It's not your grandfather's retirement community. A growing number of aging Americans are choosing to spend their senior years developing their minds and bodies at university-affiliated retirement communities. To meet demand, developers are building an increasing number of these villages on or near campuses, where the elderly can become students again, or even teachers, but in all cases active adults.

“The residents get the intellectual and social stimuli of a college atmosphere,” says Robert Kramer, president of the National Investment Center for the Seniors Housing and Care Industry in Annapolis, Md. “The elders bring mentoring skills to students.” What's more, when residents are alumni, they often contribute funds to their alma mater.

Exactly what is a university-affiliated community? It can range from developments that simply use a university name and have a loose affiliation with a school to a more substantial relationship in which the school provides land and/or seed money for the project. At some communities, residents can teach courses, play sports or work out at fitness centers, attend cultural, entertainment and sporting events, and even dine and participate in university-related events (see related story on page 34).

Healthy project pipeline

Among the growing number of players stepping up development of seniors housing communities associated with institutions of higher learning is The Praxeis Group, based in Jacksonville, Fla. In December, Praxeis, which has developed more than 40 projects in the 22 years since it started as a Methodist-based operator, hooked up with Harrison Street Real Estate Capital of Chicago in a joint venture to develop eight to 10 not-for-profit university-affiliated communities over the next three to five years.

Harrison Street expects to soon close a $150 million to $200 million fund dedicated to financing development of what Praxeis calls “life-fulfilling centers.” Dean Egerter, a principal at Harrison Street, says the asset manager plans to launch a second fund for this purpose. Harrison, which was established in 2005 with investments from the Galvin family, Motorola's founders, raises equity capital from institutions and high-net-worth individuals.

Life-fulfilling centers are not a new idea. They've existed for years as a subset of continuing care retirement communities, which offer seniors an independent lifestyle from the privacy of their own homes, with options for assisted living and skilled nursing as they age.

Firms such as Kennett Square, Pa.-based The Kendal Corp., Chicago-based Franciscan Communities, Memphis, Tenn.-based CSRA and Baltimore-based Erickson Retirement Communities have been building senior centers affiliated with institutions of higher learning for a decade or more.

Indeed, of the $2 billion to $3 billion in projects that investment banker Ziegler Inc. of Milwaukee, Wis. finances each year, about 10% to 20% are university-related, says Dan Hermann, Ziegler director and group head.

Nationally, more than five university-associated projects are under construction, 10 are in different stages of pre-construction and at least 17 formally under consideration, according to estimates by Ziegler.

By nature, these are large, complicated projects. Praxeis' Westcott Lakes at South Wood, sponsored by Florida State University in Tallahassee, Fla., for example, cost more than $200 million to develop and build, and will include 272 residences, 45 assisted living units, 40 skilled nursing rooms and 24 memory support units for residents who are senile or have Alzheimer's.

For the past year-and-a-half, Praxeis has run Oak Hammock at the University of Florida in Gainesville. It now is embarking on Phase 1 of the 90-acre Westcott lakefront development, which will include a mix of apartments and club homes in a gated, country-club style setting. The development also allocates 60,000 sq. ft. for dining, a wellness center, and performing and creative arts programs. Two more projects are under consideration at the University of Central Florida in Orlando and the University of Kentucky in Lexington.

Community energizers

Universities and the municipalities where they're based often welcome these communities because they attract tax-paying residents who aren't a drain on local expenses. They don't use schools or generally drive at rush hour, says Matt Weaver, executive vice president of Praxeis.

What's more, they generate jobs and money for the local economy. “A typical project has a payroll of about $10 million, employs over 200 full-time employees and hands out construction contracts of more than $120 million,” according to Weaver.

Permanent financing is often secured through tax-exempt bonds that recently have been issued in offerings as high as $140 million, according to John Diffey, president and CEO of the Kendal Corp., which operates university-affiliated retirement communities.

Investments can be rewarding. Bond offerings for start-up continuing care retirement communities are now pricing in the 5.6% to 5.75% range, according to a 2006 Ziegler report. With the return on a Triple-A municipal bond at about 4 3/8%, that's a 122 to 135 basis points spread.

