Return to the Brecht Associates Site "Let the Buyer Be Aware: Making the Most of Feasibility Studies" by Susan B. Brecht Is the feasibility consultant your new, best friend or a necessary evil? Should they be your advocate or an independent arbiter? What do you do once the results are in and what if they are full of surprises? When should you bring the feasibility consultant on to the team? These are all important questions that shape the nature and quality of the relationship that is to be created between developers of assisted living communities and the analysts with whom they work. The answers can make a significant contribution towards facilitating the developing planning and financing process. Before selecting a market and/or financial feasibility consultant it is important to understand and recognize the specialized nature of assisted living. It is unlike multi-family housing or any other traditional forms of real estate, and so consulting firms with a broad base of real estate experience are not necessarily the best choice. The development process is expensive enough without having to pay for the cost of educating your consultant. Look for firms that are known to have expertise in senior housing and assisted living. There are a number of highly qualified consulting and accounting firms which have established lengthy and successful track records in this industry. ALFAA and other trade organizations such as the National Association of Senior Living Industry, the American Senior Housing Association, the American Association of Homes and Services for the Aging and the American Health Care Association know which firms are qualified to do the work and will gladly share their lists with you. Once you have identified qualified feasibility consultants, there are other factors that need to be weighed in making the selection. The most important is whether or not the chemistry is right and the match is a compatible one. This doesn't mean hiring a firm that will always agree with you. It means hiring people who have the integrity to tell the truth as they see it at the same time that they are able to work with the people in your organization in a team effort that is not adversarial in nature. You must feel that you can trust the judgement of the feasibility consultant that you hire, without feeling that you can't challenge their interpretation and judgement of the data that they gather. Feasibility studies are frequently thought of as a part of the due diligence process necessary to accomplish the financing of an assisted living community. Most direct lenders require them and without significant credit enhancements in place, investment bankers will insist on a feasibility study before bonds can be sold to finance a project. Financing that does not involve taxable or tax exempt bonds frequently requires only a market feasibility study, rather than the full financial feasibility study necessary for inclusion in a public financing document. However, what is being recognized with increasing frequency is that feasibility studies represent an important component of the planning process which should take place long before you are ready to go to the closing table. A good market study conducted early in a project's planning stage, for example, will help a developer to answer far more than the question of "to build or not to build." It will provide detailed information and advice about how to shape the project to meet the needs of the specific market it is being designed to serve. Organizations retaining consultants should expect that a full market feasibility study will comprise not only an analysis of market conditions, but specific recommendations on overall size, unit styles, unit mix, pricing, services and amenities. Further, based on the detailed analysis of the existing and planned competition, it may yield guidelines on market positioning. The financial feasibility study bases many of its assumptions on the results of the market feasibility study. Recommendations regarding overall project size, unit sizes and mix will drive the overall project cost as reflected in the development budget. Recommendations regarding services to be provided form the basis for the operating budget's assumptions. Revenue projections should reflect pricing recommendations, unit mix and the pace of absorption identified in the market study. Despite the fact that a great deal of advice can and should be encompassed by a feasibility study, it is, on its most fundamental level, a risk analysis. It provides the client with guidance so that his or her organization can reach its own, informed decision about whether or not to pursue a development opportunity. The ultimate decision must be the client's, not the feasibility consultant's. Used early during a project's planning phase, the feasibility process represents a series of "go/no-go" steps. There are several key points at which a study might either indicate that planning should continue or that without significant changes, the project should be abandoned. Each represents a decision benchmark. The first point at which such a decision might be made is the site analysis. While hopefully, a quality site has been chosen, it is possible that a site might be considered inappropriate because of highly incompatible surrounding land uses. If the site would prohibit successful marketing of any assisted living facility, the decision may be not to develop the project. It is also possible that, given the location, a different economic segment should be targeted than originally intended. Additional stages in the analytical process which could result in the recommendation not to proceed or to alter the project could be based upon either qualitative or quantitative data gathered during the study. For example, it is possible that qualitative interviews might indicate that the market to be served cannot afford or will not spend the money necessary to support the proposed fee structure. Seniors in such a market might be resistant to the idea of spending money on themselves, for what they and others might construe as a luxury. Instead, they may be making due with home health care services when necessary. Conditions such as these require that the developer decide whether or not fees can be lowered to an acceptable threshold or whether sufficient marketing dollars can be allocated to educate the market to overcome this resistance. From a quantitative perspective, the demand analysis may indicate that there are insufficient qualified households to support a development, or that too many other strong competitors are simultaneously planning to develop similar projects to serve the same market. Should the latter be the case, the developer must decide whether or not anything can be done to position the project to distinguish it enough to overcome competitive forces. From a financial perspective, it is possible that the feasibility analysis will indicate that the community cannot be developed at the rates that are considered supportable within the market. If further financial analysis assessing both development and operating costs cannot yield lower fees, it may be time to look for a better development opportunity. Developers should be wary of a study that relies on "rules of thumb" rather than market-specific analyses. For example, some