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THOMAS, THOMAS & HAFER
BY: Jeffrey B. Rettig, Esquire
IDENTIFICATION NO.: 19616
305 North Front Street
P.O. Box 999
Harrisburg. PA 17108.0999
17171256.7639
GENERAL ELEVATOR COMPANY, INC.,
Plaintiff
V.
BEVERLY ENTERPRISES t/d/b/a BLUE
RIDGE HAVEN CONVALESCENT CENTER
WEST,
Defendant
Attorneys for Plaintiff
IN THE COURT OF COMMON PLEAS OF
CUMBERLAND COUNTY, PENNSYLVANIA
<..? e ?JEA-f1l
NO. 4
?I? ?l ?j(r- O e
CIVIL ACTION - LAW
JURY TRIAL DEMANDED
NOTICE
YOU HAVE BEEN SUED IN COURT. If you wish to defend against the
claims set forth in the following pages, you must take action within
twenty (20) days after this complaint is served, by entering a written
appearance personally or by attorney and filing in writing with the Court
your defenses or objections to the claims set forth against you. You are
warned that, if you fail to do so, the case may proceed without you and
a judgment may be entered against you by the court without further notice
for any money claimed in the document or for any other claim or relief
requested by the Plaintiff. You may lose money or property or other
rights important to you.
YOU SHOULD TARE THIS PAPER TO YOUR LAWYER AT ONCE. IF YOU DO NOT
HAVE A LAWYER OR CANNOT AFFORD ONE, GO TO OR TELEPHONE THE OFFICE SET
FORTH BELOW TO FIND OUT WHERE YOU CAN GET LEGAL HELP.
As provided by Pennsylvania Rules of Civil Procedure No. 1018.1, the
following officer is designated to be named in the Notice to Defend in
order to find out where legal help can be obtained.
Court Administrator
Fourth Floor
Cumberland County courthouse
one Courthouse Square
Carlisle, PA 17013
(717) 240-6200
GENERAL ELEVATOR COMPANY, INC.,
Plaintiff
V.
BEVERLY ENTERPRISES t/d/b/a BLUE
RIDGE HAVEN CONVALESCENT CENTER
WEST,
Defendant
IN THE COURT OF COMMON PLEAS OF
CUMBERLAND COUNTY, PENNSYLVANIA
NO.
CIVIL ACTION - LAW
JURY TRIAL DEMANDED
COMPLAINT
AND NOW, comes the Plaintiff General Elevator Company, Inc., by its
attorneys, Thomas, Thomas & Hafer, and pleads the following cause of
action:
1. Plaintiff General Elevator, Inc. ("General Elevator") is a
corporation with a business address of 2405A Old Gettysburg Road, Camp
Hill, Pennsylvania 17011.
2. Defendant Beverly Enterprises is a corporation trading and
doing business as Blue Ridge Haven Convalescent Center West with an
address of 770 Poplar Church Road, Camp Hill, Pennsylvania 17011.
3. On or about May 24, 1978, General Elevator entered into a
contract entitled "Full Preventive Maintenance Agreement" with Blue Ridge
Haven West. A copy of the agreement is attached hereto and marked
Exhibit "A."
4. The contract between the parties contains a self-renewing term
providing that the contract continues from year to year until terminated
at the end of any year after the first by giving the other party ninety
(90) days prior written notice.
1
COUNT ,-j
BREACH OF EXPRESS CONTRACT
5. The allegations contained in Paragraphs 1-4 are hereby
incorporated herein by reference thereto.
6. The Full Preventive Maintenance Agreement signed between the
parties was renewed continuously each year subsequent to 1978 up to and
including 1993.
7. No notice to terminate the existing agreement had been given by
any representative of Beverly Enterprises or Blue Ridge Haven West prior
to October 19, 1993.
8. On October 19, 1993, Beverly Enterprises, through its agent,
Gary Lauer, informed General Elevator by correspondence that it was
unilaterally terminating the contract between the parties due to the
outdated nature of the agreement and unsatisfactory maintenance
performance. A copy of the correspondence is attached hereto and marked
Exhibit "B."
9. Subsequent to the Defendant's unilateral termination of the
agreement, Defendant, through its agent, Gary Lauer, admitted that the
Defendant's attempt to cancel the agreement between the parties was not
due to unsatisfactory performance, but rather, was due to the fact that
he had received a better offer from a competing supplier.
10. At all times since the execution of the original contract on
May 24, 1978, and until Defendant's unilateral termination on October 19,
1993, both General Elevator and Defendant substantially performed their
respective obligations under the contract.
2
11. Defendant's action in unilaterally attempting to cancel the
contract between the parties on terms other than those specified in the
contract constitutes a breach of the agreement between the parties for
which Defendant is solely responsible.
12. General Elevator has sustained damages in the form of lost
revenue in the amount of Two Thousand Three Hundred Eighty-One and 12/100
($2,381.12) Dollars as a result of Defendant's breach.
WHEREFORE, Plaintiff respectfully requests judgment be entered in
its favor and against Defendant in the amount of Two Thousand Three
Hundred Eighty-One and 12/100 ($2,381.12) Dollars, plus interest and
court costs.
COUNT II
NOVATION
13. The allegations contained in Paragraphs 1-12 are hereby
incorporated herein by reference thereto.
14. On or about July 21, 1981, Beverly Enterprises purchased the
assets of the Blue Ridge Haven West facility.
15. If the purchase of the Blue Ridge Haven West facility by
Beverly Enterprises is deemed to have extinguished the original contract
between Blue Ridge Haven West and General Elevator, a novation is pleaded
in the alternative.
16. Both General Elevator and Beverly Enterprises consented to a
novation whereby Beverly Enterprises as owner of Blue Ridge Haven West
assumed the responsibilities undertaken by Blue Ridge Haven West under
the terms of the original contract.
3
17. The consent of the parties was manifested by their continuous
performance under the terms of the contract for a period in excess of
twelve (12) years.
18. Valuable consideration was exchanged between the parties during
the period of time between Beverly Enterprises' purchase of Blue Ridge
Haven West and their unilateral termination of the agreement in October
of 1993.
19. The conduct of the parties subsequent to Beverly Enterprises'
purchase of the Blue Ridge Haven West facility resulted in the
substitution of a new contract between General Elevator and Beverly
Enterprises under the same terms and conditions as the original agreement
between General Elevator and Blue Ridge Haven West.
20. Both General Elevator and Defendant substantially performed
their obligations under the terms of the substituted contract.
21. Defendant unilaterally breached the substituted contract as
alleged in Count I of this Complaint.
22. General Elevator has suffered damages as alleged in Count I of
this Complaint.
WHEREFORE, Plaintiff respectfully requests judgment be entered in
its favor and against Defendant in the amount of Two Thousand Three
Hundred Eighty-One and 12/100 ($2,381.12) Dollars.
COUNT III
ESTOPPEL
23. The allegations contained in Paragraphs 1-22 are hereby
incorporated herein by reference thereto.
4
24. The conduct of Defendant subsequent to its 1981 acquisition of
the Blue Ridge Haven West facility induced General Elevator to conclude
that the original contract executed in 1978 was still valid and
enforceable.
25. To its detriment, General Elevator relied justifiably and
reasonably upon twelve (12) years of performance by the Defendant under
the terms of the original contract.
26. Defendant's conduct has induced General Elevator to maintain
personnel, equipment and materials necessary to complete its obligations
under the terms of the contract.
27. Defendant breached the agreement between the parties as alleged
in Count I of this Complaint.
28. General Elevator has suffered damages as a result of
Defendant's unilateral breach of the contract as alleged in Count I of
this complaint.
WHEREFORE, Plaintiff demands that judgment be entered in its favor
and against Defendant in the amount of Two Thousand Three Hundred Eighty-
One and 12/100 ($2,381.12) Dollars.
Respectfully submitted,
THOMAS, THOMAS 6 HAFER
DATE:
rt19 i6/?a`ysy, panaaao
? 05•North'Front Street
P.O. Box 999
Harrisburg, PA 17108-0999
(717) 255-7639
Attorneys for Plaintiff
NOV-00-9E MON 17180 BNERAL ELEVATOR 71' ,1867
'? • :• GENERAL ELEVATOR COMPANY INC.
• ^' •.
FULL PREVENTIVE
MAINTENANCE Crntrol,
AGREEMENT 8 fierola
To: 81ue Ridte Haven Date: Mby 2!1. 1978
770 Poplar Church Rood Of los: 8arriebun
Cam Fi?17 Per. aylvania'
General Elevator, Inc., subject to the terms and conditions below, will maintain ft
equipment as described herein. General Elevator will examine, adjust, and
lubricate the elevator equipment regularly and systematically; and repair or replace, it
in General Elevator's judgment conditions warrant:
machines, molors. generators, controllers, guide rails and guide shoes,
conductor cables, safety devices, plungers, pumps, operating valves,
Including all component parts of these items.
We will also;
• Renew all wire ropes as often as Is necessary to maintain an adequate factor
of safety based on the recommended procedures as
prescribed in the current American National 6tandard Practice for the
Inspection of Elevators, and to equaliZO the tension of all hoisting ropes
• Examine, lubricate and adjust, regularly and systematically and. If In General
Elevator's judgment conditions warrant, repair or replace all of the accessory
equipment. The replacing of bulbs in signal fixtures will be performed only
during regularly scheduled visits to service the equipment.
• Furnish General Elevator lubricants prepared in accordance with our
specifications.
• Examine regularly and systematically all safety devices and governors and,
In addition, make a lest every five (5) years in the manner prescribed under
Rule 1001.4b of the 1971 American National Standard Safety Code, or conduct
our customary test if a hydraulic elevator.
• Use trained employees directly supervised by General Elevator personnel.
This Agreement does not cover and we will not:
• Assume responsibility for power switches and their fuses, power wiring to the
controller; work caused by power voltage fluctuations beyond the normal limas of
5%, plus or minus; heat and smoke senaing devices; holstway enclosures, and
enclosure doors, frames, sills and supports; ventilating tans; hatchway lighting;
cylinder, casing, or any equipment, piping, or wiring underground; refinishing,
repairing or replacing car enclosure including car door panels, poor covering, light
fixtures, light bulbs and tubes or other car lighting devices.
• Be required to make safety tests other then those described, nor to install
new attachments on the elevator whether or not such attachments are
recommended or directed by Insurance companies or by governmental
authorities, nor to make any replacements with parts of a different design,
unless in our judgment conditions warrant the use of such pans.
• Assume liability for violations of elevator code provisions adopted subsequent
to the installation of subject elevators. (continued)
Prop. No. 4m 871-e0. Ills Page-L-
P. 06
rUj Sales We Unto. 011114461 rNe•rnM IA. hrt cam w.•p.Mm I.O. tier 17M. eulir.m. W. 71707, (301) 71041100
NOV-06-9E MON 17901 :NERAL ELEVATOR 717 •,10467 P.07
• 9e required to make renewals w ripaln necessitated by reason of negligence,
misuse or obsolescence Of the equlpmwnt or by reason of any other cause
beyond'Its control except ordinary wear and Isar.
• Assume possession or management of any part of the equipment but such
remains exclusively your responslbltily as the owner, or as ownees
representative.
• Be responsible for work or service other then that which is specifically set
foah In this Agreement: nor assume any liability not specifically described.
Miscellaneous ProvisiOna' The Items listed In the schedule below 111M
considerable weer and will have to be replaced In the near future. To provide
you with the maximum of service from these Items, General Elevator Is
accepting them In their present condition with the understanding that you
are to pay, in addition to the base amount of this AgreemmnL an extra at the
Ume the Items listed are first replaced. The charge for ads replacement will be
determined by pio-rating the total cost of replacing the Individual Rams.
You are to pay for that portion of the items used prior to the date of this
Agreement and General Elevator will pay for that potion used since the date of
this Agreement.
Schedule of Panto be prorated
Pan name Date Originally Installed
?0??r
All work Is to be performed during General Elevator's regular working hours
of our regular worldng days, unless otherwise specified below. If overtime
examination, repairs or emergency minor adjustment callback service are
not included in this agreement and are later requested by you, we will charge
you extra at our regular billing rates for the overtime bonus hours only.
Prop. No.-L-2349 slut-n1v.1175 Page NNIA
fvl $4140 •Nr e4ner 014"41 imeoEhoW No Htt Cent e•o/yu•Mtu P.O. Ex fRt, 840r4m. NQ, 1f= fie?) M -OW
NOV-00-9E MON 17101 .:NERAL ELEVATOR 717 110467
P.00
' filets, duration, and tsrminatloni
• The services described above will be furnished for five (5) -years
- .'"
