A CRITICAL REVIEW OF FINANCING OPTIONS
FOR RETIREMENT HOUSING
by
KEVIN MICHAEL HASSEY
B.S., Marketing
Boston College
Newton, Massachusetts
(1979)
and
M.S., Business Administration
Carnegie Mellon University
Pittsburgh, Pennsylvania
(1981)
Submitted to the Department of Urban Studies and Planning
in Partial Fulfillment of
the Requirements of the Degree of
Master of Science in Real Estate Development
at the
Massachusetts Institute of Technology
October 1987
S)Kevin
M Hassey 1987
The authors hereby grant to MIT permission to reproduce
and to distribute copies of this thesis document in whole
or in part.
Signature of Author
Department of Urban Studies hna Pladning, October 17,1987
Certified by
Marc Louargand, Visiting Associate Professor, Urban
Studies and Planning, Thesis Supervisor
Accepted by
Michael Wheeler, Chairman of Interdepartmental
Degree Program in Real Estate Development
'MACHUSETTS
INSTITUTE
OF TECHNOLOGY
JUL 29 1987
LBRARIES
Rotch
A__
ABSTRACT
This thesis focuses on the financing of retirement
housing. It presents a review of the industry, the major
financing options, develops a framework for analysis and
susequently presents a critical review of each option.
The market for retirement housing is large and growing.
The number of individuals over 65 has grown from 3 million
at the turn of the century to 28 million today. By the
year 2030, there will be 65 million individuals,
or one in five Americans, over 65 years of age.
Many individuals within this group require assistance in
daily living. This need for assistance has created a need
for specialized facilities which can provide the required
services. The facilities are typically 200 -300 units
and provide an array of services including social,
transportation and dining and other daily living services.
Lenders are reluctant to finance retirement housing. They
view the industry as relatively new and the product as
highly specialized with significant operational
complexity. Current and potential financiers include
conventional banks, FHA programs, tax exempt issues,
pension funds and syndications.
Success in raising funds for elderly housing has been
achieved primarily in three areas. More specifically,
fund raising appears to have been successful through
consumer based limited partnerships, conventional bank
lending when a lendee has a pre-existing relationship with
the bank and government insured FHA proposals. The cost
of funds generated has been high and reflective of the
risk associated with retirement housing. Positives and
negatives of each financing option are outlined in this
thesis and a developer should review them to determine
which financing option works best for his or her
particular organization.
Thesis Supervisor: Marc Louargand
Title:
Visiting Associate Professor of Urban
Studies and Planning
PAGE
TABLE OF CONTENTS
INTRODUCTION
3
OVERVIEW OF ELDERLY MARKET
4
CHARACTERISTICS OF ELDERLY
9
REAL ESTATE PRODUCTS SERVING THE ELDERLY
12
DISCUSSION OF FINANCING OPTIONS
-- OVERVIEW
18
-- CONVENTIONAL DEBT
20
-- FHA FINANCING
25
-- TAX EXEMPT FINANCING
29
-- PENSION FUND FINANCING
33
-- PUBLIC STOCK OFFERINGS
35
-- SYNDICATION
38
EXAMPLES OF FINANCING OPTIONS
-- OVERVIEW
40
-- CONVENTIONAL DEBT
42
-- FHA FINANCING
43
-- TAX EXEMPT FINANCING
44
-- PENSION FUND FINANCING
45
-- PUBLIC STOCK OFFERINGS
46
-- SYNDICATION
47
SUMMARY OF FINANCING
OPTIONS
CONCLUSIONS
48
55
1
SUMMARY OF TABLES AND FIGURES
PAGE
TABLES
TABLE
1:
"ELDERLY
HOUSING GROWTH BY SUB-GROUP"
TABLE 2:
"NEED BASED ELDERLY POPULATION GROWTH"
TABLE
"RENT
3:
CAPACITY
OF
THE
ELDERLY"
6
7
10
FIGURES
FIGURE 1:
"NUMBER
FIGURE 2:
"PERCENT NEEDING FUNCTIONAL
FIGURE 3:
"PROVIDER OF OPERATIONS SERVICES"
OF PEOPLE 65+"
2
4
ASSISTANCE"
5
14
INTRODUCTION
This thesis addresses
More
specifically,
questions about retirement housing.
it
options are available
"
Which ones are being
addresses
the
questions
"What
for financing retirement housing?",
well received in the marketplace?"
and "Which options make most
sense from the point of view
of the developer?".
An overview section presents a
a prelude
to the
discussion
summary of the industry as
of
financing options.
reviews the
market size, characteristics and
the
consumer,
target
differing types
of
concerns of
elderly
estate projects and development organizations.
3
It
real
OVERVIEW
The Elderly Housing Market
America is aging.
of 65 has
million to 28
increased nearly ten-fold from 3
million people.
65, and
Since 1900, its population over the age
2000, 35 million people
By
by 2030, when the
will be over
baby boomers of the
1950s and
1960s hit retirement age, the elderly population will have
more than doubled
nearly
one in
to 65 million people.
five Americans
will be
This means that
over 65
in 2030.
Details of this age distribution follow in Figure 1.
(1)
FIGURE 1
PROJECTED GROWTH IN SENIOR
POPULATION, 1985-2020
Millions
60
and Owr
50 Age 5 74
Agv 7561
10
0
1985
2000
1990
2010
220
American
Association
of
Administration on
Aging, U.S.
Department of
Source:
Human Services, 1984
4
Retired
Persons
and
Health and
The
elderly
"go-go"
market
(age
market
three
consists of
65-74),
75-84) and the "no-go" market
the
submarkets;
"slow-go" market
the
(age
The primary
(85 and older).
the need for assistance in
difference between segments is
Typical types of assistance include help in
daily living.
medicines.
Approximately
dressing, bathing
or taking of
7% of the "go-go"
market requires assistance.
Over twice
as many "slow-go" individuals require assistance (16%) and
over
one
(39%)
third
of the
"no-go"
market
requires
assistance in daily living as depicted in Figure 2.
(2)
FIGURE 2
Percent Needing Functional
Assistance, By Age: 1979-80*
40 -
30
-
20
10 -7%
3%
M
01%
0
45-64
18-44
Source:
American
Administration on
05-74
Association
Aging, U.
Human Services, 1984
5
75.84
of
85+
Retired
S. Department
Persons
and
of Health and
Growth in the elderly population
will
be
skewed
towards
the
during the next 25 years
"no-go"
specifically,
while the size
markets will
increase 24% and 42%,
now and the year 2010,
increase
by 130%
segment.
of the "go-go"
More
and "slow-go"
respectively, between
the size of the "no-go" market will
from
2.7 to
6.2 million
individuals.
After 2010, growth in the elderly population will begin to
skew back
towards the
generation begins
"go-go" elderly
to enter
as the
the retirement
baby boom
market.
distribution of growth is outlined in Table 1.
This
(3)
TABLE 1
ELDERLY HOUSING GROWTH BY SUB-GROUP
------------------------------------(millions of people - indicia versus base year)
YEAR
"GO-GO"
"SLOW-GO"
% CHG.
% CHG.
"NO-GO"
TOTAL
#
% CHG.
#
BASE
2.7
BASE
28.0
BASE
% CHG.
1985
16.7
BASE
1990
19.0
(114)
10.0
(116)
3.5
(130)
32.5
(116)
2000
19.4
(116)
11.6
(135)
4.9
(182)
34.9
(125)
2010
20.8
(124)
12.2
(142)
6.2
(230)
39.2
(140)
2020
30.0
(180)
14.3
(166)
7.1
(263)
51.4
(184)
Source:
American
Administration on
8.6
Association
Aging, U.
Human Services, 1984
6
of
Retired
S. Department
Persons
and
of Health and
double over
will
in daily living
in elderly needing assistance
The growth
growth will be skewed heavily towards the "no-go"
propensities
people needing
number of
now
for each
and
2020
Approximately 1.8
forementioned
we find
segment,
million
to
7.2
(50%)
to the
that
the
double between
assistance will
3.6
from
segment.
daily living
assistance in
to need
projected population
the
applying
when
specifically,
More
this
years and
five
next thirty
the
million
individuals.
of these people
will be
part of the "no-go" market while the remaining 1.8 million
individuals will be split
equally between the "go-go" and
"slow-go" markets as outlined in
Table 2.
