May 25, 2022 DST.EDU Series B Part 5 Senior Housing Asset Class

Editor’s note- this is part five of a ten-part series on the var­i­ous asset types of DST offer­ings.
Part 5: Senior Hous­ing Asset Clas­si­fi­ca­tion

By Al DiNi­co­la, AIF®
May 25, 2022
DST & 1031 Tax Deferred Spe­cial­ist
NAMCOA® – Naples Asset Man­age­ment Com­pa­ny®, LLC
Secu­ri­ties offered through MSC-BD, LLC

Lay­ing the Ground­work

The types, styles, and range of senior hous­ing and ser­vices being offered today con­tin­ues to expand. Unfor­tu­nate­ly, the end is in sight of what has been known as the Great­est Gen­er­a­tion. The Great­est Gen­er­a­tion com­mon­ly refers to those Amer­i­cans who were born in the 1900s through the 1920s. The Silent Gen­er­a­tion is most­ly a demo­graph­ic sec­tor of peo­ple who were born between mid-1920 and mid-1940s. This gen­er­a­tion is referred to as the “silent gen­er­a­tion” as the pre­vail­ing feel­ings were that speak­ing out or par­tic­i­pat­ing in activism is dan­ger­ous, and that they should focus on careers. This gen­er­a­tion expe­ri­enced the Great Depres­sion and in spite of that many grew into suc­cess­ful pros­per­ous life expe­ri­ences. You may have heard the phrase “the Lucky Few” as anoth­er descrip­tion of the silent gen­er­a­tion. The Todays’ seniors (includ­ing part of the Lucky Few) are liv­ing longer and want more active lives than the pre­vi­ous gen­er­a­tion.  Match­ing their lifestyle pref­er­ences becomes the key to suc­cess­ful devel­op­ments.

The investors of today are some­what con­fused or at lease want­i­ng more details regard­ing senior hous­ing on what was a niche real estate asset class that is becom­ing more in demand. This sec­tor is now falling out­side of the mul­ti­fam­i­ly asset class where it was a sub­set. Delaware Statu­to­ry Trust (DST) spon­sors are active­ly engag­ing and acquir­ing Senior Hous­ing Assets. There is a wide spec­trum of offer­ings of options for seniors that go out­side the inde­pen­dent 55 Plus age restrict­ed com­mu­ni­ties. This is a com­mer­cial real estate asset class that pro­vides a much need­ed and sought-after alter­na­tive.  Hope­ful­ly we can pro­vide some insight into the dif­fer­ences between ever grow­ing aspect of Senior Hous­ing.

Senior Hous­ing Depth and Breath

Senior hous­ing is more than the tra­di­tion­al “nurs­ing homes”. Investors of com­mer­cial real estate are ask­ing ques­tions on the eco­nom­ics of the asset class as well as the options. As com­pared to 20 years ago, the options for seniors who are more active and health­i­er con­tin­ue to expand. There is still a need for extend­ed care for seniors who can­not take care of their dai­ly needs. Some of those seniors need con­stant mon­i­tor­ing and care on a 24-hour basis.

The breath of offer­ings of senior hous­ing selec­tions starts with age-restrict­ed sin­gle fam­i­ly and mul­ti­fam­i­ly (with a vari­ety of addi­tion­al options) all the way to ser­vic­ing the needs for intense care in nurs­ing homes and hos­pi­tals.

55 and old­er age-restrict­ed sin­gle fam­i­ly and mul­ti­fam­i­ly prop­er­ties have been around for a long time.  Of late the activ­i­ties have increase along with the demands by many baby boomers seek­ing to extend their time beyond their prime.  The selec­tion of home may include rentals as well as pur­chase options such as Apart­ments, town­homes, vil­las, and sin­gle-fam­i­ly homes. Very few 55 plus com­mu­ni­ties are includ­ed in the REIT struc­ture or Delaware Statu­to­ry Trust (DST) offer­ings. Many of these are offered on a for sale bases. Invest­ments into senior hous­ing rely on rental income as a source of rev­enue. There may be some addi­tion­al fees that add to the total income for the investor.

