Close up image of a caretaker helping older woman walk

More and more, aging facilities are begging the question: Is it time to remodel, refurbish or just start over?

It’s safe to say hundreds, if not thousands, of long-term care operators are at least a bit envious of the crew at the Los Angeles Jewish Home for the Aging.
That’s because that group took two aging irritants and simply got rid of them.
That’s right. Leaders at LA Jewish bypassed the “makeover or not?” quandary and simply razed two older resident facilities. The two outdated buildings ultimately made way for two bigger facilities, the latter of which was scheduled to open this month.
The nursing home boom of the late 1960s and 1970s leaves many providers today pondering when, and how, they should trade in their older models for newer ones. And if a change is made, should it be a touch-up, massive makeover or total “do-over”?
With so many willing lenders in today’s red-hot lending market and many facilities on the verge of physical-plant arteriosclerosis, many providers are now dreaming big.
Not Molly Forrest. She’s the CEO of Los Angeles Jewish Home. She already has her new structures, complete with increased capacity, more amenities for residents and better staff safety.
“A nursing building, if built properly, would go on for 50 years. But after 50 years, you really have to start over and ask, ‘What’s appropriate now?'” she says. “We can’t continue to do programs in buildings that don’t make accommodations for today’s staff.”
When properly maintained and gradually updated, some buildings can be functional for three or more decades. But most, even if well maintained, are in need of sprucing up long before that.
Driving changes have been resident and worker needs, as well as an evolving menu of service offerings.
In are private lounges, improved dining areas, wireless networking, gazebos and walking paths. Out are buildings with 6-foot-wide corridors, bathrooms not equipped for wheelchairs, big dining halls that double as activity halls and army-model assembly-line service.
“The federal government provided most of the funding to build facilities when Medicare came out (in the 1960s), and the model the government suggested was two or three beds in a room, sometimes even six or eight, centralized baths and one dining room that doubled for activity space,” Forrest explained. “It may have worked sort of OK in the 1960s, but it certainly does not work for today’s nursing home resident.”
She said her organization also looked at making changes because the older buildings were not worker friendly. Now, instead of serving 49 residents between two buildings, the same number of caregivers serves twice as many residents, thanks to a bigger, two-story building with a better physical configuration.
“The other took more labor to operate, and it was poor for morale because they were working in an environment that didn’t support good care,” Forrest said.
“The new center returns more cash on the bottom line, but we’re able to run the same staffing ratios, or better,” she added. “You can remodel and remodel, but at some point in time, when you’re remodeling a 16-square-foot or 20-square-foot bathroom, you have issues related to worker and resident safety. How many times do you have to spend $42,000 on a back-injury lawsuit before you say it doesn’t make sense?”
Builder James McManus, chairman and CEO of the S/L/A/M Collaborative, understands both sides of the remodel/do-over question. His company has worked on facilities throughout the East and Midwest.
“Our general philosophy is if there’s value there, we try to retain it,” he said. “(But) if the cost of the remodeling is going to approach 50% or more of replacement value, you have to scratch your head and say is it really worth that type of investment? That’s kind of the break-even point I look at.”
Hazardous material removal, or drastic structural reconfiguring could drive costs to a questionable level, he said.
“Living with compromised spaces can be difficult to correct. However, if there’s extra space, and it’s not designed to within a gnat’s whisker of program space, then it’s well worth considering that,” he said.
McManus said the most common shortcoming in older buildings is a lack of amenities: smallish dining rooms, minimal kitchens and simple bedrooms.
“People expect to see more in the way of lounge spaces and sunrooms and libraries. Today, rather than plans being driven just by license requirements and regulations, it’s driven more by market conditions. There are more staff amenities being offered, too,” he said.
He added that basic upgrades no longer will do: “nice” finishes, vinyl wall coverings, wood trim and other fine touches are expected.
“When there weren’t so many people and so many choices, operators didn’t have to cater to the whims of families,” he noted. “But now there’s a tremendous amount of choice out there.”

