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Appraising continuing care retirement centers: the income approach.

Continuing care retirement centers (CCRCs) are an increasingly popular form of real estate development for the elderly, and are expected to play a large role in meeting the future needs of aging baby boomers. CCRCs, also known as life-care facilities, are a form of retirement facility that provides the full continuum of care for the elderly. A typical campus is improved with independent-living units for those residents still able to adequately care for themselves; assisted-living units for residents who are mostly independent but require some medical assistance; and skilled-nursing units for residents who require full-time nursing care and supervision. The improvements usually include large commercial kitchens, dining facilities, recreational facilities, social facilities, and amenity packages.

According to the American Association of Homes for the Aging (AAHA), the number of CCRCs throughout the country has grown from approximately 330 in 1980 to over 700 in 1992, and 230,000 to 250,000 persons were estimated to have resided in CCRCs in 1992.(1) According to an article in Modern Healthcare,(2) over 80% of all life-care facilities have been built since 1985. These trends indicate that a CCRC is one of the newest forms of retirement center development, and appraisers will most likely find them subjects of analysis in the future. Appraisers need to understand how CCRCs operate to properly define the appraisal problems they present and to competently complete these types of assignments.

The value estimate of a CCRC is a value in use, for life-care facilities are special-purpose properties. They have been designed for a particular purpose and as such include extra features that would appear to be superadequacies when compared with alternate uses. This does not, however, preclude an estimation of market value. Rather, an appraiser must make note of the special features and limited market associated with these facilities. An alternate-use valuation that does not consider these features may result in a much different estimate of value, and thus is not appropriate. In addition, CCRCs (especially the nursing home facilities) are typically regulated by state governments, and require special permits and certification. The value created by becoming a holder of such permits and certificates and the management expertise required to maintain them in good standing with state regulators must be considered.

This article focuses solely on the income approach, as the other approaches are beyond the scope of the analysis presented here.


To begin, a brief discussion of how a CCRC operates may be helpful. A new resident of a life-care facility is typically a retired person (or couple) in good health. Applicants in poor health are usually not accepted or encounter severe restrictions. The new resident pays an entrance fee to become a member of the community, and in return is provided a fully equipped but typically unfurnished independent-living unit. The resident also pays monthly maintenance fees, which, along with entrance fees, are used to provide the residents with all utilities, common area maintenance, periodic interior maintenance, meals as specified, and nursing care services. When residents can no longer adequately care for themselves within independent-living units, they move through the system from independent-living to assisted-living units where limited nursing is provided. When residents begin to need full-time nursing care and supervision, they move to full-time nursing-home units. Therefore, residents can migrate through the system without being faced with major moves, merely a change of units. This is convenient, especially if one spouse continues to reside in an independent-living unit while the other spouse resides in a nursing-home unit just a short walk away.


An income approach analysis of CCRCs involves the following six basic tasks:

* Identification and quantification of revenue sources to estimate gross potential income (GPI)

* Deduction of an allowance for vacancy and collection loss to estimate the effective gross income

* Identification and quantification of operating expenses and potential refunds

* Estimation of net operating income (NOI)

* Estimation of appropriate capitalization rate and discount rate

* Performance of direct capitalization or discounted cash flow (DCF) analysis and test of reasonableness

Identification and quantification of revenue sources

A CCRC generates several forms of revenue from the following basic sources:

* Entrance fee

* Maintenance fee

* Nursing home

* Investment

* Other services

Entrance and maintenance fees vary depending on the geographic location, the quality of the facility, the unit type selected, and the services offered. Some CCRCs have high entrance fees but low maintenance fees, while others may have low entrance fees and high maintenance fees. The pricing often reflects the particular marketing strategy of the facility. In Florida, entrance fees may vary from less than $50,000 for small units in facilities of average quality to over $300,000 for large units in first-class facilities. Maintenance fees are more standardized and typically range from $1,000 to $2,500 per month. The entrance fee and monthly maintenance fee ensure that a resident will be provided with housing and nursing care as needed for the duration of the resident's life. Therefore, the contract is similar to a rental agreement and insurance contract. As a result of this insurance element, an article in Modern Healthcare(3) reported that as of May 1992, thirty-five states had some form of governmental regulation of these facilities, typically under the jurisdiction of the department of insurance.

