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How Will Senior Living Providers Capture the Middle Market?

The largest wave of Baby Boomers is beginning to hit the age in which senior living becomes a factor for their near- and long-term lifestyles. In less than a decade, every Boomer will be 65 or older, which means there’s going to be a major demand for a spectrum of senior living offerings.

Unlike previous generations, Boomers are demanding more options: many want options that allow them to stay in their own home, with family members, or in retirement communities that align with their lifestyle. For providers, this poses a unique business opportunity: demand for a broader array of services gives businesses unique opportunities, but with this comes the need to find, renovate, or build the kind of senior living accommodations today’s seniors demand.

No customer segment is more in need of broader options than the middle market. Seniors who can afford robust senior living options have several to choose from; so too do seniors who need assistance through non-profit organizations or Medicaid. But seniors who fall somewhere in the middle are still underserved by senior living businesses.

Senior living providers that want to capture the middle market have a host of options at their disposal. How they rise to the opportunity, however, is more complex.

The Current Care Landscape in the Middle Market

The variety of senior services currently available is vast, ranging from companionship aides to all-inclusive retirement communities. There’s demand for these and every service in between.

“When we look at this from an affordability standpoint, there’s a squeeze within the middle market,” says Mike Mason, Senior Vice President of Healthcare Finance at First Midwest Bank. “This is also driving an increase in so-called home- and community-based services.”

These services typically include support for daily living tasks, such as personal care, financial services, legal services, and transportation assistance. They usually include health services as well, such as home health care, personal care, and health promotion. While these programs tend to cater to Medicaid recipients or may be covered by private health insurance plans, the majority of the services needed by seniors falls into the “private pay” category. 

Alternatively, there is also a growing demand for middle-market senior living facilities with “reasonable” monthly fees. Chief among these are communities often owned and operated by family owned for-profit senior communities and by continuing care retirement communities that are often sponsored by a not for profit organization. CCRCs provide residents with a broad array of services as well as accommodations that can evolve as a residents’ needs expand – supporting their needs by offering the full continuum of care.  For example, seniors who are healthy and independent can move into independent living apartments or townhouses at a CCRC, only receiving medical or emergency care as needed by on-site staff. If their condition worsens, they can move into a more hands-on portion of the CCRC campus, such as the assisted living, memory care or nursing home facility located on site.

Addressing Middle-Market Demand

CCRCs are a hot commodity with long waiting lists, particularly for upper income and middle-market consumers.   There is growing demand coupled with less supply for more affordable senior living options available in many communities throughout the United States. Scarcity coupled with an appropriate price point plays a large role in this issue, according to Mason.

“You’ll see waitlists for some of these communities of up to a year. I've seen as high as an eight year waiting list for an age-restricted independent living community,” said Mason.

Even middle-market CCRCs come with often-hefty upfront costs for residents. Most charge anywhere between $50,000 to $550,000 as an entrance fee model CCRC or rental model CCRCs can charge monthly rents can range between $3,000 to $8,000 per month depending on the level of care, age, amenities and quality of the community.

“More supply will ultimately bring down the price, and the demand for these options will  be here for some time,” he continued.  But there’s a genuine shortage of affordable private pay options for the average family.

Again, more supply may result in a reduction in upfront costs for consumers in markets that are more saturated with senior living units.  Mason is seeing an interesting increase in adaptive reuse of former hospitality and retail buildings as an affordable senior living option.  “Oftentimes these locations have large parking lots; as the footprint of a hotel is much larger than what is needed for a true senior community. This additional space gives the developer some ability to expand with a new wing, kitchen, community services, or other recreational facilities.”

Financial Considerations for Senior Living Providers

Although there’s a large demand for senior living options, developing and operating a senior living community is not without significant financial challenges. Startup costs can be significant, especially for senior living facilities. Present estimates put the average cost of constructing a medium-sized facility with 100 units anywhere from $12.5 million to $30 million.

