Economic Vacancy In Senior Housing

This year is creating a number of precedent setting situations.

The Senior Housing industry is under extreme financial pressure these days. Prior to the pandemic they were experiencing dropping occupancy as more and more new supply entered the market, faster than demographics could support increased demand. Some markets have experienced occupancies in the 80’s and 70’s. The most over-built market in the US right now is San Antonio Texas where occupancies were averaging in the low 80’. Then the covid-19 pandemic hit.

The combination of a tight labor pool and falling occupancy are the main pressures senior housing operators currently face, and those pressures are not going away anytime soon. Staff who are concerned about workplace safety and contracting Covid-19 are demanding higher pay.

The increase in expenses, combined with falling occupancy and price concessions has hampered providers’ ability to raise rates. That’s resulting in NOI erosion and margin pressure.

On today’s show we’re talking about the impact of the moratorium on evictions on senior housing. Senior housing is partly a residential situation, but it’s primarily a service business. To be clear, we’re talking about the private pay, premium end of the market. In those properties, the real estate component represents maybe 20% of the cost of delivering the service in most cases. Labor typically accounts for about 60% of operating expenses, and providers are facing major workforce pressures at the moment. Of course the pandemic itself has increased operating costs for assisted living and skilled nursing operators as additional protocols have come into play.

If a resident stops paying, the question is “What is an operator to do?”

Does the operator put a claim on the estate of the senior citizen? Do they seek a court order to garnish social security payments? Do they seek a court order for capital encroachment if the senior has any savings? Do they evict? The image of an eviction of an elderly person with multiple infirmities is horrifying to say the least.

It may be too early to determine what the law means for residents of senior housing communities across California and similar rules across the nation, but those in private-pay senior housing should be studying its details.

We have a situation where there are millions of people unemployed. It’s often the adult children of seniors in assisted living who pay the bill. The seniors themselves are already on fixed incomes.

Overall, the California law gives tenants broad protections from evictions,

The new law provides eviction protections through January 31, 2025, but in order to be protected you must (1) return the declaration of COVID-19-related financial distress hardship declaration within 15 days after receiving any eviction notice, and (2) pay 25 percent of each month you could not pay from September 1, 2020 through January 31, 2021 by January 31, 2021.

This raises a number of legal questions regarding how services are delivered in senior housing. Should there be a residential lease for the accommodation portion, followed by a separate contract for health care services?

What is classified as rent perhaps should be brought into alignment with the actual cost allocation between rent and services. Considering that the average stay in assisted living could be in the range of 24-36 months, the idea that residents could choose not to pay their fees for 17 months and then only be required to pay 25% in order to extend the eviction moratorium for another 4 years. It would then require the senior living operator to sue the estate in order to get paid.