Mov­ing up the senior hous­ing list would be inde­pen­dent liv­ing facil­i­ties. While there may be some sim­i­lar­i­ties to age-restrict­ed hous­ing, inde­pen­dent liv­ing facil­i­ties tend to cov­er more pro­gram­ming and ameni­ties, such as restau­rant-style din­ing.  Assist­ed-liv­ing facil­i­ties are one step up, pro­vid­ing addi­tion­al ser­vice with dai­ly liv­ing activ­i­ties, such as eat­ing and bathing. Assist­ed liv­ing facil­i­ties are reg­u­lat­ed and must be licensed to pro­vide med­ical care.

Peo­ple with mem­o­ry-loss con­di­tions require spe­cial care.  The inte­gra­tion with assist­ed as well as inde­pen­dent liv­ing with mem­o­ry care may offer an easy tran­si­tion for some seniors. Mem­o­ry care may also be on a stand­alone basis. Skilled nurs­ing facil­i­ties are the most inten­sive clas­si­fi­ca­tion of senior hous­ing. These facil­i­ties are licensed and sim­i­lar to tra­di­tion­al nurs­ing homes.

There was good rea­son to clas­si­fy senior hous­ing as a sep­a­rate asset class from mul­ti­fam­i­ly. The senior hous­ing sec­tor is a heav­i­ly reg­u­lat­ed busi­ness. The operator’s expe­ri­ence is crit­i­cal. Investors need to under­stand this is an oper­at­ing inten­sive asset.  As with all invest­ments iden­ti­fy­ing the details and under­ly­ing eco­nom­ic issues may affect the per­for­mance and prof­itabil­i­ty of any invest­ments.

The Key to suc­cess is the Operator’s Expe­ri­ence.

As a real estate asset class senior hous­ing is an intense oper­at­ing busi­ness as well as a local busi­ness. DST spon­sors total­ly under­stand this fact. Pri­or to an investor becom­ing inter­est­ed in invest­ing cap­i­tal into an offer­ing the crit­i­cal ques­tion is the expe­ri­ence on the oper­a­tor run­ning the facil­i­ty as well as the busi­ness. DST spon­sors may seek out exist­ing facil­i­ties where a dif­fer­ent man­age­ment team can boost oper­a­tions as well as returns.  This will set the table for a suc­cess­ful invest­ment. All real estate con­tains risk but hav­ing an expe­ri­enced oper­a­tor helps to sti­fle or man­age the risks.

The demand for an expe­ri­ence qual­i­ty oper­a­tor who under­stands all of the facets of the high­ly reg­u­lat­ed indus­try is extreme­ly high. There are a vari­ety of com­pli­ance issues to adhere to for keep­ing the busi­ness open.

Staff and Labor, the Key Ele­ment

The largest line item in the oper­a­tional bud­get is labor. Oper­a­tors who can recruit, train, and retain staff will increase not only the bot­tom line but the expe­ri­ence of the res­i­dents.  The res­i­dents are the cus­tomers, and their liv­ing expe­ri­ence and rela­tion­ship expe­ri­ence is vital to a suc­cess­ful oper­a­tion. True appre­ci­a­tion for the staff may only occur when you per­son­al­ly expe­ri­ence a fam­i­ly mem­ber liv­ing each day in a senior facil­i­ty. It is expect­ed that the envi­ron­ment (inte­ri­or and exte­ri­or) will be a car­ing envi­ron­ment that is invit­ing and warm. The qual­i­ty of the envi­ron­ment will help to min­i­mize vacan­cies. There will be poli­cies and pro­ce­dures in place for the well­be­ing of the res­i­dents and employ­ees. Sys­tems need to be in place, mon­i­tored for com­pli­ance and feed­back obtained.

