Competing for a $1.1 trillion resource.
APPROXIMATELY 77 PERCENT OF THE AGE 75+ SENIORS MARKET are homeowners--most with no outstanding mortgage. The median value 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 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 by the IRS 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 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 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.
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 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 of $150,000 and $30 per resident-day in operating expenses 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.
(4) Develop prudent spend-down strategies. Some seniors eventually experience financial distress. 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 2000.
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|Publication:||Contemporary Long Term Care|
|Date:||Dec 1, 2000|
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