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'
-9-
V
rate
commencing at 12:01 A.M. an tho firs+ dayol >
19-LB, for the sum of S 152.00 per month, payable monthly.
upon presentation of Invoke for the month In which the service is tendered, but
subject to the adjustments set forth below.
• You shell pay, as an addition to the price quoted, the amount of any local, stale
or federal tax based on sales.
• The monthly price shall be adjusted annually by increasing or decreasing
$ 23 • _5 of said price to reflect the increase or decrease of cost
of materials. This adjustment shall be the proportionate increase or
decrease of the cost of materials from year to year as shown by the index of
"Wholesale Commodity Prices for Metals and Metal ProduCts", published
by the U.S. Department of Labor, Bureau of Statistics. The adjustment shall
be based on Cie Index figures for the second month preceding Me month
In which the anniversary dale fells.
• $ _ 135.15 of the monthly price shall be annually Increased or
decreased by the percentage of increase or decrease In hourly rate paid to
elevator mechanics, on the yearly adjustment date as compared with the rate paid
on the lirot dayof Juno •127L
It For the purpose of price adjustment, the starting month of the Agreement shall
be used as the annual adjustment dale throughout the tenure of the Agreement
and any renewals of same.
NOTE: As used in this provision, the phrase "hourly rate paid to elevator
mechanics" means the sum of the straight time hourly rate paid to elevator
mechanics In the locality, where the equipment Is to be maintained, and the
a verage hourly cost of fringe benefits paid to elevator mechanics.
The, words "Fringe Benefits' mean employee benefits granted in You of or
in addiflon to hourly rate Increases and Include, but are not limited to,
pensions, annuities, vacations, paid holldays, group life, sickness and
accident and hospitalization Insurance.
The straight time hourly labor rate applicable to this Agreement Is $ 3.3,•01
of which s 2-46 constitutes the cost of fringe Benefits.
• The ad;ustmenl in price resulting from the above provision shall not Increase the
Agreement price to more than the maximum price permitted by any applicable,
legally issued government regulation in force on the date that the adjustment
becomes elfective.
• The Company reserves the right to discontinue ft maintenance service provided
for herein it at any we payments are thirry (30) days in arrears
• After the term provided for herein has expired, this Agreement will continue from
year to year therealter until terminated. Either parry may terminate it at the end of
the first term, or at the end of any subsequent year by giving the other parry ninety
(90) days prior written notice.
• This Agreement is based upon the existing elevators and equipment and govern.
mental regulations controlling the same. the present methods of operation, hours
of use, and general Condillons surrounding the site of the equipment. Any change
In these or other conditions beyond the control of General Elevator which would
materially affect the performance of the elavalbrs or the cost of maintaining them.
small constitute grounds for renegotiating this Agreement.
• It is expressly agreed, in consideration of our performance of the service
enumerated at the price stated. that General Elevator assumes no Ilsbility for
Injuries. Including death. to any poison or persons. except employees of General
Elevator, or for damage to property. except when directly the result of out
negligent performance of the work done under this agreement and the purchaser
agrees to indemnify and hold harr-..tess General Elevator from all damages,
claims, suits. expenses and payments on account of or resulting from any such
Injury, death, or damage to persons and/or property.
Prop. No. 4-13119 ere-eev Ins Pape.?
0tWl 10f SOMWO OONU TNW//gvr IM 1111 c0/11 blNpun,nt 0.0. •o• AOt. ("II 1" 4m
NOY-00-9E
.
Two (2) Electric Oil 'Jydra•,ulic Duplex Passenger
Elevators
P.09
Rid" ylv. T 77 hn '' 90..
LtleatedAt 11-112 R
, i...
GENERAL ELEVATOR CS!OPANY- INC.
PRESENTED BY: •---?sA Name "aOnd ? t `?"L _..._...-
Thomes A. Block, Branch ?tanager It 19
Signed and Accepted
BY:
Q/4L
Accepted for General Elevator Company, Inc.
vol
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BY:
0. O1Sson,
sarrnr:v, I176
Prop. No.-"- 49
MOH 17s02 THERAL ELEVATOR 71' 110467
• General Elevator shall not be liable fol any toss or damage caused by Strikes,
' lockouts, explosions, fire, ftlf: or the like, or any cause beyond its control, not
shed it be liable In any avert for consequential damages.
• In the avant your acceptance h in the lorm of a purchase order cr almilar
document, the p(WSIons of this proposal shell Severn In the "Al of conflict
or omission.
• Sete working conditions In and around subject elevators are of essence to the
perfotmance of this agreement and are primarily the responsibility Of tM
purchaser.
• This proposal. when signed and accepted by the Purchaser and by an authortsed
representative of General Elevator Company shall constitute the contract between
the parties, and all prior representations or agreements whether written or verbal,
are superseded.
Equipment Is described below:
Page
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NOV-00-9i MON 17100 YNQRAL CLCVATOR T1' fiO?iT r.05
Wr?1'1rRlf?-?f',1
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` OCT 8 0 1093
BEVER
UES
October l9s 1993
General Elevators Inc.
2405A Old Gettysburg Road
Camp Rills PA 17011
Dear Blrs
Blue Ridge Maven Nest is cancelling your Maintenance Contract
With you due to outdated agreement and unsatisfactory maintenance
performance. We feel that our elevators lack up-keep and
attention. Thank you.
Sincerely, l / /
Cary Lauer
Director of Plant Operations
BLUE RIDGE HAVEN CONVALESCENT CENTER WEST
770 Poplar Church Road , Camp Hill, PA 17011 . (717) 7837070
.
VERIFICATION
it (!f? , state that I am an authorized
representative of General Elevator Company, Inc., that I make this
Verification on behalf of Plaintiff General Elevator Company, Inc., and
that I am familiar with the facts and allegations set forth in the
foregoing Complaint. I have read the foregoing document and hereby
affirm that it is true and correct to the best of my personal knowledge,
information and belief. This Verification is made pursuant to 18 Pa.C.S.
S 4904 relating to unsworn falsification to authorities.
GEN
By:
DATE:
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SHERIFF'S RETURN
COMONWEALTH OF PENNSYLVANIA:
COUNTY OF CUMBERLAND
General Elevator Company Inc. In the Court of Common Pleas of
Cumberland County, Pennsylvania
No. 94-2964 Civil Term,
VS Civil Action Law Notice Complaint
Beverly Enterprises t/d/b/a
Blue Ridge Haven Convalescent Center West
Daniel Rn i ppr , XF jW' Kfxjar Deputy Sheriff of
Cumberland County, Pennsylvania, who being duly sworn according to law, says,
that he served the within Civil Action Law Notice Complaint
Beverly Enterprises t/d/b/a
upon Blue Ridge Haven Convalescent , the defendant, at 2.20 o'clock
Center West
_p M. Jjjj'c / EDST, on the 3rd day of June 19gAat
770 Poplar Church Road.Camp Hill , Cumberland County,
Pennsylvania, by handing to Ginny Swank Associate Administrator
for Beverly Enterpries t/d/b/a Blue Ridge Haven Convaleecent Center West
a true and attested copy of the Civil Action Law Notice Complaint ,
and at the same time directing her attention to the contents thereof and
the "Notice to Plead" endorsed thereon.
Sheriff's Costs: So answers:
Docketing 14.00 ??`??
Service 8.40
Affidavit
Surcharge 2,00 R. Thomas Kline, Sheriff
24.40 Pd. by Atty.
6-6-94 by 5L
Sworn and subscribed to before me Deputy Sheriff
this IV tL- day of
199Y A. D.
Prothonotary
GENERAL ELEVATOR COMPANY,
INC., plaintiff,
v.
BEVERLY ENTERPRISES t/d/b/a
BLUE RIDGE HAVEN
CONVALESCENT CENTER WEST#
Defendant
: IN THE COURT OF COMMON PLEAS
: CUMBERLAND COUNTY, PENNSYLVANIA
: NO. 94-2964 CIVIL TERM
CIVIL ACTION - LAW
: JURY TRIAL DEMANDED
ENTRY OF ABPEARM&
TO: LAWRENCE E. WELKER, PROTHONOTARY
Please enter my appearance on behalf of Defendant Beverly
Enterprises t/d/b/a Blue Ridge Haven Convalescent Center West in
the above-referenced matter. I am authorized to accept service on
behalf of Defendant.
Respectfully submitted,
Tacx M. rIUM& &.., --- ,
Attorney Id. No. 32695
DUANE, MORRIS & HECKSC R
305 North Front Street
P.O. Box 1003
Harrisburg, PA 17108-1003
(717) 237-5500
Attorneys for Defendant
Beverly Enterprises t/d/b/a
Blue Ridge Haven Convalescent
Center West
Date: June 20, 1994
CERTIFICATE OF SERVICE
It NORA A. STARNES, a secretary with the law firm of Duane,
Morris & Heckscher, hereby certify that a true and correct copy
of the foregoing Entry of Appearance was served upon the following
individual by hand delivering the same at Harrisburg, Pennsylvania:
Jeffrey B. Rettig, Esquire
Thomas, Thomas & Hafer
305 North Front Street
Harrisburg, PA 17101
Nora A. Starnes
Qs _
T
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M _ .
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GENERAL ELEVATOR COMPANY,
INC.,
Plaintiff,
V.
BEVERLY ENTERPRISES t/d/b/a
BLUE RIDGE HAVEN
CONVALESCENT CENTER WEST,
Defendant
: IN THE COURT OF COMMON PLEAS
: CUMBERLAND COUNTY, PENNSYLVANIA
: NO. 94-2964 CIVIL TERM
: CIVIL ACTION - LAW
JURY TRIAL DEMANDED
8 E
AND NOW, comes Defendant, Beverly California corporation
t/d/b/a Blue Ridge Haven Convalescent Center West (hereinafter
"Beverly"), by its counsel, Duane, Morris & Heckscher, and presents
the following Answer:
1. Admitted.
2. Denied on the basis that Blue Ridge Haven West is owned
and operated by Beverly California Corporation, not Beverly
Enterprises.
3. Admitted.
4. Admitted.
5. Admitted.
6. Admitted.
7. Admitted.
8. Admitted.
9. The allegations contained within paragraph nine (9) of
the Complaint are denied on the basis that Beverly had good and
sufficient grounds to terminate the contract based on the lack of
performance of General Elevator's obligations thereunder and the
termination was motivated by unsatisfactory performance.
10. Admitted in part and denied in part. It is admitted that
Beverly substantially performed its respective obligations under
the contract until its termination of the agreement on October 19,
1993. The allegation contained within paragraph ten (10) is denied
to the extent that it alleges that General Elevator substantially
performed its obligations under the agreement.
11. The allegation contained within paragraph eleven (11) is
a conclusion of law to which no answer is required. To the extent
the allegation is deemed to be factual, it is denied.
12. After reasonable investigation, Defendant is without
sufficient knowledge, information or belief as to admit or deny the
allegation contained within paragraph twelve (12) and strict proof
thereof is demanded at trial.
2
13. Admitted.
14. Admitted.
15. The allegation contained within paragraph fifteen (15) of
the Complaint is a conclusion of law to which no answer is
required. If the allegation is deemed to be factual, it is denied.
16. The allegation contained within paragraph sixteen (16) is
denied on the basis that there is no evidence of any consent of
Beverly Enterprises to continue the arrangement under the same
terms and conditions.
17. The allegation contained within paragraph seventeen (17)
is a conclusion of law to which no answer is required. If any
portion of the allegation is deemed a required answer, it is
denied.
18. Admitted.
19. The allegation contained within paragraph nineteen (19)
is a conclusion of law to which no answer required. To the extent
the answer is deemed to be required, it is denied.
20. The allegation contained within paragraph twenty (20)
that General Elevator substantially performed its obligations under
3
the terms of the substitute contract is denied on the basis that
General Elevator failed to properly maintain the elevators in
question.
21. The allegation contained within paragraph twenty-one (21)
is a conclusion of law to which no answer is required. If the
allegation is deemed to be factual, it is denied.
22. The allegation contained within paragraph twenty-two (22)
is a conclusion of law to which no answer is required. If an
answer is deemed to be required, the allegation is denied.
23. Admitted.
24. The allegation contained within paragraph twenty-four
(24) is a conclusion of law to which no answer is required. If an
answer is deemed to be required, it is denied.
25. The allegation contained within paragraph twenty-five
(25) is a conclusion of law to which no answer is required. To the
extent that an answer is deemed to be required, it is denied.