TABLE 2
NEED BASED ELDERLY POPULATION GROWTH
(millions of people; changes versus base year)
"GO-GO"
YEAR
#
INCR.
"SLOW-GO"
#
"NO-GO"
#
INCR.
INCR.
TOTAL
#
INCR.
1985
1.2 BASE
1.4
BASE
1.0
BASE
3.6
BASE
1990
1.3
+.1
1.6
+.2
1.4
+.4
4.3
+.7
2000
1.4 +.2
1.9
+.5
1.9
+.9
5.2
+1.6
2010 1.5 +.3
2.0
+.6
2.4
+1.4
5.9
+2.3
2020 2.1 +.9
2.3
+.9
2.8
+1.8
7.2
+3.6
Source:
American
Administration on
Association
Aging, U.
7
of
Retired
S. Department
Persons
and
of Health and
Human Services, 1984
8
CHARACTERISTICS OF THE ELDERLY
The elderly do not move frequently, and when they do, they
do
1975 -
changed their residence between
40% of
17% of
Approximately
far.
not move
relocated
to a
movers
fact, most
In
state.
different
of those
elderly population)
the entire
4% of
move (or
1979 compared with
Only one fifth
the general population.
that did
elderly persons
(4)
stayed within their original county of residence.
The
that
reasons
satisfaction with
many years;
to family and
their home
do
are;
- a home
2) the
1)
they have
proximity of
friends; and 3) the
to "get around".
knowing an area and how
move
not
their current home
in for
typically lived
elderly
most
comfort of
Among the small
segment that do move a sizeable distance, the overwhelming
reason is to be closer to another family member.
As
a group,
the
wealth is primarily driven by
of households 70 and over
or more.
affluent.
elderly are
In terms of
Although
their
home equity, over one third
do have cash incomes of $15,000
home equity, over 70% of households
over 65 own their own home, with over 85% owning them free
If the
and clear.
invested
the
average homeowner
at
net proceeds
10%
potential incomes of $25,000 or more.
9
sold his
per year,
(5)
home and
23%
have
Table 3,
"Rent
explanation
Capacity of The Elderly",
of how
many
households
levels of monthly payments.
gives a further
can afford
various
For example, nationally, 12%
of the "slow-go/no-go" market (75+) can afford a rental of
$2200.
This percentage could
be increased by identifying
clusters of affluent elderly within a community.
(6)
TABLE 3
(millions of households)
HH that can afford payment greater than...
$800
$1000
$1200
$1500
$1800
$2200
AGE
65-69
3.3
2.6
1.8
1.3
.8
.7
70-74
2.5
1.7
1.3
.7
.4
.3
>74
3.4
2.6
1.8
1.1
1.0
.9
TOTAL
9.2
6.9
4.9
3.1
2.2
1.9
>65
51%
38%
27%
17%
13%
10%
>70
48%
35%
25%
15%
12%
9%
>75
46%
35%
24%
15%
15%
12%
AFFORDING HH
AS % OF TOTAL
HH IN AGE GRP
Source: Real Estate Research Corporation Analysis of Data
from Susan Wachter, University of Pennsylvania
10
The
Over two
68%
is
elderly market
skewed
are
widows
females.
female,
market is
thirds of the "slow-go/no-go"
those females
of
towards widowed
live
and 52%
alone.
Typically, these women might see family members who live
nearby several times a month, but have no desire to live
with them.
For perspective,
in retirement centers today,
women outnumber men by a ratio of four to one.
Interviews
the
with
indicate the
lifestyle.
elderly
Typically, they
about future
still lead
concerned with
a highly
active
into a retirement community only
inasmuch as that environment
lifestyle.
operators
facility
"go-go" segment is primarily
life and consider moving
active
and
(7)
While
enhances or compliments that
this group
might be
assistance in daily living,
concerned
this concern is
typically secondary to lifestyle issues.
Consumer
and facility
"slow-so/no-go"
planning for
desire
controlling
throughout their
as
a
way
currently
or perceives that
daily living
corner" and
either
to
it is
important.
maintain
that
the
their
in
"around the
They
have a
independence
a retirement facility
independence.
be rising property taxes
Secondary
and difficulties
in getting economical home maintenance assistance.
11
the
future.
needs assistance
this need is
lives and look at
of preserving
concerns might
interviews indicate
concerned about
is
market
group (75+)
This
operator
REAL ESTATE PRODUCTS SERVING THE ELDERLY
Real
for the
estate products
broadly into
elderly fall
three categories; retirement villages, congregate care and
life
While
care communities.
lifecare communities
are
heavily regulated due to their inclusion of a nursing home
, retirement
villages
and
congregate
communities
are
typically subject to significantly less regulation.
The retirement
usually
villages are planned communities
self-contained,
that are
age-segregated
housing
developments offering home ownership and rental units in a
leisure-oriented environment.
between
the ages
and
based programs
medically
These
of 55
facilities are
inability to
are
They tend to attract people
74 and,
not exceptionally
number due
decreasing in
provide for
in general,
their residents as
their
strong.
to their
they become
older and require additional services.
communities cater to
Congregate care
market.
Residents
the "slow-go/no-go"
highly active.
are ambulatory but not
Residents have their own apartment and most have kitchens.
Amenities include
room,
transportation,
activities.
assistance in
home on
daily food service in
site.
While
this
maid
Congregate
service
type of
organized
may
not have
communities are
12
and
facility
it does
daily living,
a central dining
provide
a nursing
almost always
rental communities.
Lifecare communities generally provide a continuum of care
with
housing options
cottages to
full
care
skilled nursing
range of
service,
ranging from
services
can
pricing programs.
units.
including
transportation and
facilities
independent, detached
have
They also
provide a
central dining,
organized activities.
either
rental
or
Endowment programs typically
maid
Life
endowment
have the
endowments take out construction lending, thereby carrying
no long term debt, while rental facilities typically carry
long term mortgages.
Services required for all elderly
can be broken into four
major groups; building maintenance services, recreational
services,
daily living
and
types of services are always
who provides
them.
The
health
services.
13
four
needed; the difference is in
following chart helps
distinction.
All
make this
FIGURE 3
SERVICES PROVIDED IN ELDERLY LIVING
AT HOME
ACTIVE COMMUNITY
CONGREGATE
LIFECARE
UPKEEP
SELF
FACILITY
FACILITY
FACILITY
RECREA-
SELF
FACILITY
FACILITY
FACILITY
SELF
SELF
FACILITY
FACILITY
SELF
SELF
SELF
FACILITY
BUILDING
TIONAL
DAILY
LIVING
HEALTH
SEVICES
Source:
and
"Trends
Strategies
American Health Care Association.
Length of
stay typically
Residents
average
community before
back
home.
10
years
of
1985, p.
at
an
Term
Care,"
4
of institution.
active
retirement
skilled environment or
congregate
care and
lifecare
4 and 15 years, respectively.
facilities average stays of
The abnormally
Long
varies by type
moving to a more
Residents
in
long stay in a
14
lifecare facility reflects
its
ability to
care
for the
elderly
in basically
any
mental or physical state outside that of acute care.
These
differences in
financing decisions
timing
differential
occupancy
average length
as it
overlapping of
is important
between
turnover.
can impact
that there
This
refinancing and
is
financing and
the facility at
of stay
important
any
because
major occupancy
risk by forcing it to absorb
likely
that
a
facility
major
the
voids puts
the risk of
refinancing and operational risks at the same time.
highly
be a
allowing
It is
refinancing
decisions and significant turnover to occur simultaneously
would find it difficult to refinance the project.
There
are currently
vying to
three
groups of
capture the retirement home
hospitals,
hotel companies
development community,
--
major
larger
and
individuals
business.
developers.
there are two types
developers with a national
They are
Within
the
of developers
horizon and smaller
developers looking on a much more localized basis.
Hospitals
are becoming
actively
housing for three reasons.
housing
has
therefore,
a
is a
large
involved in
retirement
First, they believe retirement
medically
logical extension
based
component
of their
and
profession.
