Long-term care operators certainly didn’t foresee, and certainly weren’t looking forward to, record inflation and recessionary pressures as they come out of the pandemic. For many, routine maintenance and repairs were likely sidelined over the last three difficult years. Those are projects that still need to be addressed. As they come up for air in the warm months ahead and reconsider priorities and preferences, how should operators tackle their to-do lists? And what kinds of projects can be temporarily shelved until more stable ground is found? Experts weigh in here.
- Prioritize repairs. Then decide on the type of financing to pursue.
“Unless you are fortunate enough to have long-term fixed-rate debt on your project, the cost of financing any project has gone up dramatically over the past year,” explains Imran Javaid, managing director, BMO Healthcare Finance Group.
“Now is the time to be judicious with the projects that you undertake. Don’t delay projects that can cost you more if you didn’t fix them. Anything that can have a measurable impact on occupancy or efficiency of operations in your building should be undertaken.”
Now is also a good time to address major repairs.
Assuming a sufficient analysis was completed during the underwriting of the loan, the reserve for replacement escrow should provide funding for CapEx [capital expenditure] items that for most would be “surprises,” cautions Patrick Shearer, director of healthcare and seniors housing lending for Greystone.
“Focus on servicing and maintaining all major building systems in advance of any sort of aesthetic improvements,” he says. “Confirming there are no issues with the HVAC, electrical, plumbing, roofing, windows, siding, etc. should be prioritized.”
2. Sift carefully through “buy now, pay later” arrangements.
“Taking advantage of any payment plans that provide 0% interest on unpaid balances is wise,” says Mark Myers, managing director of investment sales focused on seniors housing at Walker & Dunlop. “There are installment plans for many types of equipment, whether payment over time with low or no interest and leasing of equipment such as computers and laundry equipment.”
Shearer believes there are a few situations where it may be advantageous to pursue a project with that structure: One, if the owner/operator determines that paying in full would reduce cash on hand to an uncomfortable level; and two, if the project was something that would create savings on energy bills or would receive a rebate that defers some of the costs associated with the buy now, pay later structure.
3. Carefully weigh “build versus buy” options. If you’re an operator with clean and strong credit, it may be worth the effort.
“Although the construction cost increases have moderated, the interest costs for all projects have gone up dramatically over the past 18 months,” Javaid says. “Hence, any development or complete redevelopment timeline requires that the downtime is minimized. Minimizing downtime will reduce the need for a larger than expected debt service reserve for your project.”
In general, Myers believes it is preferable to buy rather than build due to the cost of ground-up construction.
“Since many properties are experiencing financial and operating difficulties, buyers can acquire at a discount,” he notes.
4. Consider potential pitfalls or traps before signing off on your next big project.
“Everyone needs to have a thorough process of vetting the costs and benefits of a project,” Javaid says.
“Costs are generally easier to measure by soliciting bids and requesting a guaranteed maximum price for a clearly defined scope of work.”
Shearer believes one of the biggest mistakes to avoid right now is trying to compete outside your current asset class, such as a nursing home trying to make improvements that measure up to a new assisted living facility down the street.
“It would also be worthwhile to pay attention to the depth of the resident base and understand where the level of improving a building is reasonable and when it is just throwing good money after bad,” he says.
Adds Myers: “Business owner-operators should avoid spending money that does not result in a rate increase. Wherever possible, owner-operators should spend money on things that improve resident experience and care, which drives higher rates.”