on the field. Second Act has a call center that today can handle up to 1,000 calls a week, and management can sit down and train a provider’s staff on the product.
The unique thing about this product is that there are really two customers: the provider and the family. The family wins because they don’t have to make quick financial decisions like selling a house or securities and can worry about the other aspects of the move. The provider wins because the customer can move in faster and they can use the program as a marketing tool and not discount rates, which can have harmful, long-term financial effects.
The other difference with Second Act compared with the original version 20 years ago is that this is just the beginning. Loans to seniors moving into communities is the first step, but they really want to build a true retail bank for the 55+ market, something that does not exist right now. And, it is federally chartered and can operate throughout the country. It will be a bank that knows the issues that retired people have when it comes to banking, loans and investing, not to mention seniors housing. And that $500 million available now? If the demand is there that can easily be doubled or tripled. He’s baaaaack, and he means business.
