Be careful out there.

I have been in long-term care for about 18 years now, starting out with a company called Host Masters, which later became GranCare and went public in 1991. For four years in a row, it was one of the top five fastest-growing companies in America. In 1994, I joined another long-term care start-up, Covenant Care, and we grew that company to about 45 facilities in less than four years. Both of these were great experiences for me and I learned a lot that would help me later when I started my own company.

One of the things I decided from these experiences was that I wanted to be at the top end of the market--I felt that the opportunities were bigger on the upside and the risks smaller on the downside if the company could get into that position. We wanted to be number one in every market we served; however, this would require a substantial commitment in terms of systems, training, and capital. I believed that the commitment could pay off in an extraordinary way, so we jumped in and began spending millions of dollars improving the quality of our properties.

As we did so, I was reminded of something Mark Twain once said: "You can be sure that the man walking down the street carrying a cat by its tail is getting at least 10 times as much experience as the man watching him." That was certainly the case with us as we began to rehab and remodel our facilities. Once we started opening things up in one of these facilities, we always found surprises. The following are a couple of interesting anecdotes on that point.

Recently, we acquired a facility in Canoga Park, California. We bought a note that was being foreclosed in a Department of Housing and Urban Development auction. The property had about $20 million in past-due tax liabilities. The owners were not paying the employees and the state was about ready to close the 200-bed facility, which had only 90 patients, almost all Medi-Cal (California's Medicaid), many with dubious benefits.

We ended up spending approximately $4.5 million for the note and probably another $4 million remodeling the facility. Although working around patients can be difficult, in this case we benefited enormously because we only had 50% occupancy. We could sequester all of the patients to one-half of the building while we worked on the other half without difficulty. Nevertheless, it still took us close to a year and a half to finish the project.

Most of the work was generally very straightforward, but there were a few surprises. One of the biggest came from the dietary staff. They complained that they were getting electrical shocks all the time as they moved about the washing area of the kitchen. We needed to open all of the electrical to the kitchen to find the cause. Shortly after we started digging up the main line, we found a two-inch electrical cable that had been severed (by the previous owner) during some earlier project and left buried underground. The cable--literally red hot--had been pouring electricity all through the ground and up through the walls.

This is the type of challenge faced when buying 40-year-old facilities. In this case, every inch of the facility needed to be completely redone, including a large rehab room, great corridors, carpeting throughout, new courtyards, and many other amenities.

We bought another facility, in Sunnyvale, California, in 2000. Literally two months after we took over, a large explosion awoke the residents. Behind the facility, big steel and concrete poles had been driven into the ground (again by the previous owner) around the generator so that people wouldn't drive their cars into it. Unfortunately, the construction crew hit the main electrical line while digging to install the poles, and over time water leaked into the line. This set the stage for a potentially huge disaster.

Sometime during the night of the explosion, the facility's electrical panel caught on fire because of a short that resulted from the construction crew's earlier work. The fire sprinklers activated and put out the fire; however, because the water heaters and electrical panel were in the same room (which isn't permitted anymore) when the sprinklers came on, they extinguished the flame on one of the water heaters, as well. So, for who knows how long, gas was discharging into the utility room. At approximately 4:00 a.m., the other pilot light kicked on, blowing the room apart and leaving the facility with no gas or electricity. Fortunately, no one was hurt, but we had to discharge every resident in the facility, leaving us with an empty building, a lease that would continue, and a hundred employees wondering what would happen to them.

[ILLUSTRATION OMITTED]

We were very lucky in two regards in this instance; the first is that no one got hurt, and the second is that our insurance company did a fabulous job for us. All operators and investors are generally worried about liability insurance or about workers' compensation insurance, but I would bet that most are like we were and really did not understand fully the implications of our property insurance policies. I would strongly suggest reviewing all insurance policies and carefully examining your business interruption insurance. We learned that most policies have limited business interruption coverage. But we usually are not looking for something very useful called an "extended period of indemnity," which protects if the loss continues past what would normally be expected. It costs essentially the same.

In our case, repairing our facility required approvals from a state agency that is notorious for being nonresponsive and an obstacle to getting work completed in a timely manner. Under normal circumstances, repairing the damage to the facility would have taken three to five months, but because of the state's involvement it took a whole year. If not for our extended period of indemnity, we would have sustained a loss in the millions of dollars. Fortunately, we had recently changed our broker, and the people at Lockton did a fabulous job of ensuring that we were adequately covered and that our insurance company lived up to the policy provided.

Improving the quality of our facilities has a real upside--but be prepared to expect the unexpected.

Tom L. Olds is CEO/President of Generations Healthcare, based in Santa Ana, California. For more information, phone [phone], e-mail [e-mail], or visit www.lifegen.net.