Communities also age.

Product, price, and value are what really count

CONSIDERABLE ATTENTION HAS BEEN FOCUSED ON THE CHALlenges of residents aging in place in senior living communities. But there's another equally serious problem emerging in hundreds of senior living communities--the aging of physical plants. Even as our automobile ages, we still expect to realize essentially the same performance as when it was new. The same is true with our facilities, except the solutions are far more complex. Many sponsors of aging communities feel trapped because the solution is not as simple as trading up to a better automobile.

Simply stated, many communities are charging Buick prices for Chevrolet-Pontiac-quality physical plants. Most have to do it to sustain break-even cash flow and avoid financial distress. Their existing residents express reasonable levels of satisfaction. However, the future marketplace is heavily focused on three key attributes: product, price, and value. In the next 18 to 24 months, the status of many of the physical plant-aging problems will evolve from serious to critical.

Space is at a premium

Typical shortcomings in many older senior living communities include: (1) very small studio or alcove units, (2) no kitchenettes, (3) no showers in the individual living units, (4) shared bathrooms for unrelated residents, and (5) dated appliances, plumbing fixtures, lighting fixtures, and cabinetry.

There is frequently inadequate space in community and common areas--space that is now desperately required to serve the growing needs of both the aging resident and the professional staff for offering expanded services. Dining areas are too small or lack ambience. Some communities offer only self-service buffet lines, but with aging residents and current competitive threats, full wait-staff table service is becoming an imperative. The problems are exacerbated by overall cosmetic deterioration of the public areas and serious deferred maintenance issues, which in turn can have a costly impact on efficient operations.

The professional staffs will start to recognize subtle changes as previously

strong waiting lists start to soften resulting in a decreasing inventory of serious, qualified prospects. Stabilized occupancy begins to decline, and marketing momentum eventually stalls.

Start attacking the problem by addressing two questions: What are the costs of reasonable enhancements and upgrades, and how specifically will the value of your community be enhanced?

Where the money comes from

We need to consider improvements to both individual units and common spaces. One way to look at the cost recovery or value sensitivity of investing money in your senior living community is to determine how much additional monthly service fee a resident must pay for you to break even on the additional borrowed money needed to fund those improvements. Here's a common-sense approach:

* Determine the amount to be invested in each individual living unit (let's say $7,500 per unit).

* Determine the annual increase in debt (both prinicpal and interest payments) needed to pay for the improvements to just that individual unit. Consider approximately 9 percent if you're a for-profit entity, or as low as 7 percent for a not-for-profit organization using credit-enhanced bonds.

You must also consider an acceptable Debt Service Coverage Ratio (DSCR) of about 1.3 at 93 percent stabilized occupancy.

For a living-unit improvement costing $7,500, you must increase a resident's monthly service fee by $74.10 or about 5 percent to recover your investment. (See "Increase in monthly service fees," above.) You can improve your units as they are vacated or while they are still occupied.

Common area improvements get considerable bang for the buck. That's because we are able to allocate or spread the recovery of these new investments across all of the occupied units in a senior living community. For example, a $125,000 investment in improving the common spaces of a senior living community will require each resident's monthly service fee to be increased by only approximately $18 per month.

Many owner/operators and boards of directors may be reluctant to make relatively expensive, progressive capital improvement decisions, hoping that the downward spiral will level off to a plateau of acceptable performance. However, experience clearly indicates that such an operational, marketing, and financial miracle is unlikely to occur in most of these aging communities.

Jim Moore is president of Moore Diversified Services, a Fort Worth, Texas-based seniors housing and health care consulting firm, and author of Assisted Living 2000.

                    Increase in monthly service fees
                          Debt service
                              interest
                              rate at:
Individual living units             7%            9%
  $5,000/unit             $49.40/month  $58.65/month
  $7,500                         74.10         88.00
Common/public spaces [1]
  $75,000                         9.30         11.05
  $125,000                       15.50         18.45
(1.)Spread across 100 units
SOURCE: MOORE DIVERSIFIED SERVICES, INC.