Real Systems Change = Real Opportunities + Real Challenges Financing Affordable Assisted Living Using Low Income Housing Tax Credits LIHTC Basics • Affordability unit election set-aside: 20% @ 50% AMI or 40% @ 60% AMI • Development costs allocated as basis eligible for 9% credits (4% for bldg acquisition and with bonds automatic) • Awarded by State HFA and/or City on annual basis for 10 years (Annual award x 10 years = total equity available) • GP forms partnership with Investor for 15 years and sells tax credits for % of total equity available • Investor contributes equity (up to 70% of deal) and gets $1 for $1 write off on taxes as well as depreciation AL Environment & Philosophy • Enriched Residential Setting – Housing – Meals – Personal Services – Light Nursing Care • Informed Choice – Independence – Remain in community – Privacy – Dignity Affordable Assisted Living • Need – 65-70% elderly over 85 with incomes less than $25,000 – Cost range from $2,500 - $4,500 per month – 90% of AL is private pay (focus top 15% of market) • Regulation – More independent alternative to institutional nursing home – State's approach to licensure and/or certification with Medicaid Waiver – Consumer Protection Public Subsidy Options • SSI – Room & Board Only – State Supplement may pay for services * Illinois SSI Level III no state supp. (room & board) * $545 - $90 PNA = $455 • Medicaid – State Plan • Entitlement for all – Waivers • May be based upon finite number of slots * Illinois Rate for SLF Waiver • 60% NF rate • Chicago - $62.76/day • Downstate - $46.13/day Tax Credit Qualifying Factors • Residential – Not transient – Complete units with kitchenettes and bathroom – Resident does not require 24 hour medical care – Separate lease agreement • Services – Must be optional – Not required as condition of occupancy – Free to reject services – Viable alternative service provider – Separate food and services agreement Three Critical Elements • Licensing / Certification policy and regulation ... residential & social model defined by nature and degree of services provided • Qualified Allocation Plan (QAP) by State Housing Finance Agency ... allows AL to compete for 9% credits or have set asides • Adequacy of Service ... subsidy via Medicaid Waiver for low income residents Illinois Environment • Regulations – Community Care Program (DoA) • Home & Community based services (not a facility) • Medicaid state-wide plan – Assisted Living & Shared Housing Act (DoPH) • Licensure • No Medicaid payment for services – Supportive Living Program (DoPA) • Certification • Medicaid Waiver based upon slots Supportive Living Program • 2,750 slots for Medicaid-eligible persons – June 2002 CMS renewal request for 5 years • Residential Model – New construction - 300sf unit – Rehabbed nursing facility - 160sf unit – Full commercial kitchen & common areas • Eligibility – 65 years or older & not mentally ill – DoN score 29 or higher & 1 or more ADLs – Must have SSI Level III income (room & board) SLP Services = Assistance with ADLs & IADLs • Personal Care – Bathing – Dressing & Grooming – Eating • Temporary Nursing • Medication Management • Housekeeping • Laundry • Three meals a day • Recreational & Social Activities • 24 hr emergency response • Maintenance of living space • Transportation • Shopping Illinois SLP Good & Bad News • Features & Flexibility – Project-based slots – Adequate Reimbursement rate – Elderly only buildings – Allow payment for 30 day absence – Only 25% of units as Medicaid-eligible • Moratorium as of Nov 2001 – Fiscal crisis Sept 11th – 100 applications received with 76 applications approved & 10 operational – To early to collect data to support deflection from nursing homes – Slow payment Challenges to LIHTC • State or city housing agency must provide LIHTC to AL – No formal partnership between IDPA & IHDA and/or CDoH – Differing market assumptions, reserve requirements and property management issues • Initial Concept to Full Operations of AL – Experience is 3 to 4 years Investors Business & Underwriting Risks Assisted Living is 100% a business =With 40% real estate underwriting &60% hospitality services underwriting Revenue Sources for Services • Medicaid Waiver – Limit number of units using subsidy – Look at trending & do not depend on annual increases in income projections – Identify transition plan if subsidy goes away or is not renewed – Develop additional service payment sources such as SSI supplement and/or food stamps AL Lease Up Risks • Needs driven market so limited ability to pre-market • High degree of resident hand-holding and screening required for property managers • Takes time to liquefy assets and qualify for programs • High fixed operating costs due to services • May be new concept in market • Low barriers to entry and increased competition • Time to place in services and meet qualified occupancy (tax credit 24 month window) Ways to Mitigate Lease Up Risk • Focus on marketing plan and teams • Generate realistic lease up assumptions • Budget for lease up deficit on fixed and variable costs ($2,000 - $3,000 per unit) • Be prepared for larger and stronger guarantees. AL Operating Risks • Higher fixed operating expense ratios when compared to straight senior housing so drop in gross income result in reduction of net income; • Low barriers for entry couple with turnover rates in excess of 50% annually hurts occupancy and revenue projection; • Vary in Medicaid reimbursement for residents who have short hospital stays or away from facility; • Replacement residents drawn from highly specialized pool changes with acuity; • Service budget dependent on affordable labor; and • Economic fluctuations in industry and in state budget have greater impact Additional Risks for AL • Service budget and cost creep – Aging in place (acuity) – Adequacy of services – Admission and discharge policies – Local Labor costs • Potential for regulatory changes • Staffing and turnover Risk Reduction = Debt Coverage & Reserves • Projections of 1.30-1.40 DCR* even though lender may accept 1.15 (1.10 DCR on LIHTC for multifamily) • Capitalize higher operating reserves ($3,500 -$5,000 per unit) • Hold back developers fees longer for guaranty against lease up and break even * DCR = Net Operating Income (income available to pay for mortgage debt service) divided by annual debt service Replacement Reserves in AL • Higher for AL as there is 40-50% more common space and furniture – Mitigate with up front capitalized reserve and/or larger annual contributions (FFE percentage) • Multifamily has $250/unit per year * AL has minimum of $300/unit per year Design Issues for AL • Never do shared units and units with two separate bedrooms should be market rate • Think in terms of hospitality not just housing by designing for activities and socializing • Meet more than just ADA requirements as AL population has higher acuity • Provide amenities that attract residents Variety of Debt Options May be Layered • Conventional • Federal – Low Income Housing Tax Credits – Federal Home Loan Bank – Tax Exempt Bonds – HUD Guaranty • State – Housing Trust Fund Management Experience = Success • High level of property management, hospitality service and healthcare is required – Good Property Management = tax credit experience – Good Hospitality = personal care choice + meal menus – Good Healthcare = Client-focused Assessment & Plan of Care – Good Partnerships = effective operations & responsible management REMEMBER YOUR & YOUR PARTNERS MISSION Illinois Affordable AL Initiative • Managed by – NCBDS – LISC/NEF * Predevelopment Loan – $2 million revolving pool • Funded by – RRF – CCT – CMF * Grants – $200,000 per year for 3 yrs