Monthly Archives: July 2017

July 26, 2017
Jason Punzel

How Are Cap Rates Calculated?

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How Are Cap Rates Calculated? – by Jason Punzel

The cap rate ratio is probably the most common metric in reporting and comparing real estate sales, which leads many new investors asking, “how are cap rates calculated?” A cap rate is calculated by dividing the net operating income of a property by the purchase price.   The cap rate would equal the cash on cash return on equity if a property was bought with all cash and the net operating income stayed the same for the next twelve months.  Cap rates move inverse to price, thus, as cap rates increase, the purchase price decreases, and vice versa.   The cap rate is also inverse to a P/E ratio (price to earnings) the common metric to measure stock values.

A cap rate is a measure of risk.  Typically, the higher the cap rate, the riskier the asset is.  Cap rates for skilled nursing facilities typically range between 10-15%, where assisted living facilities typically range from 7-10%.  However, why does one assisted living facility sell for a 7% cap rate and another one sell for a 10% cap rate?

Typically, newer, larger facilities located in larger, growing, metropolitan areas are perceived to be lower risk and thus sell at lower cap rates than older, rural facilities.   Other determinates are the income/occupancy history of a property.  Properties that have a history of high occupancy and consistent earnings sell for lower cap rates than properties that have struggled in the past.

Outside factors also determine cap rates such as interest rates, availability of debt and equity capital, and general economic conditions.  As interest rates rise, cap rates tend to rise as well because debt becomes more expensive and other “risk free” investments become more attractive.

Conclusion:

Although there are many factors that determine the cap rate of a property, it is important to remember that cap rates are a measure of risk and the lower the perceived risk the lower the cap rate and the higher the price.

For more information about cap rates and how they affect the value of your senior living communities, please contact Jason Punzel at 630-858-2501 x 233 or punzel@slibinc.com.

July 21, 2017
David Balow

Where’s the Upside? What Senior Living Buyers Really Want…

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About a month ago, I wrote a blog post on some questions Senior Living buyers should ask themselves when evaluating Senior Living acquisition opportunities. The final question on my list was, “Is there any upside?”. When Senior Living buyers evaluate deals, they aren’t just looking at the present value of the opportunity, but they are looking for ways to enhance the value of their investment in the future. Here are a few questions buyers will ask themselves, when evaluating what the upside of a deal is for them:

Can I improve my payor mix? If a facility is predominantly comprised of Medicaid residents, a buyer will want to evaluate the feasibility of boosting their Medicare and Private Pay payor mix.

Is there an expansion opportunity? If a facility has adjacent land that it resides on, a buyer could view that land as an opportunity to expand the facility to add more units, or potentially develop on that land and add a new level of care to their operation.

Senior Living BuyersAm I able to manage expenses more efficiently? When a buyer underwrites a deal, they will typically spend a lot of time in the financials for the deal. If there is an opportunity to manage the expenses required to operate the facility more efficiently, that will show a buyer there is more potential for their bottom line.

How are the demographics of the area trending? If a buyer sees an upward trend forecasted for the 65+ demographic, and also a rise in their median income, that indicates more future opportunity for their investment.

If you currently own a Senior Living community and wanted a no-obligation valuation that factors in the upside present within your community, please contact Dave Balow at 630.858.2501 or balow@slibinc.com.

July 18, 2017
Brad Goodsell

How to Maximize Sale Price of Senior Care Property?

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It’s an essential question for any seller of a senior care property; how to maximize the sale price of a senior care property?

The answer to this question can take a variety of angles, however this blog will focus on most commonly discussed solution, and that sought most by senior care buyers; cash flow.

Cash flow can be called a number of different terms from Net Operating Income (NOI) or Earnings Before Interest Tax Depreciation Amortization & Rent (EBITDAR).  Senior Care Property ValueIn the world of senior care transactions, buyers are most concerned with the cash flow that a given property produces, as income is primary driver of its value.  For more on valuation, please refer my prior blog post (Valuation of Senior Care Properties).

Typically, the most common ways for the owner of a senior care property to maximize their sale price is to increase the occupancy of the property, thereby increasing the top line revenue, and associated bottom-line revenues.  To increase occupancy, a property may need to focus on their marketing or spectrum of care offered.  For instance, skilled nursing beds may be converted to assisted living or memory care, if it is believed this would cater to a larger pool of new residents.

Other factors that help to drive cash flow, and thereby the value of your senior care property can also include the optimization of staffing.  When analyzing staffing levels, the decrease of costs, must be balanced with the quality of care provided, ensuring no drop-off of care occurs.  Other options for increasing cash flow may be to re-evaluate the monthly rates charged versus those of the local market competition.

Closing;

When considering how to maximize the sale price of your senior care property, a qualified senior living broker, will be able to provide a throughout property analysis, and recommended list price.  Additional consideration should also be given to the current analysis versus an anticipated sale price if cash flow increases.

Please contact Brad Goodsell at 630.858.2501 or goodsell@slibinc.com to discuss a complimentary property valuation and analysis.

July 5, 2017
Brad Goodsell

Elimination of 1031 Exchange?

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Always a favorite of real estate investors, the question looms, will there be an elimination of the 1031 exchange?  Increasingly so, the answer may be ‘yes’, as Congress mulls options to implement a tax cut, while finding ways to supplement the tax breaks.

In short, a 1031 exchange allows investors to defer their tax liability, while reinvesting capital gains from a sale into a like asset.  Senior Living 1031

Currently a 1031 exchange applies to a variety of assets, however according to Ernst & Young LLP, real estate exchanges account for 36% of all 1031 exchanges, across industries.

 For more insight, the Wall Street Journal published a recent article (1031 Exchange, a Cherished Real Estate Tax Break, Faces Extinction).

Closing;

As you consider the timing of selling your senior care property, please contact Brad Goodsell at 630.858.2501 or goodsell@slibinc.com to discuss a complimentary valuation, and associated timeline of sale.