The monthly fee for a resident who transfers to the nursing-home section of a CCRC depends on the health care guarantee, which varies across the industry. Most facilities offer a comprehensive type of contract, according to which a resident continues to pay the same monthly fee after transfer to a nursing home. Another type of health care provision guarantees access to health care at a discounted rate of the current per-diem amount charged to private-pay patients. Health care provisions may vary between permanent and temporary transfers. Appraisers need to be aware of the particular type of health care guarantee involved.

Similar to other properties, the method of estimating the GPI of CCRCs is based on an analysis of historic income, historic occupancy, and current rent roll information as well as forecasted supply and demand considerations. As part of this analysis, a survey of the entrance-fee and maintenance-fee rates for comparable CCRCs located throughout the competitive market area is necessary. These competing facilities should then be compared with the subject to determine whether the subject is generating fees at market rates. If not, then existing contract rents should be considered, but all new resident entrants should be forecasted at the market-rate levels. CCRCs often draw residents from a regional and interstate market, and therefore the competitive market area may be quite large. A list of competing CCRCs within the market area can be obtained from state regulators as well as from the subject property administrator.

Actuarial information

Once an appraiser gets a good handle on entrance fees and monthly maintenance fees, he or she can begin to estimate GPI. Because the operation of a CCRC is partly based on an insurance contract for nursing care, actuarial information is critical to proper analysis. An appraiser is an expert in analyzing market information, but typically is not an expert in actuarial science; he or she therefore must rely on other sources for this information. Critical actuarial information affecting revenue and expense includes:

* Projected turnover by unit type

* Projected double-occupancy patterns by unit type

* Projected nursing-home use by life-care resident

* Projected nursing-home use by private-pay residents

Central to the valuation of a facility are the turnover assumptions of the units by unit type to correctly estimate revenues and expenses. The role of an actuary is to develop these assumptions and project the pattern of resident movements through the various levels of care until death or withdrawal. It is necessary to develop an actuarial model to achieve this end. An appraiser must obtain assistance or the needed information from an actuarial expert to competently perform this part of the appraisal assignment and be in compliance with the competency provision of the Uniform Standards of Professional Appraisal Practice (USPAP). The actuarial model is used to develop the following statistics:

* Deaths in the independent-living units by unit type

* Deaths in assisted-living units

* Deaths in nursing-home units

* Temporary transfers from independent-living to assisted-living units

* Temporary transfers from assisted-living to nursing-home units

* Temporary transfers from independent-living to nursing-home units

* Permanent transfers from independent-living to assisted-living units

* Permanent transfers from assisted-living to nursing-home units

* Permanent transfers from independent-living to nursing-home units

* Voluntary withdrawals by unit type

To track these resident population movements, an actuary develops probability assumptions for each based on large samplings and in-house databases, and then applies these probabilities to the resident population. Independent-living units are turned over through death, withdrawal, or permanent transfer to a higher level of care, while nursing-home units are turned over by death, withdrawal, or temporary transfer back to independent-living units. Tracking double occupancy in the various unit types is also critical when developing unit turnover statistics.

As mentioned, the number of residents in assisted-living and skilled-nursing units who are only temporary residents as a result of sickness or injury must be projected. These temporary nursing-home residents maintain their independent-living units and will return to them after recovery. Temporary-stay residents in the nursing home portion of mature CCRCs typically comprise from 7% to 10% of total life-care residents. These temporary-stay residents must be considered to avoid overestimating income. For example, if a resident in an independent-living unit is injured in a fall or other accident and is temporarily transferred to the nursing home, that resident's living unit is not leased to a new entrant while he or she is in the nursing home. Rather, it remains held for his or her use until recovery. To assume this temporarily vacant unit could be provided to another paying resident would not be appropriate.