Playing the market
The decision to remodel or rebuild is always complex, said Brian Pollard, managing director of Lancaster Pollard, Columbus, OH.
“The big factor is will the market support changes – will it provide incremental cash flow to provide an appropriate level of return?” Pollard said. “If you can’t provide debt service coverage, you can’t do it.”
While continuing care retirement communities have been repositioning themselves with wellness and community centers to appeal to more active seniors, nursing homes have tackled other challenges. They typically try to convert to private rooms from semi-private rooms, build better therapy areas and try to give facilities a “more residential” feel, Pollard observed. “Facilities with that institutional feel need an extreme makeover. A lot is driven by what competitors are doing in the market.
“If you have wards or shared bathrooms or a flat roof, those are all major problems to competing in today’s market because seniors have so many more options,” he added. “If you have bathrooms in each room and a nice lounge and activity areas, maybe that renovation doesn’t have to be so great. Maybe it just needs more therapy space to become more attractive to hospital discharge planners.”
Banks may require a physical condition analysis to examine remaining useful life on critical components when considering loans, one veteran banker said.
“Sometimes old buildings don’t look that bad, as long as the operator has been maintaining them,” he said. “Some spend a lot to keep them up and believe in curb appeal. But I don’t stop at curb appeal. If surveys are excellent and everything looks OK, that’s what I want.”
He says a case usually can be made for remodeling rather than starting over.
“The average cost of a new nursing home, depending on the geographic location, is $120,000 to $140,000 per bed. I don’t think you’re ever going to spend $100,000 per bed for repairs,” he explained. “To say you have to replace windows, a roof and the HVAC, that’s maybe $1 million. Interiors are not very costly on a per-bed basis, compared to building a new building.”

Long odds
From a census perspective, it is difficult for a 30- or 40-year-old facility to compete with a newer one, noted Kymberlee Keefe, the leader of Aon Healthcare’s long-term care arm. “It may be just the look that can do it,” she said.
“With the issue of licensed beds, very rarely will you see someone literally tear down a piece of property and rebuild it. But you do see replacement buildings going up down the street, or around the corner. Usually it’s when an operator said enough’s enough. You can only put so much into a building and get value out of it. Sometimes they’re just too old to accommodate what you’re trying to do.”
Revenue streams will govern how much refurbishing should be done, Keefe said. Although she acknowledged insurance considerations would not be a main driver in those considerations, she noted that aged buildings do seem to carry a stigma.
“When underwriters look at a building 30 years old, they cringe at the thought,” Keefe said.
Getting funding for a makeover depends a lot on the type of loan you’re requesting. Traditional banks will be more stringent, desiring minimum debt coverage ratios of 1.35 to 1.5 — covered with historic, not projected, cash flows, Pollard noted. The level of historic coverage needed could drop to the 1.0 to 1.1 range, if an applicant can show a project that can create incremental cash flow, a good market study and evidence of good management history.
Government-sponsored funding, such as from the FHA or the USDA BNI program, tends to be easier to get, Pollard added. Other lenders, including real estate investment trusts, will assume additional credit risk — but always at a price to the borrower.
“The most distressing situation is when you come across a facility that continues to lose market share because their physical plant is more and more dated, and their cash flow is historically poor. They are in a very difficult position because the money they need to put back in is either unavailable or very expensive,” Pollard said.
“There are occasions where we’ll see a project and say maybe you’ve waited too late. You’ve lost market share over the years as you’ve waited and it’s negatively impacted your cash flow and become this death spiral that’s very difficult to get out of. You can’t wait until occupancy falls from 90 percent to 70 percent.”
Location, location, location
As with most real estate considerations, location plays a big role in decision-making, says Jim Pieczynski, co-president, Healthcare & Specialty Finance Group, of CapitalSource. He cites examples of one provider in the Northeast remodeling an existing facility due to high land and labor costs, while another in Texas worked to secure a license and other requirements before acquiring (relatively cheap) land, yet alone constructing a building.
“People first and foremost add on to or convert existing space to a larger therapy room,” Pieczynski said, noting that therapy and Medicare reimbursement rates are the lifeblood of many facilities. “A large therapy room, preferably with an outside entrance to attract outpatient business and get the name in the community, is that much more attractive.”
Secondly, providers are investing more in dining areas, Pieczynski said. This could include conversion to more restaurant- or home-like eating areas, with tablecloths and the ability to order individual meals.
Other common facility upgrades include new flooring (often to add a wood appearance), wood cabinetry, elegant window treatments and nicer televisions.
“I think we’re finding a new breed of operators — definitely not the small, private operation that cuts costs as much as it can to take as much money home as possible,” Pieczynski explained. “It’s in regional private chains. You generally have one to two guys who tend to be coming from the care-based side, as opposed to the finance side. They’re less concerned about earning quarterly interest — they’re in it for the long haul. This new breed wants a sustainable business and is less worried about taking every dollar that comes out of it. They’re still doing fine, but they’re investing in the business.”
What a lender thinks of a provider carries a lot of weight.
“You look at the history of their care surveys, reputation with regulators, who their existing facilities are and what they do,” Pieczynski explained. “If I have somebody I know has done this (turnaround business) before, it’s a very easy deal for me to do because I’m betting on that operator’s ability.”
Or as John Cobb, senior managing director, GE Healthcare Financial Services’ real estate finance team, puts it: “It’s always the ‘who,’ not necessarily the ‘what.'”
He said he knows of numerous operators looking to buy a facility and update things like flooring, furnishings, fixtures and equipment, and to enhance therapy areas.
“That’s really where I see the upside: enhanced therapy rooms, and Medicare services,” Cobb said. “That is, quite frankly, where we’d like to do a lot of business.”

