Don't Tax the Business Value of Senior Housing as Real Estate
By: Jim Regan, as published in Real Estate Chicago, September 2002
The scope of long-term health care services is expanding to meet the needs of Americans age 75 and older. For this group, the assisted living model is a relatively new, widely popular option.
For the first quarter of 2002, construction starts for assisted living facilities were more than three times those of any other type of senior housing. Assisted living is a long-term alternative for seniors who need more assistance than a retirement community offers, but who do not require the medical and nursing care provided by a nursing facility. In an assisted living facility, seniors can still enjoy both the companionship and independence they cherish. |
A realistic approach to the valuation |
The proliferation of this form of senior housing raises very important questions for the assessing community, which must value them for real estate tax purposes. An assisted living complex, like a hotel is first and foremost a business. The real estate in which the business is located constitutes only one asset that contributes to the business' bottom line. The value of the business itself cannot be subject to real estate taxes; only the value of the land and buildings may be used to determine real estate taxes.
A description of a typical Chicagoland assisted living operation should illustrate how the physical location (real estate) offers a lifestyle, a wide range of services, and insurance for the future (a business). Let's say the operation contains 156 independent residential units, the majority of which are studios and one-bedrooms. Each unit has a kitchenette. In addition to shelter, a significant amount of services are provided to the residents.
To deliver most of its services, the operator must be licensed by the Illinois Department of Public Health (IDPH). The operator's life-care contracts with IDPH require that it offer at least two meals per day to each of the residents. Also, the operator must guarantee the life-care resident the availability of full nursing care, should that become necessary. Our fictional facility has also qualified for licenses to operate an assisted living facility and an Alzheimer's care program. With these licenses, a host of services can be offered, including medication management, incontinence management, personal laundry and daily housekeeping.
Twelve beds in the facility are in the Alzheimer's care program. The residents also have access to a nearby wellness center sponsored by a local hospital, and a full recreation program is offered to all residents. Transportation is provided on a daily basis for shopping and outings.
From the valuation standpoint, this business relies on real estate assets, but there are also the necessary licenses, and a significant amount of specialized equipment, all of which contribute significantly to the assisted living center's revenues. We have three distinct elements that add to the value of the business: real estate; furniture, fixtures, and equipment; and business assets, such as licenses and other services.
Traditionally, assessing officials rely on a sales analysis or an income analysis to arrive at a value for real estate taxes. To determine the value of the assisted living center's real estate, the use of a sales analysis or an income analysis deserves very close scrutiny. If we look at comparable sales, the task is daunting. The question for each sale is, "What is being sold?" Normally, the entire business is the subject of the sale, i.e. the real estate, the furniture and equipment and the licenses to offer services. To accurately judge each of the sales, the non-real estate items must be identified. Then their value must be subtracted to account for the value of the real estate.
Using an income analysis to value the component elements of the business also presents a problem. the individual parts are not rented separately and the licenses and contracts - which are the most valuable assets of the business - cannot be rented. Thus, an income analysis is extremely difficult to develop.
A new and realistic approach to the valuation of an ongoing business' real estate element has been developed by the Appraisal Institute. It offers a methodology for valuing the total assets of the business and then deducting the value of each of the non-real estate elements to arrive at a value of only the real estate. In the interest of fairness, it's the responsibility of the assessing community to pursue this new methodology assiduously.
James P. Regan is the managing partner of the Chicago law firm of Fisk Kart Katz and Regan Ltd., the Illinois member of American Property Tax Counsel (APTC). jregan@proptax.com