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Creating an Orderly Seven-Step Plan Now Saves Money in the Future

Capital budgeting sounds complex and something only very large, sophisticated organizations can really implement.  But, by executing some basic fundamentals, long-range capital budgeting for senior living can be one of your most important strategies for the future.

Up to 20 percent of older communities across the United States may no longer be able to effectively serve their future residents while being truly competitive in the marketplace.  This is especially true in market areas that compete with newer, state‑of‑the‑art buildings.  The term “older, functionally obsolete community” does not necessarily mean a facility that has been operating for 15 to 20 years.  Some five‑year‑old communities have serious obsolescence and deferred maintenance problems.

How Did We Get There?

Faced with an aging physical plant, most operators can’t help but wonder, “How did we get in this position in the first place?”  Part of the answer is related to the elusive concept of depreciation as a generally accepted accounting practice.  Depreciation is a non‑cash (accrual) accounting expense.  That means you don’t write someone a check for “depreciation” each month.  Most buildings are depreciated annually over at least a 25- to 35-year period; using a conservative definition of the building’s useful life. If you are a for-profit, writing off depreciation allows you to save taxes and satisfy your CPA or auditor on paper, but the real issue is, “Are you actually investing any real cash in your aging community?”

The Unfunded Depreciation Trap and the Cap ‘X’ Solution

The problem with writing off depreciation is that you are not actually investing any real cash in your aging community.  This “unfunded depreciation trap” is a recipe for trouble and it is creating major problems for many older senior living and health care communities.

Owner/operators and lenders are also using a capital budgeting concept called Cap ‘X’ (for “capital expenditure” or “reserve for replacement”).  This is an imputed operations expense line item of approximately $250 to $350 per unit per year.  For an older property with serious deferred maintenance, this assessment can be as high as $600 to $700 per unit per year.  These funds are allocated, expensed, and reserved as real cash for future capital needs of a routine, generally predictable nature (wear and tear, cosmetic refurbishment, etc.).  This allocation does not cover the more serious capital needs, such as roof repair or a major HVAC overhaul, etc.

Buyers and appraisers will also impute a Cap ‘X’ factor into your income statement that reduces their estimate of your community’s value.  This can suddenly become troublesome for the owner/operator because Cap ‘X’ is an expense line item and every dollar is subject to the capitalization rate of approximately 7.0 to 7.5 percent (for independent living with some assisted living) in the 2017 time frame.  As described above, Cap ‘X’ is a partial solution to the unfunded depreciation trap.

Most progressive new communities now deploy a Cap ‘X’ strategy along with a pragmatic, more extensive forward-looking annual capital investment plan.

The Capital Budgeting Process – A Seven Step Process

A relevant question to ask is, “Now that we recognize the problem, how do we properly plan for the future?”  The answer is to deploy a pragmatic annual capital investment plan and strategy.  A good technique is to combine your actual facility experience with available industry standards and guidelines.  Here are seven key capital budgeting issues to address:

1. What major points need to be considered when establishing a capital budgeting plan? Three important issues need to be addressed:

• Set capital budgeting priorities
• Determine payback or return on capital investment
• Evaluate your relative cost of ongoing ownership

Prioritizing involves categorizing capital budget line items in a manner like those summarized below.

Wherever possible, you should target a minimum criterion of 6 to 8 percent cash return on your invested capital.  Hopefully, every capital investment initiative will have a favorable return, either in the short-run or long-run.  This is where the cost of ownership concept comes in. Estimate how a capital investment will affect your ongoing operations costs.  For example, a $3,000 annual expense savings in an energy-efficient heating, ventilation, and air conditioning system may increase the value of your community by over $42,000 using a 7.0 percent valuation capitalization rate.  The capitalization rate is the cash return (percentage) that reasonable buyers or investors would expect to realize on their cash investment. This would obviously be influenced by their perception of relative risk.

2. Create a detailed punch list of possible capital investment items. Here is a suggested start of that punch list:

3. Develop a pragmatic step‑by‑step capital budgeting process. Sound capital investment planning can be a five‑step process:

• List potential needs. Make a detailed list of potential capital investment needs ‑ all of the components, subsystems, and materials that make up your community. The list should be extensive, certainly including, but not limited to, those items listed above.
• Estimate each item’s life expectancy. Now, identify each item’s life expectancy and warranty expiration dates. Let’s take the roof, for example.  First, determine its current age and then project the expected remaining life.  When this is done to all the items on your list, you’re now in a position to estimate the likely need, cost, scope, and timing for future repairs and replacement costs at your community.
• Create a working spreadsheet. Insert all this information into a spreadsheet, listing potential repair and maintenance details vertically, with five‑year planning columns spread horizontally.
• Consider a revolving five-year plan. Create a revolving five‑year plan, updating your plan by adding an additional 12 months with every year that passes.
• Estimate costs. Insert budgetary cost estimates into the spreadsheet.  You now have the basis for a simple, pragmatic and prioritized five‑year revolving capital investment program.  There are also more comprehensive computer‑based software systems available to accomplish this task.

