In March, we highlighted the most expensive rental senior living communities in the United States. In that piece, we aimed to standardize the rates various communities charged to get as close to an apples-to-apples comparison as possible.
What we didn’t include in that comparison were communities with entry fee structures – i.e., those that require a “down payment” of sorts and offer (in many cases) some type of refund when a resident leaves the community. We made that decision largely because most communities today operate on a rental fee structure.
But entry fee communities still make up a sizable minority of the industry. In this post, we take a closer look at the state of senior living communities through the lens of entry fees: where things stand nationally, the role a local market plays, how care level affects fee structure, and where things might be headed post-COVID.
As always, if you have questions about what you’re reading, feel free to reach out.
Quick Background on Entry Fee Communities
If you’re not familiar with entry fee senior living communities, here’s a crash course.
To move into these communities, residents pay a large entry fee upfront, which functions a bit like a down payment. Residents then pay monthly fees as long as they live in the community. Those fees may or may not include additional care levels (say, if a resident needed to transition from independent living to assisted living or memory care).
When the resident leaves the community, they receive some portion of the entry fee back. For communities and investors, revenue comes from…
- Interest from entry fees, which communities invest.
- Monthly fees.
- Selling units (ideally at a higher price than the refund they paid the last resident), though this applies almost exclusively to independent living units.
Today, the average entry fee in the US is $329,000, though they can exceed $1 million on the high end.
And while the entry-fee model was popular in the 1970s and 80s, it’s fallen out of favor more recently, in large part because investors prefer the steadier income that rental communities offer.
Among the 116 communities we considered in our analysis for this piece, just 20 of them (17 percent) operate with an entry-fee structure. (Nationally, about 25 percent of communities have an entry-fee structure.)
But there’s not a simple relationship between fee structure and community age – in our sample, we saw entry-fee communities that launched as recently as 2019. Let’s take a closer look at the factors that affect a senior living community’s fee structure.
Senior Living Community Fee Structure Trends by Property Age
For this analysis, we compared communities that launched after 2008 – when the bottom fell out of the real estate market – with those that launched in 2008 or before. Our reasoning is that communities that launched up through 2008 were planned prior to the real-estate-fuelled economic collapse of the Great Recession.
Those launched in 2009 and after had to take into account a different economic reality.
Our findings are telling: 90 percent of the entry fee communities in the group we analyzed were opened in 2008 or earlier (see Figure 1).
Figure 1: 90% of entry fee communities in our sample launched in 2008 or earlier
Here’s a slightly different view, for context: among the communities we analyzed, 22 percent of those that opened in 2008 or before operate with an entry fee structure, whereas just six percent of those that opened after 2008 do.
Figure 2: Of communities that launched in 2008 or before, 22% have an entry fee structure; since 2008, just 6% have
In other words, the portion of communities using an entry fee structure fell by 72 percent after 2008.
This isn’t shocking: real estate prices plummeted in 2008. Reselling a unit for significantly more than a past buyer’s refund became much less of a sure thing – and therefore a much bigger risk for operators and investors.
This past year, when COVID restrictions prevented many entry fee communities from selling new units, we saw yet again that entry fee revenue can be fickle. Still, that doesn’t mean they’re universally out of favor.
But it’s also likely that COVID will impact the way operators and investors view various fee structures.
The Impact of COVID
Before we get into that impact, let’s take a step back.
COVID had a number of negative impacts on senior living communities. Some indicators suggest that entry fee communities were hit particularly hard, as the inability to sell new units for a year caused a much bigger dent in income than a similar inability to rent new units at rental communities.
But anecdotally, we’re hearing that inquiries and move-ins are picking up. Early occupancy data backs that up.
The second consideration is less obvious and involves looking at the long-term impacts COVID will have on residents. Recent research shows that social isolation and loneliness are associated with a 50 percent increase in the risk of dementia.
COVID restrictions translated to unprecedented levels of loneliness and isolation for many seniors, especially those with hearing loss and low tech skills, who struggled to embrace tech-enabled versions of group activities and family visits.
The fallout for senior living communities could be significant.
Post-COVID, all communities will likely have a greater proportion of residents who require assisted living or memory care services than anticipated in the coming years – i.e., higher populations of higher acuity.
This could mean many things for the infrastructure of the community, including…
- A need for more assisted living or memory care units.
- A need for additional staff to support residents (amid a time of high turnover and widespread staffing shortages).
- A financial strain for CCRCs that budgeted for care for a smaller portion of their population.
And given the current surge of COVID cases powered by the Delta variant, there’s no guarantee that this coming winter won’t include additional bouts of lockdown and isolation.
A Complex Question for All Parties
There are thousands of articles online dedicated to helping seniors and their families choose from among the various fee structures senior living communities offer. On the consumer side, the question is complex, not least because nobody knows how long they’ll live or how much care they’ll need in the future – two factors that greatly impact which type of fee structure makes the most sense.
The calculus is no less complex for investors, whose returns are affected by everything from interest rates to, yes, global pandemics.
One added source of complexity is that most entry fee communities offer multiple buy-in options. Residents might choose a plan that offers to return either 0, 50, or 90 percent of their entry fee, for example (as is the case for one of the Oklahoma City comps we analyzed).
Some communities offer dozens of buy-in structures, in part because they know they’re competing with rental communities and want to offer residents a plan that they see as valuable.
Evaluating Senior Living Investments
Clearly, there’s no single rule of thumb for how fee structure affects a senior living community’s viability as an investment. But for today’s market, three factors will likely play a major role in a community’s success:
- Competitive offerings. Local trends matter more than national trends. In an industry where customers are choosing between a handful of communities in the same area, success is a matter of selling or leasing incremental units. It’s essential to understand what competitor communities are offering: how their fees are structured, how they’re tweaking pricing, how they’re positioning their value props. (For a report on comps in a market you’re analyzing, get in touch.)
- COVID. Resident care needs as a result of last year’s lockdown and potential future lockdowns, depending on the trajectory of the pandemic, could greatly impact communities’ resource capacity.
- Fee structure options. Communities that offer multiple fee structures will likely appeal to a greater population – and be more competitive with rental communities – than those with a single structure choice.
If you’d like insight into what’s happening in the markets you care about, let us know. We’d be happy to put together a comp report.