Looking at the numbers alone, the investment potential forseniors housing product is compelling--the US Census Bureau expectsthose over age 65 to increase in number from 35 million in 2000 tomore than 86.7 million by 2050. The population of those over 86.7will nearly quintuple to 20.9 million over that same period.

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According to Gorman, "One of the most salient threats totraditional senior housing product is the increasing preferenceamong seniors to age in place." As such, there has been a shifttoward in-place care in both the private and public sectors, thelatter being federally financed with such programs as Medicaid andthe Program for All-Inclusive Care for the Elderly (PACE). The riseof such options as continuing care retirement communities,traditional retirement communities and inner-city home healthservices, as well as state programs including HCBS waivers and HUDaffordable assisted living grants, as also added pressure on theinstitutionalized senior living space.These factors, along with thebelief that seniors should live independently as long as possible,poses a challenge to developing mixed independent and assistedliving facilities, since seniors in independent living "wouldprefer not to see closely located assisted living facilities astheir next step."

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Seniors with resources, spouses or adult children generally havethe means to defer entry in assisted living and skilled nursingproperties as long as possible. "Among these groups, independentliving facilities would be the more popular choice and brings withit the advantage of having a low variable component of NOI andindependence from state or federal reimbursements, which aresubject to rulings and interpretations," says Gorman. She adds thatnot only are such facilities least complicated to design and buildand require low maintenance since they don't go through as muchwear-and-tear, but they also have lower operating costs since theresidents, for the most part, are healthy and active and don't needextensive care. Most of the revenues for such product come frommonthly leases, and earnings can be upped through the addition ofamenities.

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In terms of pay structure, most of those living inindependent-living facilities pay privately. Therefore, moreaffluent, married seniors tend to choose facilities with low carecomponents, including independent living and CCRCs. Often, the onlyoption for those without resources is assisted living or skillednursing, though states and the Fed are working to change that. "Themost interesting trend is that whether seniors enter intense carefacilities as private pay or Medicaid pay, they all eventually endup as Medicaid pay patients, and in a relatively short amount oftime," Gorman points out, citing a 1998 study that "showed how thespend-down rate of personal assets was higher and faster infacilities with a high proportion of entering private paypatients."

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The point, she says, is that a high percentage of private-paypatients will not stabilize net operating income at assisted livingor skilled nursing facilities. Because all patients inevitablybecome Medicaid recipients, these properties face an inordinateamount of risk since that program is coming up against financialstrain due to a shirking labor force.The more a property relies onMedicaid, the more variability in cash flows, explains Gorman. Thevariable service component share of monthly fee income depends onthe type of facility, with the share rising along the care spectrumfrom 5% to 10% for independent living, all the way up to 75% forskilled nursing/Alzheimer facilities. At the same time, NOI growthdecreases along the same spectrum. CCRCs have the highestyear-over-year NOI growth--26% between 2005 and 2006--followed byindependent living at 18% and then assisted living at 8%, accordingto the 2006 State of Senior Housing Survey administered by theAmerican Seniors Housing Association.

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"The risks of intense care facilities can be attributed to thecomplexities of Medicaid reimbursement, labor shortages in nursingaides and healthcare support staff, and the amount of customizationand maintenance required at intense care facilities," says Gorman.However, the level of risk varies by state. Areas with high elderlypopulations have high Medicaid reimbursement rates--Arizona, forinstance, has a rate of 65.77%, while New York has the nationalminimum of 50%.

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Demographics, too, may work against traditional seniors housingproduct, says Gorman. The need for qualified aides and healthcaresupport--typically entry-level positions--is so great that thedemand exceeds supply, according to the Bureau of Labor Statistics."As a result, ALF and SNF in some states need to increase wages toretain staff or employ expensive temporary nursing agencies to fillgaps," she states.

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Also, the level of build-out for a facility--amenities, safetyfeatures and the like--can cost a chunk of change, as do the higherliability insurance and labor costs of the asset, particularly inskilled nursing and Alzheimer care centers. "Though the maze ofentitlements, state-level need demonstration, and Medicaidcomplexities do create high barriers to entry at the intensecare-level of the market, the impact to pricing power and returnsdoes not outweigh the escalating, volatile costs of operatingassisted living, skilled nursing and Alzheimer's care facilities,"says Gorman.

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These risks are playing themselves out in the capital markets,with cap rates for age-restricted apartments the lowest at 7.1%,and skilled nursing facilities the highest, at 12.1%, in 2007. As aresult, Gorman suggests that investors diversify their portfolioswhen it comes to senior housing investment. "Investors today willrecognize that the demographics that make senior housing a slamdunk will favor new aging-in-place product types to the traditionalnursing home facilities of the past," she says.

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