This project has everything to do with “scale” and creating the overall value of the project, and is, without a doubt, THE most important aspect of this investment. We have been asked more than we care to remember; “why 175 beds/units?” People ask this question because most facilities are 100 units/beds or less, a critical business mistake. Our empirical example showed this same dynamic when we first started researching the Williamsburg Antique Mall project in 1995. In order to create investor value in a business related real estate asset; “size or number” means everything in creating “stand alone” end value. What are we talking about? It’s all about the “specialized” real estate that houses a specific “kind” of business. Whereas, the real estate itself would be valued at an average, normalized value if not for the unique business it supports. When adding this “specialized” business to the real estate asset; an exponential increase in value is realized; e.g., run of the mill apartment complex versus an Assisted Living complex. This also gives you flexibility from a tax standpoint when selling the asset; i.e., value of the real estate versus the value of the business; as you’re a actually selling both.Specific real world example; our Williamsburg Antiques Mall in Williamsburg, Virginia.
When it was realized that Williamsburg Virginia didn’t have an antique mall, we asked, can we make money at it? Since we had absolutely NO experience running or owning an antiques mall, we spent 2 years perusing antique malls from the Mississippi River to the east coast; what was good?, what was bad?, how big are they?, how do they do business?, so on and so forth. One thing became evident from the start; most operations were what you would call, a “Mom and Pop” operation. Why? Because they didn’t understand that scale meant everything in creating end investor value and time for themselves. What do I mean time? We determined that any size operation 20,000 square feet or less, dictated one thing and one thing only; the owner either had to work the business themselves or the numbers didn’t work. Sure, you could hire someone to be the manager but you would be operating at a breakeven. Either way, there is NO VALUE for any end game investor in either case. It is only after you move over that certain size operation that you create the kind of value that makes the effort worthwhile. The flipside to the equation is determining; “what is too big?”. This is difficult to ascertain in almost every case; so, you make your best effort based upon all the information at hand, design your base plan and then, most importantly, plan for expansion if you feel the market might possibly absorb it. This is what we did with the Williamsburg Antique Mall; we determined that a 45,000 square foot facility would be easily absorbed but, we built the actual facility with an expandable end that could be expanded in 10,000 square foot sections. Although the antique mall consistently stayed 100% occupied throughout our 23 years of ownership; the occupancy at 100% was “soft” at those numbers; i.e., we never got the feeling that an additional 10,000 or 20,000 square feet would be overly successful. We enjoyed having a consistent wait list of 1,000 (10 units) to 2,000 (20 units) square feet. But, the ability or flexibility to capture an expansion was always available to us.
We will be building the assisted living business with the same approach. After studying this business for nearly 30 years, we have decided to become a major force in the Virginia/North Carolina corridor. We recognized then, the elderly care business would take a dramatic turn when the Baby Boomers reached “the age” of need. The evolution of this business is another paper all unto itself, but for these purposes we will deal strictly with current assisted living needs. We have researched this business in detail for the past 3 years and have determined that any facility 100-125 units/beds or under is the nearly the same as our 20,000 square foot antique mall example. While it “makes” money; it doesn’t really generate the value that makes it appealing from an investor “end game” environment. It is the 50-75 additional beds/units that we are planning that really “adds value”; i.e., over $50,000,000 in value. Facilities with under 100 beds are just kidding themselves, and in most cases are directly managed by individual owners. Entities that own facilities with 100-125 units/beds can find buyers but the prices paid are not based on performance, but “potential”, and this is never a good overall investment strategy. More than likely, if the buyer is savvy, they are planning an expansion of some sort.
We are planning that each new facility will start off with approximately 175 units/beds; thus generating an overall value of over $90,000,000 against a debt of $25,000,000 +/-. The important variable lies with pre-planning and the architect; as we are planning from day one to be able to add, at minimum, two separate (50) bed/unit wings at any point in time. These wings will not involve any additional investment by our Members, but they will most certainly enjoy the financial benefits of such additions. We feel very strongly that these “wings” will come into play very quickly. The most important fact is to become established in the assisted living community with the base facility.
It is this “scale” that has forced usto attract investor partners. We cannot personally support the scale size necessary to make the facility an “end game” investor sized facility. We can personally handle the “Mom and Pop” version but you have to ask the question; “Why would you?”. We don’t have the answer for that; we can only sign on to creating the size facility that makes sense for everyone concerned.