4. How much time should you allocate for decision‑making, budgeting and actual execution? Whatever it takes.  This effort will likely have a very high return on your time investment.
5. What time of year should the process be initiated? The capital budgeting activity should be synchronized with your annual operations budgeting process.  That’s because the annual financial budgeting process yields an estimate of next year’s cash flow.  Revenues less expenses equals net operating income.  Net operating income less debt service hopefully results in a positive cash flow.  Your annual capital investment expenditures should typically come out of available cash flow proceeds generated in that year of operations.
6. What other ways can I plan for future capital investment? Some organizations and lenders establish a previously discussed Cap ‘X’ concept.  These funds are allocated, expensed, and reserved for future capital needs of a more routine, generally predictable nature (wear and tear, cosmetic refurbishment, etc.).
7. Which administrative team members and department heads should be involved in the budgeting process? All of them.  From an operations’ perspective, every major department (healthcare, dietary, housekeeping, plant maintenance, etc.) should be a stand‑alone cost and contribution to profit center.  The capital budget plan should evolve from these same cost centers.  Department heads should develop a reasonable rationale for each line requested.  Management and administration (CEO, COO, CFO, etc.) should then negotiate and modify these budget numbers, resulting in a cohesive, achievable, value-engineered budget.  This compels all the players to take ownership and implement the finalized capital budgeting plan.

Remember, capital investment is not just to spend money for obvious needs.   It involves spending the right amount of money for the right items at the right time.  This requires prudent capital investment planning that optimizes financial returns to the sponsor or owner/operator while delivering positive impressions and tangible benefits to current and future residents.  Both of these lofty goals can be accomplished with the help of the basic capital investment principles described herein.

Call to Action

      MDS has an extensive capital investment database that we use in comprehensive financial pro formas for our lenders, equity investors and not-for-profit and for profit senior living clients.

In an old TV commercial for the FRAM automobile oil filter, a cagey auto mechanic stood by a smoking engine and held up a filthy oil filter as he said, “You can pay me now, or you can pay me later.”  Like skimping on an oil filter change, deferring needed repairs or replacements can be penny-wise and pound foolish for senior housing sponsors.  “Later” can be synonymous with “very, very expensive.”

The above was taken from Jim Moore’s book Independent Living and CCRCs; Survival, Success & Profitability Strategies for Not-for-Profit Sponsors and For-Profit Owner/Operators.  Jim Moore is president of Moore Diversified Services, Inc., a national senior housing and healthcare consulting firm based in Fort Worth, TX that has been serving clients for 46 years. He has authored five books about senior living and healthcare including Assisted Living Strategies for Changing Markets and Independent Living and CCRCs.  Jim Moore can be reached at (817) 731-4266 or jimmoore@m-d-s.com.

 

Four Simple Strategies That Can Produce Dramatic Results

Today we will deal with some subtle, but still important, strategies and how capital investment, on an ongoing basis, are crucial to keeping your senior living community in a competitive condition.

Three Capital Investment Traps

In planning a capital investment strategy, many owners and sponsors frequently commit three tactical errors.  They:

1. Spend money on the wrong things
2. Lose sight of their overall strategic objectives
3. Pay too much for less-than-optimum value

Consider Two Important Time Frames

In developing a new senior living community or improving an existing one, capital expenditure decisions must consider two distinct time frames:

• Short-Run – The initial (one time) costs of the capital investment
• Long-Run – The ongoing (perpetual) operating costs of ongoing ownership

Cost of Ownership Considerations

To plan effectively, you must carefully weigh the short run capital cost expenditures (immediate capital costs, such as new heating, ventilation, and air conditioning systems) against the long run costs of ownership (ongoing operating costs such as maintenance, utilities, and insurance). Investing less in capital improvements in the short run can sometimes be very expensive over your total ownership period.  These cost considerations become very important if you plan to hold your property for more than five years.  Even if you plan to be a short-term property owner, realize that your ultimate sale value can be adversely affected by your earlier “short run” capital investment mentality.  The buyer’s sophisticated due diligence efforts will likely detect flaws in your original capital investment planning.

These four simple steps should help you make important cost of ownership trade-off decisions:

1. When considering two alternative capital investments evaluate the payback period and calculate the impact on total community value. How many years of operation are required for the operational savings/benefits to result in financial break-even or recovery of each of your alternative initial cash investment options? This can be a simple arithmetic calculation (dividing the initial cost of the capital investment by the estimated annual financial benefit or savings) or a more sophisticated discounted cash flow analysis that takes into consideration the time-value of money invested.  Ideally, your payback period should be between three and five years.  From that point forward, there should be an ongoing positive incremental financial impact.

