Real Systems Change Real Opportunities Real Challenges

1
Real Systems Change Real Opportunities Real
Challenges

• Financing Affordable Assisted Living
• Using
• Low Income Housing Tax Credits

Matthew Haas, Program Manager IAALI / NEF
2
LIHTC Basics

• Affordability unit election set-aside 20 _at_ 50
  AMI or 40 _at_ 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

3
AL Environment Philosophy

• Enriched Residential Setting
• Housing
• Meals
• Personal Services
• Light Nursing Care
• Informed Choice
• Independence
• Remain in community
• Privacy
• Dignity

4
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
• States approach to licensure and/or
  certification with Medicaid Waiver
• Consumer Protection

5
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

6
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

7
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

8
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

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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)

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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

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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

12
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

13
InvestorsBusiness Underwriting Risks

• Assisted Living is
• 100 a business
• With 40 real estate underwriting
• 60 hospitality services underwriting

14
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

15
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)

16
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.

17
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

18
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

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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

20
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

21
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

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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

23
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

24
Illinois Affordable AL Initiative
Targets Nonprofit Community-Based Organizations

• Managed by
• NCBDS
• LISC/NEF
• Predevelopment Loan
• 2 million revolving pool

• Funded by
• RRF
• CCT
• CMF
• Grants
• 200,000 per year for 3 yrs