Effective strategies to to create a dynamic senior living operating budget for senior living investments nationwide.

By Scott McCorvie, CEO, Enhance Senior Living

Learn more about Senior Living Investment Brokerage, Senior Living Broker, Senior Living Asset Management, and Investment Advisory Services at Enhance Senior Living.

The Senior Living Operating Budget Process:

1. What is a senior living budget?
   1. Annual operational financial projection broken out per month that includes all the revenue and expense estimates based on a certain set of assumptions. Typically created in Excel and reported in either Excel or PDF format
2. What is the senior living budget used for?
   1. It’s an annual understanding between the operator and owner on the financial expectations for the upcoming year. It’s used by lenders, investors, capital provides, etc. to calculate investment returns, KPIs, and other tracking ratios.
   1. It’ a chance to compare the actual monthly performance to the budgeted performance and look for variances. Create action plans to quickly identify and mitigate any areas of operational inefficiency.
3. When is the senior living budget season?
   1. Typically Sept 1 to Nov 30 of each year for Jan 1 to Dec 31 of the following year.
4. What is the process of a typical budget season?
   1. It’s typically multiple rounds, discussions, and revisions between the owner and operator. The owner could be an individual, partnership, JV, corporation, REIT, non-profit, P/E Firm, Asset Manager, etc. The historical financials and last year’s budget is typically used as a starting point
5. Are other decisions made during budgeting season that impact the community
   1. Yes, the capex budget and allocation is usually created and negotiated during this time too. The capex budget focuses on any physical upgrades including new carpet, painting, furniture, amenity areas, landscaping, etc. The target annual allocation is typically documented in the Management Agreement – or $350 to $1000 per unit per year. Industry average is around $500 per unit per year.
6. What’s the best way to create an accurate operating budget
   1. Break down monthly detailed historical financials per department and per line-item on a per resident day basis (or per occupied unit basis). Why do we do this? To get a better apples-to-apples comparison with variable occupancy and properly perform portfolio and industry benchmarking analysis.
7. How to calculate the revenues and expenses on a per resident day and per occupied unit basis
   1. I wrote an article about this – enanceseniorliving.com – news sectionPRD = dollar amount / number of resident days (monthly, quarterly, annually, etc.)Resident days = average bed occupancy per month multiplied by number of days in the month. Average bed occupancy for the year multiplied by 365.
   1. Per Occupied Unit – Annual dollar amount / number of occupied units (monthly, quarterly, annually, etc.)
8. Revenue assumptions
   1. Use the latest rent roll to calculate concessions and other losses to market rent. Create rental increases per unit to both in-house and new residents. Use a competitive market survey to see areas of enhancement. How are your rates compared to the market? Include the new unit rates in the budget. Calculate a stabilized senior living occupancy and any absorption (95% is highest).Audit care charges and look for areas of missed opportunityRevenue concessions to community fees. Consider increases to ancillary revenue like second resident fees, special services like transportation, guest meals, etc.
   1. Consider charging more ‘a la carte fees for technology / connection services
9. How to use the Per Resident Day analysis to make smarter go-forward projections
   1. PRD gives more of an apples-to-apples comparison metric that can be adjusted by occupancy. There’s not a straight correlation with PRD and occupancy, so trend adjustments and variances are necessary with occupancy changes. Calculate and review the PRD for the T12, T6, T3, T1. Look for trends and season aspects.Using the sample set, select an appropriate PRD amount. Multiply that amount by the number of days in the month along with any resident occupancy changes per monthUse this for all department line-items – most accurate with stable or monthly stable communities
   1. Per occupied unit is a similar concept, but does not take number of days per month into analysis (Feb is always lower in expenses – lower amount of days).
10. How to review the accuracy of the budget
    1. Analyze last years budget to actual performance – where were the hits and missesOperating Margin – depends on the acuity and occupancy – but, should be running 20-40%.
    1. Industry Resources – ASHA State of Senior Housing Report – reports historical financial performance of the industry – per occupied unit basis. I use this to do industry comparison and benchmarking analysis in all of my underwriting to look for areas of improvement.
    1. Sister communities – How does this budget and assumptions compare to other communities in your portfolio? Have open group discussions with Eds on things that area working and not working – transparency and collaboration enhances performance.
11. What are other things to consider?
    1. Makes sure you involve the ED in the entire process. The ED should really sign off and own the budget each month and be ready to discuss any variances along with plans of correctionWatch for operator budget sandbagging. Operators always want to outperform – especially when there’s incentives tied to outperforming the budget. A lot of the incentive fee structures are tired to outperforming the budget – so, operators want to maximize that delta and fees.Give it time. Be prepared to spend several weeks to a few months going back and forth on the operating budget. Make sure everyone is on the same page for it’s finalized. Analyze, discuss, and opine on any discrepancies.Be prepared to defend or share the budget when asked – lenders, investors, capital provides, etc.The Senior Living Operating Budget and Operating Budgeting Process is one of the most important factors in the senior living industry.
    1. Having an accurate and realistic budget is one of the most valuable assets in senior living.

To learn more about creating an accurate, dynamic senior living operating budget and receive more information on our senior living brokerage, senior living broker, senior living investment advisory, and senior living asset management services on our contact page.

If you want to learn more about effective Senior Living Investment Brokerage, be sure to visit Enhance Senior Living. Also, be sure to subscribe to The Inner Circle of Senior Living to learn more ways to enhance your senior living operations, financial performance, and overall value.

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