The agony and the ecstasy.

How to prepare for an assisted living launch

LIKE A SPACE SHUTTLE LAUNCH AT CAPE CANAVERAL, AN ASSISTED living project launch can represent the most critical, high-risk phase of the entire development process. The cost of preparation and actual launch is significant and frequently underestimated. But the cost of a failed launch is enormous and will likely have a long-term impact on both your reputation and your financial statement.

Let's look at the typical expectations for a new 80-unit, freestanding assisted living community. Initial "in-rush" occupancy upon opening usually will range between 12 percent and 15 percent, or approximately 10 to 12 move-ins upon achieving a Certificate of Occupancy. After the initial move-ins, you might expect future move-ins to average between four and six units per month; net of turnover. The operative words are "net of turnover." That's because while you're initially filling up your project, you're already experiencing resident turnover. Annually, this turnover can exceed 40 percent.

If you actually perform within the fill-up envelope described above, you will reach 93 percent stabilized occupancy in about 10 to 16 months from first opening your doors. However, to achieve this success model, you will need significant dollars in your capital budget to fund a sophisticated sales and marketing program and to cover some substantial negative cash flow during the critical fill-up period:

Sales and marketing initially should be budgeted at $3,500 to $4,000 per unit; or, for our 80-unit community, between S280,000 and $320,000. And that's just to get to 93-percent stabilized occupancy so your normal operating budget can kick in. Once you allocate these dollars for your sales and marketing budget, you must prepare a detailed budget.

Working capital/fill-up reserve funds are necessary in the early months of initial project fill-up where it is normal to experience negative cash flow. This reserve fund is necessary to cover the moral monthly cash flow deficits (before debt service) because modest, but growing, revenues are not yet large enough to cover necessary fixed and semi-variable expenses already being incurred. Most projects will already be making significant mortgage payments on their project loans. For an 80-unit project, the typical (negative) cash drain from debt service can average $45,000 per month. And peak or cumulative negative cash flow (expenses and debt service) can total approximately $350,000. Under normal fill-up conditions, this is to be expected and should be a distinct line item in the project's initial capital budget.

The sales and marketing and working capital budgets are carefully designed to underwrite the successful launch of your project. Without these resources, your project will likely experience an unstable and costly disastrous launch into the competitive marketplace. Many sponsors tell their lenders and investors that their sub-par performing community was not their fault, blaming unpredictable saturated markets and irresponsible competitors. But, in fact, some operators may not have funded their start-up project adequately, while others may not have properly allocated and deployed available cash that was provided in their initial capital budget.

An assisted living project launch is a very complex endeavor. There are, however, three basic strategic initiatives that must be executed:

* Develop and execute a six- to eight-month pre-launch program. Sophisticated operators hire key staff (executive director, sales and marketing professionals, etc.) well in advance of the project opening date. They execute a detailed, pragmatic "countdown to opening" to ensure a successful project launch.

* Build a strong backpressure of market demand. A successful project launch requires at least a definitive pre-sales effort to realize the critical initial move-ins upon opening.

Many projects suffer sagging sales momentum after the initial in-rush because they did not properly plan to sustain their projected fill-up ramp of four to six units per month. While actual industry sales closing ratios are difficult to track and a closely guarded competitive secret, you will probably need 1,600 to 2,000 qualified leads initially to fill an 80-unit community.

* Conduct a sobering fill-up sensitivity analysis. The earlier you get the proverbial wake-up call, the better. Most new sponsors dream of an initial absorption rate of six units per month or better. For some, the dream turns into a nightmare when, after turnover and the impact of emerging local competition, their actual absorption rate comes in at about three units per month. With that scenario, you'll probably observe and conclude that: (1) The initial fill-up period to stabilized occupancy doubled from 10 months to 20 months, (2) The sales and marketing budget was not invested in an optimum manner, (3) The required working capital/fill-up reserve has ballooned from approximately $325,000 to $685,000, and (4) The equity investor's annual internal rate of return (IRR)--with a five-year stabilized holding period--decreased from 17.1 percent to 3.8 percent.

As some markers mature and competition intensifies, the successful launch of new assisted living projects will become an even more critical element of that project's life cycle. There are still many good opportunities for properly conceived and effectively launched assisted living communities.

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 2000.