Second, they believe it will diversify their profitability
base --
a
base which is falling due to
15
fewer and shorter
stays
in hospitals.
Third, the
hospitals believe
bring significant
value to
a retirement venture
of surplus
land and
goodwill within
terms
they
both in
a community.
Hospitals most often joint venture with a developer and an
example
of
such
an
General
Hospital/
arrangement
Cabot,
is
Cabot and
the
Massachusetts
Forbes
project
in
actively involved
in
Westwood, Massachusetts.
Hotel
companies are
retirement housing.
hospitality based
highest
also becoming
They view the business as principally
and therefore,
value added
to a
believe they
bring the
retirement facility.
The two
major hotel companies in the field are Marriott and Hyatt.
Unlike its
hotel operations,
developer and
operator in
joint venturing
and will act
Marriott is acting
retirement housing.
with developers on
as operator only.
a city by
While
as both
Hyatt is
city basis
these hotel chains
have only a handful of "in the ground" retirement projects
active, they are committed
of
future activity
to significantly higher levels
in both
the lifecare
and congregate
care businesses.
Developer involvement
in retirement housing
demographic attractiveness of
the elderly market compared
with the
relative unattractiveness
the real
estate business.
of other
Large national
tending to develop prototypical
16
reflects the
segments in
developers are
facilities and expand the
concept
broadly.
An
"Chambrel" retirement
example
facilty --
with independent, assisted and
throughout the U.
the
S. and
"Chambrel" name.
tend
to
have
of
this
a large
is
Oxford's
scale facility
nursing care to be located
marketed at all locations under
Additionally, national
specialized
subsidiaries
developers
to
operate
facilities and therefore, tend to build with the objective
of long term ownership.
Smaller developers tend to start from the "bottom up" on a
project
by
project
basis
and
typically
operational expertise.
Smaller
operate
themselves or
the
facility
not
have
developers may attempt to
venture with an operating company.
17
do
contract
out/joint
FINANCING OF ELDERLY HOUSING
OVERVIEW
Financing of elderly housing
industry grows,
it is
is evolving quickly.
attracting significant
attention from the financial
is resulting
However,
breadth
of attention
retirement
housing
of financing programs.
realization is
may
amounts of
community and this attention
in a sizeable number
an important
As the
bode well
financing,
that although
for
there
the future
are
few
actually financing retirement housing today.
the
of
programs
The programs
that are being developed fall broadly into two areas; debt
and equity programs.
Debt
is
currently
attention
for a
Reform Act of
investor,
and
attractive.
receiving
variety
a
significant
of reasons.
Although the
1986 has increased the cost of
hence
This
the
developer,
attractiveness
amount
it
of
Tax
debt to the
still
remains
reflects
the
favorableness of interest rates today vis-a-vis historical
rates and the perception that the developer can maintain a
larger
degree
of
equity financing.
through
project control
through
debt
versus
Examples of debt are financing achieved
commercial banks,
FHA
coinsurance lending,
exempt bonds and pension fund financing.
18
tax
Equity offerings remain the preferred way of raising funds
for
some institutions.
large
Typically,
entities
raising
simultaneously.
Examples
companies
money
these companies
for
multiple
of equity financing
issuing incremental
stock
are
projects
are public
(ie, Marriott)
and
national syndications.
A discussion
of
each
option is evaluated
financing vehicle
follows.
in three critical areas;
of funds to the developer;
Each
1) the cost
2) the constraints placed upon
the developer by the financier; and 3) the agency costs or
organizational costs associated with pursuing and adhering
to the guidelines of each financing option.
an
application
discussion
and
of
each
then
a
financing
summary
presented.
19
option
and
An example of
follows
the
conclusions
are
DEBT FINANCING
COMMERCIAL BANKS
OVERVIEW they
Interviews with
have a
housing.
sizeable
However,
commercial banks indicate that
amount of
interest in
they currently
business, perceive it to be
retirement
know little
about the
high risk and are approaching
it cautiously.
The first
as
to
decision commercial banks face
what area
application.
of
Should
the
group.
should handle
forge entirely
In most
health care lending
important as it may cause
new allegiances
loan
be handled
health care lending group?
decision has been the
This is
the
a retirement center loan
by the real estate or
instances, the
bank
is the decision
a developer to
in pursuing this
type of
financing.
Although
the banks
center lending
interviewed
to date,
under consideration.
reviewing these
the
risk profile
satisfactory
the
done no
several proposals
The objectives
proposals were; 1) to
outlined
return; 3)
client base and
had
by
2)
the bank's
lending position
20
banks while
place money within
generate new clients; and
bank's competitive
were actively
of the
the bank;
to service
retirement
to earn
a
existing
4) to maintain
vis-a-vis other
banks in the area.
The banks were especially
relationships of
proposals
their existing
received
companies
were
The banks
proposals
making the
hospital
were as
refusal
take
the
whom the
highly and
concerned
about
not
More specifically, the
would cause
retirement
institution and that this might
through which all of
development
ventures with
loans as making them.
to
from
these relationships
reasons,
believed a
Among the
successful, longterm relationships.
clearly valued
competitive
banks
client base.
and developer/hospital
banks had established
for
concerned about maintaining the
the developer
project
to
or
another
become the point of entry
the developer's or hospital's future
projects would be financed by the competitive bank.
The
banks
were
particularly
center lending proposals.
Due
the newness of the industry,
time
isolating the
proposals.
position
quickly
industry
by
retirement
to lack of information and
they were having a difficult
key criterea
with which
to evaluate
Consequently, in the short term, the banks had
decided to minimize their
only to
frustrated
their existing
in
any
deals
about the
was
going
lending position by;
client base; 2)
entered into;
industry
to
be
business.
21
as they
a
major
1) lending
minimizing their
and
3)
learning
were convinced
source
of
the
future
As
they see
major
the proposals
reservations
First, they
about
lending on a
of occupancy.
of little value
banks have
housing
retirement
see themselves
any assurance
elderly
today, the
They see
a
projects.
project without
pre-sales as being
(although they do still
consumers have
three
require them) as
legal right
to
and often
do
withdraw after having entered into any such obligation.
frightening realization
to banks
situation
endowments
where
unidentified
the
residents
are
is that this
of
the
construction loan.
Second, the banks are
retirement
are
centers
alternate use and this
Third, they
specialized
creates a
these
takeout
A
as
to
yet
their
concerned that
products
with
no
makes them extremely apprehensive.
are concerned because
they know it
would be
difficult to recoup their investment via foreclosure as it
would create a major negative public relations incident in
the community.
COST OF FUNDS that
Interviews with commercial banks indicate
commercial banks
charge
finance retirement housing.
retirement
other
types
compensated
housing as
of
real
minimal at
significant premium
to
More specifically, they view
a substantially
higher risk
estate projects
and
accordingly.
banks willing to finance
a
Additionally,
want
the
than
to
be
number
of
retirement housing appears to be
this time, and
those that do
22
put significant
constraints on usage of funds.
CONSTRAINTS -
The major constraint commercial banks put on
retirement housing is the type
willing to provide.
financing
and
financing.
of financing that they are
Typically, they provide construction
are
leary
From their
of
providing
long
perspective, providing
financing significantly increases
sometime during
any
term
long term
the risk of foreclosure
the life of the
loan and this is
a risk
they are usually unwilling to take.
The banks
impose significant constraints
lending for
retirement housing.
1) the requirement that
50%)
of
units
commencement;
prior
to
be
2) that
4) that
pre-sold
prior
a specific
3)
stringent are;
control
be minimized
the bank taking
to
construction
takeout be
and a guarentee of
bank participation
financing with
The most
a significant percentage (usually
construction;
construction contract
on construction
identified
over
type
of
completion;
and
through layered
the "last in,
first out"
position.
ORGANIZATIONAL COSTS - The organizational costs associated
with securing bank financing are frontloaded.
The biggest
challenge is generation of the necessary pre-sales.
typically involves
opening of
development of extensive
a pre-sale
office and
23
hiring a
This
site models,
sales staff.
This process may require over 12 months of project time.
Other
costs
center
around
the
structuring
and
follow-through on a fairly complicated financial deal.
example of
this is the role
particular
proposal
from
venture.