For example, let’s assume that a combination of capital expenditure decisions costing a total of $50,000 could actually save you $1,000 a month in total operating expenses.  Using the simplified approach, this $12,000 per year in additional net operating income can pay back your initial investment in about four years.  Keep in mind that these annual operating expense savings will likely be realized far beyond the initial payback period – possibly – over the entire useful life of the community.

2. Estimate the total impact on community value. To determine the increased intrinsic value of your community, you should capitalize the incremental increase in your net operating income resulting from the capital investment¹.  The capitalization rate is the cash return (percentage) that reasonable buyers or investors would expect to realize on their cash investment. This would obviously be influenced by their perception of relative risk.

Continuing with the example from Item 1, that same $12,000 annual savings would also increase the economic value of your community.  An investor expecting an 8.5 percent return on a cash investment should, therefore, be willing to pay or invest about an additional $141,000 for your community (12,000/.085 = $141,177).  Simply stated, with that $50,000 investment, the value of your community is likely to be increased by approximately $141,000.

3. Value engineer your capital investments. This means lowering or controlling capital costs without significantly detracting from the look, operational efficiency, or marketplace acceptance of your community.  The results of this effort should be largely invisible to the consumer marketplace.
4. Let the “flash value” concept influence capital investment. Flash value is a fairly obscure, but surprisingly simple, way of quantifying, and thereby maximizing, perceived value in the eyes of the consumer.  This concept is defined as follows:

Flash Value Index  =    What Consumer Thinks an Item Costs / Your Actual Cost

Through consumer testing (focus groups, etc.), you can identify a menu of design features and amenities that exhibit a positive “flash value index” of greater than two to one.  This means that the consumer thinks the item is worth at least twice as much as your actual cost.  You should incorporate a number of highly favorable flash value items into your community.  Typical high flash value items in senior housing include high-quality wood molding or millwork, walk-in closets, unusual (but attractive) public spaces, recessed solid-core living unit entry doors, incandescent or new LED lighting vs. traditional, older fluorescent lighting, wall coverings and artwork, interesting roof lines, and “breaks” in exterior elevations.  The list could go on, but the ideal outcome is for a senior prospect and their family to comment, “This place sure seems to offer a lot for the money!”

Call to Action

Before you move on, remember you can get very creative with your capital investments by taking four basic steps:

1. Evaluate the investment payback period.
2. Estimate the total impact on existing operation and long-run community value.
3. Value engineer for cost investment savings.
4. Invest in flash value to enhance perceived value.

Finally, address the key question, “Is now the appropriate time to take action?”

 

The above was taken from Jim Moore’s book Independent Living and CCRCs; Survival, Success & Profitability Strategies for Not-for-Profit Sponsors and For-Profit Owner/Operators.  Jim Moore is president of Moore Diversified Services, Inc., a national senior housing and healthcare consulting firm based in Fort Worth, TX that has been serving clients for 46 years. He has authored five books about senior living and healthcare including Assisted Living Strategies for Changing Markets and Independent Living and CCRCs.  Jim Moore can be reached at (817) 731-4266 or jimmoore@m-d-s.com.

 

In most instances, your goal should be to deliver comfortable yet reasonably affordable Buicks – not extravagant Cadillacs.  Developing Cadillacs can be a market-responsive strategy, but not for the mass market.  A concept called value engineering can help control costs and actually increase a consumer’s perceived value.

Value engineering is the reduction (or control) of capital costs without significantly changing the final “look” of your community.  The results of this effort should not negatively impact your competitive position and should be largely invisible to the consumer marketplace.  Value engineering starts with an exhaustive review of essentially every line item of capital cost. Through this process, it is not unusual to realize a reduction in total capital costs of between 3 and 7 percent.  Sometimes the value engineering exercise actually increases costs – but only when the increase is reasonable, necessary, and competitive.  Hopefully, the result is an obvious increase in value, a reduction of ongoing operations expense, or providing specific increased benefits to residents.

Value engineering capital costs is best implemented using a two-tier process:

• Tier 1 – Architect/contractor driven. If you are still in the preliminary design phase, ask your development team what it would take to reduce overall costs by 10 percent and what really would be the impact. If your design and development process is further along, a cost reduction goal of 5 percent is probably more realistic.  Your professional team may not reach your total value engineering goals, but more often than not, you’ll be pleasantly surprised with the overall results.
• Tier 2 – Owner/sponsor driven. With the help of your professional design team and staff, next determine what reasonable tradeoffs you are able to make in an effort to reduce ongoing operating costs. If a 150-unit independent living portion of a CCRC community with a preliminary cost of $30.0 million (or $200,000 per unit) could be value engineered by just 5 percent, the savings would be about $1.5 million. Residents could save approximately $60 on their monthly service fee.  If your pricing strategy involves entry fees, those fees might also be reduced modestly to become more competitive.

