Barriers to entry challenge NY seniors market leaders

A difficult regulatory environment and higher-than-average land costs are among the factors that make seniors housing development particularly challenging in New York, especially for companies not already active in the state.

But there's good news, too: Primarily due to its barriers to entry and the state's large aging population, New York offers one of the deepest untapped seniors housing markets in the entire country. Companies that are creative and flexible in terms of construction and operation are enjoying a strong, underserved and profitable environment with great opportunities for assisted and independent living.

Compared to other states, obtaining government approvals in New York for an assisted living-type project is an arduous and time-consuming process; for a skilled nursing facility, it's nearly impossible. In fact, the term "assisted living" didn't even exist in New York until recently; New York calls this product an "adult home." Many of these homes are assisted living "look-alikes" - residences not licensed as adult homes but that provide medical and personnel care through licensed home healthcare companies. To gain a license to provide the residence and the care under one entity, a company may not be publicly traded, a big barrier for many national developers. Until just recently, even a business corporation could not obtain an adult home license; only an individual, partnership or not-for-profit company could acquire the license.

New York's adult homes are not limited to the elderly; they serve anyone over the age of 18. Getting a handle on current supply for elderly adults is just one of the operational challenges this presents.

"New York is fairly well regulated," explains Lisa Newcomb, executive director of the Empire State Association of Adult Homes and Assisted Living Facilities. "Currently there is no provision in New York for a publicly-traded corporation to operate an adult home. But there are ways around that, for example, through a management arrangement with another company."

"There are also strong regulations in place for the licensed adult home model, which someone may or may not consider a barrier. For example, only recently could a business corporation procure a license for an adult home. There are still restrictions in place for individual holders: they don't enjoy all the liability limits that a business will," explains Newcomb.

She adds that no licensing is required for an independent living facility. In the skilled nursing area, a Certificate of Need is required, but "I doubt a company can get new nursing home beds into New York unless it's already operating in the pipeline."

A DIFFICULT MARKET TO ENTER "New York was a difficult market for us to enter, as it is for most large developers, given the development costs, time and difficulty in locating appropriate sites," states Michael Zaccaro, executive vice president of operations for CareMatrix Corp. of Needham, Mass., a publicly held company providing seniors housing and assisted living. "On the other hand, we couldn't ignore the demographics: The number of people, their level of affluence, the high percentage of home owners and the fact that the number of people turning 75 years and older in the region will increase by more than 20% between now and 2005."

States Alan Plush, president of Gulf/Atlantic Valuation Services of Sarasota, Fla., a national consulting and appraisal firm specializing in healthcare and retirement, "One of the many challenges of operating in New York is that its adult homes serve not just seniors but anyone over 18 years of age with a mental or physical need. When looking at supply and demand, it's difficult to assess how many beds are for senior adults and how many are for adults in general."

"Nursing home development is flat in New York. Few Certificates of Need are going out, and acquisitions are tough for out-of-state providers. Licensed home healthcare companies are serving seniors in New York's adult communities, allowing these adults to age in place without creating more need for expensive care environments," says Plush.

On a regional basis, in terms of independent and assisted living, Plush sees "more than a moderate amount of interest and proposals" in the lower geographical half of the state, but "finding land at a price that makes sense is difficult." In the upstate area, he points to a developer in Buffalo that tore down a strip retail center to build an adult home. "Location was driving this deal. The company paid handsomely for the site, but the rates it will achieve made the deal worthwhile."

STRONG DEMAND, NO OVERBUILDING "We like New York, and so do our investors," maintains Jeffrey Davis, president of Chicago-based Cambridge Realty Capital Ltd., which funded $240 million nationwide in seniors housing last year, $80 million of which was HUD. "We see strong markets, demand and compliance, with no overbuilding. Our clients are making money, and that makes us happy."

"We believe New York has an enlightened attitude about regulating and monitoring senior facilities, which gives us comfort. Each type of property has its own type of licensing, with state regulators checking the facilities. To build a new property, an in-depth, need-driven compliance process is required, with an orientation toward larger, more economical facilities. So, we know residents are being cared for, and there's no Wild West show going on in terms of building, with lots of established owners and operators in place. We like that about New York."