The venture
endowment
based lifecare
major client of
a bank proposed taking
a
developer/hospital
is proposing
the bank.
center
building a
and the
To do business
An
in a
joint
300 unit
hospital is
a
with the bank,
the venture first had to generate 80% of its financing via
a bond
issue.
Then,
after an
involved
time-intensive negotiation, the venture
paperwork
and
and the bank were
able to structure a deal where the bank agreed to take the
remaining 20% position with priority over the bondholders,
a takeout identified, pre-sales completed and construction
performance guarenteed.
24
FHA INSURED MORTGAGES
- There
OVERVIEW
today
that
are two
are designed
elderly housing.
federal programs
to
assist
The programs
Urban Development
areas -those
programs for
for
nursing
analysis is
with
FHA
(HUD)
the
in the
and broadly
(#232).
programs
of
the remainder
have
fall into
been
two
(#221.d.4) and
The
on the retirement center
focus
of
the Department of Housing
retirement centers
homes
funding
are offered by the Federal
Housing Authority (FHA) through
and
in existence
focus
of
this
product, consistent
of
evolving
the
over
thesis.
time.
More
specifically, HUD recently began approving private lenders
to underwrite
HUD's
coinsured FHA loans on
objective is
to
shift
retirement housing.
the mortgage
underwriting
responsibility from the public to the private sector.
Once
a
loan
request
has coinsurance
eligible
for
mortgage
backed securities.
AAA
rated Ginnie
Mae
approval,
it
securitization
At this
point, 80%
is
via
of the
loan amount is insured by FHA and the remaining 20% by the
private sector coinsurance lender.
COST OF FUNDS
- The cost of funds under
in line with that
FHA financing is
of conventional financing.
FHA mortgage placed with Ginnie
25
Although an
Mae will most likely have
*
a lower
interest rate
interest
versus
rate differential
coinsurance lender
insurance
a
is
conventional loan,
typically
offset by;
fees (usually 2.5-3.5 points);
fees (50
basis
points
on declining
the
1)
2) FHA
schedule
balances); and 3) Ginnie Mae fees (25 basis points).
The
advantage of
rate per
these
se, are multiple.
loans
are
providers of
More
this progam,
very
although not
First,
and most importantly,
available at
financing are
specifically, there
a
leary of
are
in interest
time
when
most
retirement housing.
currently
69 FHA
insured
projects "in the ground" around the country at a time when
most other
in
the
financing vehicles for retirement
formulation
stage.
housing are
Additionally,
they
are
available to developers without an extensive track record.
There
are
mortgages
other
are
counterparts;
2) loan
more
1)
liberal
liability -
term - FHA
financing
30
sources; 3)
value financing
sources; and 4) inclusion
relevant
cost
- FHA
FHA
coinsurance
than
their
FHA loans
provides 40 year
vis-a-vis
conventional
loan to
areas where
year
conventional
are non-recourse;
assumable permanent
non-assumable
loan amount
versus 70-75%
-
FHA
from
insures 90%
from conventional
of developer profitability as a
allows
included as a reasonable
approved
a
developer profit
to
be
project cost versus conventional
sources which may or may not allow its inclusion.
26
CONSTRAINTS - There are
FHA
insurance.
They
many restrictions associated with
fall
primarily into
project type,
financial, amenity and
In
of
project
will
not
terms
program
type, the
insure
the areas
timing constraints.
FHA
retirement
facilities
fees or facilities
extensive medical
(NOTE
- the
center
which
endowment/initial entrance
services
of
charge
which have
separate nursing
home FHA program exists for facilities devoted exclusively
to
nursing
care).
As
a
direct
result
of
these
constraints, the FHA does not insure life-care facilities.
The
financial constraints
designed
to
insure that
are threefold.
the
developer
The first
has a
is
sizeable
financial reserve.
Specifically, the FHA
requires that;
1) developers hold
a reserve equal to six
months of debt
service or 200% of the projected operating deficit (NOTE If
projected
operating
deficit equals
months' debt service, BOTH
operating deficit
held
until
maintained
for 90
exceeds
debt service
occupancy has
days (The
been
reserve be
reached
reserve requirement
covered with cash, a letter of credit or a bond).
the FHA
six
reserves are required); and 2)
escrow and/or
sustaining
or
requires laborers on
paid "prevailing" wages (most
FHA insured projects
can be
Second,
to be
often synonymous with union
wages) as outlined in the Davis Bacon Act.
27
and
*
The
final
financial
mortgage amount
regional
constraint
per unit.
basis and
average cost in the
per
unit
and
FHA
This limit
is currently
unit in the Boston area.
is
limitation
is adjusted
$70,000 for
on
on a
an average
High land costs have driven the
Boston area to approximately $100,000
made
this
last
constraint
the
most
controlling one in pursuing FHA financing in this area.
Amenity
constraints
stringent.
imposed
by FRA
The restrictions are
must have
a kitchen
burner); 2)
financing
must have an
refrigerator and
individual bathroom;
and 3) the unit must be of a "liveable" size.
Timing constraints have traditionally
in
FHA financing.
applications
receive
When
itself,
approval.
the
it
not
as follows; 1) each unit
(including a sink,
each unit
are
(8)
been a major factor
government was
took approximately
However,
with
the
processing
a
year
advent
to
of
coinsurance, leadtimes have been reduced to 60 to 90 days.
ORGANIZATIONAL
COSTS
required to secure FHA
loaded.
processing
The
-
Administrative
information
is exhaustive,
and
and
time
financing is significant and front
completed,
required
during
particularly
information requested by FHA.
approved
costs
the market
area
However, once a project is
maintenance
requires little time or paperwork.
28
project
of
FHA
financing
TAX EXEMPT BONDS
- Tax
OVERVIEW
retirement
exempt
center
funding is
financing.
a
growing source
However,
the
of
benefit
associated with tax exemption has decreased as a result of
the
decrease in
Reform Act of
marginal tax
1986.
bond financing.
issued
by
particpate
There are three types
First, there are project
non-profit
agencies
in
non-profit
their
Second, there
bonds
housing
authorities on
issued
agreeing to set
by
specific bonds
hospitals
bond funds issued by
to
ventures.
exempt industrial
agencies
of for-profit
income individuals.
Tax
of tax exempt
retirement
non-profit
behalf
as
by the
aside some fixed percentage
and moderate
blind pool
such
are project specific tax
revenue
low
rates created
such
as
developers
of units for
Third, there
are
for-profit companies for
investment in ventures with non-profit partners.
Project specific
bonds are
blind pool counterparts.
typically smaller
Whether
than their
issued in the public or
private sector, they originally have only the backing of a
priority
lien against
were raised.
the property
for which
This project specific backing
the funds
is typically
not substantial enough to generate significant interest on
Wall Street and
or additional
creates a need for
credit enhancement --
backing, typically by an
29
insurance company
or bank --
The
prior to sale to the investment community.
financial
providing
community
credit
has
enhancement
retirement housing bonds.
are
"junk"
absorbed
in
the
apprehensive
for
project
about
specific
Without this enhancement, bonds
and require
to
been
a
high
yield
in
order
to
be
marketplace.
Tax exempt blind pools
differ sizeably from their project
specific counterparts.
First, by definition, the projects
are
unknown
at
the
time
participate in the venture.
participate directly in a
rather in a
the
investor
decides
to
Second, the investor does not
specific tax exempt project but
fund which subsequently invests
in a diverse
set of tax exempt ventures.
Third, the partnership shares
are not enhanced but rather
backed solely by the strength
of the participating projects.
is
the Oxford
invests solely
Tax Exempt
in the
An example of a blind pool
Fund Limited
Partnership.
company's tax exempt
It
ventures and
pays 8.25% on a priority basis and can return a ceiling of
16% with superior performance of its facilities.
COST OF FUNDS - The cost
entity raising
reflects market
tax exemption
are
of funds to the project specific
funds through
levels less
tax exempt
bonds typically
the benefit
associated with
plus the cost of
no retirement
center
enhancement.
examples
30
While there
of enhancement
cost
multi-family non-retirement
available,
enhancement costs
average 2 to 4 points plus 125 to 200 basis points.
