As the government becomes the corporate lender of last resort, one company figured out long ago that a partnership with the state isn't necessarily a bad deal.
When Pathway Senior Living was formed in 1998, a decision was made to build the for-profit business around a state program that provides affordable assisted living to low-income seniors. The business plan seemed counterintuitive at the time since development activity was robust and project financing was readily available.
"No one wanted to waste their time on this program," recalls Brian Cloch, principal at Pathway, based in Des Plaines, Ill.
But, as it turns out, Pathway now finds itself in an enviable position with a full development pipeline that relies on an expanding government program instead of a contracting finance market. "The (program) is a great model. It's done well for us," says Cloch.
Pathway is among the lead for-profit developers in the Illinois Supportive Living Program. Through partnerships with developers, the program creates affordable assisted living buildings that accept Medicaid payments. Food stamps are used to offset the cost of meals. Residents pay a portion of their income for rent.
Today, 101 supportive living buildings operate in the state. Another 46 sites are under development, according to the Affordable Assisted Living Coalition. About 60% of the residents in the operating buildings are supported by Medicaid. Occupancy for buildings open 12 months or longer is 96%.
Seeking to reduce long-term care costs, states are experimenting with programs to keep people out of expensive nursing homes. The Illinois program is unique because it is building based. Low-income seniors can only get subsidized assisted living in a supportive living building.
Most states that allow Medicaid dollars to be used for assisted living reimburse the resident for a portion of the costs in a market-rate building. But a recent study shows that Medicaid reimbursements for assisted living are low, and poor seniors make up a small portion of residents in market-rate buildings.
For developers, a key element of the Illinois program is that buildings can accept private-pay residents, though 25% of residents must be supported by Medicaid.
Pathway owns and operates six affordable seniors apartment buildings, and seven supportive living buildings. Pathway operates two other supportive living buildings for other owners. Private-pay residents comprise as many as 75% of the residents at some of Pathway's supportive living buildings. A more typical resident mix is 50% Medicaid and 50% private pay, according to Cloch.
Services at the Pathway buildings are comparable to those at market-rate assisted living properties, he adds. Pathway rents average about $3,500 a month. The average rent for an assisted living building nationwide is currently $3,031, according to the MetLife Mature Market Institute. Pathway's after-tax return is 15% to 20%.
The buildings are profitable for several reasons, Cloch says. The buildings are highly occupied because they draw from a large pool of potential residents. The projects are financed, in part, with low-income housing tax credits. And the properties are located in middle-income areas where land costs are relatively low.
“Higher-end providers put their buildings in (expensive) suburbs," says Cloch. "We don't." He adds that right now it's easy to find land because the condo developers that used to outbid Pathway on deals have exited the market.
Pathway currently has two new projects under way in Chicago. Victory Centre of Galewood opens next spring on the city's West Side. The $24.3 million project features 102 apartments. The other project, Victory Centre of South Chicago has 112 units and also opens next spring.
Pathway plans to expand with three more supportive living projects, all in the Chicago area. The company also is considering a project in New Jersey, though Cloch says it won't be like the Illinois buildings because New Jersey has different reimbursement rules for long-term care buildings.
Some states are studying the Illinois program as a model to reduce long-term care costs, though it could be a while before another state opens a similar program. The managers at Pathway have decided not to invest time recreating the Illinois program elsewhere since they're busy with new projects. But, says Cloch, “It could be a great opportunity for developers to look at this.”