Competing for a $1.1 trillion resource.This is Part II of a two-part series involving the significant role bome equity will play in seniors housing. Part I, which appeared in the October 2000 issue, defined the total potential. APPROXIMATELY 77 PERCENT OF THE AGE 75+ SENIORS MARKET are homeowners--most with no outstanding mortgage. The median value Noun 1. median value - the value below which 50% of the cases fall median statistics - a branch of applied mathematics concerned with the collection and interpretation of quantitative data and the use of probability theory to estimate population of this pent-up home equity is approximately $110,000, resulting in a $1.1 trillion resource to tap. This resource is growing at about 6 percent or $66 billion per year. We've been tapping this resource for more than 25 years, but it's time It's Time was a successful political campaign run by the Australian Labor Party (ALP) under Gough Whitlam at the 1972 election in Australia. Campaigning on the perceived need for change after 23 years of conservative (Liberal Party of Australia) government, Labor put forward a to take a new look at an old concept. Let's start with some basics. Many seniors directly or indirectly use their liquidated home equity to help pay for independent living or CCRCs. Pricing methods vary; from straight market rate rental, life estate/entry fees, condominium ownership, cooperatives, and the relatively new master trust concept. Let's focus on the creative use of liquidated home equity for the most common upfront fee concept: refundable and non-refundable entry fees. Refundable entry fees. An interest-free loan from the senior consumer to the sponsor comes in the form of refundable entry fees. These carry little or no threat of imputed interest Imputed Interest A term used to describe interest considered to be paid, even through no interest payment has been made. Notes: Imputed interest is calculated based upon actual payments that are to be paid, but have not yet been paid. by the IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. to the consumer. The sponsor gets to use the consumer's money interest-free until the consumer dies or moves off the sponsor's campus. But acceptable past trends and future pricing strategies There are many ways in which the price of a product can be determined. The following are the foremost strategies that businesses are likely to use. Competition-based pricing Setting the price based upon prices of the similar competitor products. may be drifting apart. In the past, it was very common for sponsors using entry fees to offer both significant pre-paid "life care" health benefits and reductions in the monthly service fee (as compared with the straight market rate rental pricing concept). But now, most new contracts either limit or eliminate the prepaid life care benefit. The senior consumer's perceptions of value from a financial planning Financial planning Evaluating the investing and financing options available to a firm. Planning includes attempting to make optimal decisions, projecting the consequences of these decisions for the firm in the form of a financial plan, and then comparing future performance against perspective is changing. Non-refundable entry fees. In reality, this pricing method represents a form of significant spend-down of assets for the senior. For example, with a $150,000 entry fee the refund of which declines at 1.5 percent per month (very common in the industry), a senior is experiencing an asset spend-down of $2,250 a month. And that's in addition to their monthly service fee outlay. Why would a senior agree to this concept? In the old days, it was primarily faith and a pre-paid health care benefit. Without lifecare, delivering value is more difficult. Here are four strategies to help you sharpen your focus. (1) Help seniors avoid sticker shock. In a pricey market, seniors are generally more reluctant to pay relatively high, $3,000-a-month plus service fees rather than committing to a one-time entry fee with a lower monthly service fee. Upfront fees generally work best in pricey markets with high home equities as a hedge against monthly service fee sticker shock. (2) Help seniors realize entry fee affordability and flexibility coupled with the potential of leaving a legacy. For the same unit no. 101, one senior with children and grandchildren might want very high guaranteed entry fee refundability (75 percent to 90 percent) and be willing to pay a premium for this "leaving a legacy" benefit. Conversely, a senior with limited estate concerns may not be as sensitive to refundability, but want that same unit at a more affordable entry fee. (3) Show seniors how to avoid taxes legally. Using liquidated home equity for entry fees delivers another significant benefit for both the consumer and the sponsor--legal tax avoidance The process whereby an individual plans his or her finances so as to apply all exemptions and deductions provided by tax laws to reduce taxable income. Through tax avoidance, an individual takes advantage of all legal opportunities to minimize his or her state or federal . Using entry fees, the seniors can enjoy two tax advantages: (A) a home sale capital gains exclusion of $250,000 (widow) to $500,000 (couple), and (B) having to take less cash into taxable income Under the federal tax law, gross income reduced by adjustments and allowable deductions. It is the income against which tax rates are applied to compute an individual or entity's tax liability. The essence of taxable income is the accrual of some gain, profit, or benefit to a taxpayer. from their tax-deferred accounts because, with upfront fees, they will be paying a lower monthly service fee. A unit with an all-in cost All-In Cost Shorthand for "all-included" costs, which are expressed as the interest paid or received for total costs of a financial transaction. Notes: All-in costs include the spread, commission, interest payments, and any other fees resulting from the transaction. of $150,000 and $30 per resident-day in operating expenses Operating expenses The amount paid for asset maintenance or the cost of doing business, excluding depreciation. Earnings are distributed after operating expenses are deducted. might require a total monthly service fee of $2,125. If you give the resident some credit for the use of her $150,000 entry fee, the $2,125 monthly service fee can be reduced by $875 to $1,250. And the senior is also avoiding taxes on that savings because she won't have to draw as much cash as taxable interest income; keeping it within her tax-deferred savings account Savings Account A deposit account intended for funds that are expected to stay in for the short term. A savings account offers lower returns than the market rates. Notes: . (4) Develop prudent spend-down strategies. Some seniors eventually experience financial distress Financial distress Events preceding and including bankruptcy, such as violation of loan contracts. . There are practical spend-down "safety nets" where the senior can continue to live on your campus because you agree to debit your refund obligation to cover his modest payment shortfalls. An increasing number of seniors are seeking financial advice from families and third-party professionals. Sponsors trying to tap the $1.1 trillion resource will find their pricing strategies spending more time under the microscope in the future. Jim Moore is president of Moore Diversified Services, a Fort Worth, Texas-based senior housing and health care consulting firm, and author of Assisted Living as·sist·ed living n. A living arrangement in which people with special needs, especially older people with disabilities, reside in a facility that provides help with everyday tasks such as bathing, dressing, and taking medication. 2000. |
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