199-Bed Assisted Living

This is one of the most lucrative deals we've ever done. This is a 199-Bed assisted living with an acquisition cost of $6.7M. We performed what is called a change of use upgrade for an additional $3.5M. This was initially a supplemental pay facility with Medicare and social security residents. We purchased the facility and turned it into a luxury private pay facility. We installed electronic locking doors for our memory patients and significantly updated the kitchen and added a world class chef. The problem was through our evaluation, we discovered that a nearly $7M acquisition cost would mean we were acquiring the building at market pricing. The net income was only $710K annually, given the fact that the average bed rate was $850 per month. I learned something really valuable as I did not see the potential initially. Luckily, I met an assisted living consultant who suggested that we buy the asset at market and make a change of use to make it more valuable. He suggested that we commit an additional $3M to upgrade the facility. Committing an additional $3.5M to a property that we were acquiring at market rate made even less sense to me, which motivated me to want to pass on this investment. The consultant informed me that making a change of use will increase the value of the building fivefold. It was risky but we did exactly that. We committed $3.5M to upgrade the facility. Our initial projection was $3M which created a $500K overrun. What happened next was truly astounding. The bed rates climbed from $850 per month to a staggering $3.75K per month. This increased the value significantly. 

Here's how it worked out:

The average bed rate of $3.75K multiplied by 199 beds equals $746.2K monthly. Multiplying the monthly income by 12 equals $9M. The expense ratio of 65% brought the net income to $3.2M. The market cap rate in Los Angeles is a ridiculous 5%. We won't use that cap rate as it would have skyrocketed the value to over $60M. I don't believe we could have sold it for that much as it would have taken a special kind of buyer, which at the time was hard to come by. We will use an average national cap rate of 10%. Dividing the income of $3.2M by the Cap rate of 10% puts the value at approximately $32M which we can easily sell it for. 

In Conclusion:

We had 9 investors who committed a total of $11M. They earned 15% annually for 3 years. That's a total of $1.4M. They earned a premium of an additional 15% at the end of the term for an additional $470K, for a total of $1.9M. The building has since been refinanced for $15M paying off the 9 investors and is now enjoying a loan to value of 47%. This loan to value includes taking a $4M cash out which is grandfathered into the loan.