Let’s take a close look at this calculation for the 150-unit community:

• Preliminary all-in cost of the community of $30.0 million, or $200,000 per unit, with a cost of capital (interest rate) of approximately 5.0 percent.
• A 5 percent cost savings realized through the value engineering exercise, or $1.5 million.
• Multiplying the $1,500,000 savings by a 5.4 percent loan constant results in a reduction in annual debt service of $96,620; approximately $715 per occupied unit, or approximately $60 per unit per month.¹ Remember, debt service can only be paid by revenues from occupied (150 units @90% = 135 units)

_______

¹Loan constant – A convenient analysis factor which provides a single arithmetic calculation for computing the combination of a specific interest rate (5.0%), principal, and loan term (30 years).

 

Consider the Big Picture

This savings may not seem like much until you consider the possibility of putting that money to work. You can invest some or all of the savings in other areas to reduce ongoing operating expenses or to realize a much higher impact on value.  You might also consider lowering the monthly service fee or entry fee so that it is slightly more affordable and competitive.

Call to Action

Spend considerable time developing your capital budge.  First, consider everything and then value engineer with a passion.

Establishing a sound capital budget is literally the financial foundation of your new independent living community or CCRC.  Like the original cost of your personal home, you’ll be living with (and paying for) any mistakes made during its creation for years to come.

 

The above was taken from Jim Moore’s book Independent Living and CCRCs; Survival, Success & Profitability Strategies for Not-for-Profit Sponsors and For-Profit Owner/Operators.  Jim Moore is president of Moore Diversified Services, Inc., a national senior housing and healthcare consulting firm based in Fort Worth, TX that has been serving clients for 46 years. He has authored five books about senior living and healthcare including Assisted Living Strategies for Changing Markets and Independent Living and CCRCs.  Jim Moore can be reached at (817) 731-4266 or jimmoore@m-d-s.com.

 

Ten Steps to Avoid Becoming a “Price-Sensitive Commodity”

In our previous blog “Community of Choice or a Price Sensitive Commodity?” I discussed the benefits and rationale for creating a senior living community of choice.  The less desirable alternative was to be perceived as yet another price-sensitive commodity – just like your competitors.  A true community of choice must deliver at least three superior benefits:

1. Provide an attractive physical plant.
2. Offer flexible value-enhanced services.
3. Deliver an extraordinary quality of life experience.

In return, you should enjoy increased resident satisfaction leading to higher occupancies, optimum value-based pricing and improved financial operating margins.

Quality of Life Defined

Defining quality of life is, at best, an elusive concept. Most of us are on a constant search for self-fulfillment. And residents of senior living communities have more limited options and a shorter lifespan in order to achieve this lofty objective.  In my previous blog, I indicated that I’ve lived briefly in over 130 independent and assisted living communities.  While the typical stay is only several days, I always mingle and dine with the residents. I try to gain a deeper understanding of their real life situation.  Seniors have stories to tell involving a lifetime of distinguished achievements.  They want to share these accomplishments with anyone who will patiently listen.  Many also have untapped artistic and intellectual talents that, properly structured, would significantly enhance their life satisfaction. Many ladies want you to sit and hold hands while some of the men want to reminisce about war and workplace battles won and lost.  The staff hugs them, calls them by their first names and monitors their well-being.  But as an 85-year-old lady told me at dinner one evening, “I just want to talk to someone from the outside world who is really interested in what I have to say”.

Ten Steps Toward Creating a Community of Choice

Providing a value-enhanced community of choice won’t be easy and it can get moderately expensive; but the payoff can be significant.  As a sponsor or owner/operator, you must first create unmistakable value.  Here is a ten-point program for starting down this difficult, but highly rewarding, path:

1.  Give your community a modest make-over. Optimize first impressions of your community in areas such as signage, landscaping, building exteriors, rejuvenation of interior public spaces, and improvements to individual living units.
2.  Zero-base your existing operations. A true community of choice must be able to report a secure financial foundation to its residents.  Efficient operations should deliver financial ratios consistent with recognized industry benchmarks.
3. Get inside the minds of your residents. First, talk to your residents, both individually and in small groups, to get their practical ideas on how to enhance value and improve their quality of life. Next, sample some of your residents’ individual backgrounds.  Determine how you could make each of their individual lives more meaningful.
4. Walk in your residents’ shoes. Project yourself into the future thirty or forty years and ask the defining question, “What would I really want out of life at age 80?”  It’s safe to say your answer might be, “not exactly what I find in my community today.” Explore this hypothetical further by considering what would be acceptable (and necessary) changes in areas such as living arrangements, services, affordability, value, quality of life, financial peace of mind, and staff responsiveness.  Use these items as a punch list to identify your community’s short comings.
5. Focus more activities on your residents’ individual daily life. Quality of life attributes that are really important to Seniors include; adventures, nostalgia, new experiences, individual recognition, intellectual stimulation, self-expression, and the overall feeling of self-fulfillment.  If each resident was your Mom, what would you do differently?  How would you want her to spend her day?
6. Promote health and wellness activities. Don’t overdo it with highly restrictive, structured programs. Provide them with practical advice, flexible programmatic content, and a realistic expectation of favorable outcomes.  Where possible, place a high priority on supporting and enhancing individual quality of life rather than an excessively heavy focus on regimented and institutional medical routines.
7. Leverage, motivate and train human resources. After determining how to enhance quality of life on your campus, you must encourage your staff to take ownership into this changed philosophy and new initiatives.
8. Revisit structured volunteerism. It’s time to revisit volunteerism. While successful volunteerism exists on some campuses, it has not worked for many others. The reasons are two fold; lack of a structured master plan and inconsistent performance on the part of non-family volunteers. The new era of volunteerism involving specific family members may well be the answer. These individuals are more committed stakeholders who have a vested interest in their loved one at the community.  Using their time and talents in an organized and carefully planned manner can result in not only enhanced quality of life for their loved one, but their efforts could possibly impact the lives of many other residents. Also consider using some of your talented residents as volunteers. Helping others could well enhance their quality of life.
9. Every resident should have an advocate. Some progressive sponsors have assigned a specific staff member to act as a “personal advocate” to look after the unique needs and interests of each individual resident on an ongoing basis.
10. Develop a “You talked, we listened” market positioning strategy. Your external market positioning could be: “The Gardens at Westridge – The Community of Choice, Anytown, USA”. Develop a creative communications campaign with central themes focused on the first seven steps.