26. After reasonable investigation, Defendant is without
sufficient information, knowledge or belief so as to allow it to
admit or deny the allegation contained within paragraph twenty-six
(26) and strict proof thereof is demanded at trial.
4
27. Paragraph twenty-seven (27) represents a conclusion of
law to which no answer is required. To the extent the allegation
is deemed to be factual in nature, it is denied.
28. The allegation contained within paragraph twenty-eight
(28) is a conclusion of law to which no answer is required. To the
extent that an answer is deemed to be required, it is denied.
, Defendant demands that the Complaint be dismissed.
Respectfully submitted,
Jack M. Mumfb d, Es ire
Attorney Id. No. 32695
DUANE, MORRIS & HECKSCHER
305 North Front Street
P.O. Box 1003
Harrisburg, PA 17108-1003
(717) 237-5500
Attorneys for Defendant
Beverly Enterprises t/d/b/a
Blue Ridge Haven Convalescent
Center West
Date. T? - \S -ok A
5
V E R I F I C A T I O N
I, Dennis McGowen, hereby depose and state that I am
Administrator of Beverly California Corporation t/d/b/a Blue Ridge
Haven Convalescent Center West, the Defendant in this case; that I
am authorized to make this Verification on behalf of the
Corporation; and that the facts set forth in the foregoing Answer
and New Matter are true and correct to the best of my information,
knowledge, or belief.
This statement is made subject to the penalties of 18 Pa.
C.S.A. § 4904 relating to unsworn falsification to authorities.
t
Date -2
CERTIFICATE OF SERVICE
On this 15th day of July 1994, I, Pamela L. Russell, a
secretary with the law firm of Duane, Morris & Heckscher, hereby
certify that a true and correct copy of the foregoing Answer was
served upon the following individual by depositing the same in the
United States mail, first-class, postage prepaid, at Harrisburg,
Pennsylvania:
Jeffrey B. Rettig, Esquire
Thomas, Thomas & Hafer
305 North Front Street
Suite 600
Harrisburg, PA 17101
L
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LAW OFFICES OF
DUANE, MORRIS 6 HECKSCHER
309 NORTH FRONT STREET. P.O. BOX 1003
HARRISBURG. PA 17100.1003
Tellatin, Louis & Andreas, Inc.
15455 Conway Road
Suits 355
Chesterfield, Missouri 63017
Telephone: 3141530-0004
Facsimile: 314/530-0046
' June 10, 1996 ?A 4 - Zq (9 q
File Reference: INISM
Ms. Melissa Karron
Manager of Real Estate Services
Beverly Enterprises, Inc.
5111 Rogers Avenue
Fort Smith, Arkansas 72919
RE: Blue Ridge Haven Convalescent Center -- West
770 Poplar Church Road
East Pennsboro Township, Cumberland County, Pennsylvania
"As Is" Market Value Appraisal of the Real Estate
As of September 1, 1994
Dear Ms. Karron:
' In accordance with the signed engagement letter dated March 5, 1996 (shown as
Exhibit A in this report), we have appraised Blue Ridge Haven Convalescent Center
-- West, a 313-bed skilled nursing facility.
1 The purpose of the appraisal is to estimate the "as is" market value of the fee
simple interest in the real estate to determine the reasonableness of the ad
valorem taxation. A description of the property, together with information
' providing a basis for estimates, is presented in the accompanying report. This
appraisal is subject to the definitions, assumptions, conditions and
certification contained in the attached report. We believe to have prepared this
appraisal in compliance with the Code of Professional Ethics, and the Uniform
Standards of Professional Appraisal Practice of the Appraisal Foundation.
' Based on the data, analyses and conclusions presented in the attached report, it
is our opinion that the "as is" market value of the subject real estate, as of
September 1, 1994, is:
' $4,500,000
Respectfully submitted,
TELLATIN, LOUIS & ANDREAS, INC.
'
Wv' ames a atin, A Sterling E. S o t
Principal
TABLE OF CONTENTS
Assumptions & Limiting Conditions i
Profile of Salient Data iv
Subject Photographs v
INTRODUCTION
• Identification of the Property I
• History of the Property I
• Purpose of the Appraisal I
• Property Inspection I
• Function of the Appraisal 1
• Interest Appraised 1
• Definition of Market Value 2
• Scope of the Appraisal 2
DESCRIPTIVE DATA
• Regional Analysis 4
• Neighborhood Analysis g
• Subject Property Description 14
• Market Analysis 20
HIGHEST AND BEST USE ANALYSIS 35
VALUATION ANALYSIS
• Valuation Procedures 37
• Cost Approach 38
• Income Capitalization Approach 48
• Reconciliation and Final Conclusion of Value 66
CERTIFICATION 67
EXHIBIT SECTION
• Exhibit A - Engagement Letter
• Exhibit B - Legal Description
• Exhibit C - Zoning Regulations
• Exhibit D - Nursing Home Sales
• Exhibit E - Yield Rate Calculations for Comparable Sales
• Exhibit F - Qualifications
ASSUMPTIONS AND LIMITING CONDITIONS
Title to Real Estate
No investigation of legal title has been made, and we render no opinion as
to ownership of the property or condition of the title. We assume that:
a) The title of the property is marketable;
b) Unless otherwise indicated in this report, the
property is free and clear of all liens,
encumbrances, easements and restrictions;
C) The property does not exist in violation of any
applicable codes, ordinances, statutes or other
government regulations;
d) The property is under responsible ownership and
competent management, and is available for its
highest and best use.
Sketches and Maps
Sketches and maps in this report are for aiding the reader in visualizing
the property and are based on field investigations made by the appraiser.
Dimensions and descriptions are based on public records and information
furnished by others. These sketches and maps are not meant to be used as
references in matters of survey.
¦ Information and Data
Information supplied by others that is considered in this valuation is
from sources believed to be reliable and is considered to be reasonable,
but no further responsibility is assumed for its accuracy. We reserve the
right to make such adjustments to the value reported as may be required by
' a consideration of additional or more reliable data that may become
available.
Unexpected Conditions
We assume that there are no hidden or unexpected conditions of the
property that would adversely affect value.
Distribution of Value
The distribution of total value between land and improvements applies only
under the stated program of utilization. Separate values for land and
improvements may not be used in conjunction with any other appraisal and
are invalid if so used.
Legal or Specialized Expertise
No opinion is intended to be expressed for matters requiring legal
expertise, specialized investigation or knowledge beyond that customarily
used by appraisers.
i Tellatin, Louis & Andreas, Inc.
Sale or Purchase
t All opinions of value are presented as Tellatin, Louis & Andreas, Inc.'s
considered opinion, based on the facts and data appearing in the report.
We assume no responsibility for changes in market conditions or for the
inability of the owner to locate a purchaser at the appraised value.
imitations on Marketability Due to Status of License
The value of the subject assumes that the license for the nursing home is
in good status with the Pennsylvania Department of Public Welfare, and
that the license is transferable to a qualified buyer. While the
Department of Public Welfare scrutinizes potential buyers, this appraisal
maintains that there is a large enough number of potential buyers as to
impose no limitation on marketability. Additionally, it is assumed that
' the license will remain as a part of the subject business enterprise along
with the real estate, equipment, assembled work force, etc.
Advertising
Neither all nor any part of the contents of this appraisal report shall be
conveyed to the public through advertising, public relations, news, sales
or other media without the written consent and approval of Tellatin, Louis
& Andreas, Inc.
1 Plagiarism
Neither all nor any part of the contents of this appraisal report shall be
1 plagiarized for any purpose by the client or anyone else who obtains a
copy of the report directly, or indirectly without the written approval of
an officer of Tellatin, Louis & Andreas, Inc.
Court Testimony
Testimony or attendance in court by reason of this appraisal shall not be
' required unless arrangements for such services are subsequently made.
Date of Value
' The date of value to which the conclusions and opinions expressed in this
report apply is set forth in the letter of transmittal. The dollar
amount of any value opinion herein rendered is based on the purchasing
power of the U.S. dollar as of that date. The value conclusions reflect
consideration of typical financing conditions as of the date of value. The
appraiser assumes no responsibility for economic or physical factors
occurring subsequent to the date of value that may affect the opinions
stated herein.
Title Report
No title report has been made available. We assume no responsibility for
such items of record not disclosed by customary investigation.
t
ii Tellatin, Louis & Andreas, Inc.
Inspection
James K. Tellatin, MAI, and Sterling E. Short have personally inspected
the subject property.
Mineral Rights
The value of mineral rights, if any, have not been considered in this
appraisal unless otherwise noted.
Structural Deficiencies
The appraiser found no obvious evidence of structural deficiencies.
However, no responsibility for structural soundness or conformity to city
' or county building and safety codes can be assumed without an independent
structural engineering report.
Termite Damage
The appraiser found no obvious evidence of termite damage or infestation.
However, a thorough inspection by a competent termite inspector has not
been performed for the appraiser.
Soil Conditions
No detailed soil studies of the subject property are available to the
appraiser. Therefore, statements in this report regarding soil qualities
are not conclusive, but are considered consistent with information
' available to us.
Hazardous Substances
Hazardous substances, if present
or potential liability that will
value. Such liabilities may be
existing hazardous conditions.
release of contaminants such as
formaldehyde foam insulation, or
renovations.
in the property, can introduce an actual
adversely affect its marketability and
in the form of immediate recognition of
Future liability could stem from the
asbestos fibers, toxic vapors from urea
radon gases, through aging or building
In the development of an opinion of value, no consideration has been given
to such liability or its impact on value. The professional staff of
Tellatin, Louis & Andreas, Inc., is not qualified to make an investigation
to determine the possible presence of toxic materials requiring either
immediate or future correction. There are experts in this special field
who can conduct such investigations and provide guidance regarding the
impact of toxic materials that may be present in the subject property.
iii Tellatin, Louis & Andreas, Inc.
PROFILE OF SALIENT DATA
NAME: Blue Ridge Haven Convalescent Center -- West
LOCATION: 770 Poplar Church Road
East Pennsboro Township, Cumberland County,
Pennsylvania
CURRENT FEE OWNER: Cumberland County Industrial Development
Authority
INTEREST APPRAISED: The tangible and business assets of the
business enterprise including the fee simple
' ownership in the real estate.
PROPERTY TYPE: Skilled nursing facility
' LAND AREA: 6.8 acres
PRINCIPAL IMPROVEMENTS: Part one-story, wood-frame and brick
structure, and part three-story, metal frame
and brick structure used as a skilled nursing
facility containing 88,010 square feet and
313 licensed beds; erected in 1966 with
' substantial additions occurring in 1968,
1970, and 1975.
HIGHEST AND BEST USE: Present use - skilled nursing facility
1st-Year
PATIENT CENSUS: Current Projection
' Occupancy rate 83.1% 86.2%
Private-pay mix 8.1% 7.5%
Medicare Mix 10.6% 12.3%
' Average private-pay rate $117.91 $118.00
Medicare rate $274.00 $250.00
Medicaid rate $99.63 $102.85
' Medicaid capital rate $5.56 $5.56
"AS IS" MARKET VALUE
OF THE REAL ESTATE: $4,500,000
VALUATION DATE: September 1, 1994
INSPECTED BY: James K. Tellatin, MAI, and Sterling E. Short
DATE OF INSPECTION: April 11, 1996, and April 2, 1996
iv Tellatin, Louis & Andreas, Inc.
SUBJECT PHOTOGRAPHS
1
L
Tellatin, Louis & Andreas, Inc.
Front Building tlevatiul,
Front Building Elevation
SUBJECT PHOTOGRAPHS
Typical Corridor
vi Tellatin, Louis & Andreas, Inc.
Typical Patient Room
_..,, rneoADWS&
Ivu? ?_° -
vii
Louis & Andreas, Inc.
Tellatin,
IDENTIFICATION OF THE PROPERTY
The property is an existing 313-bed, skilled nursing facility known as
Blue Ridge Haven Convalescent Center -- West located at 770 Poplar Church
' Road in East Pennsboro Township, Cumberland County, Pennsylvania.
Fee simple title in the real property is vested in Cumberland County
Industrial Development Authority. The legal description is presented as
Exhibit B in the addenda.
HISTORY OF THE PROPERTY
This facility is owned by Cumberland County Industrial Development
Authority It is our understanding that the facility is not currently for
' sale, and the current owners intend to continue operating the facility.
Beverly, a publicly traded, for-profit corporation, operates numerous
facilities in the state, and is the largest operator of nursing facilities
' in the nation, with more than 700 under ownership or lease.