To ensure seniors don't lose their investments in these communities, some states require a certain percentage of pre-sales before a bond can be issued. Florida requires a 50% minimum of presales. Maryland requires 65%.

Lenders, however, require even higher percentages. William Sims, CEO of Southport, Conn.-based Herbert J. Sims & Co., an investment banking and fixed-income broker, says pre-sales generally must reach approximately 60% before his firm will underwrite a bond offering. But the exact percentage varies depending on the firm's relationship with a developer.

The projects are often built in phases of approximately 250 units and include a common area; once one phase is sold, developers move onto a second stage. John Erickson, chairman and CEO of Erickson Retirement Communities, says that total costs can reach $400 million after four phases.

Continuing care retirement communities and university-related communities cost more to build than basic nursing homes because the accommodations include individual housing and separate buildings for social events and fitness centers. “It's not for the faint of heart,” says Erickson.

Out of equilibrium for now

Supply currently exceeds demand, especially in communities where more thought was given to the potential for alumni residents than local demographics to ensure the long-term viability of these projects, say developers and asset managers. But any excesses in development are likely to be overcome as America grays and more older adults recognize the advantages of university-affiliated continuing care retirement communities.

Down the road demand will exceed supply, predicts Sims. About 12 to 15 years from now, the relatively affluent baby boomers will reach the age of entry for university-affiliated continuing care retirement communities.

While real estate fundamentals may be at issue, cap rates on continuing care retirement communities have dropped from 10% in the first quarter of 2006 to 8.2% in the third quarter, says NIC's Kramer. “There's a lot of money” chasing after the product, he says. Cap rates on skilled nursing care facilities are higher because of reliance on Medicare and Medicaid. Continuing care retirement communities depend much more on private funds.

Do your homework

When planned properly, the development of university communities benefits all parties. Universities, for example, get potential employees and volunteers, a critical mass of users, and economies of scale for on-campus services. What's more, they often can reap the benefits of generous alumni support, says Kathryn Brod, senior vice president at Ziegler.

FSU President T.K. Wetherall echoes that sentiment. “Florida State has found that alumni and supporters over the age of 62 want to enjoy the cultural, social and athletic benefits of living near an institution of higher education.”

The residents get intellectual stimulation and fitness facilities, have an opportunity to pursue second careers and can attend all the concerts, plays, art exhibits, discussions and sporting events a campus life offers. At many institutions, they even get cards identical to student ID cards, which they can use at the library, bookstores and student center.

Alumni make up a large component of the population at life-fulfilling centers, but it would be a mistake to rely on graduates to fill the housing. Indeed, that mistake was made at The Village at Penn State (Pennsylvania), where the number of independent living units in Phase 1 was cut to 150 units from a planned 250 units, according to Brod of Ziegler.

“The inexperienced approach will say, ‘We're going to pull from the alumni so we're going to walk away from traditional measures of a project's feasibility,’” according to Brod. “You need to develop a continuing care retirement community related to a university with the same criteria as other housing developments.”

Weaver of Praxeis agrees. “We look for universities that have favorable demographics in the local marketplace and have strong alumni affinity.” But that's only part of the equation.

That means targeting areas that meet specific demographic measures within a defined radius. “A demand study must be based on a concentric ring analysis,” emphasizes Egerter of Harrison Street. “Are there enough income-qualified seniors that live in close proximity?”

For Praxeis, in order for a project to be viable a specified number of households within a 15- to 20-mile radius must have at least one member 65 years of age or older and an annual household income of $50,000 or higher. “Census information can give you those answers fairly quickly,” says Weaver.

Another requirement is finding a willing university. Some affiliations are loosely based cooperative agreements, while in other cases universities provide land, or perhaps even an equity stake.

Oberlin College in Ohio, for example, purchased land and made it available to Kendal at Oberlin, a university-affiliated seniors housing project, says Diffey. “Cornell University provided land and some seed money,” he says. “And Denison University (Ohio) provided seed money and made land available through a long-term land lease.”