During the early years of a CCRC's operation, a state typically allows it to lease nursing home beds to private-pay patients. Therefore, the number of private-pay patients in the nursing home must be forecasted. Over time, however, the migration of residents from independent- and assisted-living units to nursing-home units should fully occupy the facility at some point, at which additional private-pay patients can no longer be accepted or considered in the analysis. In Florida, the law allows a five-year corridor for such absorption. Actuarial information answers these questions and provides appraisers with the needed assumptions for valuation.

Because of the insurance characteristics of a CCRC resident contract, states normally require such facilities to establish reserves to ensure that monies are set aside to meet future health care obligations. These health care reserves are above and beyond those reserves typically considered in an analysis of the replacement of short-lived items. Investment regulations of these reserve funds vary by state, but they generally must be invested in safe, relatively liquid vehicles to minimize potential risk of loss and to enable easy conversion to cash as needed. The income generated from these reserve investments must also be considered.

Other income is generated by extra meals, snacks, recreational activities, social functions, transportation, and extra medical services. Extra medical services include physical therapy, pharmaceuticals, and physician care. Most CCRCs require residents to have Medicare and supplemental insurance policies to cover extra medical expenses.

Once all sources of revenue have been identified and estimated, an allowance for vacancy is deducted. It should be remembered that unit turnover or temporary changes in unit occupancy that have already been accounted for in the actuarial assumptions should not be considered in this allowance. A brief synopsis of the sources of income and an example of how to estimate Year 1 GPI for a stabilized facility is provided in Table 1.

Once GPI is estimated and the allowance for vacancy and collection loss deducted, operating expenses are estimated and deducted. The expense statements for CCRCs are typically divided into various cost centers such as general and administrative; marketing; housekeeping; plant operations and maintenance; food and beverage; and health services. To assist in underwriting and review processes, an appraiser needs to translate these departmental expenses into traditional appraisal categories such as real estate taxes (if applicable because many CCRCs are non-profit corporations), insurance, utilities, and maintenance. Operating a CCRC is expensive, and an appraiser may be surprised at the cost. In Florida, such costs typically range from $10,000 to $16,000 per bed-unit, though some first-class facilities TABULAR DATA OMITTED experience operating expenses greater than $20,000 per bed-unit. The bed-unit is the unit of comparison, and it is calculated by dividing operating expenses by the sum of all independent-living beds, assisted-living units, and skilled-nursing beds.

After reconstructing the expense statement and analyzing historic trends, an appraiser should gather information on expense comparables. In states that regulate CCRCs this is easy, though it may require a trip to the state capital for research. Regulating agencies have files of reporting data on CCRCs, and these records typically include a third-party financial audit by a nationally reputable accounting firm. Such an audit provides income and expense statements, balance sheets, a brief history of the project, and other relevant information. By researching expense comparables an appraiser can determine whether the subject expenses are reasonable and in line with the market. If the expenses are out of line, either high or low, additional research will be necessary to determine why.

The last key item to consider in an income and expense analysis of CCRCs is potential refunds. Because residents have life-care insurance types of agreements, they are entitled to refunds if they should choose to withdraw from membership. Such a refund is much like a cash withdrawal from a whole life insurance policy. In this way, a resident has the option to reinvest money in another life-care agreement. Refunds may also be due to estates upon death. The most common refund provision is a refund declining 2% per month over 50 months. CCRCs also may offer a minimum refundable contract that stipulates 50%, 75%, or 90% of the original entry fee amount. The amount of potential refunds is directly related to contractual terms, the amount of the entrance fee, and the forecasted number of deaths and withdrawals. Here again, an appraiser must rely on actuarial information for assumptions of the analysis.

The following schedule summarizes the basic cash flow format of analysis:

Gross potential income (as previously estimated)

Less allowance for vacancy and collection loss (not including turnover and temporary transfers that have already been considered)

Independent-living units Nursing-home units Assisted-living units

Equals effective gross income

Less operating expenses

Management Administration and salaries Real estate taxes Insurance Utilities Refuse Maintenance Professional fees Food and beverage Health care items Miscellaneous

Less reserves for replacement

Less forecasted refunds

Equals net operating income

Then either direct capitalization or a DCF analysis can be applied as pertinent. The capitalization rate, discount rate, retrofit (renovation) costs, income and expense inflators, and other factors should be extracted from the market. We prefer to employ a DCF analysis because it reflects changes in actuarial positions over time that a direct capitalization approach cannot reflect.