THE OPTIMUM SENIOR LIVING EXPERIENCE

Ten Desirable Expected Outcomes For Residents

1. Experiences/Adventure/Nostalgia
2. Comfort/Peace of Mind
3. Affordability and Financial Security
4. Quality and Value
5. Optimize Independence
6. Health Maintenance
7. Socialization
8. Individual Recognition
9. Intellectual Stimulation
10. Self-Expression and Fulfillment
    

 

Call to Action

      For seniors, time is not simply money – it’s their remaining life!  As their time horizons shorten, seniors certainly think about leisure activities.  But many place an even higher value on the quality of the remaining time in their lives.  This should be your central focus when developing your community of choice strategy.

The senior living industry has a tremendous challenge, opportunity, and responsibility to enrich the lives of hundreds of thousands of seniors living out their final years in retirement communities.  Many are experiencing the peak of their social, financial, and health challenges. The pay-off for residents will be the enhancement of their individual quality of life.  And sponsors will be taking that big step toward becoming that uniquely desirable community of choice.

 

The above was taken from Jim Moore’s book Independent Living and CCRCs; Survival, Success & Profitability Strategies for Not-for-Profit Sponsors and For-Profit Owner/Operators.  Jim Moore is president of Moore Diversified Services, Inc., a national senior housing and healthcare consulting firm based in Fort Worth, TX that has been serving clients for 46 years. He has authored five books about senior living and healthcare including Assisted Living Strategies for Changing Markets and Independent Living and CCRCs.  Jim Moore can be reached at (817) 731-4266 or jimmoore@m-d-s.com.

The Ultimate Market Positioning Challenge

  In my consulting activities, I try to live in as many senior living communities as possible.  So far I’ve had short stays in over 130 of them.  As I was having dinner one evening with a distinguished gentleman, he said, “You know, I was somebody once.” The lady at the next table chimed in, “The management and young people who work here are just delightful — but they really don’t understand us.”    This community seemed to have all of the right services and amenities.  The staff knew all the residents on a first name basis.  But, there was something missing and that was a true understanding of each resident’s inner emotional needs.  We all recognize the importance of demographics, but now we must also focus on the changing psychographics of seniors.

Changing Expectations

A new generation of seniors is gradually emerging that will expect much more from our senior living communities.  Today’s seniors will be more demanding, less complacent and more pragmatic in their continuing search for self-fulfillment and their definition of value.  The men will have experienced Corporate America’s “gray flannel suit era” including the   transition from a period of conformity to one that emphasized entrepreneurial individualism and autonomy.  Females, who were primarily homemakers, joined the outside workforce in surprising numbers, making them less passive, worldlier and less likely to settle for someone else’s definition of the status quo.

There is an evolving disconnect between the situation-driven focus of many sponsors and owner/operators and what it takes to be truly market-responsive for this new breed of seniors.  Sponsors and owner/operators necessarily focus on covering real estate costs and operating expenses; while delivering their definition of business success, acceptable operating profit margins and cash flow after debt service.  These are certainly very important financial fundamentals.  But there is an equally important question to address: “In the future, do I want to be perceived as offering a price-sensitive commodity or a unique value-enhanced community of choice?”  In many cases, the deciding factor is the senior consumer’s definition of good value.

Seniors Do Buy Value

Throughout life, seniors have made most of their purchase decisions by balancing affordability, choice and their perception of value.  After a lifetime of financial conservatism, many seniors are now in a position to focus primarily on choice and value.  In fact, many have been making value choices for the better part of their lives.  They don’t always opt for the lowest price commodity.   Many buy Buicks and Cadillacs – not Chevrolets.  They dine at the nicer restaurants and buy clothes by brand names at the better department stores – not necessarily Walmart or Sears.  They travel extensively.