The university, however, is rarely directly involved in the management of an affiliated retirement community, though local officials could — and should — be on the non-profit board. “We must maintain a firewall needed to keep from financial and legal liability standpoint,” says Diffey.

One mantra at schools involved in these projects is stability. “Colleges aren't interested in seeing real estate built and flipped,” says Diffey, adding that they want agreements for the life of the residence. “This is not a real estate play.”

Beth Karlin is a writer based in South Florida.

Dancing the light fantastic at Oberlin College in Ohio

Most days, Eileen Dettman heads for the barre at Oberlin College — the barre at the school's Center for the Arts ballet program, that is.

There she takes classes and practices dance, a lifelong love. Dettman, 79, practices her plies alongside college students. The former ballet teacher, who with her husband owns one of 212 cottages at the Kendal at Oberlin continuing care retirement community in Oberlin, Ohio, had no intention of retiring to a rocking chair. “Exercise is very important to me mentally and physically,” she says.

A university-affiliated continuing care retirement community can range from a loose association with a school to non-stop opportunities for activity — classes, fitness centers, speaker forums and sports activities. Here's a sampling of some activities at university-affiliated projects:

  • At Praxeis' Oak Hammock at the University of Florida in Gainesville, retirees take advantage of a program where dental students perfect their skills in a specially built dental facility.

  • At Praxeis' planned Westcott Lakes at South Wood, located on a lakefront on the southeast side of Tallahassee, retirees will enjoy talent from the Florida State University's fine arts program in a performance center.

  • At Kendal at Ithaca, where the continuing care retirement community has informal ties to Cornell University, Ithaca College, Tompkins-Cortland Community College, Syracuse University and other schools, residents have taken part in research projects. Case in point: The Gerontology Institute at Ithaca College and the Bronfenbrenner Life Course Institute at Cornell are undertaking a 10-year life-quality project.

Oh, and dancer Dettman also audits a variety of classes, including creative writing, and plays the violin in the Oberlin College Community Strings orchestra.

Dettman covets her role. “The teachers think I'm still good enough to show the kids something.”
— Beth Karlin

Fees help seniors housing projects pencil out

When it comes to university-affiliated continuing care retirement communities, it's a fee-for-all situation. Developers, for example, are paid fees based on the project's operating budget and construction costs. Management fees run from 3% to 6% of the annual operating budget, which will amount to about $15 million at Westcott Lakes at South Wood in Tallahassee, Fla.

Development fees run from 4% to 6% of the total project cost, according to Matt Weaver, executive vice president of The Praxeis Group of Jacksonville, Fla., which is developing Westcott Lakes.

The total budget for Westcott Lakes is estimated at $400 million, but other continuing care retirement center startups typically have a budget of $250 million. These projects generally are built in phases of 250 or more units and include support facilities.

While early stages of development are financed though a variety of equity and loans, the bulk of the project capital in non-profits comes from tax-exempt bonds. They provide a 200-basis point savings for developers vs. a taxable bond, says Weaver of Praxeis. Bond underwriters, meanwhile, typically earn 1% to 2.5% of the offering, says Dan Hermann, director and group head at Ziegler Inc., a Milwaukee, Wis.-based investment banker.

Because of the tax-exempt nature of the bonds, this model also delivers lower resident fees. The Internal Revenue Service requires some benefit to the community in return for granting tax-exempt status. “You must demonstrate that a charitable mission is involved,” says Weaver. “That could mean subsidizing some residents.”

Prices for residents vary. At some developments, residents can purchase a share of the house for a lower price rather than pay for the whole residence. At Westcott Lakes, for example, the entry fee can range from $100,000 for a percentage of a 900 sq. ft. space — one of 18 models — to $500,000 for a three-bedroom, 2,300 sq. ft. home.

At the luxurious for-profit Classic Residence by Hyatt in Palo Alto, Calif., home to Stanford University, residents can spend more than $600,000 for a one-bedroom unit and $3,100 in monthly fees. Most entry fees are partially refundable, depending on how much a tenant puts up.
— Beth Karlin