Sleeping giant.

CCRCs are suddenly the darling of lenders and investors

ALTHOUGH THE TYPICAL "ALL IN" COST OF A CONTINUING care retirement community in the Northeast ranges from $50 to $100 million (which alone would give most lenders pause), there are four good reasons why today's CCRC lender is making what is arguably the safest loan possible in the senior housing market. This point can best be illustrated by comparing an assisted living facility loan with a CCRC loan. [See box, this page.) But there are other advantages:

Barriers to entry

Because CCRCs, a life care concept that blends independent and assisted living with nursing care, must include components such as a nursing home, indoor pool, extensive common areas, and assisted living units, developers must seek large tracts of land. Increasingly, this type of acreage is unavailable in areas desirable to future residents. Also, large-capacity utilities are usually not located in optimal residential areas. The net effect is that most towns have few zoneable" parcels of land so the risk of future competitors is slight. Counterintuitive as it may seem, if zoning in a particular town is problematic, and the locals are litigious, it bodes well in the long term for both developer and lender by discouraging competitive facilities.

What's more, in the CCRC world it is not unheard of for a developer to risk $3 to $4 million prior to loan-closing drawing up plans, optioning the site, jumping through CON--and other regulatory--hoops, and getting pre-sales. This fact alone significantly narrows the field of potential competitors. By contrast, some ALE developers spend as little as $150,000 pre-construction.

Pre-sales and marketing

When it comes to CCRC lending, the proof is in the pudding. Rather than relying on a "Big Eight" feasibility study--which frequently is undermined by actual events within months of closing--a CCRC loan usually will not close until certain pre-sale requirements are met. A typical requirement would be signed residency agreements accompanied by large deposits from future residents representing as much as 70 to 75 percent of the first phase. Assuming an 18-month buildout and only mediocre pre-closing sales, most communities should open with 90 percent or more of their units (net of dropouts) sold.

Contrast this scenario with a typical ALE, where the loan closes on the basis of a great feasibility study, but with no pre-sales. The pudding won't be tasted until long after opening day. In the meantime, the lender's money is in the pudding bowl.

Turnover

Assume a CCRC with 250 independent, 50 nursing, and 20 assisted living units, and an average entry age of 76 to 78. Upon stabilization several years after opening, turnover will probably be around 15 to 19 apartments per year, or fewer than two sales a month. Contrast this with a stand-alone ALF of 100 units and an average age upon entry of 80 to 82. It is a reasonable assumption that several years after opening, it will be necessary to fill 35 to 45 of those apartments annually. Although the ALF in our example is about one-third the size of the CCRC, it has to work twice as hard (3 to 3.5 new rentals per month) to keep the community full and the lenders happy.

Impatient money & developer risk

When the typical CCRC loan is sized, and certainly well before it closes, most CCRC lenders have planned their escape route, with the first-mortgage money planning to exit when 80 to 85 percent of the first generation has filled the community, the second mortgage money leaving when 92 percent or so of the community is filled, and the long term debt lender happy to slide into first position upon the departure of the first two lenders.

In the case of an ALE, however, opening day represents the riskiest part of the transaction for a first mortgage lender. If initial fill-up projections were overly optimistic, the working capital reserve would immediately start dwindling. As most first mortgage ALF lenders do not exit the loan until the debt service coverage ratio (DSC) ratio is greater than 1.3, if this hurdle is not achieved in a timely fashion there may not be a graceful way to exit the transaction. In contrast to the ALE lender who is taking the majority of the fill-up risk upon himself, the CCRC lender is, in effect, putting the fill-up risk squarely on the developer by requiring high pre-sales prior to closing.

The real risk in a CCRC development is taken by the developer prior to loan closing and is of such magnitude that it serves to discourage others from directly competing, which, post-construction, inures to the benefit of both lender and owner. CLTC

David Reis is managing member of Senior Care Development, LLC, a Westport, Conn.-based developer and owner of CCRCs and ALFs.

                        Competition issues compared
                           ALF     CCRC
Typical                    4-6    25-100
parcel size               acres   acres
Zoning                    9-12     2-3
time expended            months   years
Sizing and availability
of utilities critical      No      Yes
Neighborhood
opposition
and/or lawsuits         Sometimes Frequent