Residential Assisted Living Facility

[Jarrett Duncan]

Investment Info:

Other commercial investment investment in Phoenix.

Purchase price: $490,000
Cash invested: $160,000

This property is a residential assisted living facility in the Phoenix, AZ metro. It is licensed for 10 residents and we have a long-term lease in place with an experienced ALF operator. We will also be putting about $30,000 of renovations/repairs into the property immediately after closing.

What made you interested in investing in this type of deal?

We purchased a similar property 2 years ago and have been leasing it to an ALF operator under a similar model. The "tenants" are typically elderly and so are very low-impact on the property. The lease terms are typically about 2x market rent for an ordinary SFH and the leases are typically 3-5 years in length so they provide much more stability and less vacancy overall.

How did you find this deal and how did you negotiate it?

I started reaching out directly to numerous brokers in the area over a year ago that had ALF properties for sale. I would introduce myself and tell them the exact model I was looking for to see if the property they had listed might be a fit. Most times, the seller owns the business and the real estate and wants to sell both. Through this direct contact I established a great relationship with a local broker who is well established in the ALF market and eventually brought me this deal.

How did you finance this deal?

We went under contract just before the COVID-19 lockdowns started going into place. At first, it seemed every commercial lender we talked to could finance this and we were just looking for the best terms. In the matter of a couple weeks, the commercial financing market completely dried up. We spoke to at least 20+ commercial lenders and kept getting the same answers: they either weren't lending or had drastically changed their terms. We eventually found one willing to lend at favorable terms.

How did you add value to the deal?

The difference in valuation between a SFH and a licensed and converted ALF is immense ($125k difference in appraisals in this case). We were able to buy below market value and by doing additional renovations/repairs to improve the quality and appearance of the facility, as well as getting a long-term lease in place with an experienced operator, we will add additional value to the property.

What was the outcome?

We are in the process of completing the final renovations and repairs and the tenant will be beginning operations later this month.

Lessons learned? Challenges?

The biggest issue we encountered was the financing, mostly due to COVID-19 and the tightening of the credit markets. You typically can't get residential financing on these type of properties since you're using a commercial lease, and not every commercial lender understands this type of property or can lend on it. Understanding the licensing and ALF state requirements for the property are another dynamic that you have to work past.