This property was designed and constructed specifically for nursing home
use. It has been operated continuously as a nursing home since 1966, and
' several additions have been made increasing the capacity to 313 beds. The
facility has been well maintained, and based on our inspection, it does
not suffer from deferred maintenance.
' PURPOSE OF THE APPRAISAL
The purpose of this appraisal is to estimate the "as is" market value of
the real estate as of September 1, 1994.
PROPERTY INSPECTION
' The subject facility was inspected by James K. Tellatin, MAI, on April 11,
1996, and by Sterling E. Short on April 2, 1996. During the inspections,
' Dennis McGowen, the administrator, was interviewed regarding the
operational aspects of the facility. Additionally, Steve Boring, the
maintenance supervisor, was interviewed regarding the physical aspects of
the facility, and he guided the tours.
FUNCTION OF THE APPRAISAL
' It is our understanding that the appraisal will be used by Beverly
Enterprises, Inc. for reviewing the current ad valorem assessment of the
real estate.
' INTEREST APPRAISED
The interest appraised is the fee simple interest in the real estate. The
' value of the intangible and personal property assets of the going concern
are excluded from this appraisal.
1 Tellatin, Louis & Andreas, Inc.
DEFINITION OF MARKET VALUE
In accordance with Federal Reserve System (12 CFR Part 225), Federal
Deposit Insurance Corporation (12 CFR Part 323), The Office of the
Comptroller Of Currency (12 CFR Part 34), the regulatory definition for
market value is defined as follows:
"The most probable price which a property should bring in a competitive
and open market under all conditions requisite to a fair sale, the buyer
and seller each acting prudently and knowledgeably, and assuming the price
t is not affected by undue stimulus. Implicit in this definition is the
consummation of a sale as of a specified date and the passing of title
from seller to buyer under conditions whereby:
A) Buyer and seller are typically motivated;
B) Both parties are well. informed or well advised, and
acting in what they consider their best interests;
C) A reasonable time is allowed for exposure in the
open market;
D) Payment is made in terms of cash in U.S. dollars or
in terms of financial arrangements comparable
thereto; and
E) The price represents a normal consideration for the
property sold unaffected by special or creative
financing or sales concessions granted by anyone
associated with the sale."
SCOPE OF THE APPRAISAL
The scope of the appraisal has included a personal inspection of the
nursing home, as well as the collecting, analyzing and reporting of
geographic, legal, social and economic factors pertaining to the valuation
of the nursing home. These factors and analyses include the following.
r Social, political, economic and physical factors and trends of
the region and neighborhood as they impact the nursing home
' appraised.
• An inspection of the subject property and review of local
taxation and zoning as they relate to the subject.
' A survey and analysis of local competitive market conditions
as they relate to census, revenue and expense characteristics
' in the operation of the nursing home.
• A review and analysis of Pennsylvania and Federal Medicaid and
Medicare reimbursement policies, licensing requirements and
Certificate of Need (CON) policies.
1 2 Tellatin, Louis & Andreas, Inc.
• Gathering, confirming and analyzing comparable nursing home
revenues, expenses and sale data relevant to developing a
well-substantiated estimate of value by the application of the
income capitalization and direct sales comparison approaches.
The scope of this appraisal is believed to be in conformance with the Code
of Professional Ethics and the Uniform Standards of Professional Appraisal
Practice of the Appraisal Foundation.
1
1 3 Tellatin, Louis & Andreas, Inc.
REGIONAL ANALYSIS
The regional analysis focuses primarily on the socioeconomic trends.
Population data best explain current socioeconomic conditions.
Demographic factors most relevant to the valuation analysis include
changes in the elderly population, levels of income and poverty, and
employment composition. The optimum market area for a nursing home is one
that has a growing number of elderly persons with relatively high levels
of income and wealth, and that also contains sufficient labor at
reasonable wages. Income and wealth levels directly relate to the current
and historical economic conditions of the region. Axiomatically, nursing
homes that serve market areas with declining population, low income
levels, and low housing values will generally achieve low private-pay
mixes and have greater difficulty attracting qualified staff members.
This analysis will focus on the important socioeconomic trends for the
long-term care industry.
Blue Ridge Haven Convalescent Center -- West is located in East Pennsboro
Township, Cumberland County, Pennsylvania in the southeastern portion of
the state -- 85 miles west of Philadelphia. Cumberland County is a part
of the Harrisburg-Lebanon-Carlisle Metropolitan Statistical Area (MSA),
which includes the Pennsylvania counties of Cumberland, Perry, Dauphin and
Lebanon. The region is situated within the Susquehanna River Valley where
the terrain is generally hilly. The climate is humid continental with
cold winters and hot, humid summers.
Major highways servicing the area include: Interstates 76 (Pennsylvania
Turnpike), 81, 83, 283, and 581; U.S. Highways 11, 15, 22, and 322; and
numerous state routes. Within the MSA, there are five bridges crossing
the Susquehanna River; Taylor Bridge is due east of the subject providing
easy access to the Harrisburg commercial business district. Capital City
Airport provides commercial air and freight service. There are several
railroads serving the MSA.
The population trends for the total population are profiled in Table R-1
as follows.
Table R-1
Regional Population Trends 1980 to 2000
Harrisburg
Lebanon
Carlisle Cumberland
Pennsylvania MSA County
Total Population
1980 11,863,895 555,158 178,541
1990 11,881,643 587,986 195,257
1995 12,083,907 614,351 206,495
2000 12,334,083 639,456 217,192
Annual Rate of Population Change
1980 to 1990 0.01% 0.58% 0.90%
1990 to 1995 0.34% 0.88% 1.13%
1995 to 2000 0.41% 0.80% 1.02%
Data Source: CACI Marketing Systems.
4 Teliatin, Louis & Andreas, Inc.
According to the CACI data shown above, Cumberland County experienced an
increase in population from 1980 to 1990, and the population trend
continued from 1990 to 1995. The population is projected to increase at
an annual rate of 1.02 percent through 2000. Compared to the entire MSA,
Cumberland County is anticipated to incur slightly greater population
growth, and the county growth rate is more than twice the state
projection.
The population trends, according to age group and other data pertaining to
age demographics, are profiled in Table R-2 as follows.
¦
Table R-2
Age Distribution and Elderly Population Trends 1990 to 2000
Harrisburg
Lebanon
Carlisle Cumberland
Pennsylvania MSA County
Population Age 65-74
1990 1,070,021 47,684 15,340
1995 1,076,909 50,562 16,747
2000 995,140 49,843 16,785
Population Age 75-84
1990 587,249 26,022 8,018
1995 647,795 28,930 9,089
2000 709,698 32,743 10,701
Population Age 85+
1990 171,836 8,086 2,783
1995 201,308 9,422 3,105
2000 246,226 11,352 3,664
Annual Growth: 75+
1990 to 1995 2.27% 2.37% 2.46%
1995 to 2000 2.40% 2.83% 3.33%
% of Population 75+
1995 7.0% 6.2% 5.9%
2000 7.9% 7.2% 7.0%
Median Age - 1995 36.3 36.2 35.8
Data Source: CACL Marketing Systems.
Age demographics are important to isolate and analyze relative to
projections for the long-term care industry. The growth of the elderly
population should correlate to growth in nursing home demand. The Demand
Analysis within the Market Analysis will address these issues in more
detail. The 75+ age group is the greatest user of long-term care, and
Cumberland County is projected to experience growth in this age group from
1995 to 2000 at 3.33 percent as compared to growth from 1990 to 1995 at
2.46 percent. Annual growth of 3.33 percent is moderately high compared
to most areas of Pennsylvania and the nation. The increasing trend for
the overall population has some influence on the elderly population
trends. Cumberland County has a slightly lower percentage of 75+
residents than all of Pennsylvania, and the median age is slightly lower
too. The "graying of America" is a trend that will not start to boom
until 2010; the "Baby Boomers" are still 35 to 50 years old.
Since earnings margins are generally greater from private-pay revenue
sources, the level of wealth for the community, and specifically the
5 Tellatin, Louis & Andreas, Inc.
market area of the property appraised, warrants closer examination. While
there are no demographic figures available indicating net worth averages
for any geographic area, wealth levels can be inferred through the
following demographic data.
• Household and/or per capita income
• Percentage of households in poverty
• Average home values
• Percentage of owner-occupied dwelling units
• Educational attainment
t Typically, the cost of a single-year stay in a skilled nursing facility
ranges from $30,000 to $50,000 for private-pay patients. Funding a
lengthy stay by all but the wealthiest persons usually necessitates the
use of all regular income sources including social security, pensions,
interest, rents, dividends and other income. Additional monies are often
obtained through the sale of assets, including principal residences, other
real and personal property, and liquidation of investments. All of these
resources must be exhausted, or spent down, to qualify for Medicaid. All
other things equal, facilities located in market areas that have high
income levels and property values typically achieve higher private-pay
mixes than nursing homes located in poorer areas.
Demographic data providing insight as to the economic status of the region
are profiled in Table R-3 as follows.
Table R-3
Economic Data 1980 to 2000
Harrisburg
Lebanon
Carlisle Cumberland
Pennsylvania MSA County
Economic and Other Data:
Household Income Distribution
$25,000 to $49,000 35.4% 39.8% 40.1%
$50,000 to $99,999 20.8% 22.2% 24.5%
$100,000 to $149,999 3.0% 2.4% 2.7%
$150,000+ 1.6% 1.1% 1.3%
Average Household Income - 1995 $40,040 $39,804 $42,357
Percent of Households in Poverty 11.4% 8.0% 5.7%
Median Home Value - 1990 $69,689 $75,379 $85,016
Home Value : Household Income Ratio 1.74 1.89 2.01
% Owner-Occupied Dwellings 52.3% 51.9% 54.9%
Percent Housing Units Built
Before 1970 71.8% 63.9% 59.5%
1970 to 1980 15.8% 20.1% 21.0%
1980 to 1990 12.4% 16.0% 19.5%
% Adults Bachelor Degree, or Higher 11.3% 12.0% 15.3%
Data Source: CAN Marketing Systems.
The average household income for Cumberland County is 105.8 percent of the
state average indicative of a modest standard of living. The percentage
6 Tellatin, Louis & Andreas, Inc.
of the population living in poverty is lower than the state average. Real
estate values play an important role in measuring the level of wealth in
an area because many potential nursing home patients own their residences
and are often forced to sell this major asset in order to fund their long-
term care. Thus, housing values and historical appreciation are important
considerations. In Cumberland County, the home values are fairly high
indicating a median value of $85,016. Also, the cost of housing/living
relative to household income affects personal savings which could
potentially provide funds for nursing services. The Pennsylvania ratio
for median home value to average household income is 1.74:1, and the ratio
for Cumberland County is 2.01:1. Cumberland County has a higher
percentage of new housing units as compared to all of Pennsylvania which
parallels to the overall population trend. The county population is more
educated in comparison to the state average based on college graduates.
Most of these economic data suggest that the region will achieve a
comparable or higher ratio of private-pay patients when compared to the
state average.
The Harrisburg MSA has an economy dominated by state government, but it is
also well diversified in other areas. Cumberland County comprises a
region of the MSA commonly known as the West Shore. Major, local, non-
government employers in the region are listed as follows; employers
located in Cumberland County are italicized.
Major Employers
Employees
M.S. Hershey Medical Center Hospital/Healthcare Hershey 5,550
Navy Ships Parts Control Center Ship Parts (Federal Government) Mechanicsburg 4,900
AMP Electronics Harrisburg 4,500
Hershey Entertainment & Resort Entertainment/Lodging Hershey 4,151
Defense Distribution. East Region Army Material Distribution New Cumberland 4,136
Kinney Shoes Shoes Harrisburg 2,600
Polyclinic Medical Center Hospital/Healthcare Harrisburg 2,442
Capital Health System Medical Services Harrisburg 2,337
Giant Foods Food Retailina Carlisle 2,316
The state government employs 27,589 workers. The regional economy has
been stable for the last few years influenced by the state government and
other stable companies. Current unemployment in Cumberland County is 3.5
percent; the statewide unemployment rate is 6.1 percent.
In summary, the region has been experiencing moderate population and
economic growth. The relatively average income of the region, coupled
with the projected growth trend, portrays an average to good future for
the local long-term health care providers.