All asset class­es require oper­a­tions for suc­cess.  When com­pared to oth­er com­mer­cial real estate asset class­es the oper­a­tor risk to senior hous­ing is mag­ni­fied.  DST spon­sors will have oper­a­tors with deep expe­ri­ence in a posi­tion to move into a facil­i­ty if nec­es­sary. This is tru­ly the only way for the senior hous­ing asset to per­form to its full poten­tial.

The Demand Com­po­nents

Under­stand­ing the aging trends and local demo­graph­ics may at first thought of as an easy task.  If an area has a high con­cen­tra­tion of aging adults the ini­tial con­clu­sion may be this would be an ide­al place to devel­op and invest in senior hous­ing.  There are more aspects to pin­point­ing the demand. One key ele­ment may be where the key deci­sion mak­ers for the aging adult lives. There is a point in many fam­i­lies where deci­sions need to be made for the seniors by the adult chil­dren. These deci­sions go beyond finan­cial and include the liv­ing accom­mo­da­tions.  Aging in place is a goal many seniors have, mean­ing stay­ing in their homes as long as pos­si­ble.  How­ev­er, there comes a point in time where this becomes over­whelm­ing.  The aging par­ents may or will move into a senior liv­ing facil­i­ty. There are two age groups to con­sid­er:  the aging par­ents or seniors (over 70) and the age of the adult chil­dren (50–65) when eval­u­at­ing poten­tial demand for senior hous­ing.

Scope of the Demo­graph­ics

Many ini­tial stud­ies will uti­lize the typ­i­cal­ly dri­ve time or mile(s) of radius from a poten­tial facil­i­ty. The demo­graph­ic pro­files with­in a three (3) to twelve (12) mile radius should pro­vide an ini­tial indi­ca­tion of need. Urban areas may be short­er than sub­ur­ban.  There are a list of ques­tions DST spon­sors (and ulti­mate­ly investors) will ask or want clar­i­fi­ca­tion.

• What is the need or poten­tial num­ber of seniors who would be poten­tial users?
• What are the income sta­tis­tics (Medi­an house­hold income) for seniors liv­ing inde­pen­dent­ly?
• What are the demo­graph­ics on the adult chil­dren of the seniors (medi­an income and oth­er key ele­ments)?
• Do the Local hous­ing val­ues indi­cate a good sign of afford­abil­i­ty or wealth?

As with any prod­uct offer­ing there needs to be an eval­u­a­tion of the num­bers of house­holds earn­ing above a par­tic­u­lar income lev­el (for exam­ple $100,000). The oth­er com­po­nent would be the future of this demo­graph­ic mean­ing is this group increas­ing or declin­ing with­in the geo­graph­i­cal local area.

What are the Sources of Income?

Under­stand­ing who the res­i­dents (or ten­ants) of the facil­i­ties is very impor­tant to under­stand. Recent sta­tis­tics show the medi­an income for seniors over 75 years of age is 54,058 per year. The medi­an net worth is $254,800 (aver­age is $977,600). Each senior hous­ing com­plex may have a vari­ety of ser­vices besides rental pay­ments (some may exceed $10,000 per month). As the need for care increas­es with mem­o­ry care cost may increase. While there is a need for many types and styles of senior hous­ing facil­i­ties most DST offer­ings seek out pri­mar­i­ly pri­vate pay.  Hav­ing said that many facil­i­ties have state require­ments to include sub­mar­ket rents (Med­ic­aid).

Suf­fice to say that col­lect­ing Social Secu­ri­ty ben­e­fits (most seniors will receive), this will not cov­er the full costs of senior hous­ing.  There needs to be oth­er sources of income. The analy­sis and due dili­gence process DST spon­sors engage in becomes the key deci­sion fac­tor.   Seniors who have retire­ment accounts, pen­sions, sav­ings accounts, stocks, and bonds cre­ate a finan­cial foun­da­tion. In addi­tion, the sale of the senior’s res­i­dent (and oth­er real estate), vehi­cles may cre­ate addi­tion­al income. There may also be long term care insur­ance poli­cies pro­vid­ing sup­port.  As a last para­chute may be the adult children’s’ finan­cial assis­tance.