Sophisticated product and service providers are constantly selling seniors on value and, where appropriate, quality of life.  Yet, as many seniors face the biggest, most important decision of the rest of their life – senior living options – we find that we haven’t done a very good job of either creating unusual value or effectively telling our value story.

The Search for Self-Fulfillment

Directly or indirectly seniors are on a constant search for self-fulfillment.  This search involves five very important quality of life attributes:

1. Experiences/adventures/nostalgia.
2. Comfort/peace of mind.
3. Individual recognition.
4. Socialization and intellectual stimulation.
5. Self-expression and fulfillment.

Astute sponsors know that the real issue is not just resident satisfaction, it’s quality of life leading to exceptional value.  Ask yourself this question, “What would I want out of the last six to ten years of my life?”  Tough question, isn’t it?  If you’re having trouble projecting yourself into the future, ask what would you want your parents to benefit from in the later years of their life.

Challenges and Opportunities

The primary obstacles to improving the perceived value of your community will be creativity and, frequently, cost.  Making major improvements in the quality of life discipline could require increased staff time and new, innovative program strategies. This will obviously increase operating expenses.  But the long-run benefits realized in distinguishing a community of choice from a look-a-like price sensitive commodity can be significant.  The good news is that you can actually recover most of the additional costs you incur in delivering unique value.  In fact, premium pricing and cost recovery by delivering enhanced value is the essence of avoiding the price sensitivity community syndrome.  Will it be easy?  Certainly not.  In a future blog we will address a ten point program for creating and selling unique senior living value.

Today’s Senior is a “Distinguished Achiever”

If one were able to inventory and make use of the aggregate knowledge, experience and resources that exist with the residents in a typical senior living community, the results would be staggering.  A senior’s unique capabilities, intellect and inner drives that were developed over a lifetime of productive work and community contribution suddenly do not fade away as they “retire” and move into senior living communities.  But sadly, in many cases, these attributes are inadvertently suppressed – never surfacing again during the autumn years of their lives.

 

The above was taken from Jim Moore’s book Independent Living and CCRCs; Survival, Success & Profitability Strategies for Not-for-Profit Sponsors and For-Profit Owner/Operators.  Jim Moore is president of Moore Diversified Services, Inc., a national senior housing and healthcare consulting firm based in Fort Worth, TX that has been serving clients for 46 years. He has authored five books about senior living and healthcare including Assisted Living Strategies for Changing Markets and Independent Living and CCRCs.  Jim Moore can be reached at (817) 731-4266 or jimmoore@m-d-s.com.

 

The Uncertain Future of Staffing

Recent articles point to the fact that proposed immigration laws and the plans to end DACA will likely intensify the senior housing workforce crisis/shortage. According to research released in June by Paraprofessional Healthcare Institute(PHI) a New York City-based nonprofit organization that works to improve long-term care services for seniors “roughly one in four direct care workers are immigrants, totaling approximately 1 million immigrants in the field.”¹

With this strain on the senior living workforce looming, now is the time to evaluate your ability to attract new talent.  If talent is limited, how will you ensure your organization the ability to not only gain but also retain the employees you need.  Becoming an employer of choice is more important than ever.

In an economy that can pay potential employees more than what you might can offer, what is going to bring good employees to your community?  The facts are, some will definitely go for the money, but they are probably not the ones who will not make an effort to excel when times get lean.  You want employees motivated by happy residents, service to others and a job well done.  Yes, your pay must be competitive but you need to cultivate a culture of excellence with employees that strive to achieve that excellence.

Becoming an Employer of Choice

 

This happens not just by competitive pay and great benefits, but by happy and engaged employees, good leaders and a positive culture.

In an ideal world, our employees would only need the satisfaction of a job well done.  But in the real world, the best employees want fair and competitive compensation, recognition for that job well done and access to the resources they need to perform their job well.  In fact, that is why they are our best employees; because they know what it takes to succeed.

What is your company culture? What kind of atmosphere do your employees project? Is there teamwork, cooperation, and support or complaining, negativity and lack of effort? Does your company embrace a culture of caring for residents or just making money/saving money where possible?

Not only should you examine what your company is but what it is not.  A recent blog by Cameron Morrissey titled Top 10 Reasons Even the Best Employees Quit states these reasons for good employees leaving companies;

• No career development
• Overworked
• No recognition
• Lack of follow through by their boss/manager/supervisor
• Not fostering passion and purpose
• No challenge
• Toxic Environment
• Nobody is held accountable
• No trust with boss
• No communication

Do any of these exist in your community or your company? It is difficult enough to obtain good employees, make sure you keep them once you get them.

Competitive compensation, positive culture, adequate recognition, availability of resources and competent leadership; all this combine to create an employer of choice.  And if you are a borderline good employer, you will likely get employees long enough to get some experience and then move on to greener pastures.  (How are those turnover rates?)

