In part three of the discussion of a workable master planning approach, financial feasibility is addressed. Without this collaborative portion of the plan, the client doesn’t really have a concept of initial or on-going financial sustainability, and obviously, without financial feasibility, there could not be a sustainable project.
The financial consultant should be fully engaged and working in conjunction with the collaborative team from the beginning of the engagement. As the modifications to the built environment and product/care mix are developed, exploration of revenue impact based on these changes as well as payer source can take place. Additionally, the revenue stream can be modeled based on the phasing of any environmental modifications and the displacement or moving of any existing residents.
Critically important is the balance of revenue producing portions of the built environment with non-revenue producing portions. New state-of-the art non-revenue areas can enhance marketing efforts and resident satisfaction, comfort and independence, while not directly enhancing revenue. Care needs to be taken that these spaces are not out of balance with competition or with associated operational costs versus overall revenue. An events center, for example, can capture additional market by providing a venue for resident entertainment and outside community engagement providing an excellent marketing opportunity.
Investigating financial feasibility involves analyzing hard (construction) costs and soft costs. An accurate estimation and understanding of the construction costs is critical to the accuracy of the financial projections. To this accord, another member of the collaborative team might be a construction manager or a professional construction cost estimator not only for cost estimating but also for scheduling expertise. Additionally, having a full understanding of how construction pricing is trending and how local construction markets might be influenced during the anticipated construction period is critical to financial projections. Inclusion of contingency amounts both for unforeseen variances in construction pricing and for owner generated modifications as the project moves forward are important elements in assuring the financial feasibility is conservative.
Soft costs are too often underestimated or overlooked. These include such things as professional service fees, insurance costs, seed capital for project initiation and marketing expenses. In addition, interest expenses are calculated under this area of financial feasibility. These costs can be quite significant and need to be carefully analyzed for project success. The financial model is also a dynamic tool and needs to be constructed to react quickly to changes in interest rates, operational variables and construction costs during the master planning process.
The financial consultant must also provide calculations for the sources and uses of funds and provide clear indications of operational costs and any fill-up or vacancy overlays and their inflationary increases over time. To satisfy potential lenders, calculations of debt coverage ratios, projected days cash on hand and the ratio of cash to debt need to be completed, not only during the construction and start-up period of the project, but also through projected stabilization.
That’s How to Create a Senior Living Campus Master Plan… That Works
All of this work integrates into a well-reasoned master plan and contributes to a clear understanding of how a repositioning or right-sizing of a campus might alter not only the campus aesthetic, but enhance the market position and, over time, the financial position of the campus. If properly completed, this analytical master planning approach can be an inexpensive exploration of possibilities, opportunities and resident enhancements and provide a tool by which an organization can make fully informed decisions regarding the future of a campus.