It should be noted that the capitalization and discount rates applicable may be surprisingly low. This is because most CCRCs are financed through long-term bonds issued in the capital markets, and such bonds are typically tax-free investments since most CCRCs are owned by religious organizations. Therefore, the associated interest rate is often low. Bond companies that specialize in CCRC financing can be contacted to survey interest rates on this type of debt.


Three standards and ethics provisions of note are the competency provision of the USPAP; "Guide Note 6" of the USPAP, which has to do with reliance on reports prepared by others; and the separate allocation of real and personal property.

Concerning the competency provision, some steps in the valuation of CCRCs involve actuarial forecasts, and an appraiser who is not an expert in actuarial sciences probably cannot competently perform such an assignment unless actuarial reports prepared by others are used or the assistance of an actuarial professional is obtained. This leads to "Guide Note 6" and the reliance on reports prepared by others.

An appraiser is in no position to evaluate such reports. Therefore, unless also an actuarial expert, an appraiser must disclose lack of knowledge in this area. A joint venture or other team approach should be considered to pair a valuation professional with an actuarial professional. An appraiser should clearly disclose these facts to a client.

Further, a CCRC includes a large amount of personal property that is reflected in the value estimated. Items of personalty include furniture, equipment, goodwill, and other items. To comply with the USPAP the value of personalty should be estimated and allocated.


Continuing care retirement centers are a popular trend in elderly care development and are expected to play a large role in meeting the future housing and health care needs of aging baby boomers. CCRCs are special-purpose properties that are management intensive and include a significant amount of personal property. As such, the appraisal of CCRCs poses a challenge to valuation professionals. To undertake such an assignment and comply with the USPAP, an appraiser must clearly understand the appraisal problem, and must either be an expert in actuarial sciences or retain the services of an actuarial professional for assistance.

1. Research Department, American Association of Homes for the Aging (AAHA), Washington, D.C.

2. Karen Pallarito, "Capital Crunch Restrains CCRC Development," Modern Healthcare v. 21, no. 20 (May 20, 1992): 90-94.

3. Karen Pallarito, "Opportunities Await in Retiree Communities," Modern Healthcare, v. 22, no. 20 (May 18, 1992): 96-101.


Gimmy, Arthur E., and Michael Boehm. Elderly Housing: A Guide to Appraisal Market Analysis, Development and Financing. Chicago: American Inst. of Real Estate Appraisers, 1988.

Hogan, John J. "An Overview of the Senior Housing Market." The Appraisal Journal (January 1994): 47-51.

Roberts, Joe R. and Eric Roberts. "Nursing Homes--Government Influence." The Appraisal Journal (July 1989): 308-316.

Roberts, Joe R. and Eric Roberts. "Nursing Homes--Cost Approach." The Appraisal Journal (April 1990): 202-204.

Roberts, Joe R. and Eric Roberts. "Nursing Homes--Sales Comparison Approach." The Appraisal Journal (October 1990): 527-532.

Tellatin, James K. "Medicaid Reimbursement in Nursing Home Valuations." The Appraisal Journal (October 1990): 461-467.

David Michael Keating, MAI, is a practicing fee appraiser in Jacksonville, Florida, and was a member of the Appraisal Institute's 1994 Young Advisory Council. He is a graduate of the University of Florida with a BSBA in real estate.

Gary L. Brace is a consulting actuary with the Atlanta office of KPMG Peat Marwick. He is a graduate of Drake University and a Member of the American Academy of Actuaries.
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Copyright 1994 Gale, Cengage Learning. All rights reserved.

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Author:Keating, David Michael; Brace, Gary L.
Publication:Appraisal Journal
Date:Oct 1, 1994
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