Evaluate today what your community or company looks like to your current employees as well as outside job seekers. What do you need to do to attract and keep the talent you need to succeed?  High turnover rates are costing your company thousands of dollars. See two of our previous post for the eye-opening issue of employee turnover.

Measuring Employee Retention and Turnover

Is Employee Turnover Draining Your Cash and Productivity

 

Need answers to your questions on how to handle your current operational struggles or how to enhance an already successful strategy? MDS has answers with decades of experience.  Contact MDS for a consultation today.

Kim Jimenez has been a regular contributor to the MDS website and MDS blog for the past 15 years.  Kim holds a management position in a Fortune 100 company and has experience with a multitude of employee, training and leadership issues.  She obtained her Bachelor’s Degree concentrated in Human Resource Management from Southern New Hampshire University

 

¹ Trump-Backed Immigration Plan Could Worsen Senior Housing Workforce Crisis, August 6, 2017, Senior Housing News.

Expanded Market Positioning Is Now A Necessity

Most seniors, their families and their financial advisors need answers to critical senior living questions.  That’s because a number of deal killing misconceptions continue.  The Frequently Asked Questions (FAQs) concept is a very effective and credible marketing communication strategy.  Consider creating a market positioning theme that addresses “You’ve got questions . . . We’ve got answers”.  Rather than rambling text or boilerplate, this approach focuses very directly on specific important issues.  Here are ten FAQ examples:

1. With my Medicare and Medicaid entitlements, aren’t almost all of my future health care costs covered? Obviously an erroneous assumption.  A senior consumer or their family’s future private pay exposure can be significant.
2. Private health care insurance is getting very expensive. Do I really need it?  Efficiently operated assisted living or possibly a comprehensive CCRC with life care options is frequently the correct answer.
3. Can’t most of my future health care needs be provided in an affordable manner at home? This may be initially true, but the aging process frequently results in higher acuities.  The skills of a typical companion or homemaker are rapidly exceeded.  Licensed, third-party home health agencies can provide reasonably effective short-run temporary assistance, but the long-run cost effectiveness is questionable.
4. It appears that living in a retirement community is much more expensive than staying right here at home. Am I correct?  Not necessarily true.  A surprising majority of seniors have significant misconceptions regarding their true annual cost of living versus the pricing of well run, market-responsive retirement communities.
5. Is there a way to control my future health care costs so I don’t spend-down my life’s savings? If a prospect is initially income qualified for a well run community, their likelihood of experiencing significant spend-down is relatively remote.  Many operators also have a menu of options to avoid future spend-down such as unit downsizing, reducing the future entry fee refund obligation for a CCRC and possibly charitable content funding for a not-for-profit.  Many life care community’s initial pricing assume the financial risks of providing high cost health care when needed.
6. Some entry fee communities charge quite a bit. Won’t I seriously reduce my current net worth if I decide to move to one of them?  Frequently this is a classic example of short-run thinking.  Most seniors do not pay entry fees with their current actual net worth.  Most sell a home and pay their entry fee from new cash from their home sale.  Very frequently a senior’s current active net worth (before the home sale) is not significantly impacted.  A brief explanation of this concept can avoid initial sticker shock.
7. If I pay a big entry fee, how will I be able to leave a legacy to my children and grandchildren? Upon death, a senior may have a refundable entry fee of up to 90% of their original payment.  This can provide a living financial legacy to their children or grandchildren.  The initial entry fee payment might also provide substantial life care benefits in the form of significant cost reductions to cover their future health care financial exposure.  There can also be a substantial tax benefit to the consumer of a one-time medical tax deduction of between 30% to 35%.  See next FAQ for an example.
8. Are there any special income tax deductions available for some health care costs? For a moderate $300,000 entry fee that involves life care.  That one time deduction would be in the range of $90,000 to $105,000 with tax loss carry back and carry forward financial options.
9. If I live in an assisted living community, are there any tax benefits? Yes, If you are receiving assistance with at least two Activities of Daily Living or require substantial supervision because of cognitive impairment you can potentially deduct almost all of the full monthly service fee; shelter, services and care.  IRS Publication 502 (irs.gov) provides the details.
10. Will my children or my financial advisor understand all these FAQ details? Probably not.  Most of the answers to the FAQs seem like basic common sense that the senior consumers, their adult children or financial advisors already know.  Not true.  Many have not either considered them or have not put them in proper perspective.

These ten FAQs are just the tip of the iceberg.  The concept can be substantially expanded.  There are at least another 25 very relevant questions to address.  Don’t assume the market knows about all the relevant questions that need to be asked . . . and answered.  Implementing a comprehensive FAQ approach sharpens the market positioning of your community and dramatically increases the competency of your sales and marketing professional team.

