Due Diligence and Profitability

Longwood at Oakmont is a non-profit continuing care retirement community (CCRC) located in Plum Borough, Pennsylvania, 13 miles from downtown Pittsburgh. By early 1997, the seven year-old facility was ready for the Phase III expansion. This expansion would include a 75-unit three-story apartment building, an Alzheimer’s wing in the Health Center, a new 30-unit assisted […]

Longwood at Oakmont is a non-profit continuing care retirement community (CCRC) located in Plum Borough, Pennsylvania, 13 miles from downtown Pittsburgh. By early 1997, the seven year-old facility was ready for the Phase III expansion. This expansion would include a 75-unit three-story apartment building, an Alzheimer’s wing in the Health Center, a new 30-unit assisted living building and an expansion to the formal dining room. The planned funding for the expansion was a $59.5 million bond issue, which would not only fund the Phase III expansion, but also refinance and consolidate the debt that Longwood had incurred from Phases I and II.

What Challenges Have You Faced During the Due Diligence Process? There were several strong driving forces behind the decision to proceed with Phase III, including a 98% occupancy of Phases I and II, no competition in the facility’s Primary Market Area (PMA) and strong market demand as evidenced by the 81% pre-sale of Phase III. Supporting these positive statistics was strong history, market and sponsorship that would work to attract financial parties.

In turn, there were several challenges that the facility faced in obtaining financing. In 1993, in order to secure a reduction in debt servicing costs, Longwood refinanced part of the 1991 bond issue. By 1997, Longwood’s liquid cash was tied up in restricted funds, therefore, the Phase III financing had to be achieved without an equity contribution.

If you Partner the Knowledge and Experience of your CCRC Development Team, you will … For both the Lender as well as the Borrower, the expansion of a facility presents a substantial amount of risk. Dresdner, Kleinwort, Benson Bank, the primary Lender imposed certain requirements on the Borrower in order to minimize risk. Tom Rockenbach, like most Borrowers, initially viewed the due diligence requirements, such as a comprehensive actuarial study, enlistment of a Construction Consultant and certain covenants in the agreement, as restrictions. While Dresdner required John zumBrunnen to join the project team, Tom in time realized that he could benefit from the presence of the Construction Consultant as well. By partnering the knowledge, experience and goals of the CCRC expansion team, the Longwood at Oakmont project team was able to build more than just the facility. They built trustful, open relationships with effective preplanning, a better product by securing successful construction and the long-term fiscal and physical health of the facility through proactive asset management.

Build Strong Relationships

Tom Rockenbach, Executive Director of Longwood at Oakmont, expected John zumBrunnen, to “blow in, blow up, blow out.” By this he meant that he perceived John’s role as entering into the project without any commitment to its success, delivering a haphazard report focused on project errors and leaving before the consequences and solutions were realized. However, John zumBrunnen views the pre-planning phase not as a chance to “kill the deal,” but rather as an opportunity to build strong, open relationships that will endure throughout the project. Tom first realized the difference in John’s approach in the negotiation stage of the closing. Although John was primarily accountable to Andrew Nesi, First Vice President of Health Care Finance with Dresdner, he was actively involved in the contract negotiations as an objective, third-party who protected each entity’s interest. As John indiscriminately resolved concerns regarding retainage issues, bank time-frames and tear-out requirements, the interests of the project team became aligned and more trustful and open relationships emerged. Beyond facilitating negotiations, the Construction Consultant is brought to a project to provide a Pre-Closing Document Review. John distributed a draft of the report to the Borrower and Lender before the project closing. This practice further promotes open communication in the project team as well as saves time and money by eliminating the surprises that can delay the project closing.

Meanwhile certain financial goals must be met. Selling adequate number of units, meeting debt loan service requirements and maintaining on-time, on-budget construction were Andrew Nesi’s key concerns. In addition to these common interests, Tom Rockenbach was also responsible for maintaining communication and cooperation with Board Members, ensuring the comfort and safety of the residents and developing a Construction Disruption Plan. With so many facets determining the success of a CCRC expansion project, how can you actively secure the project’s success?

Unlike Tom’s preconception, which is prevalent in the industry, John did not “blow in” to the project. He came with 25 years of solid construction experience and a serious commitment to Longwood’s success. Instead of dictating project requirements that might “blow up” the project, John demonstrated his knowledge and maintained his third-party role, much like a coach on the sidelines of the playing field, offering advice, guidance and solutions. His approach, as Tom was pleased to realize, helped to build the open working relationships that would see the project through successful construction.

Build a Better Product

The Consultant’s understood function during construction is to provide due diligence, i.e., monitor the construction of the project on a monthly basis and provide the Lender with a report. However, once again acting as a coach on the sidelines, John took preliminary steps to secure construction success and a $750,000 construction budget savings. He coordinated several pre-construction meetings to review installation issues such as vinyl siding, roofing and EIFS so that everyone’s expectations would be met. Furthermore, addressing these issues upfront reduced the potential for errors, costly tear-outs and timely delays. Open communication continues through the distribution of the Construction Monitoring Reports to the entire project team, maintaining a working forum of trust and shared knowledge.

Tom Rockenbach found that the Construction Consultant helped to protect his operational interests as well by acting as a comforting presence to the residents and the board members. In essence, although the Construction Consultant is enlisted for reporting purposes, taking full advantage of his knowledge and experience can assist both the Lender and the Borrower in protecting their interests and actively ensuring that the facility is built well, on-time and on-budget.

Secure Future Success

Even after the successful construction, John zumBrunnen did not “blow out” of the project. There are still long-term financial and operational goals to be met and there is still value that the Construction Consultant can bring to these objectives. When it comes to the long-term success of the CCRC, the Lender not only wants to realize a positive return on the investment, but also welcomes opportunities in financing future expansions. Correspondingly, the Borrower wants to meet the debt loan service requirements, maintain a healthy facility and remain competitive through future expansions.

One resource that this team found instrumental was a Long-Term Capital Reserve Budget. John was now enlisted independently of Dresdner by Tom to perform a campus-wide property evaluation, which was financed from the considerable construction $750,000 savings. From this evaluation, John created the Reserve Budget that detailed the life expectancy of capital items, repair and replacement costs and the most strategic time for the repairs/replacements for the entire CCRC campus. The detail of the Budget was customized to meet Tom’s needs and addressed every campus item from building roofs to smoke detectors. Aside from the benefits of this type of Budget as a comprehensive asset management guide, it can also be utilized in fulfilling state licensing requirements and as an effective planning tool in determining resident entrance and monthly fees. Furthermore, the Budget acts as a marketing tool to attract prospective residents and potential Lenders for future expansions. In fact, the financial protection that the Budget offered was so compelling that Dresdner decided to finance the Budget for Longwood.

By Partnering the Knowledge and Experience of your Team, you will . . . open, trustful working relationships that in this case study were the platform from which successful construction of the expansion was secured and proactive asset management is practiced today. The success of Longwood at Oakmont can be attributed to the understanding and partnering of the knowledge, experience and goals of each member of the CCRC expansion team. While the Construction Consultant was originally an imposed presence in the team, the Borrower maximized the value he received from the Construction Consultant, thereby transforming due diligence into a profitable partnership — a partnership that continues today and will come together again for future expansions.