A slew of new construction is in the works for the senior housing industry, but before committing to the projects, operators must determine if they’re financially feasible.
Conducting a financial feasibility study is the first step providers should take to assess the risks and opportunities associated with new projects, according Lancaster Pollard, a firm that provides financial advice to senior housing and health care organizations.
“A financial feasibility study is not only crucial to the decision-making process, but will help organizations maximize the success of their projects,” the firm writes in a recent article.
Doing so early in the planning process will help operators avoid higher project costs and missed market opportunities. Consider five best practices to pursue:
1. Look at Debt to Establish a Framework
Prior to investing in a financial feasibility study — which can be costly depending on the level of analysis required for the project — the provider should conduct a debt capacity study.
This analysis is more limited in scope than a financial feasibility study and helps identify capital necessary for an organization’s success.
A debt capacity study will help establish a framework for more detailed analysis by answering the question, “Will an organization’s or company’s balance sheet provide sufficient liquidity — cash and investment reserves?”
2. Focus on Key Services
New projects come with new opportunities, but they may mean cutting back on existing services. Lacaster Pollard suggests identifying service lines that an organization may need to add or discontinue with new construction.
“Service line goals are critical because whether adding or subtracting, the result will be organizational change,” the article states. “The question for providers is if patients/residents, staff and the community are prepared for the necessary adjustments.”
For example, is a community prepared to make a necessary trade-off, such as letting go of a costly nursing home to provide the cash flow necessary for expanded memory care services?
While new projects are exciting, managing change is an essential part of the expansion planning process. And providers must recognize this early in the financial feasibility process to accommodate change management.
3. Outline the Project Timeline
Together with financial advisers, project managers and lenders, providers should establish time frames and deadlines for each step in the project.
This includes identifying how long it will take to secure the land; the length of the architectural and construction contract process, as well as design iterations and value engineering; and above all else, securing funding, which will be determined by the desired financing structure.
“To avoid delays and additional expense, a financial feasibility study should be pursued in conjunction with the overall project timeline,” the article states.
4. Be Realistic in Revenue Projections
Successful projects require careful examination of the demographics and utilization information that will support a feasibility study’s revenue projections. Providers should focus on projects that have the greatest revenue potential.
The key to assessing senior housing demand, Lancaster Pollard says, is being honest about the number of income-qualified senior households, utilization and penetration rates.
5. Include Staff as Key Expenses
Though organizations often plan to maintain their existing full-time employee level post-construction, they fail to consider that the number of these employees tends to increase because existing service lines do not immediately change.
“Successful organizations understand staffing benchmarks and have adjusted them appropriately for project and operational impacts,” the article states.
So with an imminent increase in senior housing demand, providers must consider these factors in order to accommodate residents and expand successfully.
To read the full Lancaster Pollard article, click here.
Written by Emily Study
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