7 Tellatin, Louis & Andreas, Inc.
REGIONAL MAP
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r+11e
8 Tellatin, Louis & Andreas, Inc.
NEIGHBORHOOD ANALYSIS
The subject is located in the near eastern portion of MSA in Pennsboro
Township just to the north of Camp Hill. The subject facility uses Camp
Hill for its mailing address. The delineated boundaries of the
neighborhood include the 17011 ZIP code which encompasses Camp Hill and
extends north into East Pennsboro Township. The Susquehanna River, and
even more predominantly, the Conodoguinet River, are geographical
influences on the neighborhood. Access to the neighborhood is easily
achieved via the nearby highways: Interstate 81 runs about six miles to
the north of the subject; Interstate 83 cuts through downtown Harrisburg
and crosses the Susquehanna River within a mile to the south of the
subject; and U.S. Highways 11 and 15 traverse through Camp Hill as the
main routes. These routes allow the subject to draw potential patients
from a primary market area spanning a seven- to ten-mile radius
encompassing most of eastern Cumberland County, as well as western Dauphin
County (Harrisburg). Poplar Church Road is a moderately-traveled arterial
that has been developed with offices, and medical offices/clinics relating
to Holy Spirit Hospital. The neighborhood is approximately 3.5 miles west
of the Harrisburg central business district. The neighborhood is
characterized as mature urban/suburban area.
Table N-1 presents salient demographic data for the 17011 ZIP code area,
which encompasses the subject neighborhood.
Table M-1
Population Trends 1980 to 2000
Primary
Cumberland Zip Code
County 17011
Total Population
1980 178,541 31,666
1990 195,257 33,023
1995 206,495 34,000
2000 217,192 35,274
Annual Rate of Population Change
1980 to 1990 0.90% 0.42%
1990 to 1995 1.13% 0.58%
1995 to 2000 1.02% 0.74%
Data Source: CACI Marketing Systems.
According to CACI, the population within the neighborhood increased from
1980 to 1990. The population trend continued from 1990 to 1995, and it is
anticipated to increase through 2000 at an annual rate of 0.74 percent.
The neighborhood has been growing at an increasingly greater rate, but
this rate should stabilize beyond 2000 simply for lack of vacant land.
9 TeHatin, Louis & Andreas, Inc.
The population trends, according to age group and other data pertaining to
age demographics, are profiled in Table N-2 as follows.
Table N-2
Age Distribution and Elderly Population Trends 1990 to 2000
Primary
Cumberland Zip Code
County 17011
Population Age 65-74
1990 15,340 3,379
1995 16,747 3,538
2000 16,785 3,351
Population Age 75-84
1990 8,018 1,878
1995 9,089 2,063
2000 10,701 2,389
Population Age 85+
1990 2,783 597
1995 3,105 698
2000 3,664 854
Annual Growth: 75+
1990 to 1995 2.46% 2.21%
1995 to 2000 3.33% 3.27%
% of Population 75+
1995 5.9% 8.1%
2000 7.0% 9.5%
Median Age - 1995 35.8 39.5
Data Source: CAN Marketing Systems.
The neighborhood experienced 2.21 percent in annual growth for the 75+ age
group from 1990 to 1995. This trend is anticipated to accelerate to 3.27
percent, annually, from 1995 to 2000. This growth rate is relatively high
in comparison to statewide growth rates. The neighborhood contains a
higher percentage of 75+ residents as compared to Cumberland County, and
the median age is higher. Overall, these demographics reflect a mature
neighborhood with an elderly population who are the original home owners
in many cases.
10 Tellatin, Louis & Andreas, Inc.
Demographic data providing insight as to the economic status of the
neighborhood are profiled in Table N-3 as follows.
Table M-3
Demographic and Economic Data
Primary
Cumberland Zip Code
county 17011
Economic and Other Data:
Household Income Distribution
$25,000 to 149,000 40.1% 38.1%
$50,000 to 199,999 24.5% 27.4%
1100,000 to $149,999 2.7% 3.7%
1150,000+ 1.3% 1.7%
Average Household income - 1995 142,357 147,062
Percent of Households in Poverty 5.7% 4.4%
Median Hone Value - 1990 185,016 190,629
Home Value : Household Income Ratio 2.01 1.93
% Owner-Occupied Dwellings 54.9% 62.1%
Percent Housing Units Built
Before 1970 59.5% 67.8%
1970 to 1980 21.0% 16.9%
1980 to 1990 19.5% 15.4%
% Adults Bachelor Degree, or Higher 15.3% 19.1%
I Data Source: CACI Marketing Systems.
The average household income for the neighborhood is higher than the
' regional and state averages. The percentage of the population living in
poverty is correspondingly low. The median home value to average
household income ratio for the 17011 ZIP code area is 1.93:1 which is
' fairly moderate considering the higher income level and urban/suburban
locale. There are more owner-occupied dwellings. The neighborhood
population is slightly more educated in comparison to the Cumberland
County average based on college graduates. Most of these demographic
statistics are neutral or positive indicators for the long-term care
industry relative to attracting private-pay patients and qualified staff.
1 Development within the neighborhood has continued steadily in the last two
decades because of plentiful vacant land in the northern portion of the
neighborhood, but the availability of vacant land is diminishing. As
' mentioned, the Conodoguinet River is a major geographic influence on the
subject in that it winds back and forth through the northern portion of
the neighborhood. The river flows through steep hills making development
difficult. Thus, development activity is more restrictive than might
appear on a road map. The subject facility was developed from 1966 to
1975 during which time several office buildings were developed in the same
district. Still, the predominant land use is residential with
' concentrations of commercial use along the main routes such as Poplar
Church Road / 21st Street, Erford Road, 32nd Street, and Market Street.
The homes are of average to good quality construction, and they have been
adequately maintained as exhibited by the exterior appearances. In
general, Camp Hill is known as a fairly preferred residential area.
11 Tellatin, Louis & Andreas, Inc.
Overall, the composition of real estate within the neighborhood
complements the subject facility, and the remaining useful life of the
subject facility should not be restricted by the neighborhood.
' Proximity to hospitals is an important locational aspect for a nursing
home since hospitals are primary referral sources. The subject is within
one-quarter mile from Holy Spirit Hospital, a 317-bed regional hospital
' that serves the entire MSA, and specifically Cumberland County. There are
also two hospitals in Mechanicsburg, and one hospital in Carlisle. There
are several hospitals in Dauphin County.
' Parcels adjacent to the subject have been improved with: several small
office buildings and several single-family residences converted office use
-- to the north; a parking lot, several mid-rise office buildings, and a
high-rise apartment complex -- to the south; a parking lot and mid-rise
office buildings -- to the east, and medical offices, followed by a
branch bank, followed by Holy Spirit Hospital -- to the west. These
' adjacent improvements impose no negative influence on the subject.
The neighborhood has been experiencing a slow to moderate growth stage in
' its life cycle, and it should continue as a viable locale for the subject
into the near future.
12 Tellatin, Louis & Andreas, Inc.
1
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NEIGHB0RHOOD MpP
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SUBJECT PROPERTY DESCRIPTION
Size:
Plot Plan:
Number of Parcels:
Shape:
Average Depth:
Average Width:
Primary Frontage:
Street Improvements:
Secondary Frontage:
Street Improvements:
Accessibility From Major
Regional Highway(s):
Ingress/Egress Restrictions:
Improvements Setback:
Topography:
Soil Conditions:
Nearby Primary Fault Lines:
Utility services:
Adverse Easements:
Adverse Encroachments:
Flood Plain:
Community Panel Number
Date
Zone (See Map)
Land-to-Building Ratio:
On-site Parking Spaces:
Excess Land:
Surplus Land:
Zoning:
' Permitted Uses:
Current Use Compliance:
Environmental Issues:
11
11
Site Data
6.8 acres, or 296,208 square feet
See Next Page
Two
Irregular
355 feet
830 feet
755 feet on
Two lanes
streetlight
hydrants
386 feet on
Two lanes,
sewers, and
Poplar Church Road
plus center turning lane,
s, curbs, storm sewers, and fire
House Avenue
streetlights, curbs, storm
fire hydrants
Good
None
115 feet from Poplar Church Road, at the
closest point
45 feet from House Avenue, at the closest
point
Gradually sloping downward from street
grade along Poplar Church Road; sloping
upward along House Avenue; leveling for
the main area of the improvements; sloping
downward away from the improvements at the
rear of the site.
Appear suitable for existing improvements
based on surface evidence
None
Electricity, public water, sanitary sewer,
natural gas, and telephone utility lines
None
None
420359 B
April 15, 1977
Zone "C" which is defined as "areas of
minimal flooding."
3.36:1
Adequate
None
None
"OA" Office/Apartment
See Addenda
Yes
Tellatin, Louis & Andreas, Inc., has no
expertise in the evaluation of
environmental hazards and therefore
expresses no independent opinion as to the
existence or absence thereof.
1 14 Tellatin, Louis & Andreas, Inc.
Ij
1
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11
PLOT PLAN
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' Description of Improvements
The nursing home is a part one-story, wood-frame and brick structure, and
part three-story, metal frame and brick structure (all connected),
specifically designed for its present use. The building contains a gross
floor area of 88,010 square feet including basement area. It is licensed
for 313 beds and is currently operating at a capacity of 265 beds due to
' two wings containing 48 beds being out of service relative to staffing.
Essentially, the majority of the vacant beds are concentrated in these two
wings in order to control labor costs; these wings are not staffed. The
' facility contains 13 patient wings emanating from six nurses' stations.
The corridors in the patient wings are eight feet wide which is standard
for modern facilities. The building is fully protected by a wet-type
sprinkler system plus smoke/heat detectors/alarms.
The facility contains a total of 156 patient rooms including three private
rooms, 151 semi-private rooms, and two four-bed wards. There are eight
central tub and/or shower rooms. The patient rooms have either private
toilet facilities or share adjoining semi-private facilities. Other areas
include:
' 17 Offices 2 Dining Rooms
1 Main Lobby 1 Kitchen
8 Central Tub/Shower Rooms 1 Laundry Room
' 6 Nurses' Stations 2 Employees' Lounges
6 Medical Supply Rooms 1 Living Room
1 Medical Records Room 1 Beauty/Barber Shop
1 Activities Room 7 Dayrooms
' 1 Physical Therapy Room Public Restrooms
1 Occupational Therapy Room Linen Closets, Soiled/Clean
1 Speech Therapy Room Mechanical Areas
1 In-Service Room Storage Areas
2 Conference Rooms Janitor Closets
There is a partial basement under the 1968 section, and a partial basement
is also under the 1975 three-story section. The basement contains
storage, mechanical, and resident storage.
' Details of the building components are profiled as follows.
SITE PREPARATION & EXCAVATION: General site preparation and
' grading; excavation for the basements.
FOUNDATION: Includes excavation for concrete footings under
exterior walls, interior partitions and columns.
FRAME: Loadbearing exterior walls and partitions for the one-
story structure; steel columns and beams for the three-story
structure.
EXTERIOR WALLS, SUPERSTRUCTURE: Wood frame and brick for one-
story section; metal stud and brick for three-story section.
FLOOR STRUCTURE: Reinforced concrete over fill and vapor
barrier on ground level; precast concrete over the basement
in the one-story section; open-web steel joist and metal deck
17 Tellatin, Louis & Andreas, Inc.
supporting concrete over the basement and for upper levels in
the three-story section.
ROOF STRUCTURE: Gable-type with wood trusses, rafters and
plywood deck for the one-story section; flat-type, open-web
steel joist and metal deck for the three-story section.
ROOF COVER: Asphalt shingles, metal gutters and downspouts;
rubber membrane.
INTERIOR CONSTRUCTION: Drywall on wood stud partitions in the
one-story section with some metal stud and drywall partitions;
l
e
drywall on metal studs in the three-story section; cubic
curtains; vinyl wall coverings; metal and wood doors in metal
frames; ceramic tile wainscotting in the bathrooms; wood
' hand railings.
CEILINGS: Suspended acoustical tile in most areas; drywall,
taped and painted in the patient rooms in the one-story
section.
FLOOR COVERINGS: Vinyl tile in the most patient rooms,
hallways and most other common areas; carpet in the lobby,
offices, and some patient rooms; ceramic tile in central bath
and tub rooms, and quarry tile in the kitchen.
ELECTRICAL & LIGHTING: Fluorescent and incandescent fixtures;
wiring in conduit; 3,300 amperes total (two panels); 65-KW
' emergency generator.
PLUMBING: Adequate and typical for nursing home occupancy;
two hot water thermal storage units
H.V.A.C.: Combination of electric through-the-wall heat and
air-conditioning units; zoned packaged units; electric
' baseboard heat (in only one wing).