The
cost of
components;
1)
interest
unconditionally
associated
with superior
underwriting a
pool operator
enhancement
payments
which
2)
incremental
guaranteed;
performance;
national issue.
have
and
The ability
to successfully field his
costs most
has three
pool typically
a blind
funds in
been
returns
3) costs
of
of the blind
offering without
likely reflects
the geographical
diversity already built into a national offering.
- The
CONSTRAINTS
non-profit entity
business
constraints
arising from
raising tax exempt funds
entity raising funds
on its own behalf
hospital
building
account),
its constraints are simple
a
retirement
vary.
a
For an
(ie, a non-profit
center
--
for
its
own
it has to operate
the created retirement facility as a non-profit entity.
For
the
for-profit
through a
operator raising
local agency such
constraints
can
be
as a housing
significantly
mentioned earlier, this operator
low and
moderate income
requirement
differs
from
requirements
may
elapse
deal to
may also
tax
more
well before
State
be significant
31
money
authority, the
stringent.
As
has to include units for
individuals and
deal.
exempt
bond
families.
maturity
or locally
(ie, a
This
and
imposed
ceiling on
prices of market rate units)
and most often represent the
second major constraint for this type of program.
The major business constraint for a blind pool operator is
that he is
made
limited in the type of investment
with the
proceeds from
the blind
that can be
pool.
A
second
constraint, which is true for all tax exempt financing, is
that pressure
flows
of
exists to
current
generate smooth
income
from
and significant
operations
to
satisfy
bondholder/limited partner obligations.
ORGANIZATIONAL COSTS - The organizational costs associated
with tax
reason
exempt financing are substantial.
(ie, non-profit
status, low
the government has bestowed a
For whatever
income designation),
tax exemption status and it
wants to insure that the developer fulfills his end of the
deal.
As a
result,
there is
paperwork associated with tax
also a
a
significant amount
exempt financing.
significant amount of effort
of
There is
required to maintain
files and correspondence with bondholders/limited partners
throughout the life of the financing.
32
PENSION FUNDS
OVERVIEW
-
Pension
funds
can
development, takeout or both.
such financing to date.
provide
funding
for
They have not provided any
However, interviews with pension
fund advisors indicate they believe retirement housing may
have a place as a high
risk component of a pension fund's
real estate portfolio.
They
are approaching the business
cautiously and prefer to be involved in projects on a long
term basis.
the key
The pension fund advisors interviewed believe
variables to scrutinize in
housing proposals are
evaluating retirement
micro-market penetration issues and
experience of the proposed management company.
COST OF FUNDS projects
are
Since the pension funds believe retirement
high
risk,
compensated accordingly.
of
two forms;
premium;
1)
or 2)
they believe
should
This compensation can
straight debt
debt at
they
at
a moderate
be
take one
a significant
interest rate
rate
and a
significant equity kicker.
CONSTRAINTS
advisors
is
- The
that
decisions only and
the
development
general attitude
they
want to
be
of the
involved
want to leave day to
team.
Consistent
pension fund
in
major
day decisions to
with
this
mindset,
construction financing constraints might involve selection
of
a
market
review
firm, a
33
construction
firm
and
a
construction completion guarantee.
the key variables
On
a long term basis,
for the pension fund is
control of the
management company and any refinancing of the facility.
ORGANIZATIONAL COSTS - The
required
to secure
administrative effort and time
pension
fund financing
is not
that
significant as these deals rely more on relationships than
extensive paperwork detail.
On a going basis, the venture
is required to report on the
pension fund
status of the project to the
advisor who in turn,
aggregates information
and forwards a report to the pension fund itself on all of
its real estate holdings.
34
EQUITY FINANCING
STOCK OFFERING
There are two types of companies financing congregate care
retirement housing
through public stock
offerings; large
organizations such as the Marriott hotel chain and smaller
companies
devoted
exclusively
to
operation of retirement housing.
the
development
and
An example of the latter
is the Forum Group of Indianapolis, Indiana.
OVERVIEW
-
full faith
Stock
offerings are
and credit of the
issuing organization.
are liquid investments and are
the
three
major
the
developer
by the
They
typically traded on one of
exchanges.
perspective, the strength
provides
typically backed
From
a
real
of a stock offering
an opportunity
to
estate
is that it
raise
funds
through access to the broad based consumer market.
COST
OF
reflects
-
FUNDS
the
Cost of
strength
funds
of
the
varies
issuing
and
typically
organization.
Marriott is viewed as a market leader who has consistently
generated
superior returns
expected
returns
Conversely,
the
to investors,
reflect
Forum
this
Group,
retirement housing company, has
an admittedly
and therefore,
reduction
a
newly
in
established
a minimal track record in
risky business and therefore,
must offer a
significantly higher return to attract investors.
35
risk.
CONSTRAINTS -
There are two major
with public
offerings.
shareholder
for current
The
constraints associated
first is
income.
the demand
This
achieved quickly
in retirement housing
ventures in this
area may be a drain
other
company
operations,
thereby
of the
is typically
not
and consequently,
on profitability of
reducing
short-term
returns to the shareholder.
In a
company devoted
this inability
exclusively to
to generate
impact share price.
current income
An example is the
issued stock
last year
at $12
profits
to
lease-ups,
due
perceived
to
long
be
retirement housing,
a
successful
can adversely
Forum Group which
share, has
by
and,
produced no
although
retirement
still
housing
standards, has seen its share price plummet to its current
level of $5 a share.
The
second constraint
enormous
value in
major public
will test
has
a
a company's
companies.
Marriott, which
reflects the
For
attaches an
for years or
successful
entering the market.
need to
protect the
goodwill and
impacts the
example, a company
enormous value to
until it is virtually
formula
for
elderly
such as
its name,
certain it
housing
before
This is because it cannot afford the
negative goodwill associated with a project failure.
36
ORGANIZATIONAL
COSTS
-
Much
organizational costs vary by
of
the
company.
A
typically raise funds
like the
such
as
in bulk and issuing
funds,
Marriott
would
costs would be
However, a smaller company such
as Forum Group
would spend 8-15% of its
costs.
companies
Both
of
the size and earning history
company
3-5% of the funds raised.
cost
would
incur
issue on issuing
the
cost
communicating with its shareholders on a regular basis.
37
of
SYNDICATION
OVERVIEW -
Syndication of
becoming
a
highly
successful
retirement
housing.
Partnership
(NHP)
in
selling
its
Partnership.
The
limited partnership
For
way to
example,
raise
NHP
funds
the National
is currently enjoying
$175
million
both
retirement housing at
a rate of $750,000 a
by
typically backed
the
issue
and
by the
many
are
Housing
taxable
and is currently raising
financed
Housing
Retirement
issue targets
for
enormous success
non-taxable investors
syndications are
shares is
and
funds for
day.
(9) The
projects being
typically
not
publically traded and hence, reasonably illiquid.
COST OF
with
FUNDS -
those
Private syndications
of
conventional
funding.
financing represents a tradeoff
the positive
versus
of being able
the
negative or
compensate for
syndication
This
to reach the
premium
is
in line
form
of
for the developer between
that
investment illiquidity.
compensation
costs are
the NHP
consumer market
must be
paid
An example
syndication
to
of a
which
offers investors a 13% return. (10)
- The
CONSTRAINTS
appear
with
to be
business
twofold.
syndication funds
return the
constraints of
First,
need to
promised returns
38
syndications
the facilities
purchased
generate the
funding to
to investors each
and every
year.
This can be difficult
retirement housing.
is
make
in a business as volatile as
Second, the management of the company
reasonably constrained
with syndication
as to
funds.
the investments
For example,
it can
the NHP
is
constrained to invest solely in rental retirement housing.
Investors
typically
require
this
specificity
before
surrendering the liquidity of their investment funds.
ORGANIZATIONAL COSTS - The organizational costs associated
with syndication are primarily
threefold;
cost associated with structuring the
marketing the
syndication --
1) the time and
deal; 2) the cost of
typically 10%
of the amount
raised; and 3) the cost of communicating with the investor
on a regular basis.
