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Want to develop assisted living? Some cautionary advice.

"Deinstitutionalization" is in. Though those who understand and appreciate well-run nursing homes may differ, majority sentiment these days seems to favor keeping people out of them except as a last resort.

The Clinton Administration's proposed health care reform package encapsulates this thinking: Its long-term care scheme would emphasize "home and community-based" care and relegate nursing home funding primarily to sub-acute care. What if this turns out to be a trend in coming years? What if long-term care investors would rather "join them than fight them." Or what if they simply want to follow "the smart money;" which way should they turn? Recently NURSING HOMES asked a pair of long-term care investment advisors what they would recommend to nursing home administrators and operators who may be considering the "what if's."

Joseph G. Beck, Principal, Shattuck, Hammond Partners

"I don't see many nursing home operators moving into assisted living right now. Many operators grew up in an environment of providing health care services. Assisted living is a different proposition. It is considered to be more a real estate transaction than even nursing homes are. With assisted living, investors place more value on appraisals and on demonstrated market demand. Assisted living is a more a market-driven product than an entitlement-driven product; there is very little public money out there right now for assisted living, as opposed to Medicaid and Medicare for nursing homes. In short, assisted living is viewed more like a hotel than a hospital.

"Still, if nursing homes don't feel ready quite yet to move into sub-acute, there is investment money for assisted living available. Probably the most important sources right now are the REITs (real estate investment trusts) and the REMICs (real estate mortgage investment conduits). REITs have been filling the capital vacuum left by the banks and the insurance companies that withdrew from the real estate market in the 1980s. Sale-leaseback arrangements are available to nursing homes and others considering assisted living, with interest rates at around 9-11%.

REMICs are less costly than REITs, but they are less flexible, as well; it is much more difficult to raise additional capital, if needed, with a REMIC, because these are closed-lien mortgages that have been packaged for sale. Still, they're talking about limited-recourse and non-recourse-to-the-owner approaches, so they may be very attractive. In fact, REMICs may be the next 'hot' financing tool for assisted living.

"If nursing homes want to move into this market, though, they will have to be prepared to be sophisticated about developing financial plans based on good marketing studies, with features that will attract more purely real estate investors. They will probably also be required to contribute more equity to guarantee the loans. This is a more real-estate-oriented transaction than many are used to."

Jeffrey A. Davis, President, Cambridge Realty Capital, Ltd., Chicago

"In my view, it may be a mistake for nursing home investors to consider going the assisted living route. Assisted living seems to be a better match with independent living facilities; the reimbursement rates are higher than for independent living and so are the profit margins. But they are considerably lower than the rates for nursing home care, at least on the private pay side. There would seem to be more of an economic incentive for independent living, rather than nursing homes, to move in the direction of assisted living.

"For nursing homes, the more suitable move would be toward sub-acute, which is higher-paying than nursing home care. In other words, I would think nursing homes would prefer to move upstream to sub-acute than downstream to assisted living."
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Title Annotation:interview with Joseph G. Beck and Jeffrey A. Davis
Publication:Nursing Homes
Date:Mar 1, 1994
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