The tract is perfectly sized and undeveloped, inside the city limits and adjacent to a beautiful neighborhood. The market is ripe with age- and income-qualified senior households. The configuration allows for short walking distances for residents, and the parcel can easily accommodate multiple future phases. The competition is older and passive. The seller is community-minded and likes what you propose.
Environmental and drainage issues are absent. Utilities are affordable and accessible. Zoning is preferential. Gently rolling topography makes for an interesting though not overly challenging development. Nearby services include all the “desirables”: grocery stores, places of worship, nice homes, and quality primary health care.
When it comes to senior living development, this would make a magnificent home for a quality CCRC — if only it were a reality. Unfortunately, in the real world the perfect plot of land rarely exists, if ever. The key is finding the best possible site. Just where does one begin?
Land is still cheap, right?
Everyone remembers September 2008: the bursting of the housing bubble, the freezing of capital markets, the sharp decline in new development. At that time, nearly five years ago, standing pat seemed like a good strategy. “Why risk anything,” was the mantra in this uncertain economic environment.
Senior living wasn’t the only sector hit hard by the Great Recession — multi-family housing, office parks, strip centers, residential subdivisions, new homes and resale homes all suffered mightily. In fact, statistics show that senior housing as a category of real estate was actually one of the better performers during this time.
Cities also took a blow. In 2007, many were stiff-necked when it came to zoning changes. Today, those same cities are more welcoming, receptive and flexible than ever. They are willing to work with developers on denser and more intense projects, collaborating to encourage new construction and create tax revenue and jobs.
The result: Competition for prime sites is up.
End users, senior living and otherwise, are moving off the sidelines and starting to bid up land values. This is especially true for infill locations, which lenders and investors see as having a greater chance for success, thus making them more desirable. All of this increased activity has started to reset land values toward pre-Great Recession levels. Prices and competition will most likely continue to rise.
The Site Selection Process
The path to a perfect site begins with the definition of parameters. Where is your market? Who is your competition? What sites are available? These questions and others drive the process.
A market analysis is the initial step. A dot density demographic map can demonstrate the depth of a market’s age- and income-qualified households, as well as geographic concentrations of those senior households. The level of competition must also be determined. Who else offers similar services? How do they offer them? What is the cost? This market analysis should also address local services, traffic patterns, entitlement processes and development climate. The result of this first step is a defined “search box” that narrows geographically the area for site identification.
The second step is the identification of sites that meet the search criteria. Information must be gathered from real estate databases and listing services. Additionally, local commercial brokers can provide knowledge of both on- and off-market sites. These brokers provide insight into the local market and its unique set of conditions. Aerial map analysis can be used to further uncover sites. These off-market sites may be vacant or occupied by an underperforming asset. “It’s time to pick up the phone and go fishing,” says a land broker familiar with the CCRC site-search world.
Think of the third step like a funnel: All sites identified within the search box go into the large end of the funnel; a number of filters are then applied to these sites, narrowing down the selection to a few at the small end of the funnel. These select few deserve more stringent analysis and more thorough consideration. Some of the filters applied include: location analysis, asking price, transaction terms, zoning, marketing window/adjacencies, proximity to services, size and shape, access, utility availability/capacity, drainage, topography and environmental issues.
While it would be ideal if one site that fit every parameter magically popped out of our search funnel, the more likely scenario is that two or three sites will meet about 80 percent of the criteria and require more vetting. This is where the art and science of site selection converges with market dynamics.
Making the Offer
Once the initial sites are analyzed, letters of intent (LOI) are prepared for the final one or two candidates. It’s always best to claim negotiating strength by letting the seller know there are alternatives. The nonbinding LOI will state the basic business terms for the acquisition of the preferred site. But how much should you offer? Of course, buyers in any industry are seeking value, and the nonprofit CCRC industry is no different. Determining an appropriate offer price isn’t always an exact exercise, though. Knowing what you can afford to pay and “market value” is an important piece of the puzzle.
In many markets, a distinct lack of timely comparable properties creates challenges in developing a price. Frequently, available comparable properties are outdated or incomplete. The improving economy and development environment may also lead to volatility of land prices in some markets. Further creating confusion, some properties are marketed on a price-per-square-foot basis, while others are price-per-door. This differentiation often varies by seller, density and zoning climate of municipality. Small, infill sites can experience larger price-per-foot swings than sprawling, suburban sites. Another factor to consider when comparing sites in varying municipalities is how those municipalities calculate the density of health care units. A general rule of thumb is four health care units equal one independent living unit. Be sure to check land density regulations for the proposed site chosen.
Once the parties have agreed to the price and terms stated in the LOI, negotiation of a Purchase and Sale Agreement (PSA) is next. This phase usually includes the introduction of attorneys into the process. A healthy due diligence and feasibility period is included as part of the PSA. These activities, to be conducted at the expense of the buyer, are necessary to confirm if the site is physically and economically suitable for a CCRC. Some of the more critical steps in this “look-see” period include: environmental assessment, geotechnical (soils) studies, traffic studies, zoning/land use evaluation, engineering studies, flood plain analyses and the verification of utility capacity. If any of these fail to meet the buyer criteria, the PSA can be withdrawn and typically the buyer recovers 100 percent of all monies tendered. If the site requires rezoning, the purchaser must analyze the best approach and ensure that the entitlements necessary to allow the planned project are reasonably obtainable. Often the seller must be the zoning change petitioner, so the closing has not yet taken place. This cooperation is written into the PSA.
While a buyer may start by searching for the perfect site, they often encounter many suitable sites. The search process should end with the purchase of the best available site — and there’s nothing wrong with that. Inaction and holding out for perfection may lead to missed opportunities. In today’s market, the ability to move quickly makes all the difference.