Should You Expand Your Community?
How do you decide whether expansion is right for your community?
There are many considerations to make in this decision process and organizing them to lead you to the best conclusion can seem unsettling if this is not something that you have done before. However, organizing your decision process will allow you to create a rational and organized method for improving the overall confidence and integrity of a final decision. There are three major areas that need to be sufficiently explored and produce quantifiable and qualitative results that lead to a good conclusion.
These are:
1. Financial Viability of Expansion
2. Market Viability
3. Program and Operational Compatibility
1. Financial Viability
a. Can you afford to expand?
b. What does the projected financial performance of the stabilized expansion do for the ongoing performance?
c. Do you have access to the necessary capital, both debt and equity? Are there special financing programs available in your area that could help?
d. Will the development and operating costs of the expansion be within expected ranges for similar projects?
e. Compare certain Key Performance Indicators (KPIs) of current stabilized performance with expanded stabilized performance.
i. Gross margin, Net margin, Trailing Valuation, Debt Service Coverage Ratio, Per Unit Cash flow
Most if not all of this financial analysis can be performed internally with access to some industry data like average constructions costs per square foot in your region and interest rates on debt. All other operating costs can be drawn from your current operation. Assuming this internal analysis is positive and the KPIs are equal to or better than current financial performance, you are ready to spend a little on outside expertise.
2. Market Viability
a. Is there sufficient market demand in our Primary Market Area (PMA)?
b. Identify several organizations who develop market feasibility reports and get references.
c. Work closely with the final candidate to establish the PMA and make sure all competition and pipeline developments are included in the report.
d. Never plan to build the maximum forecasted unmet demand for the report. Consider no more than 25-50% of the unmet demand as your development target.
We suggest taking a conservative approach to determining whether potential exists. There might be a fair amount of anecdotal information that already leads you to consider expansion, such as maintaining consistently high occupancy with a waitlist. However, this will not be sufficient for lenders or investors to make funding commitments. We also want to have internally high confidence that we can fill the new units. There are many good organizations who develop market feasibility reports, review their credentials for experience in senior housing reports, and also that they have are HUD and USDA qualified should you consider those funding sources.
3. Program and Operational Compatibility
a. What is the program that describes your community?
b. How well defined is the program of services and amenities being offered by your community?
c. How well is each of these programs and services further defined and quantified in support of the operating budget?
d. How will this impact our existing team and organization and community culture?
e. How does the new expansion support the current mission and vision, or how does it complement it?
Conclusion
After you have thoroughly assessed the financial, market and internal operations of how an expansion will impact the community, you will have put yourself in a position to make an informed decision and recommendation about whether expansion is right for your community.
Our experience is that in performing this due diligence process, it improves the integrity of the final decision and recommendation by educating the decision makers and thereby reducing the risks.
Have some additional questions or comments? Grand Senior Living has the experience to help. Contact us today.
