Building an assisted living facility from the ground up can be a difficult venture. The construction of a facility takes time, money, and knowledge. Live Oak Bank has an in-house construction team that works with our borrowers daily to help establish their businesses.
Know the Process
To better understand the process, we asked a member of our construction team to elaborate on considerations a borrower should keep in mind. Each of these points is vital to the successful construction and operation of a new assisted living facility.
- Make sure you trust and are comfortable with all vendors. Having an open relationship with your vendor will guarantee a smoother transaction. Using a contractor that is familiar with the senior care industry may be important. Also, be sure that you get bids on a fixed-sum or fixed-cost basis. Your lender will likely also add an additional construction contingency to cover unforeseen events during the construction term.
- Be aware of your budget at all times. Creating a plan and sticking to it is critical to ensuring success. Know what you are paying and how often.
- Feasibility study. Understanding your potential market and cash flow opportunity is key in a construction project. Do you know the area demographics and hospital data? What is the demand for assisted living beds? Do you have a cost per square foot for your facility? Look at other facilities in the area and research their policies and products. Using an independent third party that is emotionally unattached to the project is recommended.
- Confirm state licensing requirements. Assisted living communities and other senior care facilities have robust regulations and legal requirements regulated by each state. Know the state mandates for the location you are developing and ensure you have met requirements. How does your state handle medication management? What about Medicaid?
- Monitor construction when you can. Do you have a direct contact on the construction team? What phase of construction are you in and are you meeting your deadlines? Knowing the answers to these questions will keep the process advancing.
- Make sure your contractors carry general liability insurance. This will help negate any glitches and avoid possible lawsuits.
- Anticipate working capital needs and budget accordingly. Knowing your operation cycle by analyzing inventory, accounts receivable, and accounts payable each month will help you stay on track with your budget to meet the needs of your business.
Build Your Construction Budget
When planning to construct a new assisted living facility or renovate your current one, you will need to establish your construction budget. While this may seem like a daunting task, there are a few tips to make sure your construction budget is complete.
Before any successful commercial construction project begins, an “A team” must be assembled: lender, architect, contractor and, of course, the owner. The team will work together to ensure a successful project and support the owner in decision-making. A few critical elements of construction financing include a sufficient budget, timelines of the build-out, and the quality and strength of the contractor and architect.
With the help of your architect, you will want to establish your wants versus needs list for your facility. Ask yourself these questions:
- What equipment, kitchen small wares, electronics, wi-fi, furniture and soft goods will be required and/or desirable?
- How many beds will you need now as well as for future growth? What is the right mix of rooms (singles, doubles, suites)? Is your project designed properly for targeted residents on day one and does it easily accommodate aging in place?
- What kind of building and style do you want or does your franchise require? Safety and security are not only highly regulated but are significant factors in design and will contribute to your overall cost. Be sure that you understand requirements, inspections necessary and industry trends.
The answers to these questions will influence the design of your building and ultimately your budget.
In addition to the actual construction costs, don’t forget to include architectural, electrical, mechanical, structural and civil engineering costs in your budget. A lender who is experienced in senior care construction projects will help ensure your budget includes all the necessary categories.
If you are building from the ground up, the site acquisition cost and site development cost will be included in your budget. Site development costs include grading, utilities, paving, storm water management and more. When selecting the commercial real estate, determine if the property is properly zoned or if it needs to be subdivided. What are the timelines on zoning and permits? What fees must be paid? Many municipalities require monies up front to review drawings, go through the planning process and issue permits.
When building your construction budget, don’t forget to account for things that are not always included in the previous categories. The cost of the following items can vary depending on the provider: IT cabling, security system, phone service, cabinetry, furniture and equipment. Be sure to talk to your lender and architect about what equipment you will need, so it can be included in your design and budget.
Talk to your lender about your construction contingency budget. These funds will help serve as a buffer in case unforeseen issues arise or there are cost overruns. By working closely with your lender, architect and contractor, or design/build firm, you can build an appropriate construction budget.
Now that you know what should be included in your budget, how do you know how much you can afford? If you are working with a cash flow lender, like Live Oak Bank, your lender will examine things like revenue trends and your cash flow. They will look to see if your revenues are maxed out due to limited space, if upgrades are needed to keep up with the competition and what new services you will be able to offer.
By learning about your business, examining the financials and your personal credit history, the bank will determine how much debt the business can reasonably support. You will want your new building to increase business, not stress your cash flow. That’s why it is important to work with a lender who understands both construction and senior care financing.