Inertia has no place
Making the most of your aging building is always the first option, emphasizes Jeff Petty, president and CEO of Pennsylvania-based Wesley Enhanced Living.
His organization currently is struggling with how to make over a Philadelphia area facility because “if you have to build (a new) one, it’s a loser.” Especially with a possible price tag of $150,00 to $200,000 per bed, he said.
Nonetheless, renovation costs also can be so high a nonprofit facility has to carefully consider what investments fit within its mission. Further, competitors who may spruce up nearby facilities may force action, regardless of other factors, as Wesley officials are realizing.
“We can fill the beds right now, but in the long run, we won’t. It’s a marketing decision,” Petty said of refurbishing.
He said he expects makeover decisions about two Wesley facilities soon so that next year can be a time of action.
“You can’t not make a decision,” he said. “By not doing something, you have made a decision — to ultimately fold your tent and go home.”

Rising performances
The overall level of loans in senior housing rated as “performing” has risen steadily in recent years.*

Year %
2000 95.12
2001 87.95
2002 94.70
2003 93.90
2004 95.31
2005 98.54
2006 99.05**

* The NIC Key Financial Indicators Service covers a sampling of lenders who participate to illustrate conditions across a wide range of financial categories. Percentages shown are averages of quarterly performances.

** 1Q results only
Source: NIC Key Financial Indicators, 2006

Required debt-service coverage ratios
Just as with capitalization rates, the minimum debt-service coverage ratios increase as a property moves up the continuum of care. This pattern reflects the increased perceived risk of property types that offer more personal and healthcare services, and that are less dependent on the tangible assets (real estate-based assets) to generate revenue and income.

Property type Mean
Freestanding Alzheimer’s/dementia units 1.27
Seniors apartments with no services 1.28
Assisted living 1.32
CCRCs 1.33
Independent living projects 1.35
Nursing homes 1.36

Sources: NIC and ASHA studies, www.NIC.org, 2006

Pump up the volume
Overall loan volume placed by year*

Year $ Volume (billions)
2000 2.04
2001 1.94
2002 2.34
2003 2.46
2004 2.71
2005 4.03
2006 .83**

* The NIC Key Financial Indicators Service covers a sampling of lenders who participate to illustrate conditions across a wide range of financial categories.

** 1Q results only

Source: NIC Key Financial Indicators, 2006