studies still consider a radius of 3, 5 or 10 miles to be an appropriate way to define a project's market area. Very few communities draw equally from all areas encompassed by a radius. The definition of a project's market area should be based on the nature of the location and its relationship to surrounding municipalities, the economic target market to be served, the accessibility of a site in relationship to major highways, the image and perception of the site within the local area, and the experience of other competitive facilities located within the immediate area. Sponsorship can also influence a community's drawing power when a not-for-profit organization or a hospital is involved. The market area definition should be clearly explained and supported within the text of the study. Other areas requiring thought and thoroughness include the study's demographic and competitor analysis. Demographic data should be analyzed not only for those in the market area who are qualified by virtue of age and income, but information on adult children (age 45 to 64) who may be caregivers and decisionmakers should be evaluated. Competitor analyses should be based on visits to existing facilities and should incorporate qualitative information as well as a presentation of each community's basic characteristics. In today's market, decisions regarding what to consider as competition are more complex than in the past. Beyond the more obvious analysis of other facilities that are licensed as assisted living (or whatever the individual State's licensing category is called), direct competitors may also include retirement communities that have no licensed assisted living units, but which are providing personal care services to independent living residents through licensed home health care agencies or other means. This form of avoiding licensing has been increasing in nearly all markets and must be considered when doing a competitor analysis. To the extent possible, the study should also examine the impact that home care might be having more directly by allowing people to remain at home until nursing home care is needed. Finally, developers should question the demand analysis in a study that does not factor frailty levels along with age, income and household size. While not all residents will require assistance with activities of daily living when they move in, the majority will. Feasibility studies that are conducted as part of the financing process typically don't contain significant recommendations regarding project characteristics, and are more limited to evaluating and confirming or commenting on the project as it has been structured. Of particular importance in the market portion of a feasibility study being used for financing is the assessment of the competitive conditions within the market and the confirmation that project characteristics, particularly pricing, are supportable. If any pre-opening marketing results are achieved, resident origin data can be used to support the project's market area definition. The financial feasibility component is conducted to examine whether or not the assumptions regarding development and operating costs are reasonable. The study will also determine the level of debt service coverage once project revenues and costs are accounted for. Depending on the source of financing, debt service coverage ratios of at least 1.2 are typically expected. While it is certainly possible that some last minute modifications might be made, by the time financing is imminent, making changes is a rather expensive proposition. That is why studies should be conducted early, and updated when the time for financing arrives. Clients should expect ongoing communication throughout the feasibility process with the consulting firm. Decisions such as how to define a market area, for example, should be reviewed prior to proceeding with the analysis that follows it. Such a precaution prevents unpleasant surprises when the study is completed, and provides an opportunity for feedback to the consult conducting the study. If there are geographic areas that are omitted that the client believes should have been included in the market area, he/she shouldn't hesitate to discuss this with the consultant. While further investigation may not always result in the desired market area modification, the thoroughness of the assessment will be validated. Developers with a firm plan in place should also be prepared to learn from a study that certain assumptions may need to be altered. For example, the unit mix may need to favor a greater number of larger units than planned, or unit size might need to be increased. This is why the study should be conducted when there is maximum potential for flexibility. When such changes are being recommended, expect the study to present a clear and cogent rationale for the changes, and be willing to discuss this with the consultant. When a thorough study is completed, it should play an active part in continuing project planning. The architectural firm will benefit from reviewing the study because they will learn a great deal about the basic framework of the project's design. The study will also have value to the marketing staff or consultants. Vital information on competition will provide helpful guidance in crafting the project's positioning and in planning and implementing the marketing campaign. Information on demographic characteristics of the market area can be particularly helpful if they reflect the attributes of the various geographic segments that make up the overall market area. This helps the marketing firm identify specific areas in which to target marketing efforts. In addition, many of those interviewed for the study will form the core of referrals sources to be cultivated during the marketing campaign. The feasibility consultant must be in a position to render a completely independent judgment. While the consultant is an important member of the development team, the outcome of the study should not be influenced by the potential for additional, substantial fees. However, clients should expect to have an interactive relationship with their feasibility consultant. Trust is critical to the success of the relationship and the engagement. There should be sufficient comfort to encourage ongoing dialogue between the client and consultant and questioning of results. Questioning that is directed towards justifying unexpected results, or simply carefully explaining how results and recommendations were achieved should be part of the interaction. In summary, the feasibility study is a vital part of the process of developing and filling an assisted living community. Its relevance is ongoing from planning through financing and from design to marketing. Organizations retaining feasibility consultants will best be served if they understand the feasibility process, know what to expect and make their expectations clear. Under these conditions the relationship between client and consultant will be both stimulating and productive and have value for each. Susan B. Brecht is President of Brecht Associates, Inc. Brecht Associates is a consulting firm based in Philadelphia specializing in market feasibility and planning for assisted living and other types of senior housing and community-based services. Return to the Brecht Associates Site