Recently I was involved with underwriting and negotiating for a seniors housing property in Loveland, Colorado. The building totals approximately 85,500 square feet under one roof and was completed in the spring of 2007. The unit mix totals 104 units; including (10) 304 square foot studios, (60) 377 square foot studios (20) 602 square foot 1 bedroom and (14) 947 square foot two-bedroom units. The property was being quietly marketed through a seller’s broker. The asking price was $17.9 million, which equated to a 7.25% cap rate on annualized first quarter 2011 financials. This is for a property with a Medicaid census of approximately 60%, and some functional issues with the layout of the units. Furthermore, the finish of the property is average and needed renovations to meet the market.

The buyer’s intention was to convert 18 units to memory care and keep 82 units for assisted living. The buyer considered the total number of assisted living units, without a memory care component, was out of balance; particularly with consideration to some softness in the Loveland assisted living market. The buyer’s estimate of necessary renovations for the property to attract a higher percentage of private pay residents and add a memory care wing was approximately $1.05 million.

Based upon these factors the seller was willing to move forward with a $13.5 million purchase price. This would be the top end of their price since there all in cost in the project, after transaction cost and additional marketing expenses would be approximately $15 million, and they felt that amount is pushing the top end for the market. This is based upon current market conditions, with softness in lease up and occupancy at competing facilities. Also factored in is the additional supply in the pipeline in close proximity. Furthermore, the design of the units they consider to be a bit awkward and likely negatively impact the market rates. Their offer of $13.5 would include assumption of the HUD loan currently being pursued by the owner. 

The offer price equated to a cap rate of 9.75%. The offer was rejected by the owner and no counter offer was made due to the owner’s expectation of a sub-8% cap rate on an average quality property with a high percentage of Medicaid residents. 

Seller’s expectation appear to remain above the market for senior housing properties justifying the limited transaction activity in this care type. Contact Ryan Housekeeper of Tranquilium, to discuss brokerage and development opportunities of seniors housing properties, (734) 929-2250, ryanh@tranquilium.com