What Does It Take to be a Winner in the Senior Housing Market?

Although senior housing shares certain traits with this asset class, it is important to consider the significant aspects that set it apart from the others.
Okaty and Jassak

Michael Okaty and Matthew Jassak

We get it. You’ve probably seen the statistics–more than 10,000 Americans turn 65 every day. You’ve probably also heard the experts at every industry conference state it over and over–Get in now!–the market is hot and everyone can be a winner. Lets set the record straight: Yes, the senior living industry is an expanding and lucrative market open to multifamily developers interested in broadening their development opportunities. However, industry outsiders have a tendency to overlook the distinctions inherent in seniors housing projects relative to multifamily developments. Although senior housing shares certain traits with this asset class, it is important to consider the significant aspects that set it apart from the others. We’ve identified several key factors for interested and veteran multifamily developers to keep in mind when pursuing projects in this industry.

Permanent residence; level of services

Seniors housing demands a safe and engaging atmosphere for residents to live out the remainder of their lives under 24/7 monitoring tailored to their specific needs. This oftentimes requires that the community offer assistance to residents, including daily living, meals, transportation, medication assistance, etc. Further, the duration of a typical apartment lease is quite brief when compared to a seniors housing move-in that is likely to be long-term, and in many cases for the remainder of the residents’ lives. Moreover, the level of service provided is dramatically higher than the standard apartment, as seniors housing residents look for the operator to provide furniture, food service, activities and entertainment.

Increasingly, the community experience is the focal point of operators and developers in both middle market and upscale senior housing communities. With many widowed or single residents, common areas are the emphasis of most communities, as they drive engagement amongst residents. Multiple dining rooms and varied menu options provide residents with the ability to adjust their dining experience to their specific tastes and requirements on a regular basis.

Resident activity centers focus on keeping both the minds and the bodies of residents sharp. Movie theaters, game rooms, full service bars, beauty salons and spas are just some of the amenities that are now common in many communities. Limited or no amenity offerings will face an uphill battle from a marketing standpoint, particularly in the first-tier assisted and independent living categories.

Day-to-day operations

Unlike multifamily assets, the seniors housing industry deals on a regular basis with elderly, and sometimes ill, residents. Ensuring that the community is designed to minimize risk, and that staff are properly trained to care for residents, are just two of the ways developers/operators of seniors housing communities can reduce operational exposure. Owners, operators and developers can further protect the community and their investments through contracting with skilled operators with a proven track record in the industry, maintaining appropriate types and levels of insurance and utilizing appropriate legal structures to minimize operational risks inherent in the senior living industry.

Regulatory risk

While multifamily and similar asset classes can be subject to certain local and state regulation, seniors housing assets typically are subject to a broader range of regulation that can vary significantly by jurisdiction.

Recent years have seen increased local and federal regulatory scrutiny across the care continuum in seniors housing. Residents in assisted living communities are extending their stay in lower acuity care communities relative to skilled nursing facilities, resulting in increased licensing and regulatory oversight. At the other end of the spectrum, skilled nursing facilities have seen an uptick in billing and reimbursement scrutiny as state and federal governments attempt to tighten spending and clamp down on fraudulent or ineffective billing practices. As a result, there are now higher barriers to entry for potential entrants, and more arduous asset management concerns for those already operating in the industry.

Successfully navigating the legal requirements and restrictions impacting licensure, certificates of need, facility design and construction, and ongoing operation requires engaging knowledgeable counsel capable of advising on the regulatory regime under which your proposed community will exist. One approach that increases the probability of success for new developers is partnering with a seasoned manager/operator with experience in the proposed jurisdiction.

The labor force

While multifamily developments can frequently rely on a lower-skilled work force, senior housing staff are typically highly skilled and often under government regulation. This results in higher wages, increased training and supervision by management. This also results in a more limited workforce pool that can make staffing a community difficult at times.

Locating, training and retaining professional and licensed staff is of critical importance in ensuring the continued safety of the residents and the protection of your investment in a senior care facility. Inevitably, residents will get ill or pass away, mistakes will be made and plaintiffs’ attorneys will look for opportunities to litigate. Selecting the right operator and implementing programs to mitigate operational risk can save developers from expensive litigation in the long-run.

As the population ages and baby boomers move into a variety of seniors housing options, developers new to the market are looking to hit the jackpot. Despite a lack of sector-specific experience, new entrants can position themselves for success by taking the unique characteristics of the industry into account. Proper planning and connecting with knowledgeable partners are mandatory for those looking to profitably enter and thrive in this sector.

Michael Okaty is the founder and former chair of law firm Foley & Lardner’s Senior Living Industry Team. He regularly counsels clients in the acquisition, sale and related financings of senior living facilities, as well as public and private companies in a variety of industries on corporate and finance transactions, governance and counseling. Okaty serves as managing partner of the firm’s Orlando office and can be reached at mokaty@foley.com.

Matthew Jassak is the co-chair of Foley & Lardner’s Senior Living Industry Team. Jassak counsels local and national senior housing and long term care providers in all aspects of their business. His practice focuses on the representation of investors and developers in commercial real estate transactions, including acquisitions and dispositions, commercial mortgage and construction financing and joint ventures. Jassak is based in the Orlando office, and can be reached at mjassak@foley.com.