Rental vs Entrance Fee, Part II: Should Your Organization Consider Senior Living Rental Options? Here’s What You Need to Know

by | Jan 14, 2020

Senior living rental options could be the missing piece to your organization's puzzle of offerings, but keep these considerations in mind before moving forward.

Guest blog by Toby Shea, Partner at OnePoint Partners

As consumer preferences in senior living continue to evolve, many of our clients have expressed some concern about what this trend means to their organization.  Why are they so concerned? They fear that the rise of senior living rental options will diminish the viability of the entrance fee model—the operational bedrock of their Life Plan Communities. While that fear may be inflated – and the reality is that the future of our market indicates growth for entrance fee options too – there’s no question that we as a field must respond to the impending rental “boom.”

In the upcoming webinar, “Rental vs. Entrance Fee: Responding to Consumer Preferences,” I help explore the implications of the rental model along with fellow panelists Rob Love (Love & Company), Dan Rexford (Love & Company) and Keith Robertson (Ziegler). We’ll discuss why rentals are becoming so popular, how they’re different from what Life Plan Community leadership is used to, and what your organization must consider from financial, marketing and operational perspectives if you’re seeking to add them. Tune in for that deep dive, but for now let’s explore some key operational considerations of adding rentals to an entrance fee community.

Apples and oranges

If you have an existing Life Plan Community, you may think that operating a rental-based community or converting parts or all of your entrance fee-based community to rentals will be simple.

Well, not so fast.

While rental-based communities and entrance fee-based communities tend to serve similar purposes—just like how apples and oranges are both fruits—the reality is that their structures are very different. This chart provides a general overview of the contrasts:

Attribute Entrance Fee Rental Rental perspective
Cash accumulation & reserves High Low Lack of refund liability and healthcare benefit limits required reserves
Operating margin Low High Rents are sole source of cash flow
Resident turnover Low High Rental residents typically more transient given contract structure, affects marketing
Debt-to-equity High Low entrance fees serve as “quasi-equity,” rentals require different solve
Healthcare benefit Frequent Rare No entrance fee limits ability to offer healthcare
Expected amenities More Less Rentals typically offer less, some are starting to raise standards
Source of capex funding Entrance fees Operating margin  

Two approaches to consider when adding rental units to your existing entrance fee community

If your organization wants to get ahead of—or catch up to—the rental-boomer trend, I’ve seen two main approaches that tend to work for existing providers.

The first approach is to convert some or all of your existing entrance fee product into rental. This may seem impossible at first, but it is a feasible strategy. It does, however, require two key ingredients: capital and time. And if you’re considering the obvious math equation, you can probably already see that the refund obligation of existing EFs and lost EF turnover proceeds pose a major challenge when trying to harness those two key ingredients.

But when making the case from a financial perspective (which Keith Robertson explains in the webinar), the growing market for rentals and your organization’s current access to capital can be two helpful factors (remember to join the webinar to learn more).

But it’s also crucial not to wait too long: Making the conversion to rentals gets exponentially tougher if your community is already struggling with occupancy, therefore affecting access to the capital needed to make this shift.

The second approach is to develop a new rental product. In many ways, this can be easier to accomplish than a conversion from entrance fee to rentals, as noted in the case study later in this article. Furthermore, organizational leadership could see the addition of a new rental product as a clean slate, one viewed more optimistically, while converting EF to rentals is sometimes perceived as an attempt to fix an existing market challenge.

Regardless of which approach your organization chooses when adding rental options, remember to focus on creating operating leverage. With rentals, your margin should be considerably higher than that of a typical entrance fee community, as rents will be the sole source of cash flow.

Beyond that, simply be deliberate. Have a focused master plan that takes a distinct direction based on the approach you choose. With this direction, it’s more likely that the conversion to or addition of rental units will help your organization advance its mission and end up stable and successful for the long term.

A case study – and words of advice from someone who’s been there

Our team at OnePoint Partners engaged in 2016 with a not-for-profit senior living community in upstate New York, Shaker Pointe at Carondelet. The organization (sponsored by the Sisters of St. Joseph of Carondelet) sought to complete its original vision by developing a remaining parcel of land at their site. OnePoint helped evaluate the future state of the community and incorporated their goal of targeting a demographic with a more moderate income who could not necessarily afford Shaker Pointe’s entrance fee options.

With our team’s oversight, they chose “approach two” and decided to add 35 new independent living units on that remaining parcel of land that would all be rentals. “Parkland at Shaker Pointe” would be branded differently from the core campus, to prevent cannibalization of entrance fee sales and to avoid confusion among their prospects.

When presenting the plan to existing members of the Shaker Pointe community, we learned a lot. At the first town hall meeting when we presented the Parkland at Shaker Pointe plan, existing residents basically skewered us. They were frustrated that the new neighborhood would provide folks a cheaper way to get access to “their” community, one “we already paid into,” they said.

While we predicted this kind of reception to a degree—because change at this scale usually isn’t welcome among existing residents—looking back we would have done a grassroots campaign with the resident council first. That would have allowed us to get in front of the most engaged residents and explain how Parkland at Shaker Pointe would be different.

So, how did we quell their concerns? We explained several distinct elements of the rental expansion that became our key inflection points for anyone considering adding rentals:

  • Make sure to differentiate between the contracts and services, for example:
Shaker Pointe (entrance fee) Parkland at Shaker Pointe (rental)
Entrance fee No upfront fee
Monthly service fee A la carte access to programs and amenities
Access to all services, programs, restaurants, events, etc. Packages created to incentivize resident participation
  • These differentiations helped the existing entrance fee residents feel like they maintained the value they already bought into, while fulfilling the purpose and affordability of the rental contract
    • Those living in the rental units got to enjoy the new residences, but the services and amenities were available at an additional cost or limited i.e. fitness center hours, dining options, event access, etc.
  • Highlight the benefits of the expansion, in terms of advancing the sponsor’s mission and improving operational stability of the overall community
    • With the Shaker Pointe project, the organization as a whole was able to refinance their existing debt on the basis of the improving operations as a result of adding Parkland at Shaker Pointe
      • The rental expansion created economies of scale for the organization
    • Parkland at Shaker Pointe opened in August of 2019 ahead of projected fill-up targets and with a rental resident profile consistent with their desired outcome

While those points are important to make for members of the community, we found that the leadership responded well to how the community leveraged what it already had, in terms of space and human capital. Parkland at Shaker Pointe only added very few full-time employees and did not duplicate the fit and finish or amenity spaces that existed at Shaker Pointe. With the purpose of rental units (affordable access to the community), there’s no need to mirror entrance fee units and options, nor a need to create an entirely new staffing construct to support them.

With projects like the Shaker Pointe rental expansion in mind, adding rentals units to an existing organization is certainly feasible. It’s a viable option for your organization that can help it serve its mission and serve more people.

While the rise of rental options continues, our field should recognize that rentals are not bad—they just present a different opportunity—and entrance fee communities will remain to be viable, too. The direction of your community will be up to your organizational leadership and how you want to position your organization for the future of aging services.

If you can’t make the webinar but want to discuss the implications that the growth in rentals could have for your Life Plan Community, feel free to give Love & Company’s Tim Bracken a call at 410-207-0013 or click here.

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