Affordable Assisted Living: Capstone Project from The Ohio State University

VIUM Capital partnered with The Ohio State University’s Specialized Master of Finance (SMF) program for a semester-long capstone project, tackling the challenges and opportunities within the Affordable Assisted Living (AAL) sector of the seniors housing industry. The group, consisting of five international students hailing from Asia, Europe, and the United States, brought a diversity of perspectives to this critical seniors housing issue. The goal of the project was to provide a detailed depiction of the affordable assisted living landscape in the United States and provide guideposts for increased development activity in this niche and rapidly expanding sector of the seniors housing economy. 

As we forecast future economic and demographic trends, the demand for seniors housing, particularly assisted living, is rapidly rising. With the upcoming surge of seniors housing needs, the industry, as well as state and federal government officials, should expect significant challenges and opportunities ahead.

‍

Explosion in Demand

The U.S. expects a substantial expansion of its aging population in the near future. By 2040, the populations aged 65+ and 80+ will increase by 48% and 49%, respectively. By 2030, 21% of the U.S. population will be age 65 or older. This demographic shift will result in a major increase in demand for seniors housing and assistance with Activities of Daily Living (ADLs) like grooming, dressing, and medication management. 

Another factor driving this increased demand is the recent trend in Caregiver Support Ratios (CSR), which measure the ratio of “adult children” available to care for aging parents. Trends indicate a 9% decrease in CSR by 2030, further increasing demand for assisted living accommodations amidst insufficient supply.  

In addition to increases in demand for assisted living, there are critical affordability challenges. One of the primary challenges senior residents face is the cost of care. Operating a seniors housing and healthcare facility is expensive, especially a Skilled Nursing Facility (SNF). High operational costs lead to higher rents for the residents. By 2030, the average cost to operate a SNF unit is projected to total $11,970 per month, a 19% increase from current costs. Approximately two-thirds of SNF residents are funded by Medicaid.

‍

Fortunately, ALFs cost approximately 50% less to operate than SNFs, with average monthly rents totaling approximately $5,550. While ALFs are less expensive, as they do not provide 24/7 nursing care as is common in SNFs, they are still not affordable for the majority of U.S seniors, and Medicaid is often not eligible to fund the cost. An increasing number of seniors have less income available to spend, as half of the baby boomer generation (and around 66% of millennials) do not have retirement accounts. Additionally, more than one in four Americans (28%) have savings below $1,000. As the cost of private-pay ALFs continue to rise, many low-income seniors in need of some assistance with ADLs are being priced out of the market. This often forces them into SNFs where they can rely on government state-sponsored Medicaid reimbursement. 

‍

Burgeoning Costs to Governments

The funneling of seniors to SNFs leads to higher government spending and, depending on the resident’s needs, a less desirable quality of life in a traditionally more institutional setting. The inopportune placement in unnecessarily higher-acuity settings often results from a resident’s inability to afford private pay ALF rents. Implementing measures to make assisted living more affordable can help residents receive the appropriate level of care while simultaneously reducing state and federal government expenditures. In summary, ALFs provide suitable care and housing at about half the cost of 24/7 care in a SNF setting. Addressing the affordability issue by utilizing certain financial-related levers for the development of AAL is crucial for ensuring that seniors receive the appropriate level of care in the most cost-effective setting.

‍

Levers to Create Affordability

To develop and fund AAL projects for seniors, stakeholders should leverage certain tools and best practices that enhance revenues, reduce costs, improve NOI margins, and optimize debt and equity funding. 

The most prominent such lever is to increase revenue through Medicaid waivers. By allowing Medicaid to cover the majority of the costs in ALFs, low- and moderate-income seniors can avoid moving into relatively expensive SNF settings, saving states money on reimbursement and increasing resident satisfaction. Additionally, ensuring Medicaid rates are keeping up with inflationary costs is critical for producing sustainable AAL revenue.

Managing expenses can also act as a lever for AAL projects. Strategies that AAL developers and operators can implement include universal staffing practices, offering unbundled services, forming partnerships with local state programs, incorporating Environmental, Social, and Governance (ESG) features, and minimizing project basis, including land acquisition and construction costs. 

On the debt side, tax-exempt bonds, HUD-insured loans via the HUD 232 mortgage insurance program, USDA Rural Development loans, and SBA 504 loans can help lower debt service via relatively low interest rates and long term/amortization, making it less expensive for AAL sponsors to borrow money.