39
COMPARISON OF FINANCING OPTIONS
The following pages illustrate
of
the financing
specific type of
options.
the implementation of each
Each page
is
financing and the deal
devoted to
a
is held constant
across types of financing in order to isolate differences.
The hypothetical development is a 300 unit congregate care
facility.
It costs $28,500,000
$95,000 per unit.
average for
to build or approximately
It is a luxury development and rents on
$2,250 per unit
per month.
For
simplicity, we assume
that it is occupied
in all
specific assumptions
each
options.
option
The
are
outlined
purposes of
after one year
pertaining to
immediately
below
their
respective financial analyses.
The rates of return are not significantly different across
most financing
that
there
types.
However,
are significant
returns are being generated
syndications are
it is important
differences
as
to note
to how
across options.
the
For example,
generating their return from
fees while
conventional debt and other options generate their returns
primarily through increased backend value.
The one option that does
other
public
returns is
that
stock offerings.
provide a lower return vis-a-vis
of
facilities supported
In
40
our example,
through
this type
of
financing generated
a 14%
for other
I believe
options.
company being
of
a
return versus a
this is due to
less aggressive in generating
public syndication
such
disposition fees.
41
20-30% return
as
the public
typical fees
organizing and
asset
TYPICAL RETIREMENT FACILITY
CONVENTIONAL FINANCING - 12% INTEREST WITH ONE POINT
YEAR I
YEAR 0
INCOME
8ROSS INCOMJfE
LESS VACANCY (4Y."
NET INCOME
YEAR 2
YEAR 3
YEAR 4
YEAR 5
$8,100,000 $8,535,000 $8,930,250 $9,76,763
$324,000
$340,200
$357,210
$375,071
$7,77t,000 $8,164,800 $8,573,040 $9,001,692
$9,845,601
$393,824
$9,451,777
$5,132,160
$6,238,173
EXPENSES
661 OF NET INCOME
AVAILALE FOP DEBT
$5,388,768 $5,658,206 $5,941,117
2,4,84$2,776,032 $2,914-,84 $3,060,575
DEBT
PRINCIPAL, INTEREST
POINTS
COINSURANCE
ENHANCEMENT
ISSUANCE FEES
OTHER
PRE TAX CASH FLOW
TAX BENEFIT (28v)
AFTER TAX CASH FLOW
($3,156,663) ~$3,156,663) ($,156,6631 ($3,156,6~3~
($255,000
($3,000,000)
($767,823)
$214,990
($552,833)
($380,631)
$106,577
($274,054)
($241,829)
$67,712
($174,117)
($96,0B8)
$26,905
($69, 183)
($3.
16
)
$56,941
($15,943)
$40,998
SALE
SALE PRICE
PAYOFF
PRE-TAX SAIN
TAX LIABILITY
$40,170,051
($23,623,240)
$16,546,811
($4,373,614)
NET SALE PROCEEDS
$12,173,196
NET CASH FLOW
INTERNAL RATE RETURN
($3,000,000) ($552,833)
($274,054)
0.269
ASSUMPTIONS
1.300 UNIT FACILITY
2. FACILITY COSTS $28.5 MILLION OR $95,000/UNIT
3. DEVELOPER HAS $3.0 MILLION INDEAL
4. RENT AVERAGES $2250/MONTH; GROWS 5% ANNUALLY
5. EXPENSES --66% OF REVENUES, CONSISTENT WITH L&H STUDY
FACILITY
M.
OCCUPIED ONE YEAR AFTER DEVELOPER INPUT OF FUNDS
7. INTEREST RATE 12% WITH ONE POINT
8. CAP RATE ON RESALE - 8%.
9. BENEFITS FROM TAX LOSS REALIZED AT DISPOSITION
10. DISPOSITION OCCURS AFTER YEAR 5
42
($174,117)
($69,183) $12,214,194
TYPICAL RETIREMENT FACILITY
TYPICAL FHA FINANCING - 11% INTEREST WITH 3 POINTS AND INSURANCE FEES
YEAP !
YEAR 2
YEAR 3
YEAR 4
YEAR 5
INCOME
$8,1 000 $8,505,000 $8,930,250 $9,376,763
$340,200
$357 ,10
$375,071
$324, 000
$7,776,000 $8,164,800 $8,573,040 $9,001,692
$9,845,601
$393,824
$9,451,777
66 OF NET INCOME
$5,132,160 $5,388,768 $5,658,206 $5,941,117
$6,238, 173
AVAILABLE FOPDEE T
$2,643,840 $2,776,032 $2,914,834
$3,060,575
$,213,604
GROSS INC0ME
LESS VACANCY (4%)
NET INCOE
EXPENSES
DEBT
PRINCIPAL, INTEREST
POINTS
COINSURANCE
ENHANCEMENT
ISSUANCE FEES
OTHER
PRE TAY CASH FLOW
TAX BENEFIT (28%*1
AFTER TAX CASH FLOW
($2,93, 127 ($2,933,127)($2,93,127)($2,93,127)
($720,000)
($199,986' ($199,986) ($199,986) ($199,986)
($,000,000 ($1,209,273)
$338, 596
($870,677)
($2,933,127)
($199,986'
($357,081)
($218 ,279)
$99,983
$257,098)
$61,118
$20,311
$80,491
($22, 537)
($157,161)
($52,227)
$57,954
($72,538)
SALE
$40, 170,.051
SALE PRICE
PAYOFF
PRE-TAX SAIN
TAX LIABILITY
($23,623.240)
$16,546,811
($4,373,614)
$12, 173,196
NET SALE PROCEEDS
NET CASH FLOW
($3,000,000)
INTERNAL RATE RETURN
($870,677)
($257,098)
($157,161)
0.253
ASSUMPTIONS
1.300 UNIT FACILITY
2. FACILITY COSTS $28.5 MILLION OR $95,000/UNIT
3. DEVELOPER HAS $3.0 MILLION IN DEAL
4. RENT AVERAGES $2250/MONTH; GROWS 5% ANNUALLY
5. EXPENSES --66% OF REVENUES, CONSISTENT WITH L&H STUDY
6. FACILITY OCCUPIED ONE YEAR AFTER DEVELOPER INPUT OF FUNDS
INTEREST RATE 11% WITH THREE POINTS AND INSURANCE FEES
8. CAP RATE ON RESALE - 8%.
9. BENEFITS FROM TAX LOSS REALIZED AT DISPOSITION
10. DISPOSITION OCCURS AFTER YEAR 5
43
($52,227) $12,231,150
TYPICAL RETIREMENT FACILITY
TYPICAL TAX EXEMPT FINANCINS - 8.25% INTEREST NITH 3 POINTS AND ENHANCEMENT COiTS
YEAR 0
YEAR 1
YEAR 3
YEAR 2
YEAR 4
YEAR 5
INCOME
$7,200,000 $7,416,000 $7,638,480 $7,B67,634
$317,520
$333,396
$283,000
$302,400
$6,912,000 $7,257,600 $7,620,480 $8,001,504
$8,103,663
$350,066
$8,401,579
661 OF NET INCOME
$4,561,920 $4,790,016 $5,029,517
$5,545,042
AVAILABLE FOR DEBT
$2,350,)80
GROSS INCOME
LESS VACANCY (4'%
NET INCOME
EXPENSES
$5,280,993
$2,467,584 $2,590.963 $2,720,511
DEBT
($2,318,738$2,3i8,73)$2,318,78)$2,318,738) ($2,318,7381
PRINCIPAL, INTEREST
POINTS
COINSURANCE
ENHANCEMENT
ISSUANCE FEES
OTHER
PRE TAX CASH FLOW
TAX AT 281
AFTER TAX CASH FLOW
($765,000)
($491, 853
($49,85
($205,424:
$148,846
$41,677
($528,234)
$107,
($v,000,000) ($733,658'
16 9
($491,853)
($491,853)
($491,853)
$272,225
$76,223
$196,002
$401,773
$112,497
$289,277
$537,799
$150,584
$387,215
DISPOSITION
$35,706,712
SALE PRICE
PAYOFF
PRE-TAX GAIN
TAX LIABILITY
($23,623,240)
$12,083, 472
($3,383,372)
NET SALE PROCEEDS
NET CASH FLOW
INTERNAL RATE RETURN
($3,000,000) ($528,234)
$107,169
0.238
ASSUMPTIONS
1.300 UNIT FACILITY, 20% OF UNITS TO MODERATE INCOME
2. FACILITY COSTS $28.5 MILLIOLION OR $95,000/UNIT
3. DEVELOPER HAS $3.0 MILLION ON IN DEAL
4. RENT AVERAGES $2000/MONTH: INCREASES 3% ANNUALLY
5. EXPENSES --66% OF REVENUES, CONSISTENT NT WITH L&H STUDY
6. FACILITY OCCUPIED ONE YEAR AFTER DEVELOPER INPUT OF FUNDS
7,. INTEREST RATE 8.251 WITH 175 BASIS POINT ONGOING ENHANCEMENT COST
8.CAP RATE ON RESALE - 81.