FIRE PROTECTION: Wet-type sprinkler system throughout; smoke
' and heat detectors and alarm system.
ELEVATOR: One, hydraulic, three-stop, 4,000-pound capacity
' elevators.
Site improvements include the following.
' Concrete sidewalks, patios and pads
• Asphalt-paved parking lot and drives with curbing
• Exterior lighting
' Flagpole
• Signage
• Landscaping.
Condition and Functional Features
The subject improvements were erected in 1966 and 1968, 1970, and 1975,
and the improvements were specifically designed for the present use as a
18 Tellatin, Louis & Andreas, Inc.
' nursing home. The building is of average-quality construction and
exhibits no structural problems or excessive wear and tear. Based on our
inspection of the buildings and.our interviews with Dennis McGowen, the
administrator, and Steve Boring and Gary, the maintenance supervisors, the
following major capital improvements will be necessary in the very near
future.
' New vinyl tile throughout the facility (actually replaced from
November 1, 1995 through April 1, 1996)
' Its interior finishes (wall and floor covers) are adequately attractive
according to contemporary tastes. The building should continue to provide
good service for many years without requiring significant replacement of
' structural or mechanical components.
The administrator has informed us that the building is not in any serious
code or licensing violation. The Americans with Disabilities Act (ADA)
' essentially requires public properties to be accessible to handicapped
persons. While ADA regulations have forced some real estate properties to
be changed and upgraded for greater accessibility, most nursing homes
already complied to ADA regulations at the time of its enactment since
their clientele typically suffer from handicaps. Tellatin, Louis &
Andreas, Inc., has no expertise in determining compliance with the ADA,
' and therefore, we express no independent opinion as to compliance.
The building has an efficient floor plan and design. There is no
measurable functional obsolescence.
' I
th
b
ildi
n summary,
e
u
ng has been adequately maintained and does not
suffer excessive deterioration or functional obsolescence. Therefore, the
estimated effective age is 25 years, or its actual blended chronological
' age.
' Equipment Detail
The subject equipment consists of the normal items of furniture and
equipment, including patient room furniture; kitchen, laundry and
maintenance equipment; office furniture and machines; and related items
used in the operation of a nursing home. Unless otherwise stated, it is
assumed that the equipment is in working order and there is sufficient
' quantity to operate the facility.
Assessed Valuation and Current Taxes
' The current real estate assessed valuation for the subject is $524,130,
and the common level ratio is 7.3 percent, implying that the market value
of the real estate is $7,179,863, or $22,939 per bed. The 1995 taxes are
' $91,460, based on an tax rate of 1.27 percent of the implied market value.
Since the function of this appraisal is to determine the reasonableness of
the assessment, the balance of the report is devoted to this issue. The
income capitalization approach will exclude the property taxes from the
operating expenses, and instead the taxes will be measured by adding the
effective tax rate to the capitalization rate.
19 Tellatin, Louis & Andreas, Inc.
' MARKET ANALYSIS
The analysis of the competitive facilities is the keystone for the
valuation in that the conclusions are integral to the highest and best use
' analysis and the appropriate sections of the income capitalization and
h
ome
sales comparison approaches. An analysis is performed of the nursing
market conditions affecting the subject. This section profiles the
competitive conditions in the market and the impact of governmental
policies. We have obtained specific census data for the seven nursing
homes that are considered most. directly competitive with the subject
facility. In addition, we have utilized census and rate information
' available from various state sources. The following analyses of these
elements conclude with projections for the subject during the projection
period.
Competitive Position
The market, as defined by the subject and the competitors, includes most
of Cumberland County, specifically the 17011 ZIP code area. The selection
of the primary competitors is intended to represent a sample of the market
supply emphasizing facilities that are the most competitive to the
' subject. Seven facilities are located within the primary market area.
However, these primary competitors do not constitute the entire market.
The remainder of the market includes facilities that are considered to be
lesser competition. These other facilities have less affect upon the
subject than the seven primary competitors, but their presence affects the
overall supply and demand of the market. Most of these secondary
competitors are at the periphery of the subject market or even in adjacent
markets. Urban markets are difficult to delineate because of populous
neighborhoods with few political or geographic boundaries that decision
process for prospective nursing home patients and their families. The
secondary competitors will affect some of the projections for the subject.
' Tables C-1 summarizes the salient data for the seven most competitive
facilities. The current census data for the subject are for the month
ending December 31, 1994.
20 Tellatin, Louis & Andreas, Inc.
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Occupancy Rate (Supply and Demand) Analysis
Supply Analysis: The nursing home industry relates supply to demand based
' on a ratio of beds per 1,000 elderly residents over age 75. The
Pennsylvania average is 111.7 beds per 1,000/75+ ranking 20th among all
states; the national average is 118.5 beds. Other states range from 62.6
beds for Hawaii to 181.5 beds for Nebraska. Generally, states with warmer
climates that receive an influx of retirees tend to maintain lower ratios
than northern states; essentially, the elderly impose a burden on
southern states to which they have not contributed tax dollars for their
' potential need for long-term care. The bed supply ratios for all states
are presented in Table M-1 as follows.
Table M-1
Nursing Home Bed Ratios Per 1.000 Age 65+ and 75+ for 1994
and 1992 Occupancy Rates
d 1992
Beds/ Beds/ 1992 Beds/ s/
Be
1,000 1,000 Occu- 1,000 1,000 Occu-
State 65+
1 Hawaii 24.4 75+ panty
62.6 94.9% 25 State
Maryland 65+
50.4 75+
122.4 nc
97.0%
2 Florida 28.1 64.5 95.5% 26 Maine 58.0 125.6 97.6%
3 Nevada 24.9 70.4 91.0% 27 Tennessee 57.6 129.9 97.8%
4 Oregon 34.7 T7.3 90.0% 28 Georgia 56.6 132.3 98.2%
5 West Virginia 35.8 81.3 98.6% 29 Kentucky 63.4 141.4 98.6%
6 Arizona 33.9 81.3 91.6% 30 Arkansas 64.9 141.9 94.4%
7 California 35.9 83.3 93.5% 31 Massachusetts 65.1 141.9 97.9%
8 New Mexico 38.5 90.7 98.9% 32 Illinois 65.2 145.7 90.7%
9 Alabama 41.6
10 Utah 41.9 94.1 98.6% 33
95.3 86.9% 34 Texas
Wyoming 64.8
65.1 146.9
149.3 85.0%
96.9%
11 Idaho 42.8 95.3 93.7% 35 Rhode Island 67.7 150.2 97.4%
NA District of Columbia 42.7 97.8 98.2% 36 Wisconsin 71.1 151.2 96.1%
12 South Carolina 39.8 99.8 98.8% 37 Ohio 65.7 151.9 95.7%
13 Virginia 42.0 100.5 97.3% 38 Connecticut 68.0 152.7 97.8%
14 New York 45.5 101.9 97.4% 39 Delaware 63.0 154.7 91.0%
15 New Jersey 43.9 102.9 N/A 40 Iowa 76.3 156.9 96.7%
16 Mississippi 47.3 103.9 99.0% 41 Missouri 74.1 157.9 92.1%
17 Michigan 45.3
18 North Carolina 44.6 105.2 95.6% 42
106.5 96.9% 43 North Dakota
Minnesota 78.5
78.2 158.1
162.3 99.5%
98.6%
19 Washington 47.2 107.4 94.1% 44 South Dakota 80.5 165.9 97.6%
20 Pennsylvania 48.4 111.7 95.0% 45 Indiana 74.7 167.8 86.7%
21 Colorado 49.2 113.4 89.0% 46 Oklahoma 78.8 170.2 85.4%
22 Alaska 38.8 113.6 86.7% 47 Nebraska 83.9 170.7 93.3%
23 New Hampshire 52.9 116.7 96.9% 48 Kansas 83.7 174.6 94.6%
24 Vermont 54.9 118.4 97.5% 49 Montana 79.7 177.5 93.0%
NA United States 52.1 118.5 94.9% 50 Louisiana 78.2 181.5 91.6%
The most interesting as pect revealed in the above t able relates to the
high occupancy rates throughout the range of bed supp lies. Among the ten
states with the highest ratios, the average occupancy was 93.7 per cent in
1992. Apparently, an abundant, supply of nursing home beds does not
necessarily result in low occupancy rates.
' Based on the 75+ population and 2,202 nursing home beds in Cum berland
County, there are 180.6 beds per 1,000/75+ [{Number of beds + (1 995 75+
population + 1,000)) = (2,202 + (12,194 + 1,000)} = 180.6]. B ased on
these county and state r atios, the market appears to be imbalanced with an
excessive supply of nursing home beds.
L Demand Analysis: The primary market are a of the subj ect long-term health
care facility includes a large portion of eastern Cumberland County,
71
22 Tellatin, Louis & Andreas, Inc.
LJ
L
specifically the 17011 ZIP code area. According to CACI projections for
' 1995 to 2000, the 75+ population within Cumberland County is expected to
increase at an annual compounded rate of 3.33 percent. More specifically,
the 75+ population within the neighborhood as defined by the 17011 ZIP
' code indicates growth of 3.27 percent, annually from 1995 to 2000. The
"graying of America" is prevalent in most states, and these demographics
portray this trend.
' Some of the future demand for senior housing/healthcare is expected to be
satisfied by assisted-living facilities and home health care arrangements
as federal and state budgets necessitate policies that provide healthier
patients less expensive alternatives. As a result of these pressures,
nursing home acuity levels will continue to increase placing greater
demands on professional care givers.
Based on the foregoing analysis, the projected annual increase in demand
for geriatric long-term care beds over the projection period is 2.75
percent annually.
The aggregate occupancy rate for the 2,075 nursing home beds in Cumberland
County during 1994 was 90.7 percent.l The occupancy rates for the
competitive facilities and historical occupancy rates of the subject are
as follows.
Table C-2
SUMMARY OF COMPARABLE NURSING HOME OCCUPANCY RATES
1 % Fair
Fair Market
# of Market Occupancy Share Market
No. Name Beds Share Rate Captured Penetration
' 1 Camp Hill Care Center 118 9.2% 91.9% 9.6% 104.0%
2 Leader Nursing & Rehab Center 103 8.0% 92.0% 8.4% 104.1%
3 Blue Ridge Haven Center-East 67 5.2% 91.0% 5.4% 103.0%
4 Leader Nursing & Rehab Ctr.-LP 240 18.7% 92.2% 19.5% 104.4%
5 Susquehanna Ctr.-Nuys. & Rehab 180 14.0% 77.9% 12.4% 88.2%
6 Bethany Village Retirement Ctr 69 5.4% 93.9% 5.7% 106.3%
7 Messiah Village 194 15.1% 94.6% 16.2% 107.1%
Subject Facility 313 24.4% 83.1% 22.9% 94.1%
' Market Area
0% 100
0%
3% 100
0% 88
284 100
1
.
.
.
.
,
Totals and Averages
High 94.6%
' Low 77.9%
Occupancy History for the Subject
12/31/93 88.7%
12/31/94 80.3%
Average of Period Reviewed 84.5%
Table C-2 presents calculations for fair market share, fair market share
' captured, and the market penetration for each of the competitors. Fair
market share constitutes the respective beds for each facility divided by
1 Pennsylvania Department of Health - State Center for Health Statistics
' & Research, Data from the Long-Term Care Facilities Questionnaire, January 1,
1994 to December 31, 1994, Report 1.
1
23 Tellatin, Louis & Andreas, Inc.
' the total number of beds in the market. In a balanced market, all
competitors will capture fair market shares resulting in market
penetrations of 100.0 percent for each facility. Currently, the subject
captures less than its fair market share indicating a 94.1 percent market
' penetration. Besides the subject and Competitor Five, the occupancy
levels are relatively consistent. The historical occupancy for the
subject has been dropping indicating that the subject has struggled to
' remain competitive. The subject facility is relatively large at 313 beds.
Because it is the largest facility in the region, it is often the target
of demonstrators who converge on the state capital for various issues. As
a result, the subject is often portrayed negatively in the local press,
and the bad press has hurt its reputation resulting in a low occupancy and
low private-pay mix.
As previously calculated, Cumberland County has an oversupply of nursing
beds in comparison to the state average -- 180.6 beds versus 11.7 beds per
1,000/75+, respectively. The state ratio is relatively low compared to
most states. Pennsylvania applies a bed-need methodology on a countywide
basis using an expected occupancy rate of 95.0 percent, and estimated
institutional dependency within five age cohorts. Accordingly, the state
perceives that Cumberland County has a surplus of 753 beds -- including
125 beds that have already been approved. These beds have been approved
since 1990, and the likelihood that these beds will be added is considered
somewhat remote because of the oversupply.