Davis adds that his company has a "tremendous capacity to do new construction programs or refinancing at low interest rates." Cambridge closed its largest deal in New York last year, a $35 million HUD 232 loan with a 7.375 interest rate and 40-year amortization. The property, a 250-bed facility called East North Port RCHP, in Huntington on Long Island, is now under construction.

In Manhattan, Davis notes a huge density of people and a lack of viable seniors housing options. "We're working on different types of opportunities for major, luxury congregate care facilities in Manhattan but haven't financed any yet."

At Parallel Capital Corp. of New York City, a privately held commercial mortgage conduit, Jim Eagan, managing director, says he also has a tremendous amount of money available but sees limited construction taking place now in New York compared to other states. He underscores the effects of the state's stiff approval process as one reason for the relative inactivity. "There are very strong barriers for seniors housing in New York," Eagan asserts. "However, we see people skirting the licensing laws by building unlicensed senior apartments and bringing in home healthcare agencies to provide assistance with daily living. It will be interesting to see how that all shakes out."

"New York is unique in that its nursing homes have high reimbursement rates, and most homes have been owned by the same families for many generations," he adds. "A developer just doesn't come in and build a nursing home in New York."

"We also see a great market for urban assisted living in New York. Lots of people grew up in particular neighborhoods and want to stay there. We advocate urban projects and the reuse of existing structures to produce them," proclaims Eagan.

Eagan points to Woodbury, N.Y.-based Kapson Senior Quarters Corp. as one of the companies active and successful in the reuse of New York's urban buildings.

"Kapson has broad experience in renovating existing structures, whether they're schools, hotels, condos or office buildings," says Raymond DioGuardi, chief financial officer of Kapson, a provider of senior assisted living housing and services. "We can take a variety of existing shells and turn them into assisted living products. Our expertise allows us to be extremely flexible in how we approach construction and vary the structures to fit the environments. We have a standard prototype for a flat piece of land that we modify in New York City - building up instead of out because of limited space - and rely on the strength of the market's demographics to fill the facility.

"We've owned and operated seniors housing in New York for 26 years. We view the state as an extremely good, unsaturated market with great opportunities for both assisted and independent living," says DioGuardi. He adds, "But it's a difficult market to penetrate for an outside developer. From a zoning perspective, it's a long, involved process to get approvals in New York compared to other states. Also, the land itself is more expensive, and construction costs can be much higher in certain areas where the land is contoured and rocky. All this increases the entire dollar structure for building a facility."

Kapson is also involved with new construction projects. In Westchester, Kapson recently completed a 106-unit adult home facility in Briarcliff, and in Albany, a 125-unit adult home property. The company is now looking at developing 13 additional adult homes and independent living projects throughout the state, involving both new and renovated buildings.

Sunrise Assisted Living of Fairfax, Va., is one of the leading providers of assisted living in the United States. The company recently opened an adult residential community with a healthcare agency in Glen Cove, on Long Island, and is now constructing a similar facility in Smithtown, also on Long Island. "The regulations are tough and it took us a while to penetrate New York, but we're excited about the area and are looking at other sites throughout the state," says Jay Pope, senior vice president of finance for Sunrise. He reports that it requires a knowledgeable lender, or one very willing to learn, to obtain development dollars for a project in the Empire state. He adds, "But once we walk lenders through New York's methodology and they understand it clearly, acquiring the dollars are the same as in any other state."

CareMatrix Corp. currently has two residential communities operating in New York, two under construction and eight more planned in the state. The company focuses its activities primarily on lower Westchester County, along with Long Island and New York City, because "this area generally is regarded as the most affluent, underserved market for residential adult communities anywhere in the country," remarks Zaccaro.

In a joint venture with Spectrum Skanska of Valhalla, N.Y., and Benenson Capital Co. of New York City, CareMatrix is now developing the 140-acre, 429-unit BelleFair at Rye Brook in Westchester County, a traditional neighborhood providing a wide range of housing and services for young families to retirees. The BelleFair's 168-unit, three-story senior residential apartment facility will be built and managed by CareMatrix.

Holiday Retirement Corp. of Salem, Ore., is a developer and operator of retirement housing, with almost 80,000 units in operation around the world. The company entered the New York market at the end of 1997 with a 108-unit adult community in Troy and has two more projects under way.

