How this is done has been a mystery to me until I went through several dozen e-mails I have received from a company in Lenexa, Kansas. It wants me to invest in long term care restricted to assisted living and memory care (a subclass of memory care in Missouri).
“When you need these services, you have no choice but to use them. Therefore, these services tend to be very recession resistant.” (June 12, 2017) Lower levels of senior care fluctuate with the economy and higher levels with government subsidies.
Actual experience with student housing and multiple single family funds have yield about a 13% return on investment. Senior housing yields about twice that rate at 12% to 21%. (May 25, 2017)
“The one-year return for Senior Housing through Q1 2017 equaled 12.05%, far outpacing the NPI (National Property Index) at 7.27%. Senior Housing consistently outperforms all other commercial asset classes over the last 1, 3, 5, and 10 year periods.” (June 27, 2017)
[Our building in Columbia is not rated as a commercial building. It is actually less expensive home construction. Each tornado proof cell holds two apartments.]
And now, two years later, things are going so well that the Class B offering in 2019 shows an incredible after-tax net estimated investment rate of return between 38.1% and 41.7%. (Jan 29, 2019) The lowest investment amount is down to $50,000 for a qualified investor.
I am not a qualified investor as I do not have $1,000,000. We put our house funds into an annuity (2016) that is less than 1/5 of that amount and pays about 2%. The difference between the rate of return between these two investments is staggering.
At present Building, Filling, and Selling Senior Housing has been more profitable than owning and operating. BFS has greater risk and thus a greater return; for those who win. Building in the mid-west “wealthy farmer” zone may prove problematic now that there are more bankrupt farmers since the last presidential election than in many years.
“The Senior Housing sector addresses a clear need while delivering attractive returns. Deploying capital in Senior Housing is an investment in the local community. Senior Housing strengthens communities by allowing individuals to retire and live in the same place where they have established business and personal relationships.
Senior Living Fund focuses its investments with operators who don’t just look at the bottom line, but rather on those individuals that impact the bottom line – our senior citizens. Their care and well-being is [sic] vitally important. When you focus on the happiness and health of the senior, the bottom line usually takes care of itself.” (February 21, 2019)
The above two paragraphs are excellent examples of the best in memory care marketing. I have lived with my wife in memory care for the past three years. Memory care residents will never see this nor be aware of what it means. There is only a bond of trust between the facility and the individuals responsible for the resident’s welfare and bills.
That trust is earned by the caregivers who are assigned consistent care of a memory care resident to the point they can anticipate the resident’s behavior and can take preventative measures when appropriate. Almost all situations can be managed in a positive manner; that promotes happiness and health: the big family atmosphere in which each resident feels comfortable.
Caregivers are an asset, or a hazard, based on assignment, experience, and training. The largest operating cost for memory care is payroll (53% of total expenses) in a five-year projection of net operating income (NOI) for a facility in Champaign, Il. (June 29, 2017).
“. . . the bottom line usually takes care of itself”, marketing, is next at 12%; followed by kitchen (food?) at 6% and utilities at 5%. We can now look for a direct relationship between payroll and the profit needed to return the original investment (higher risk) and to maintain the established facility (lower risk).
The payroll is estimated as $1,200,000 for year three and for year four. To keep things simple, I have chosen a worker unit to cost $20,000/year. The facility director gets three units. A few others get two units each. The 60 units are then distributed among 50 to 75 full and part time employees.
$20,000/$1,300,225 = 1.5%. One worker unit saved would add 1.5% to the Net Operating Income. The yearly Net Operating Income percent is estimated at 36% during the last three years.
The investors are receiving about the same amount as some 60 employees are costing the company; $1,300,225 on a $10,074,141 investment (1.3%) vs $1,200,000 payroll (60 x 35 x 50 = 105,000 hr or $11/hr. The number of worker units, of hours per week, and of weeks worked per year can be adjusted as needed.
Another interesting relationship is with a $10,074,141 investment divided by 60 $20,000 work units each one is backed by $168,000. Then $168,000 at 12% interest earns $20,000 annually. Each caregiver is worth about $504,000 invested at 4% interest.
Investors expect an internal rate of return (IRR) of 28% from this facility on the money they put in; when the facility is sold or the fund matures. This is 20 times the 1.3% annual earned on the total cost of the facility. This bit of magic is accomplished by the company getting low cost loans to finance about 90% of a higher risk project.
Management must then hire qualified caregivers with the required training and experience, or hire people who can be trained, in a lower risk operating environment that earns at about half the rate for creating a new stable facility.
In two days, we will be one month after the sale of Provision Living at Columbia to Cedarhurst at Columbia on February 1, 2019. So far little has changed other than for the best tasting orange juice and the continuing of a slow reduction in staffing that started last year.
Assisted living residents are anxious to see what things will look like after the 30-day notice period ends. Memory care residents are happy with new table service, place mats, and flowers on their tables.
We are getting the opportunity to actually experience the handoff, from developing to optimizing operation, for the residents and the investors. Employees seem to have little input other than the traditional vote; to stay or to move on to other opportunities.
It is my understanding that in Columbia, MO, there are no recognized unions or facility bargaining groups. There is some selection by good workers picking good workers on their shift. This frequently results in two new hires working together as a potential hazard and new ways of doing things.
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