Jim Moore is president of Moore Diversified Services, Inc., a national senior housing and healthcare consulting firm based in Fort Worth, TX that has been serving clients for 46 years. He has authored five books about senior living and healthcare including Assisted Living Strategies for Changing Markets and Independent Living and CCRCs.  Jim Moore can be reached at (817) 731-4266 or jimmoore@m-d-s.com.

by Jim Moore

“You’ve Got Questions . . . We’ve Got Answers”

I need to continue to survive and prosper but I keep hearing the Senior living industry is starting to experience performance “headwinds.”  What should I do?

Focus on fundamentals.  For many owner-operators, the industry is in fact going through another challenging business cycle.  Many stabilized occupancies have dropped from the 90% plateau to the mid 80% range.  Increased new competition has intensified demand vs. supply balance.  Many operators are struggling to sustain the critical 0.5% to 1.0% spread between annual operating expense escalation while executing market-responsive monthly service fee increases.  Some communities developed 10 to 15 years ago are facing stiff competition from new state-of-the-art competition in their market areas.  The average age of a new resident is increasing along with typical acuity levels.  Direct care costs, in terms of minutes per resident-day, are frequently not measured accurately or monitored resulting in uncompensated cost creep. Increases in the minimum wage in a number of markets is impacting labor costs beyond just entry level workers as many other staff members also expect traditional increases in their wages. Staff turnover is increasing.

This is but a sample of a number of sobering issues.  The good news is that there are a number of practical, cost-effective strategies that can be implemented if we just . . . focus on fundamentals.

Jim Moore is president of Moore Diversified Services, Inc., a national senior housing and healthcare consulting firm based in Fort Worth, TX that has been serving clients for 46 years. He has authored five books about senior living and healthcare including Assisted Living Strategies for Changing Markets and Independent Living and CCRCs.  Jim Moore can be reached at (817) 731-4266 or jimmoore@m-d-s.com.

 

The following is part of the “You’ve got Questions,…We’ve Got Answers” series featured in McKnights Senior Living

By Jim Moore

What practical options are available to enhance the flexibility of my service offering to be more competitive and financially viable without significant modification to my community? 

Offer a unique and more flexible living arrangement for some of your independent living residents who obviously want to continue to maximize their independence, but many now need some moderate additional assistance in living.  They may not currently require more extensive and structured assisted living at this time.  But they could benefit from accessing additional a la carte priced assistance in living services that can be offered on a flexible, as-needed basis within their independent living unit.  I call it “Catered Living.”

You can optimize the individual independence of many of your residents by providing the necessary services on a highly customized basis.  What this means is that your residents can live as independently as their situation allows while having access to appropriate assistance.  That’s the essence of Catered Living.  Eventually, a particular resident might obviously require a more formalized high acuity assisted living setting, but short-run, many resident’s ideal lifestyle desires of experiencing optimum independence can be sustained.

As with every strategic opportunity in Senior living, there are challenges and cautions.  Here are three; 1) Make sure regulations and licensing allow you to deliver Catered Living services in your state or locale. 2) Have a clearly documented policy as to when a resident must move to a more structured, formal assisted living setting.  3) Develop a financial model for equitable a la carte charges that avoids cost creep and delivers appropriate profit margins.

Jim Moore is president of Moore Diversified Services, Inc., a national senior housing and healthcare consulting firm based in Fort Worth, TX that has been serving clients for 46 years. He has authored five books about senior living and healthcare including Assisted Living Strategies for Changing Markets and Independent Living and CCRCs.  Jim Moore can be reached at (817) 731-4266 or jimmoore@m-d-s.com.

 

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I’m concerned about being a Senior living owner-operator with just one community. 

Yes, you should be concerned.  A growing number of individually owned, self-managed communities must address three major concerns; 1) keeping up with the current state-of-the-art and growing complexities of the changing business model, 2) addressing change and challenges both short-run – in the next 18 to 24 months and longer range over the next 24 to 60 months and 3) the ability to afford and fund necessary change.

Examples of just some of the future typical needs include sophisticated systems and procedures, expanded strategic business practices, increased purchasing power and possibly funding a more market-responsive physical plant design.  One issue is very clear, increased financial viability resulting in available cash flow must be enhanced in order to fund strategic sophistication that is evolving within the industry.

Most self-managed single community owners desire to remain in complete control.  That’s understandable.  But it could be increasingly difficult to achieve.  Owner/operators might alternatively consider retaining a qualified third-party management company.

A key question is, “Should I consider exiting the business?”  Good question.  Exiting can result in a win-win outcomes.  Today, many single facility owners are selling to quality operators who have the objective to expand their existing portfolio of properties.

The complexity and sophistication of the senior living business has increased substantially over the past 10 years.  A frequently used business cliché is still very appropriate; “evaluate your past with 20/20 hindsight . . . but look to the future with an entrepreneurial vision.”

Contact MDS today to see what your next strategic move should be.  From necessary updates to expansion to an exit strategy, MDS can help you decide on your next step.