1. Valuation Issues in Senior Housing (From the parochial perspective of an ad valorem tax litigator) 2013 Appraisal Institute Annual Meeting - Indianapolis Elliott B. Pollack, Esq. July 24, 2013

2. Senior Housing Types  Age restricted conventional rental apartments  Federal/state financed affordable elderly units  Continuing care retirement communities Rental Entry fee (Non-refundable/refundable) (Interest bearing/non-interest bearing)  Healthcare

3. Some Senior Housing Property Tax Issues  Ad valorem – “unto the value of”  Intangibles not subject to assessment  Business value  Enterprise value  Strictly real estate value

4. Definition of Value  Willing buyer/willing seller formulation  Market value of the unencumbered fee simple estate  Not: Investment value Business value Enterprise value Leased fee value Encumbered fee simple

5. Analogy – Hospitality Properties v.  Restaurant income  Event income  FFE income  Recreational income  Significant, trained labor force  Extensive management efforts  Flag v. non-flag

6. Problems in Valuing Senior Housing:  Relatively small number of properties  Fewer transactions except as going concerns  Fewer financings except as going concerns Additive value from business operations almost always embedded in the sale/financing transaction even if placed on land records as exclusively a real estate transaction.

7. Additional Problems:  Limited market/special purpose properties  Legal barriers to entry (zoning, certificate of need, health department licensure)  Regulatory issues, i.e., approval of transferee; assisted living regulation  Limited capacity of many markets to absorb significant additional product  Impact on principle of substitution

8. Cost Approaches  Applicability of substitution principle  Difficulty of estimating depreciation and obsolescence  Difficulty of estimating cost of necessary code upgrades/compliance  Might make sense for relatively new construction but see above

9. Going Concern Value Seems to Make Most Sense  Most reliable methodology but great difficulty in separating real estate value from intangibles  An academic exercise to a certain degree but one honored due to lack of other reliable approaches: determination of value of real estate component has a high theatrical element

10. Special Problems in Valuing CCRCs  Treatment of entry fees  Impact of insurance/services /subsidized long term care component  Actuarial forecasts  Entry fee interest issues

11. How do the Courts Deal With Senior Housing Valuation Issues?  SNF  CCRC

12. SNF – Avon Realty, LLC v. Town of Avon (2006)  Use of going concern approach ok  Reliance on Medicare/Medicaid reimbursement element  Pre-approval of buyer by state regulators/lack of a free market  20% allocation to intangibles  Lump sum to FFE

13. CCRCs  Wake Robin Corp. v. Town of Shelburne (2013)  Redding Life Care, LLC v. Town of Redding (2013)  The Willows at Westborough v. Board of Assessors of Westborough (2004)  Willow Valley Manor, Inc. v. Lancaster County Board of Assessment (2003)  Linus Oakes, Inc. v. Department of Revenue (2000)  Polk County v. Department of Revenue (1999)

14. Wake Robin Corp. v. Town of Shelbourne - Vermont Superior Court  Constructed in 1993-1995; enlarged in 2007  295 residential units  35 assisted living units  48 SNF units  Non-interest bearing/non-refundable entry fees ($140,000 - $575,000)  Entry fee treated as long term care insurance purchase  Regulated by Commissioner of Insurance

15. Wake Robin Corp. – Continued  Declining occupancy rate  Impact of slowdown in residential real estate market  Town’s appraiser used all three approaches – relied on sales approach  Owner’s appraiser used sales and income approaches; relied on income approach  The delta: $53,600,000 v. $40,000,000  “Wake Robin is engaged in three broad categories of business at the same time. These are the provision of housing and related amenities to residents, the sale of an insurance product for future health needs, and the provision of meals, healthcare and other services.”  “Since the property tax valuation applies only to the real estate, the appraisers must extract ‘business income’ not related to the real estate from NOI before computing value.”

16. Wake Robin Corp. – Continued  “A successful retirement community, filled with trained employees and their supervisors, which offers a wide variety of services generating NOI, will have a ‘going concern’ value which is much greater than the real estate alone.  Use of 10% benchmark reflects non-real estate element based on HUD guidance -- rejected by the court  Court relies on owner’s appraiser’s sales approach  8 “comparables”  Sales prices between $10,500,000 and $85,000,000  Unit sales prices between $115,000 and $150,000  13 areas of adjustment  Potential errors in “business extraction method avoided”  Potential errors inherent in estimating a capitalization rate avoided  Value reduced from $49,000,000 to $40,000,000

17. Redding Life Care, LLC v. Town of Redding, Connecticut Supreme Court (2013) – Business Extraction/Enterprise Method Rejected – as Presented in Court  Property owner fails in its burden of proof – case dismissed  Non-interest bearing refundable entry fees (90%) Q: “But isn’t it true that the average senior, in fact, every senior thinking about going into an entry fee CCRC, non-interest bearing, thinks in general terms about swapping the value of a return that they are not getting on the entry fee for the guarantees and the promises that the developer is making for healthcare in the future?” A: “I agree with that.”

18. Redding Life Care, LLC - Continued  Recent construction cost of $175,000,000 (including land)  Property owner’s market value appraisal of real estate equals $89,000,000!!  Non-interest bearing refundable entry fees equal $125,000,000 Q. “So the more successful Meadow Ridge was as of October 1, 2007. The less it would be worth in your opinion?” A: “The market value --.” Q. “Yes --.” A: “Would be lower.” Q. “Yes. Correct?” A: “Yes.”

19. The Willows of Westborough v. Board of Assessors of Westborough  Non-interest bearing refundable entry fees  Entry fee imputed income should be included when valuing based on income capitalization approach “The fact is that Willows has chosen to use the money collected as entrance fees to pay down construction costs and to sustain other operating expenses rather than being placed in an interest bearing account of some sort. This does not change the fact that this money is a form of income – and is a financial one at that – that the Willows enjoys until it is returned to the occupant.”

20. Willow Valley Manor, Inc. v. Lancaster County Board of Assessment  Non-interest bearing refundable entry fees “The School District valued the properties as unencumbered fee simple interest, whereas the taxpayer characterized them as leased fee interest because of the long term encumbrances created by the resident agreements.... The taxpayer’s appraisal excluded the invested entrance fees, classifying them as investment income and not part of the real estate. The School District appraisal included the entrance fees and gross revenue, which it then discounted...”

21. Linus Oakes, Inc. v. Department of Revenue (2000)  Non-refundable entry fees “Certainly any owner would consider the value of the use of such funds during the resident’s tenancy. Inasmuch as property value is based upon all anticipated cash flows and potential appreciation, any measure should capture all the benefits. There is no question that use of the entrance fees in part of the flow of benefits.”

22. Polk County v. Department of Revenue Both appraisers agreed that the entry fees “should be treated as pre-paid rent and amortized over the life expectancy of the resident.” Both appraisers agreed that entry fees added to the facility’s value.

23. Conclusions  Appraisers and assessors must mirror market conditions as of the valuation date  Cost approach typically does not  Market approach – high number of qualitative and quantitative adjustments coupled with excessive subjectivity  Going concern/real estate value extraction approach may not be precise but most closely mirrors market conditions  Difficulty in convincing courts in certain cases to accept going concern approach must be accommodated  Additional methodology/adopt different HBUs and value each accordingly using market rental data – if possible

24. Elliott B. Pollack, Esq. Pullman & Comley, LLC 90 State House Square Hartford, Connecticut 06103 Tel: 860.424.4340 Fax: 860.424.4370 Email: ebpollack@pullcom.com Thank you for your attention.

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