For equity funding, levers like Low-Income Housing Tax Credits (LIHTC), Historic Tax Credits, New Markets Tax Credits, sale-leaseback transactions, tax increment financing, and PACE funding can provide and save additional capital. These various levers can collectively enhance the feasibility and affordability of assisted living projects, ensuring that more residents have access to quality care. 

‍

Similar States; Different Levers

Throughout the capstone project, the OSU students analyzed Illinois, Indiana, and Ohio, highlighting each state's unique incentive programs for AAL projects. Illinois stood out for its distinctive approach that is arguably the most mature of its kind in the U.S. 

With one of the largest populations of individuals aged 80+ in the country and around 20% aged 65+, Illinois faces significant challenges due to approximately one million seniors earning less than $30,000 per year, while the average annual cost for assisted living is $60,000. This disparity highlights a major affordability issue. To address this, Illinois has implemented certain incentive programs, particularly through Medicaid waivers, achieving an 18% penetration rate for affordable assisted living, with just under 35% of residents relying on Medicaid, compared to Ohio's rate of just over 10%. A key component of Illinois' success is its Supportive Living Facility (SLF) designation, qualifying facilities for Medicaid waivers with lower income requirements and relatively flexible eligibility criteria. This approach ensures that more seniors can access affordable care through Medicaid reimbursement. Illinois' Medicaid program and innovative incentive programs provide a promising model for addressing the affordability of assisted living, helping ensure that more seniors can receive the care they need without unnecessary financial strain.

Ohio and Indiana have taken unique approaches regarding Medicaid as well. Indiana has focused on expanding Medicaid to more residents, while Ohio recently increased Medicaid waiver rate reimbursement. These changes have caused a notable uptick in recent AAL development activities in both states.

These three states, all close in proximity with similar demographics but different politics, stand out with very different AAL targeted models, serving as examples for other states to explore, amend, and adopt depending on their own unique demographics, finances, and political climates.

Compelling Investment Alternative

Despite AAL receiving limited attention as an investment opportunity due to the product being a subset of a traditionally non-core commercial real estate (CRE) asset class (seniors housing), investing in AAL projects presents an interesting opportunity for investors. Given the current demographic driven demand, the evidenced quick fill-up of new AAL projects, and remarkably high and sustained occupancy levels, forward thinking fund asset managers are beginning to view AAL as an attractive return profile, particularly within the ESG fund space. 

ESG funds have seen tremendous growth throughout the last few years. Global ESG assets are on track to exceed $50 trillion by the year end 2025 (nearly a 45% increase from 2020). As ESG funds receive more recognition and capital, consistent yielding and low volatility CRE investments are becoming increasingly attractive. Therefore, we believe that recognition and capital moving into the ESG space will help promote the AAL model as a compelling fixed income like equity alternative, as it tends to produce market-level yields and low volatility.

In their research, the OSU graduate students highlighted Hartelt Fund Management’s Apollo Healthcare Property Assisted Living Sub-Fund, a Netherlands-based fund that promotes energy, environment, health, quality of life, and future value. Such a fund is tailored to promote social benefits by investing in residential real estate with a health care well-being component. 

‍

The Future of AAL

The future of seniors housing, particularly AAL, presents significant challenges and opportunities. Demographic trends forecast a sharp rise in the aging population, driving demand for seniors housing, while financial constraints make ALFs increasingly unaffordable for many seniors. Allowing patients access to the appropriate acuity of care through different funding mechanisms and financial levers will not only be more cost effective for residents and the government alike, but provide a better quality of life for our nation’s most vulnerable. 

The partnership between VIUM and The Ohio State University’s Specialized Master of Finance program has provided important insights into addressing these issues. The efforts of Ira Likhachova, Durgesh Balla, Adam Kadro, Patrick Schmuecking, and Xishan Zhang, have highlighted the necessity for state-level initiatives, like Medicaid waivers and access to LIHTC’s, to improve the accessibility of AAL. Moving forward, leveraging these insights will be an important component in addressing the seniors housing shortage and ensuring appropriate care for the nation’s elderly. Contact us today to learn how VIUM Capital provides solutions for the seniors housing industry.


Project oversight was provided by VIUM Capital’s Steve Kennedy, and this summary article was authored by Kennedy and VIUM intern Charlie Landshof, a student at Indiana University’s Kelley School of Business.