9. BENEFITS FROM TAX LOSS REALEALIZED AT DISPOSITION
10. DISPOSITION OCCURS AFTER YEAR 5
11. TAX RATE IS28% UPON DISPOSITION
44
$196,002
$289,277
$9,087,315
TYPICAL RETIREMENT FACILITY
TYPICAL PENSION FUND FINANCING - 11% INTEREST RATE WITH 501 BACKEND PARTICIPATION
YEAR 2
Y
YEAR 0
YEAR 4
YEAR
YEAR 5
INCONE
GROSS INCOME
LESS VACANCY 14l)
NET INCOME
$8,10,000 $8,505,000 $8,930,250 $9,7767
$340,200
$357,21
$775,071
$324,000
$9,
001,692
$2,573,040
164,800
$7,776,000 $8,
$9,845,601
$393,824
$9,451,777
EXPENSES
661 OF NET INCOME
$5,132,160 $5,388,768 $5,658,206 $5,941,117
$6,238,173
AVAILABLE FDP DEBT
$2,643,840 $2,776,02 $2,914,84 $3,060,575
DEBT
$3,11050,64, f$3115,6641 $3,105,6641 $3,105,664) ($3,105,664)
PRINCIPAL, INTEREST
POINTS
COINSURANCE
ENHANCEMENT
ISSUANCE FEES
OTHER
PRE TAX CASH FLON
TAXES
AFTER TAY CASH FLOW
($1,500,000) ($461,824) ($329,632)
$92297
$129,311
($332,513) ($237,335t
($190,830)
$53,433
($137,398)
($45,089)
$12, 625
($32,464)
$107,940
($30,223)
$77,717
SALE
$40,170,051
SALE PRICE
($23,623,240)
PAYOFF
PRE-TAX GAIN
TAX LIABILITY
$16,546,811
($4,373,614)
$12,173, 196
NET SALE PROCEEDS
NET CASH FLOW
INTERNAL RATE RETURN
($1,500,000)
$332,513)
($237,335)
0.252
ASSUMPTIONS
1.300 UNIT FACILITY
2.FACILITY COSTS $28.5 MILLIOLION OR $95,000/UNIT
3. DEVELOPER HAS $1.5 MILLION INDEAL
4. RENT AVERAGES $2250/MONTH; INCREASES 5'.ANNUALLV
5. EXPENSES -- 66% OF REVENUES, CONSISTENT WITH L&H STUDY
6. FACILITY OCCUPIED ONE YEAR AFTER DEVELOPER INPUT OF FUNDS
7. INTEREST RATE 11 WITH 50% BACKSIDE PARTICIPATION
8. CAP RATE ON RESALE - 8%.
9. BENEFITS FROM TAX LOSS REALEALIZED AT DISPOSITION
10. DISPOSITION OCCURS AFTER YEAR 5
11. TAX RATE IS28% UPON DISPOSITION
12. DEVELOPMENT COMPANY CAN TAKE ADVANTAGE OF TAX LOSSES
45
($137,38)
($32,464) $6,164,315
TYPICAL RETIREMENT FACILITY
TYPICAL COMMON STOCK OFFERING - DIVIDENDS AT DISPOSITION
YEAR 0
YEAR 1
YEAR 2
YEAR 3
YEAR 4
YEAR 5
INCOME
GROSS INCOME
LESS VAoANC (4%)
NET INCOME
$8,100,000 $8,505,000 $8,930,250 $9,376,763
$324,000
$340,200
t357,210
$375,071
$7,776,000 $8,164,800 $8,573,040 $9,001,692
$9,845,601
$393,824
$9,451,777
EXPENSES
66% OF NET INCOME
$5,132,160 15,388,768 $5,658,206
$5,941,117
$6,238,173
AVAILABLE FOP EQUITY
$2,64,840 $2,776,032
$2,914,834 $3,060,575
$3,21,604
EQUITY
PAYMENTS
POINTS
COINSURANCE
ENHANCEMENT
ISSUANCE FEES
OTHER
PRE-SALE CASM FLOW
($1,000,000)
($28,50000
DISPOSITION
SALE PRICE
PAYOFF
PRE-TAX GAIN
TAX LIABILITY
$40,170,051
$0
$40,170,051
($4,373,614)
NET SALE PROCEEDS
MANAGENENT FEE (5l)
NET CASH FLOW
INTERNAL RATE RETURN
$405,000
($29,500,0001 $3,048,840
$425,250
$446,513
$468,838
$492,280
$3,201,282 $3,361,346 $3,529,413 $39,502,320
0.145
ASSUMPTIONS
1.300 UNIT FACILITY
2. FACILITY COSTS $28.5 MILLION OR $95,000/UNIT
DEVELOPER (MARRIOTT) FINANCES 100% THROUGH STOCK OFFERING
4. RENT AVERASES $2250/MONTH; GROWS 5% ANNUALLY
5. EXPENSES --66% OF REVENUES, CONSISTENTNT WITH L&H STUDY
6.FACILITY OCCUPIED ONE YEAR AFTER DEVELOPER INPUT OF FUNDS
7. INTEREST RATE 12% WITH ONE POINT
8.CAP RATE ON RESALE - 8%.
9.BENEFITS FROM TAX LOSS REALIZED AT DISPOSITION
10. DISPOSITION OCCURS AFTER YEAR 5
46
TYPICAL RETIREMENT FACILITY
TYPICAL SYNDICATION FINANCING - 131 INTEREST-85% OF BACKEND TO LIMITED PARTNERSHIP
YEAR 0
YEAR 1
YEAR 2
YEAR 3
YEAR 4
YEAR 5
INCOME
GROSS INCrME
LESS VACANCY (4%"
NET INCOME
$8,100,000 $8,505,000 $8,930,250 $9,376,763
$324,000
$340,200
$357,210
$375,071
$7,776,000 $8,164,800 $8,573,040 $9,001,692
$9,845,601
$393,824
66 OF NET INCOCE
$5,132,160 $5,388,768 $5,658,206 $5,941,117
$6,238, 173
AAILABLE FOR E9LITY
$2,643,840 $2,776,032 $2,914,834
$9,451,777
EXPENSES
$3,060,575
EQUITY
PA YMENTES
PRE TAX CASH FLOW
TAX
AFTER TAX CASH FLOW
($3,775,521
($3,775,521($3,775,521) ($3,775,521)
($3,775,521)
($400,000) ($1,131,681)
($999,489) ($860,687) ($714,946)
($279,857) ($240,992) ($200, 185)
($719, 632) ($619,695) ($514, 761)
($561,917)
($316,871)
($814,810)
($157,337)
($404,580)
SALE
SALE PRICE
PAYOFF
PRE-TAX GAIN
TAX LIABILITY
$40,170,051
($23,623,240)
$16,546,811
($4,373,614)
NET SALE PROCEEDS
$1,825,979
FEES
ORBANIZATIONAL (27)
MANAGEMENT (5.)
DISPOSITION (2%)
TOTAL FEES
NET CASH FLOW
INTERNAL RATE RETURN
($400,000)
$570,000
$405,000
$425,250
$446,513
$468,838
$975,000
$425,250
$446,513
$468,838
$492,280
$1,205,102
$1,697,382
($156,681)
($294,382)
($173,182)
($45,9231
$3,118,781
0320.