"New York's land costs are higher than most areas, its building requirements are more rigid and things aren't done as quickly," states Bill Colson, Holiday Retirement Corp.'s president and chief executive officer. "But the market for retirement housing is underserved and the opportunities are fantastic, especially close to the Manhattan area. Our plans for New York are big: We want at least 25 properties in operation within the next seven years."

Marriott Senior Living Services of Bethesda, Md., which operates 94 independent, assisted living, skilled nursing and Alzheimer facilities around the country, is just now entering New York market with a project called Fort Washington, on Long Island, a 600-unit project with 400 units as a continuing care retirement community managed by Marriott. Ground has already been broken for the non-CCRC portion of the project. Marriott's segment will involve 310 independent units, 60 skilled nursing units and 30 Alzheimer units.

The company is also in the process of pursuing the assisted living portion of the continuum in New York: six communities are in the early stages, planned for Irvington, Mt. Kisco and White Plains in Westchester County, Stonybrook on Long Island, and two just north of Buffalo in upstate New York.

"Until recently we didn't have many options for operating in New York because of the state's regulatory and licensing requirements," says Will Holmes, Marriott vice president of development and special projects. "We're excited about entering the state. We think there's a large, unmet demand for senior communities in New York, and we're anxious to provide alternative forms of housing to the state's senior population."

ENTER WITH CAUTION "The market for all types of seniors housing in New York is enormous, especially in the lower half of the state," states Mel Gamzon, president of Seniors Housing Investment Advisors of Newton, Mass., an investment consulting and real estate brokerage firm specializing in the seniors housing industry. "However, one wants to be extremely careful in pursuing this service-oriented business in New York, given the regulatory environment and the likely increase in competition over the next five years."

He notes that the variety of options in New York for the astute seniors investor includes rental, congregate facilities, licensed adult homes, and condominiums and co-ops with available senior services.

"Given the propensity for home ownership in the New York metropolitan area, the seniors housing product of the future for New York most definitely will be an ownership-based condo or co-op. By initiating ownership-type ventures, the developer has the opportunity to reach down into the younger segments of the senior marketplace, as compared to assisted living development, which is oriented to individuals typically 84 years and older," says Gamzon.

"Ownership models afford the ability to purchase land at higher cost, which is consistent with the land values in this region," he continues. "Its market is the World War II segment of seniors, a can-do generation in its 70s, typically not paying rent, and looking favorably at ownership models. Lower monthly carrying costs, an appreciation on investment and tax benefits are among the ownership model's advantages. The model can include a variety of housing options for active adults, with an assisted living component offered on a rental basis."

Says Gamzon: "The other concept which will become increasingly important in the urbanized areas of New York is the integration of seniors housing with commercial and recreational services as part of a mixed-use environment. The senior population today and into the 21st century will be an active consumer who is likely to pursue housing environments that are not isolated, but part of a vibrant lifestyle which includes recreational, educational and even employment opportunities."

Gamzon adds that the business not to pursue in New York is nursing homes. "New York has one of the most onerous sets of nursing home regulations in the country. It's an extremely complex business, and unless investors want to be part of the state's regulatory environment, they're better off pursuing the other options available in New York."

Colleen Blumenthal, vice president of Gulf/Atlantic Valuation Services, says that most of the state's adult communities are still owned by fragmented "Mom and Pop" operators, not national developers. This scenario impacts the state's definition of assisted living and how the regulations will function, since smaller operators aren't as likely to lobby the government as large developers would be. "Assisted living is evolving in New York but it will take longer here, because of how this segment of the market and its regulations are set up," she says.

In an effort to get a better handle on the opportunities for assisted living in New York, the state of New York has legislatively mandated the New York Department of Health to undertake an in-depth study of this category. The intensive fact-finding mission is sending researchers directly into adult residences for a personal assessment of their people, needs and services. The study will serve as a basis for the state's future, long-term plan for assisted living. Due by the end of the year, its results are anxiously awaited by legislators, and especially by owners and operators in the nation's assisted living segment.

In a joint venture with Spectrum Skanska of Valhalla, N.Y., and Benenson Capital Co. of New York City, CareMatrix is developing the 140-acre, 429-unit BelleFair at Rye Brook in Westchester County.

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