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Below is a recently published article written by Jim Moore.   Please refer to our "Jim Moore in Print" page for a complete listing of articles written by Jim Moore for leading industry trade journals and how to obtain copies.

Strategy Of The Month for May 2008

GETTING CREATIVE WITH CAPITAL INVESTMENTS 

While most of us are aware that residents age in place, we frequently overlook or ignore another chronic aging trend – the gradual deterioration of physical plants.  As the assisted living industry matures, we need to focus on changing consumer preferences and needs.  Then we must insure that innovative improvements are being made in the functional design and ambiance of both existing and planned state-of-the-art assisted living communities.  Capital investment strategies are necessary and will represent major challenges to the future viability of many older communities.

Five Warning Signs

This aging process of physical plants is analogous to a senior’s increasing chronic illness.  Both represent a subtle, gradually deteriorating, but highly predictable trend.  Here are five vital signs to look for which probably signal that at least some form of capital investment is necessary:

1.      Cosmetic wear and tear – Examples are frayed or soiled upholstery, worn carpets, out of style drapes and faded wall coverings. 

2.      Physical plant deterioration – Leaky roofs or chronic failures of the heating, ventilating and air conditioning (HVAC) system usually are tell-tale signs of ignored or deferred maintenance.

3.      Functional obsolescence – The most obvious examples are kitchen and bathroom cabinets, plumbing fixtures and lighting in the individual living units.  Also included would be dated furniture styles and electrical fixtures in the common areas.

4.      Increased operations costs – Higher utility costs and hampered work flow are often signs that various types of capital improvement are necessary.

5.      Capital improvements by competitors – It’s one thing to keep your original physical plant functional, and yet another to remain competitive. If the “other guy” upgrades or has a state-of-the-art community and you don't, you're handing him a marketing advantage.

You must be in a position to respond to a dual threat – the inevitable aging process of your plant, and efforts by competitors to offer newer products with more attractive environments.

To plan effectively, you must carefully weigh the short-run capital cost expenditures – responding to immediate needs – against the carefully planned long-run costs of ownership (costs such as maintenance, utilities and insurance).  Investing less in capital improvements in the short-run can sometimes be very expensive over your total ownership period.

There are five specific areas to consider when planning capital improvements:

1.      Enhanced first impressions of the community through improvements in the external site characteristics, including signs, paving repair, landscaping and lighting.  That old “first impression” adage is truer than ever in today's highly competitive environment.

2.      Improved impressions of the building exterior, including fresh paint, new color treatments and more interesting elevation facades and roof lines.

3.      Rejuvenation of interior public spaces – This generally means using new materials and finishes, lighting and artwork to improve interior design accents; possibly adding new furniture.

4.      Back-of-the-house details, including improved kitchen equipment, laundry facilities and energy-efficient heating, ventilating and air conditioning (HVAC) systems.

5.      Improvements to individual living units, such as refinishing or replacing cabinetry, modern plumbing fixtures and appliances, new carpeting, and refinishing vertical and horizontal surfaces.  Individual living units are often improved on an attrition basis as they are vacated.

Owner/operators and lenders are now using a capital budgeting concept called Cap ‘X’ (for “capital expenditures” or “reserve for replacement”).  This is an imputed operations expense line item of approximately $250 per unit per year.  For an older property with serious deferred maintenance, this assessment can be as high as $700 per unit per year.  These funds are allocated, expensed and reserved as real cash for future capital needs of a routine, generally predictable nature (wear and tear, cosmetic refurbishment, etc.).

Capital investment is not just spending money for obvious needs.  It involves spending the right amount of money for the right items at the right time.

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