ASSUMPTIONS
1.300 UNIT FACILITY
2. FACILITY COSTS $28.5 MILLION OR $95,000 PER UNIT
3. SYNDICATION PUTS UP $400,000 INSTART-UP FUNDS
4. RENT AVERAGES $2250/MONTH; INCREASES 5% ANNUALLY
J. EXPENSES -66% OF REVENUES, CONSISTENT WITH L&H STUDY
6.FACILITY OCCUPIED ONE YEAR AFTER DEVELOPER INPUT OF FUNDS
7. INTEREST RATE 13%, LIMITED PARTNERS GET 85% OF BACSIDE
8.CAP RATE ON RESALE - OZ.
9.BENEFITS FROM TAX LOSS REALEALIZED AT DISPOSITION
10. DISPOSITION OCCURS AFTER YEAR 5
47
SUMMARY OF FINANCING DISCUSSION
48
COST OF FUNDS
Conventional Debt
High,
-Cost:
sometimes
can
decrease
through
rate
participation
-Type: Construction, shy away from long term financing
-Comments:
tends
Lending
to
be
highly
relationship
oriented
FHA Insured Mortgages
-Cost: Rate slightly below cost of conventional debt
-Type:
Construction through long term ownership
-Comments: Non-recourse, assumable, 40 year financing
Tax Exempt Financing
-Cost:
Face
conventional;
rates
interest
well
below
those
of
in line with conventional after enhancement,
issuing costs
-Type: Construction through long term ownership
-Comments:
sector,
Industrial
blind pools
revenue
and
bonds
enhanced
sector
49
issued
in
financing in
public
private
Pension Funds
-Cost:
line
In
debt:
with
latitude
structuring
in
debt/equity deals
-Type: Construction through long term financing
-Comments:
Interested in business, no lending to date
Public Stock Offering
-Cost: Varies, reflects strength of issuing firm
-Type: Limited only as directed in prospectus
-Comments:
Issued by larger firms
(ie, Marriott) and small
firms devoted exclusively to retirement housing (ie, Forum
Group of Indianapolis)
Syndication
-Cost:
-Type:
In line with cost of conventional financing
Construction
through
long
term,
purchase
of
existing facility
-Comments:
Partnerships
tend
through fees
50
to
make
most
of
return
CONSTRAINTS
Conventional Financing
-Major Constraints: Pre-leasing, takeout
construction
financing,
Layered
Constraints:
-Other
completion guarantee
FHA Financing
-Major Constraints: Extensive
financial reserve, cost per
unit, type facility - no lifecare or extensive medical
-Other
Constraints:
Must
pay union
wages,
units
need
kitchens
Tax Exempt Financing
Industrial revenue bonds, %
-Major Constraints:
to
low
project
and moderate
specific
tax
income
families;
to
run
Communication
and
exempts,
of units
blind pools
as
and
non-profit
facility
-Other
Constraints:
bondholders
51
payments
to
Pension Funds
of refinancing and management
-Major Constraints: Control
company goes to pension fund
-Other
required in
Constraints: Review
selecting market
research company and construction company
Stock Offerings
-Major
of shareholder
Demand
Constraints:
for
current
income
Profitability drain on
-Other Constraints:
other company
operations, need to protect corporate goodwill position
Syndication
-Major Constraints: Inability to use funds for any purpose
other than
that identified
generating
income to
make
in prospectus,
promised
difficulty in
yearly payments
partnership
-Other Constraints: Need to communicate with partners
52
to
ORGANIZATIONAL COSTS
Conventional Financing
-Major
Costs:
of site
Development
models,
opening
of
office to generate necessary pre-sales
-Other Costs: Effort required to find takeout lender prior
to start of construction
FHA Mortgages
time required to file and
-Major Costs: Extensive upfront
follow-through on FHA application
-Other
Costs:
Modest
required
time
to
maintain
FHA
relationship
Tax Exempt Financing
-Major
Costs:
Adherence
with
guidelines
required
by
required
to
government to maintain tax exempt status
-Other
Costs:
Time
and company
resources
regularly communicate with bondholders
53
Pension Funds
-Major
Costs:
development
Relationship
time
and
deal
structuring effort with fund advisor
-Other Costs: Monthly reporting to pension fund advisor
Stock Offering
-Major Costs: Cost and effort required to issue stock
-Other Costs: Communication with shareholders
Syndication
-Major Costs:
Development of partnership
structure; Cost
and effort required for issuance
-Other Costs: Communication with partnership over time
54
SUMMARY AND CONCLUSIONS
This
There is significant interest in retirement housing.
interest
elderly
people in
years.
One of
elderly
number of
the next
opportunities created
the major
growth will be the opportunity
growing
over
United States
the
number of
in the
expected growth
reflects the
50
by this
to provide housing for the
needing
assistance in
daily
living.
retirement housing cautiously.
Financiers are approaching
Their concerns primarily
reflect recognition that housing
products for the elderly
are highly complex products with
few alternate
higher risk
that
uses.
translates to a
This
among financiers and a
more needs
conservative attitude
learned before
to be
perception of
actively pursuing
investment in the industry.
From
a
developer's
programs depends
might have
perspective,
on who
and what you
you are, what
financing
right
the
relationships you
intend to build.
However, some
conclusions have emerged and are outlined below;
A smaller,
for-profit
established
developer
most likely
facility should
bank financing.
building
a
single
use conventional
Relationships appear to be a key variable
the developer should lever it
with conventional banks and
55
accordingly.
the use of
Additionally,
conventional debt
allows the developer to spend more energy against the real
estate
the time
project vis-a-vis
the
aspects of
that
might be spent on more complicated financing vehicles.
A small
for-profit
established
an
without
developer
reputation should most likely utilize FHA financing.
own track record and enable
insurance will supplement his
raise funds at essentially
the inexperienced developer to
However, this
the same cost as the experienced developer.
developer should
attention to be
expect his
This
diverted to
some complicated and constraining FHA guidelines.
tax exempt
vehicles.
of
facility developer
non-profit single
The
the tax
industrial revenue
This
should utilize
tax exempt
bonds or other
the value
developer should remember that
subsidy
has
decreased as
a
result of
the
lowering of marginal tax rates under the Tax Reform Act of
1986.
A
for-profit
developer
not
adjust
his
generate this type of funding
business plan to attempt to
as this would clearly an
should
example of letting the "tax tail
wag the business dog".
The multiple facility developer should most likely proceed
in one of
two ways.
for-profit projects,
financing
vehicle.
For the
developer building multiple
syndication is most likely
The
consumer
56
market
has
the best
reacted
companies
offering and this
this type of
favorably to
raise
to
as
Non-profit multiple facility
Tax
Oxford
investing
exclusively
developments.
reduced
Fund,
Exempt
the
in
at
once.
developers would most likely
the offering of a blind pool
do best through
the
$200,000,000
much as
has enabled
sizeable
a
non-profit
such as the
blind
pool
retirement
In both cases, the cost of raising funds is
through the
distribution of
multiple projects.
57
fixed costs
across
ENDNOTES
1. "Retirement Housing: A Maturing Market," Leslie Ensor
Stockman and June Fletcher, BUILDER MAGAZINE. June
1985, p.
73
2. "A Profile of Older Americans," American Association of
Retired Persons and Administration on Aging, U.S.
Department of Health and Human Services. 1984, p. 13
3. "Rental Retirement Housing: New Opportunities," Real
Estate Reasearch Corporation. 1985, p. 5
4. "Demand Grows for Retirement Housing and you can Take
Part,"
Roy L. Dietz, Professional Builder Magazine.
August, 1984, p.
7
5. "Rental Retirement Housing: New Opportunities," Real
Estate Research Corporation. 1985, p. 11
6. Ibid, p. 12
7. "The Lifecare Industry - 1984, Fourth Annual Report on
the Lifecare Industry in the United States,"
and Horwath.
1984,
p.
Laventhol
17
8. "HUD/FHA Program for Nursing Homes and Related
Facilities," U. S. Department of Housing and Urban
Development. 1986, p. 3
9. "The NHP Starts Playing For Profit," Forbes. 1987, p.
52
10.
"Developing Retirement Housing," The Urban Land
58