When look­ing at offer­ing state­ments and finan­cial mod­els DST spon­sors are very inter­est­ed in the per­cent­age of rental pay­ments com­ing from pri­vate pay vs. Med­ic­aid res­i­dents.  Can the pri­vate-pay res­i­dents’ cur­rent and future income cov­er the rental pay­ments and oth­er ser­vices pro­vid­ed by the facil­i­ty? Bot­tom line for DST spon­sors (and ulti­mate­ly investors) can the tar­get mar­ket who would move into the facil­i­ty cre­ate a sus­tain­able income stream.

There is always Mar­ket Com­pe­ti­tion

There have been tremen­dous advances for a move­ment called “aging in place”.  Aging seniors want to stay in their own home (aka age in place) in their famil­iar loca­tion com­mu­ni­ty and close to friends.  Mov­ing hun­dreds of miles away may not be the pre­ferred option.  When attempt­ing to acquire or devel­op a new facil­i­ty, or any prod­uct, look­ing at the com­pe­ti­tion in your sub­mar­ket is a key point to under­stand.  DST spon­sors will look at com­peti­tors’ occu­pan­cy rates, mix of liv­ing units (stu­dios, 1 bed, etc.), mix of care units (inde­pen­dent liv­ing, assist­ed liv­ing, mem­o­ry care), com­pa­ra­ble rents, and oth­er ele­ments.

Con­clu­sion

Senior hous­ing has been ele­vat­ed into a more main­stream prod­uct type and no longer list­ed as a spe­cial­ty asset under mul­ti­fam­i­ly prod­uct. Senior hous­ing is attract­ing atten­tion from DST spon­sors and insti­tu­tion­al investors. The inter­est in senior hous­ing should con­tin­ue with Amer­i­cans liv­ing longer. DST spon­sors believe that there will be an increase in inter­est in senior hous­ing. First steps for DST spon­sors is to under­stand the busi­ness and eco­nom­ics of senior hous­ing. Sim­i­lar to all asset class­es there is a com­plete under­writ­ing and third-par­ty report­ing on the DST senior hous­ing offer­ings.

DSTs are not for all investors. The acqui­si­tion of a DST is for accred­it­ed investors only. Con­tact your invest­ment advis­er for addi­tion­al details on how a DST may be a solu­tion to your 1031 Exchange and suit­ed for your invest­ment future. For more infor­ma­tion on how to prop­er­ly set up an IRC 1031Tax Deferred Exchange or if you are an accred­it­ed investor and would like addi­tion­al infor­ma­tion on a DST con­tact Al DiNi­co­la at 239–691-8098 or email adinicola@namcoa.com.

This is not an offer to pur­chase or solic­i­ta­tion to pur­chase any secu­ri­ty, as such be made only through an offer­ing mem­o­ran­dum or prospec­tus. Invest­ing in secu­ri­ties, real estate, or any invest­ment, whether pub­lic or pri­vate, involves risk, includ­ing but not lim­it­ed to the poten­tial of los­ing some or all of your invest­ment dol­lars when you invest in secu­ri­ties. You should review any planned finan­cial trans­ac­tions that may have tax or legal impli­ca­tions with your per­son­al tax or legal advi­sor. NAMCOA, LLC is a Reg­is­tered Invest­ment Advi­sor, reg­u­lat­ed by SEC (Secu­ri­ties and Exchange Com­mis­sion). Our cor­po­rate office is locat­ed at 999 Van­der­bilt Beach Road, Suite 200, Naples Flori­da 34108. Secu­ri­ties Offered through MSC-BD, LLC, Mem­ber of FINRA/SIPC. 410 Peachtree Park­way Suite 4245, Cum­ming, GA 30041. MSC-BD, LLC and NAMCOA are inde­pen­dent­ly owned and are not affil­i­at­ed.

Thank you.

NAMCOA® – Naples Asset Man­age­ment Com­pa­ny®, LLC