“This is not a cheap business to get into: there are high barriers to entry for any new operation,” Mason said.  One of the largest challenges for any senior living operator is finding sufficient staff with industry experience.  Often times, operators are forced to staff their buildings with agency or temporary nursing staff – which comes at a materially higher cost than hiring employees directly.  However, operators often have no choice if they cannot find and hire enough qualified staff but their residents require care – forcing operators to hire high cost agency staff as a short term solution to any hiring challenges. 

Most developments—be they within repurposed buildings or new construction—have to factor in the likely need for expansion within a few years of opening as well as the ongoing capital expenditures to ensure that the facility looks new and fresh. “You need to make sure that you are built for growth. This means being built with extra infrastructure, and the liquidity to support future growth” Mason said.

Keeping facilities modern also requires businesses to put aside some significant revenue every year. Mason estimates that providers should reinvest a minimum of $350 per unit back into the facility yearly for ongoing “maintenance capital expenditures” which includes new carpeting, fresh paint and periodic replacement of furniture and fixtures. This reinvestment will be increasingly important as more, newer facilities and new competition will ultimately arise in any market.

Senior living providers that are more dependent on government reimbursement such as Medicare and Medicaid may also face cash flow challenges due to lengthy Medicaid pay-out terms, depending on the state. Medicaid payment amounts and timing can vary significantly state by state.  Some states may pay in 30-45 days while other states can take as long as six+ months to reimburse providers – which highlights the importance of maintaining liquidity and a working capital line of credit as discussed next. 

The Right Financing Options for Providers

Today’s senior citizen wants an experience unlike that of their parents. Residents are more likely to be in their mid to upper 80s when they decide to move into Senior Living Community.  Consumers usually want amenities that reflect their active lifestyles and independence - even in their later years. For providers, this means focusing on offering private rooms while also keeping their facilities well-apportioned and frequently renovated.  The challenge is keeping these communities affordable while also offering everything that this generation of Seniors desire.   

Financing plays a significant role in helping operators address startup costs as well as general operating costs—especially in the first year (or until the community is stabilized). Mason suggested a few basic must-haves.

“Lenders need to know that the owner/operator behind this business and has the experience and liquidity to support short-term working capital and startup working capital. If it's a new build, we need to know that the borrowers have experience, and particularly experience in the local market” he said.  Many great operators have struggled when entering a new market or a new state because they didn’t pull in partners that know that specific local market.

Many providers can expect to generate losses during the first 12 – 24 months of operations when opening and filling a new facility.   Which highlights the importance of maintaining sufficient equity capital to fund start up costs while also establishing an appropriate working capital line of credit to fund timing differences of receiving reimbursement from Medicare, Medicaid or private insurance.  Equity capital and/or construction loan reserves should help support start up costs, those initial start up costs should not be funded under a working capital line of credit. 

“Operators have to plan to lose money at first, and they need to have the cash to support operations and initial operating losses. We can help them fund operations through working capital lines of credit to help with accounts receivable timing differences.”

Mason wanted to emphasize the importance of senior living developers to partner with local senior living operators as they will know the nuances of a specific market and its demographics, the staffing challenges and dynamics of a market, and the reimbursement timing of each respective state.  Partnering with people with local experience always wins – particularly when owners/operators seek out local, in-market legal and accounting expertise as they look to develop and/or acquire a senior living community.  The demand for senior living will be here for some time, the challenge for owners/operators will be balancing the cost of operating a facility while charging appropriate fees to capture the middle market consumer – which will be the largest segment of the senior population for the foreseeable future.  Change has been constant in senior living for decades and those with liquidity and the ability to accommodate the growing and changing needs of seniors will ultimately be successful. 

The opportunity for senior living providers to expand into the currently underserved middle market is vast, even in spite of the challenges that operators may face when getting started. With demand only set to rise in the next decade, the key toward profitability is riding out the initial years of operation. Those that can stand to gain significantly in the decades to come.

Talk with Mike Mason to discuss financing options for your business:

Learn more about First Midwest’s Healthcare Finance group here:

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