Given growth in demand of 2.75 percent (as previously estimated),
additions to the supply will eventually be necessary to satisfy this
growth. We have employed particular assumptions based on aforementioned
CON methodologies in order to estimate potential additions to the supply.
The occupancy threshold represents the attainment of a market occupancy
' level which triggers the need for additional beds. We have selected a
threshold occupancy level of 95
0
ercent
The urba
k
t li
it
.
p
.
n mar
e
m
s the
sensitivity to additions to the supply because of overlapping markets.
Accordingly, we have set the minimum incremental increase in additions to
the supply at 90 beds.
Table C-3 presents the estimated occupancy rates for the subject over the
eight-year projection period and the key assumptions applied to the
calculations.
1
24 Tellatin, Louis & Andreas, Inc.
Table C-3
SUBJECT OCCUPANCY RATE PROJECTIONS OVER THE PROJECTION PERIOD
Assu Dtions For Occupant Changes Over The Protection Period
Annual Growth in Demand: 2.75%
Occupancy Threshold for Added Beds: 95.0%
Minimun Incremental Increases to Supply of Beds: 90
Maximum Market Occupancy 96.0%
' Total Beds Total Subject Subject Subject
Annual Total Market Added To Market Fair Occupancy E stimated
Demand Beds Bed Previous Occupancy Share of Penetration Occupancy
Year Growth Demanded Supply Supply Rate Demand Rate Rate
Current 1,134 1,284 88.3% 24.4% 94.1% 83.1%
1995 2.75% 1,165 1,284 0 90.7% 24.4% 95.0% 86.2%
1996 2.75% 1,197 1,284 0 93.2% 24.4% 95.0% 88.6%
1997 2.75% 1,230 1,284 0 95.8% 24.4% 95.0% 91.0%
1998 3.50% 1,273 1,374 90 92.6% 22.8% 95.0% 88.0%
1999 2.00% 1,299 1,374 0 94.5% 22.8% 95.0% 89.8%
2000 2.75% 1,335 1,374 0 96.0% 22.8% 95.0% 91.2%
2001 3.50% 1,381 1,464 90 94.3% 21.4% 95.0% 89.6%
2002 2.00% 1,409 1,464 0 96.0% 21.4% 95.0% 91.2%
The subject has begun the latter stage of its expected life whereby it is
1 experiencing a persistent penetration below the market average.
As a result of these conclusions, the subject occupancy increases over the
projection period with corrections in the occupancy occurring as the
' projected additional beds are added to the supply. The intent of this
supply and demand analysis has been to show the impact of additional
supply as it affects the subject occupancy.
'
Payor Mix Analysis
Estimating the most probable payor mix of the subject is essential in the
valuation of a long-term care facility. In most instances, Medicaid is
less profitable than the other payment forms. Thus, the greatest degree of
' competition for patients is in the private-pay market. The payor mix
conclusions are vital to the income analysis and represent a major element
of comparison in the direct sales comparison approach.
F-]
The payor mix is affected by local economic conditions, local supply-and-
demand conditions, specific physical features, and characteristics of
location and reputation. Also, Medicaid eligibility requirements vary
from state to state. One important reason for examining the socioeconomic
characteristics of the market area of the subject in the regional and
neighborhood analyses is to assess the market area's current (actual) and
future (potential) capability of supporting the subject nursing home.
All other things equal, facilities located in market areas that have high
income levels and property values typically achieve higher private-pay
mixes than nursing homes located in poorer areas. The physical condition
of the facility also impacts the ability of a facility to achieve a high
private-pay mix. Obviously, newer, more attractive buildings and sites
have the advantage. The reputation of the facility also contributes
substantially to the payor mix of the subject. Under stable market
25 Tellatin, Louis & Andreas, Inc.
conditions, the current and historical payor mixes of the subject provide
a sound indication of its probable future payor mix. However, any new
facilities opening in the market area will have an impact on the market.
Generally, a new facility will reduce the private-pay percentage of the
other nursing homes in its market area because new facilities tend to
attract higher percentages of private-pay admissions.
' Private-Pay Mix: The statewide-private-pay mix was 28.4 percent during
1994, and the private-pay mix for all nursing homes in Cumberland County
during all of 1994 was 34.0 percent.2 As discussed in the regional and
' neighborhood analyses of this report, the average household income of the
residents in the primary market area of the subject is greater than the
state and regional averages, and correspondingly, the poverty rate is low.
Taken together, these data suggest that there is average to good prospects
' for a relatively high private-pay mix in this market.
Table C-4 presents the current private-pay mixes for the subject and
competitive facilities, and the subject's historical private-pay mixes for
the last three years. For the purpose of this appraisal, VA patient days
are classified as private-pay.
'
Table C-4
' SUMMARY OF COMPARABLE NURSING HOME PRIVATE PAY MIXES
Private-Pay
# of Private- Market
No. Name Beds Pa Mix Captured
1 Camp Hill Care Center 118 1.3% 0.4%
2 Leader Nursing & Rehab Center 103 54.5% 15.8%
3 Blue Ridge Haven Center-East 67 24.1% 4.5%
' 4 Leader Nursing & Rehab Ctr.-LP 240 20.9% 14.1%
5 Susquehanna Ctr.-Nurs. & Rehab 180 17.8% 7.6%
6 Bethany Village Retirement Ctr 69 62.4% 12.3%
7 Messiah Village 194 69.3% 38.8%
Subject Facility 313 8.1% 6.5%
Market Area
Totals and Averages 1,284 28.9% 100.0%
High 69.3% 38.8%
Low 1.3% 0.4%
Private-pay Mix History for the Subject
12/31/93 7.7%
12/31/94 7.0%
' Average of Period Reviewed 7.3%
' Since private-pay patients are the most discretionary in their choices for
long-term care, private-pay mixes give the greatest insight for preference
rankings among competitors. The subject is one of the least-preferred
' facilities in the market, because, as mentioned earlier, it is often the
target of industry protests descending on the capital. The private-pay
mix of the subject falls below the market average mix, and the subject
' captures just 6.5 percent of the private-pay market. Competitor One is an
affiliated facility that also suffers from a poor reputation, and it is
located just to the east of the subject. The distribution of the private-
2 ibid
26 Tellatin Louis & Andreas
Inc.
pay demand is evenly imbalanced among the competitors indicating that
prospective patients are distinguishing among facilities. Several
competitors benefits from offering complementary levels of senior housing.
As shown earlier in the supply analysis, market demand will eventually
prompt the addition of new beds. The private-pay capture rate of the new
beds is expected to be greater than the current market average private-pay
mix since the new beds will be featured within new, attractive, well-
located facilities. The private-pay mix of the new beds is estimated at
40.0 percent. The new facility will attract these private-pay patients
from the other competitors reducing the private-pay penetration rates and
mixes of the subject and the other competitors. Other than shifts in the
payor mix caused by added bed supply, the private-pay penetration rate and
payor mix will remain fairly stable for the competitive market in general,
and for the subject specifically, over the projection period.
The prospects for the subject are not good for attracting private-pay
patients. Therefore, we project a 7.5 percent private-pay mix for the
first year which equates to a 6.1 percent share of the private-pay market.
Private-pay attrition is occurring universally in the nursing home
industry, and the subject is not immune to this phenomenon as demonstrated
by its recent historical census mix trend. The private pay mix of
Cumberland County declined slightly from 34.2 percent in 1993 to 34.0
percent in 1994; similarly, the statewide mix declined from 29.3 to 28.4
percent .3 Private-pay attrition is attributable to a more-educated senior
population who is sheltering assets from Medicaid or choosing alternatives
to skilled nursing care. Also, as a facility ages, its appeal diminishes
in most cases. There is an inverse relationship between the increasing
Medicaid mix and private-pay attrition. The decline from 1993 to 1994 is
considered fairly most compared to most areas of the state. We have
estimated the private-pay mix attrition rate to equal 2.0 percent for the
private-pay mix of the previous year throughout the projection. The
attrition is applied in Table C-7 to the market which in turn affects the
subject payor mix.
VA Mix: Veterans Administration (VA) patients are incorporated in the
previous analysis of the private-pay payor mix. The VA mix will be
included in the private-pay mix and rate projections.
Based on the foregoing analyses, the projected private-pay mix for the
competitive market, and specifically the subject, for the eight-year
projection period is shown on Table C-5.
3 ibid.
27 Tellatin, Louis & Andreas, Inc.
Table C-5
ANALYSIS OF PRIVATE-PAY MARKET CAPTURE RATE AND PAYOR MIX PROJECTIONS
Proiected Private-Pay Capture Rates
No. Name
1 Camp Hill Care Center
2 Leader Nursing & Rehab Center
3 Blue Ridge Haven Center-East
4 Leader Nursing & Rehab Ctr.-LP
5 Susquehanna Ctr.-Nurs. & Rehab
6 Bethany Village Retirement Ctr.
7 Messiah Village
Subject Facility
Additions to the Supply
Total Market
1995 1996 1997 1998 1999 2000 2001 2002
0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.3% 0.3%
15.8% 15.8% 15.8% 14.3% 14.3% 14.3% 12.7% 12.7%
4.5% 4.5% 4.5% 4.1% 4.1% 4.1% 3.6% 3.6%
14.2% 14.2% 14.2% 12.8% 12.8% 12.8% 11.4% 11.4%
7.6% 7.6% 7.6% 6.9% 6.9% 6.9% 6.2% 6.2%
12.4% 12.4% 12.4% 11.2% 11.2% 11.2% 10.0% 10.0%
38.9% 38.9% 38.9% 35.1% 35.1% 35.1% 31.4% 31.4%
6.1% 6.1% 6.1% 5.5% 5.5% 5.5% 5.0% 5.0%
0.0% 0.0% 0.0% 9.8% 9.8% 9.8% 19.4% 19.4%
100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Proiected Private-Pay Patient Days
1 Camp Hill Care Center
2 Leader Nursing & Rehab Center
3 Blue Ridge Haven Center-East
4 Leader Nursing & Rehab Ctr.-LP
5 Susquehanna Ctr.-Nurs. & Rehab
6 Bethany Village Retirement Ctr.
7 Messiah Village
Subject Facility
Private-Pay Days for
Additions to the Supply
Total Market Private-Pay Days
1995 1096 1997
1.4 1.4 1.4
52.1 52.4 52.7
14.8 14.9 15.0
46.7 47.0 47.2
25.2 25.3 25.5
40.8 41.1 41.3
128.4 129.1 129.8
20.2 20.4 20.5
1998
1.3
48.3
13.7
43.2
23.3
37.8
118.9
18.7
1999
1.3
48.3
13.7
43.3
23.4
37.8
119.0
18.8
2000 2001 2002
1.3 1.2 1.2
48.7 44.1 44.1
13.9 12.6 12.6
43.7 39.5 39.5
23.6 21.3 21.3
38.2 34.6 34.5
120.1 108.7 108.7
18.9 17.3 17.3
0.0 0.0 0.0 33.4 33.4 33.4 67.3 67.3
329.8 331.7 333.4 338.7 339.0 341.7 346.7 346.6
Subject Private-Pay Capture Rate 6.1% 6.1% 6.1% 5.5% 5.5% 5.5% 5.0% 5.0%
I I Subject Private-Pay Mix 7.5% 7.3% 7.2% 6.8% 6.7% 6.6% 6.2% 6.1%
Medicare Mix: Medicare is a federal entitlement program that provides
short-term coverage for those 65 and older who require skilled nursing or
rehabilitative care on a daily basis.
Effective January 1, 1989, the Catastrophic Health Care Bill (CHCB)
upgraded the extent of coverage for most persons age 65 and over. In
general, Medicare provided short-term coverage for the first 150 days of
skilled nursing home care, requiring the patient to make only a co-payment
of $20.50 for the first eight days, and covering the remaining 142 days
entirely under this act. As a result of this law, most nursing homes
experienced large increases in Medicare census.
However, this law has now been rescinded, limiting coverage to only 100
days with Medicare entirely covering the first 20 days and a co-payment of
$92.00 being required from the patient for the remaining 80 days of
potential coverage. At most facilities, Medicare has diminished to a
level below the peak utilization of 1989, but utilization has not reverted
to the lower pre-1989 level because management has learned how to operate
within the Medicare system and trained staff to provide the necessary
28 Tellatin, Louis & Andreas, Inc.
skilled-care services. Also, nursing home patients are entering nursing
' homes in conditions that require greater acute care, and most often,
admissions are referred directly from hospitals. In order to qualify for
Medicare coverage, a nursing home patient must have experienced a three-
day hospital stay immediately prior to admittance to the nursing home.
f
Most admissions from hospitals are covered by Medicare for the purpose o
observation and assessment for a maximum of the first 20 days.
