There's no doubting the importance of skilled nursing facilities to the healthcare system, but many are housed in aging buildings with crumbling infrastructures and outdated amenities. In some cases, they've outlived their capacity to provide quality care for seniors.
Yet the buildings still exist, and this presents the quandary of what, exactly, to do with them. If not skilled nursing, then what?
Repurposing them as affordable housing is one approach offered by Bill Pomeranz, managing director at Cain Brothers. Doing so can actually help to facilitate better care for seniors, not to mention a healthy financial return for investors, or what Pomeranz calls sponsors.
But to understand the reasons why, it's helpful to have a little context.
For one thing, an inordinately high percentage of the country's skilled nursing facilities -- many of them owned and operated by nonprofits -- are approaching 40 to 50 years old. Many were built using U.S. Department of Housing and Urban Development funds in the early- to mid-1970s shortly after the introduction of Medicare and Medicaid. The nonprofits in particular that built these facilities weren't able to maintain the properties especially well, nor were they able to build new ones.
The residents of these facilities now tend to be moderate income. Nonprofits are struggling to maintain positive bottom lines due to lacking the amenities offered by well-heeled for-profits, which, according to Pomeranz, tend to operate more modern facilities with larger living units.
The living units in these aging buildings lack space, to put it mildly; a one-bedroom unit could encompass just 550-600 square feet.
"(For) a new bedroom today, even in intense urban markets like New York or Seattle, a one-bedroom wouldn't start until 650 square feet and they'd go up to 900, and even for three-bedroom units in these older nonprofit buildings, it's far less than what you'd have today," Pomeranz said. "Unless they combine these units over time."
The financial sponsors of these buildings, which can range from religious to community organizations, are also typically unable to provide things like state-of-the-art gyms or rehabilitation services. Instead, people are sharing rooms -- even bathrooms.
"In the '50s and '60s there was more of an affinity between the sponsor and residents," said Pomeranz. "The church, retired teachers, Masons, Catholics, Lutherans, Jews -- those populations often don't live in the same communities as these facilities. Neighborhoods change. It's been difficult for the communities to reach out to these new constituencies. It's not only the amenities that have suffered, but the markets have shifted around for them. The for-profits have never thought like that."
THE SWITCH TO AFFORDABLE HOUSING
Even when seniors aren't in need of the care services offered by skilled nursing facilities, they're often in need of affordable housing. The income levels that determine eligibility for affordable housing are based on working people, with qualifying incomes typically between 60 to 80% of the median.
The rules of affordable housing allow a building's sponsor to let people who are above that income level stay in the facility if they're already there -- meaning nobody would be out on the street if a skilled nursing facility was converted. The sponsor wouldn't lose its residents, and would be opening up the building to a larger market.
"What someone would do is bring in a development team, and they would say, 'What does this building look like if we converted it into affordable housing?'" said Pomeranz.
Many times, it looks like this: The nonprofit owners would sell the building to another entity but maintain a financial stake in the property, essentially creating a partnership.
"Even older buildings have enough space for affordable housing requirements," he said. "Let's say you had 200 nursing home beds, and let's say that was 10,000 square feet. You'd look at combining rooms -- to make it easy, let's say it's 200 square feet per room. It would get appraised. That is eligible for payment under the tax credit programs. In the 200 square foot example, the bones of the building might be worth $100 a square foot. That brings millions of dollars into the coffers."
The entity purchasing the building from the nonprofit would essentially be buying a depreciation shelter, and the millions of new dollars become part of the basis for the depreciation. The next $150 per square foot needed to update and modernize would become a part of that. Investors are basically paying to shelter their income over, say, a 10-year period, and at the end of that time, if the initial nonprofit owner has negotiated well, the new owners of those credits want to give that property back -- because once it starts making money, it becomes much more attractive.
If a nonprofit entered into such a 10-year partnership and maintained even a 1% ownership interest as the developer, the partner would sell it back to the nonprofit at a price that's negotiated upfront, or in some instances would simply donate it back -- in which case the nonprofit could stand to make as much as $10 million in developer's and other fees.
"Nonprofit senior living is basically either stagnant or shrinking, especially on the skilled nursing side," said Pomeranz. "Let's not get rid of nonprofits. Let's find a way to convert them into missions."
Pomeranz said there's a need for this type of thing in rural areas, but while it can be done, there's often not a big enough population to sustain it financially. The best opportunity is in urban areas with dense populations. And the approach doesn't necessarily have to be limited to skilled nursing facilities; redundant hospitals and even schools can be repurposed in much the same way.
The benefits to the nonprofit are mostly financial, while the benefits to seniors are largely health-related, said Pomeranz, since seniors already living in the properties can be retained and would benefit from modernization. Nonprofits can also use the new funds it collects from the property to invest in more modernized skilled nursing care for those who require that next level of care.
Another benefit is that it allows nonprofits to maintain favorable tax status, said Pomeranz.
"Increasingly, local governments are saying, 'Why should we give you a real estate tax exemption when you're serving people who are at the upper end of the income stream?'" he said. "By doing some affordable housing projects, I've seen officials understand that if you're a true nonprofit, you're serving the whole community. It justifies your tax-exempt status."