As the government becomes the corporate lender of last resort, one company figured out long ago that state partnerships aren't always 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 plan seemed counterintuitive at the time since development activity was robust and financing readily available.
“No one wanted to waste their time on this program,” recalls Brian Cloch, principal at Pathway, based in Des Plaines, Ill. But 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 meal costs. The 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.
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 five affordable seniors apartment buildings, and eight Supportive Living buildings. The company also operates one other Supportive Living building for another owner. A typical resident mix is 50% Medicaid and 50% private pay.
Services at the Pathway buildings are comparable to market-rate properties, Cloch adds. Pathway rents average about $3,500 a month compared with average nationwide rents of $3,031.
Pathway's after-tax return is 15% to 20%. The buildings are profitable for several reasons, Cloch says. Occupancies are high 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.
Pathway currently has two new projects underway in Chicago. The $24.3 million, 102-unit Victory Centre of Galewood opens next spring on the city's west side. The other project, Victory Centre of South Chicago has 112 units and also opens next spring.
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. Pathway has been too busy to create the Illinois program elsewhere. Cloch says, “It could be a great opportunity for developers to look at this.”
PATHWAY SENIOR LIVING
Owned & managed
8 Assisted/Supportive Living Buildings
5 Seniors Apartment Buildings
Managed
1 Assisted/Supportive Living Building
1 Seniors Apartment Building
Under development
2 Assisted/Supportive Living Buildings
1 Seniors Apartment Building
Owned portfolio value:
$200 million
Source: Company