Opportunities to reduce property taxes for senior housing properties - by David Wilkes

Senior housing, as an investment, may now require its own form of life support. With developers adding more than double the number of units in 2018 as it did just four years before that, according to the National Investment Center for Senior Housing & Care, demand appears to be slowing down faster than its target residents. Despite the sobering market trend, managers and owners of senior care facilities may find in this challenging news an opportunity to reduce their property tax burden to offset declining net income and save a significant chunk of annual fixed operating costs.

Until recently, senior housing outpaced office, retail, hotels and apartments as one of the fastest-growing commercial real estate sectors, according to Green Street Advisors. Real estate developers have long been focused on accommodating the 72 million Americans born between 1946 and 1964, who are about to reach their mid-80s, the perfect move-in demographic for most facilities. However, occupancy among senior housing facilities fell in the third quarter of 2019 to 88%, down from previous highs. 

Your mother’s iPhone may be the culprit, along with a host of other technological advances. Consider the following five ways that technology has impacted seniors’ lifestyles, arguably for the better:

Social contact
Video chat like Skype and social media, as well as email, WhatsApp, and so many other services, while not a substitute for real human connection, are being embraced by the elderly – often being configured for them by tech-savvy grandkids.

Safety
Most surveys show that some 90% of seniors would prefer to stay in their own home, and various Personal Emergency Response System (PERS) devices are now available that allow the wearer to simply push a button for emergency attention. Beyond that, GPS tracking devices can monitor the location and send alerts for a loved one who may suffer from Alzheimer’s disease or other dementias.

Exercise 
Who needs to pay substantial sums for the recreational and exercise facilities at a senior facility when products like Nintendo’s Wii sports games are availabe to provide light physical activity to the elderly right in their own living room? App-based games like Tetris and Mahjong also provide seniors with mental exercise and stimulation.

Medication Management
The challenges posed by keeping track of one’s medications have largely been solved by a variety of technologies to prevent life-threatening errors. Medication reminders are now available through smartphone apps like Personal Caregiver and RxmindMe. 

Healthcare Information Management
A variety of health tracking tools are now available to collect and keep current information such as medical history, physician contacts, medication schedules, and health conditions. 

Venture capital and other firms will spend some $1 billion this year on “aging in place” technologies. The rise of technologies that help the elderly remain in their homes cuts against real estate bets that aging baby boomers will flee their isolation to enroll in senior housing developments. Moreover, with increasingly better health, the age at which people enter senior housing is rising, at around 85 years old today, compared to about 82 ten years ago.

The result is a looming glut of senior facilities units. And, while the word “looming” may sound speculative, the impact on valuation–for a variety of significant purposes, including property tax assessments–is very much real time, as in right now. The tax assessor’s job is to estimate what a purchaser would pay as of a current taxable status date for the subject property, and that means they must consider market supply and demand factors in the industry that impact perceived risk. In two words: capitalization rate. Noted declines in occupancy combined with the widely-published trend toward remaining at home for as long as possible are now the subject of intense discussion among the sector’s investment community, and will result in higher perceived risk, more challenging access to capital, and notable declines in property values.

The tax assessor’s most challenging assignment when it comes to valuing such properties–in New York anyway–is to distill the real estate component from the overall going concern value: no easy task and one that is the subject of endless debate. Senior living facilities are, first and foremost, run as businesses that happen to occupy real estate; unfortunately many tax assessors zero in on transfer prices that represent more than just the real property. Notwithstanding this common driver of senior housing over-assessments in any market cycle, with declining demand for the going concern business now comes a parallel drop in the value of the real estate that supports a senior living facility. Owners and operators should be especially keen to evaluate their property tax burden in view of the current market.

David Wilkes, Esq., FRICS, is a partner at Herman Katz Cangemi Wilkes & Clyne, LLP, New York, N.Y.