Understanding the "mechanics" of our Valley Manor Operation

I thought I would dedicate the next couple of Blogs to communicating more about how our communites operate from a business strategy perspective. As you read on, I hope to answer the following questions:

1. What type of expenses do we incur?


2. How are our rates set?


3. What are the opportunities and risks?


4. How do we monitor results?


5. What do we do next?

Let's look at our Valley Manor community first.


Valley Manor Apartments is a retirement community for active seniors. It is an independent living facility by New York State definition, which means we can not and do not provide any resident care and thus are not regulated by the State. Independent living facilities provide residents a life-style which includes living accomodations, meal options,housekeeping, security, scheduled transportation and recreation programs. Residents who require personal care services, to help maintain their independence, are permitted to contract with an outside home care agency to provide this service in their apartment home. The home care agency is regulated by the State and is solely responsible for the care plan they establish with the resident.


Valley Manor incurs several costs associated with providing residents a unique style of living within the classification of independent living. The majority of these costs are fixed or fixed/variable, meaning we incur them regardless of any moderate variance in occupancy. These costs include the following:

• Staff Wages and Benefits


• Food


• Supplies


• Repairs & Maintenance


• Utilities & Services


• Mortgage


• Real Estate Taxes


• Insurance


• Marketing & Advertising


• Administration & General Support

To ensure that we have adequate resources to pay for these annual expenses, we establish prices for our apartments and services based on our costs. Since we are a not-for-profit organization, we do not need to produce profit distributions for owners or stock-holders. Our objective is to create only a modest surplus that allows for us to pay our costs, meet our cash flow needs and establish a reasonable reserve for capital reinvestment in the building.



We establish our prices using both a cost-based and market-based methodology. First, we compile our actual costs into the following categories:

• Property (Mortgage,Taxes,Insurance,Capital Improvement Reserves)


• Food Service (Kitchen, Dining Room, Deli, Food)


• Environmental (Maintenance,Utilities,Housekeeping,Laundry,Security)


• Resident Services (Activities,Health & Fitness,Transportation)


• A & G (Administration,Marketing,Sales,Corporate Support)

Then, we allocate the total costs in the Property category to each of our various apartment styles based on square footage. Valley Manor currently has 11 different apartment styles ranging from 1 to 2 bedrooms and square footage from 450 sqft to 1,430 sqft. The larger the apartment, the larger the pro-rata property related costs allocated to it.


At Valley Manor we currently have 137 apartments (11 different styles) that collectively represent 103,330 rentable square feet. Our annual property costs are approximatly 1 million dollars, which thus computes to a cost per rentable square foot of $10.


We recover our property related costs by collecting an upfront Entrance Fee from residents upon initial move in. The Entrance Fee for each apartment style is calculated on the $10/sqft annual cost multiplied by the average length of stay of 7 years and grossed up to account for less than 100% occupancy. An apartment preparation fee is added to the Entrance Fee to recover the average cost associated with preparing an apartment for reoccupancy (painting, carpeting, upgrading, etc.). Entrance Fees range from $45,000 to $133,000.


We recover our other costs by charging residents a monthly maintenance fee. To calculate the appropriate monthly fee for each apartment style, we first deduct from our costs any incremental income received from other services (garage & parking fees, guest room fees, building usage fees, health & fitness fees, laundry fees, outside food functions, guest meals, cafeteria & deli income, transportation fees, etc.).


Then, we allocate the net cost to each apartment style by category. The net Environmental cost is allocated based on square feet, thus the larger the apartment the larger the pro-rata share of environmental costs. Our net annual Environmental costs are approximately 1.3 million dollars or $12.50 sqft. The net Resident Services and A & G costs are allocated evenly to all apartments based on the number of total apartments, as these costs are not driven by square feet. Our net annual cost for both is approximatley 1 million dollars or $7300/apartment.


The monthly maintenance fee (excluding meal plan) is calculated on the sum of the allocated annual costs for each apartment style grossed up to account for less than 100% occupancy and divided by 12 months. An incremental fee is added to the monthly maintenance fee if more than one person resides in the apartment. Monthly Maintenance Fees (excluding meal plan) can run from $1200 to $2150.


The last component of the maintenance fee is the meal plan (if chosen). Our net annual food service costs are calculated to a cost per meal and then meal plan option prices are established depending on the number of meals each resident selects with their meal plan (1 meal/day, 2 meals/day, 3 meals/day, 20 meals/month, 15 meals/month).


Cost-based rates are designed to generate necessary income to recover your costs, but if our costs are not competitive, neither will our cost-based rates. We therefore also conduct a competitive market rate analysis to ensure that our rates are in line with comparable products and competition in our market. We have also recently implemented a "premium pricing" policy, which adjusts apartment pricing to take into account demand for certain apartment locations.


There are boths risks and opportunities associated with this rate methodology.


First, there is the occupancy factor we use in setting our rates. We are currently using 88% in our rate formula. If we experience less occupancy we run the risk of falling short of recovering our costs. Alternatively, if we experience an increase in occupancy we have the opportunity to create additional capital to invest in the facility or to reduce future rates.


Second, there is the cost factor we use in our rates. To the extent that our costs run over or under projections, we experience risk or opportunity to our bottom-line.


Third, there is the length of stay factor used in the Entrance Fee calculation. We base our 7 year factor on a rolling 3-year actual history. While stability in occupancy has an obvious upside, we need a certain turnover rate to re-generate new Entrance Fees of 1 to 1.2 million per year. We offer residents a maintenance-only option on our smaller apartments (no Entrance Fee), but gross up the monthly fee to capture what we would have collected on an Entrance Fee amortized over 7 years on a present value basis. We also offer a much higher 90% refundable Entrance Fee option which is calculated on a 7 year present value basis. Each plan returns the same income over a 7 year period, but there is risk and opportunity associated with the actual length in stay and the interest rate assumptions.


Fourth, there is the utilization factor assumed in the calculation of the meal plan prices, revenue and other ancillary service income projections.


At Valley Manor we also provide Assisted Living and a Social Model Adult Day Program. We compile the direct incremental costs associated with each of these programs and compute the rates for these services such that the Program revenue adequately recovers the Program cost.


We monitor our results using monthly budget variance reports, occupancy statistical reports and financial statements. We also benchmark our results against industry trends where feasible. We conduct resident satisfaction surveys annually to measure customer satisfaction and to learn where risks and opportunities exist from a service perspective.


Based on these monitoring results, we initiate goals and strategies to improve our performance as necessary. We develop a new operating budget annually, that includes expense and revenue projections related to our service goals and strategies. We adjust our rates accordingly, based on both cost and market trends. Our Board of Directors oversees these processes by reviewing, approving or modifying our goals and strategies.

I hope this tutorial Blog helped to shed some light on the "inside mechanics" of the Valley Manor financial operation. Be sure to visit my Blog next week, when I'll talk about the nursing home side of our business. See you then...............