Challenges Facing the Surging Demand for Affordable Senior Housing

| November 25, 2012

Industry and demographic statistics from credible sources—the Bipartisan Policy Center, U.S. Census Bureau and National Investment Council, to name a few—point to sustained and significant demand for senior housing in Chicago, the Midwest and across the country. It is the type of demand and the resultant enthusiasm that could potentially fuel a “build it and they will come” mentality that in the past has plagued other real estate sectors.

In almost all facets of the planning, development and management cycle, cost is a critical factor because the operative word in affordable housing is affordability. This affordability is from the tenant’s perspective and the developer’s vantage point, too. The U.S. Department of Housing and Urban Development (HUD) annually dictates the rents that can be charged and the rates have held steady for the past eight years. In affordable housing projects, cost overruns that may be the result of bad planning, bad judgment and poor performance by a development and management team cannot simply be passed along to the tenants.

However, the senior housing market, particularly the affordable category, represents a more specialized, niche-oriented segment of the real estate industry. Municipalities looking to attract affordable senior communities within their boundaries, lenders who will support them and investors who will further bankroll these projects must practice caveat emptor—buyer beware—before forming partnerships. This caution, in the form of extensive due diligence, will ensure that these alliances and the projects they deliver stand the test of time.

Following are some of the most significant challenges faced by those who develop affordable senior housing projects. How they meet those challenges goes a long way in determining how successful the projects and the alliances they form will be, in the short and long term.

Pursuit costs—The development of an affordable senior housing project can take significant time. It can take anywhere from 12 to 24 months from the time a suitable site is identified and put under control to the point when the appropriate approvals have been received from local municipalities and government agencies like the Illinois Housing Development Authority (IHDA). Add to that another 12 to 14 months for construction, and the total project time that could span three or more years.

With the lengthy timeframe come significant carrying costs and out-of-pocket expenses. These include land, application fees (which can be substantial), various consulting fees associated with rezoning a site for development, and architecture and engineering fees. Small development firms, and those that are not well capitalized, may not have the staying power to make that investment of time and money when the return on investment is a long-term proposition.

Design and construction—An inherent challenge of any residential project—affordable or market rate—is creating an appealing and functional design and providing an acceptable level of value to renters. It is incumbent on the developer to have the foresight to design and construct a project that competitively positions the asset—with modern conveniences and technologies and ample amenities—through several real estate cycles. The reality is that long-term rent restrictions and thin cash flow require a design to be competitive within the market for a decade or more.

Regardless of income levels or rental rates, seniors expect to receive a certain value for the rent they pay. In almost any residential community, value translates to amenities—those contained within the individual units as well as community spaces/elements. A large percentage of the total building area will be non-rentable and is common area for social and recreational activities. The secret is to provide a list of amenities and special features that ensure the long-term viability and competitiveness of a project without creating undo financial stress.

Additionally, there is increasing pressure to make affordable housing projects more energy efficient: green and sustainable. Certain governing bodies that provide funding and oversight for senior housing developments are requiring, for example, that projects have greater insulation R values in the walls and more efficient HVAC and related equipment.

At various levels this produces a juggling act for the developer, who must balance the immediate cost ramifications of these enhanced mandates with long-term financial considerations. Working toward greater levels of energy efficiency can increase costs by as much as 10 to 15 percent, and it can take a number of years to recoup those expenses. Yet for the resident, this helps to ensure affordable housing is, in fact, affordable.

Property operations (cost control/management issues)—With property income relatively fixed, or at least capped, based on pricing parameters established by HUD, the profitability of a development is tied to ongoing operations. A significant element to this is managing the property with a tedious eye to the bottom line. While all managers in market rate or affordable communities strive to be as cost effective as possible, affordable communities demand an extra level of scrutiny on all outside management services.

One other important area of consideration for operations is maximizing occupancy and minimizing resident turnover. It takes valuable resources to market vacancies for lease—resources that may be somewhat limited. The ability to avoid lengthy marketing efforts will provide tremendous financial benefits to ownership and reduce the strain on operating budgets.

Financial considerations—The financing of an affordable senior housing project is a particularly complicated endeavor requiring significant amounts of equity and, almost certainly, Federal and local tax credit programs. Typically, equity requirements are as high as 60 to 80 percent of the project. Finding the sources for that equity and developing the appropriate structures makes it particularly complicated. The potential use of bond financing only enhances the complexity. The debt portion of the equation, ranging from 20 to 40 percent, can come from multiple sources. This means there can be numerous moving parts.

Government/legislation matters—Local, state and federal governments play a significant role in the process for creating and supporting a diverse housing stock within a community. Yet with the financial limitations the government is facing, all tax credit programs are under scrutiny as Congress considers how to cut spending. It is imperative that housing developers and their industry partners understand the impact of current and pending legislation and how it will affect them and the community.

Challenges are inherent in every development opportunity, regardless of the property type. The complex nature of this form of development—with multiple moving parts—can be very risky. It is necessary for development team partners—from the local municipalities to lenders to private investors—to carefully evaluate the credentials, track record and expertise of the project developer.

How the developer navigates these challenges and other issues that may arise speak volumes to the integrity and potential success, or failure, of a project.

Written by Dan Walsh, vice president of development for Ryan Companies US, Inc., a national developer, designer, capital investment consultant, builder and real estate manager specializing in fully integrated solutions and serving customers throughout the U.S. with offices in the NorthCentral, Midwest, Great Lakes, SouthEast, SouthCentral and SouthWest regions. Jeanmarie Kapp, COO of The Renaissance Companies, contributed to this piece.


Category: Development, Low Income Senior Housing, Senior Housing

Comments (0)

Trackback URL | Comments RSS Feed

There are no comments yet. Why not be the first to speak your mind.

Comments are closed.