' Thus, the Catastrophic Health Care Bill prompted most nursing home
administrators to pursue more Medicare patients in 1989, and upon
rescission of CHCB, management personnel have attempted to retain this
payor mix given their new and/or enhanced knowledge of the system.
Table C-6 presents the current Medicare mixes for the subject and
competitive facilities, and the subject's historical Medicare mix for the
last three years.
Table C-6
SUMMARY OF COMPARABLE NURSING HOME MEDICARE MIXES
Medicare
# of Medicare Market Subacute
No. Name Beds Mix Captured Specialty
1 Camp Hill care center 118 20.7% 16.1% Yes
' 2 Leader Nursing & Rehab Center 103 23.5% 16.0% Yes
3 Blue Ridge Haven Center-East 67 9.4% 4.1% No
4 leader Nursing & Rehab Ctr.-LP 240 16.3% 25.9% No
5 Susquehanna Ctr.-Nurs. & Rehab 180 5.1% 5.1% No
6 Bethany Village Retirement Ctr 69 8.3% 3.9% No
' 7 Messiah Village 194 6.9% 9.1% No
Subject Facility 313 10.6% 19.8% No
Market Area
' Totals and Averages 1,284 12.3%
High 23.5%
Low 5.1%
' Payor Mix History of the Subject
12/31/93 7.6%
12/31/94 11.0%
' Average of Period Reviewed 9.3%
According to figures published by the American Health Care Association,
' Medicare patients represent 6.6 percent of all patients in freestanding
nursing facilities 4. The management of the subject aggressively pursues
Medicare patients. It has 61 Medicare-certified beds and adequate
building area for therapy services to maximize overhead cost shifting.
' The historical Medicare mix for the subject has been greater than the
market and state average (7.8% -- 1994).
' The subject receives its Medicare referrals from several hospitals in the
area. According to a CON inventory list effective July 14, 1995, there
were no approved hospital-based.SNF beds not yet licensed in Cumberland
County. However, 25 beds were recently added to Seidle Memorial Hospital
' 4 American Health Care Association, Facts and Trends, The Nursing Facility
Sourcebook. 1995
29 Tellatin, Louis & Andreas, Inc.
in Mechanicsburg, about eight miles to the west. The addition of these
beds will have a minor impact on the subject. Based on these
considerations, the Medicare mix of the subject should remain consistent
with its historical performance.
Given management's inclination for a higher acuity mix, and the
anticipated hospital situation, we expect the subject will continue to
' experience a Medicare mix that is consistent with its historical average.
Thus, we project a first-year Medicare mix of 12.3 percent.
' Medicaid Mix: Medicaid is the payor of last resort, and the Pennsylvania
Medicaid program pays the least in most cases. The remaining portion of
the payor mix is projected to consist of Medicaid patients.
' Table C-7 summarizes the payor mixes for the projection period.
Table C-7
ESTIMATED PAYOR MIX Of THE SUBJECT OVER THE HOLDING PERIOD
Payor Mix Assumptions Over The Projection Period
' Natural Private-pay Attrition factor: -2.0%
Subject Market Medicare Penetration: 100.0%
Private-pay Capture Rate of New Beds: 40.0%
Natural --------------------- Ma rket Payor Mix Data --- ------------ -------
'
'
Year
End
Current
1995
1996
1997
1998
1999
2000
2001
2002 Annual
Demand
Growth
2.75%
2.75%
2.75%
3.50%
2.00%
2.75%
3.50%
2.00% Private
Attrition
Rate
-2.0%
-2.0%
-2.0%
-2.0%
-2.0%
-2.0%
-2.0%
-2.0% --------- Percentages --
Medicaid Medicare
58.8% 12.3%
59.4% 12.3%
60.0% 12.3%
60.7% 12.2%
61.2% 12.3%
61.7% 12.2%
62.1% 12.3%
62.7% 12.2%
63.1% 12.3% --------
Private
& Other
28.9%
28.3%
27.7%
27.1%
26.6%
26.1%
25.6%
25.1%
24.6% --- Average Number of
Medicaid Medicare
667.0 139.0
692.8 142.8
719.0 146.7
746.2 150.7
778.7 156.0
800.8 159.1
829.4 163.5
865.4 169.2
889.7 172.6 Days --
Private
& Other
327.7
329.8
331.7
333.4
338.7
339.0
341.7
346.7
346.6
Subject Subj
t S
b
ec u
ject Subject Subject
New Private Private Medicare Medicare Medicaid
Year Beds In Market Mix Market Mix Mix
End Market Captured Estimate Penetration Estimate Estimate
' Current 6.5% 8.1% 86.5% 10.6% 81.2%
1995 0 6.1% 7.5% 100.0% 12.3% 80.2%
1996 0 6.1% 7.3% 100.0% 12.3% 80.4%
1997
1998 0
90 6.1%
5.5% 7.2%
6.8% 100.0%
100.0% 12.2%
12.3% 80.6%
80.9%
1999 0 5.5% 6.7% 100.0% 12.2% 81.1%
2000 0 5.5% 6.6% 100.0% 12.3% 81.1%
2001 90 5.0% 6.2% 100.0% 12.2% 81.6%
' 2002 0 5.0% 6.1% 100.0% 12.3% 81.6%
' Rate Analysis
This section analyzes the market and governmental data that set the most
' probable private-pay, Medicaid, and Medicare rates.
11
30 Tellatin, Louis & Andreas, Inc.
' Private-pay Rates: Private-pay rates are the only rates that are not
regulated in Pennsylvania; these rates are set by competitive market
forces. The relative differences in neighborhoods, physical qualities of
the nursing home property, level of care, and general reputation of the
facility in the community- at large and the health-care community in
particular, directly influence the private-pay rates. This appraisal
embraces these issues by directly comparing these various attributes of
the subject to the competitive facilities. By utilizing this comparison
' process and examining actual historical results of the subject nursing
home, we can firmly establish the most probable stabilized average
' private-pay rate.
Table C-8 presents the private-pay rates for the subject and the
competitors according to acuity level and room type. Since semi-private
' rooms are most abundant, these rates provide the best comparisons; greater
disparity is typical among the rates for private rooms since some
facilities will charge a substantial premium while others will not.
Table C-8
' SUMMARY OF COMPARABLE NURSING HOME PRIVATE-PAY RATES
------- Private-Pay Rates --------
----- SNF ------ ----- ICF ------
!!o. Name Private 2-Bed Private 2-Bed
'
' 1 Camp Hill Care Center $114.00 $105.00
2 Leader Nursing & Rehab Center 142.00 120.00 120.00 108.00
3 Blue Ridge Haven Center-East 115.00 110.00 110.00 97.00
4 Leader Nursing & Rehab Ctr.-LP 133.00 120.00 133.00 120.00
5 Susqueharna Ctr.-Nurs. & Rehab 136.00 107.00 136.00 107.00
6 Bethany Village Retirement Ctr 135.00 120.00 135.00 120.00
7 Messiah Village 150.00 113.00 150.00 113.00
Subject Facility 153.00 150.00 95.00
Market Area
Totals and Averages $135.17 $120.43 $131.00 $108.13
' High $150.00 $153.00 $150.00 $120.00
Low $115.00 $107.00 $110.00 $95.00
Average Private-pay Rate History of the Subject
' 12/31/93 $94.72
12/31/94 $112.16
Current $117.91
The private-pay rates of the subject are in the lower portion of the
competitive range. The subject is one of the least-preferred facilities
in the market, but management is still pricing private-pay rates
relatively high sacrificing private-pay mix.
' The projected average, stabilized, private-pay rate for the subject is
$118.00 per patient day, or slightly high than its approximate current
average rate.
' Medicaid Rate Analysis: While a new reimbursement program became
effective January 1, 1996, it was not known that this program would be
implemented as of the date of the appraisal -- September 1, 1994.
31 Tellatin, Louis & Andreas, Inc.
1
The program that was effective was essentially a cost-based, retrospective
reimbursement methodology. Meaning, the costs of the facility were
reimbursed based on the actual costs incurred, including a final cost
' settlement upon reviewing the Medicaid cost report. Thus, we projected a
Medicaid rate based on actual costs less ancillary pertaining to Medicare
and private ancillary services and less reserves for replacement. Also,
the audit process typically disallows certain costs; we have accounted
' for this process by using a 97.0 percent multiplier. Based on these
calculations, a variable cost component of $97.29 is used for the subject.
Additionally, we have used the current capital rate. Thus, the projected
' Medicaid rate for Year One is $102.85. This rate compares closely to the
1994 per diem of $99.63, as-presented in Table H-1 in the Income Approach.
' Medicare Part A Rate Analysis: Medicare is a federal program administered
by the Health Care Financing Administration (HCFA). Medicare
reimbursements are computed on a cost-based retrospective system whereby
an interim rate is reimbursed through the fiscal year with a year-end
' settlement based on the differential between allowable actual costs and
the reimbursements received from the interim rate. Since Medicare
patients must spend three days in a hospital immediately prior to
' admittance to a nursing home in order to qualify for the program, their
conditions are typically more acute, requiring greater care than other
nursing home patients. Medicare recognizes the greater costs associated
with high-acuity patients by including ancillary services in the
' reimbursement.
Medicare distinguishes services as either "routine" or "ancillary" --
ancillary services are either Part A or Part B. The routine services are
reimbursed based on the lower of actual costs or charges (most frequently
costs) up to a regional peer group ceiling set at 112.0 percent of the
mean (excluding capital). HCFA has frozen routine cost ceilings, and
several extensions have been made delaying the termination of the freeze.
Within the routine costs, capital costs are computed based on facility-
specific interest costs plus depreciation with no allowance for equity.
' Part A routine services are combined with costs for Part A ancillary
services which correlates to the interim Medicare rate. The Part B
ancillary services apply to patients who no longer qualify for Medicare
Part A but who do require and qualify for certain therapy services. These
' Part B ancillary services are billed separately from the interim rate.
Most providers combine Part B revenues with private-pay ancillary revenues
' in the income statement. Part B ancillaries will be discussed and
projected in the income a
roach
pp
.
Medicare reimburses for Part A based on the lower of cost or charges. As
' a part of the costs, overhead is allocated to the therapies based on
building area dedicated to therapy room(s) and other units of measure
which relate to the step-down allocation process. The age of the facility
is a major influence on overhead because newer facilities have greater
capital costs than older facilities; these capital costs are allocated as
a part of overhead. The overhead is essentially the profit on the therapy
services. According to industry reimbursement consultants and
accountants, overhead allocation typically results in a 15.0 to 30.0
percent "profit margin" on the ancillary services.
' The subject earned $254.19 in 1994 as presented in Table H-1 in the Income
Analysis. We have used $230.00 for the projected Medicare rate.
32 Tellatin, Louis & Andreas, Inc.
' Operator sophistication can have a tremendous impact on Medicare
reimbursements. Documentation of services is required for reimbursement,
and if services are rendered but not documented, Medicare will not
adequately reimburse for the services. If documentation is erroneous,
' Medicare will make an "exception" to the identified charge, and management
must correct the error in a timely fashion, or Medicare may disallow the
cost of the service. In the past, many small operators have elected to
' forgo participating in the Medicare program as a result of these
documentation requirements. However, since a larger percentage of nursing
home residents are referred to nursing homes from hospitals, Medicare
participation is becoming more essential to maintain occupancy levels.
The advent of computer software programs has improved documentation.
Clearly, the provision of ancillary services for Medicare is one of the
' most obvious examples of the business enterprise component in the value
for a nursing home. In general, nursing home operators merely view the
real estate as a platform for providing health care services, and in
' general, greater services creates higher profits and more value within the
business enterprise.
Inflation Analysis: The rate of inflation for medical services has
consistently exceeded the overall inflation rate as measured by the
Consumers' Price Index (CPI). In the past, increases in long-term health
costs were are directly tied to additional services required by OBRA in
' 1990 and to the general shortage of nurses. Essentially, the underlying
costs have increased as well as the provision of health care services.
' The Medicaid payment is almost entirely cost driven, while the private-pay
rates are influenced by market forces. The estimated inflationary rate
for the variable components of the Medicaid payment should equal the
aggregate inflation rate of the operating expenses. A separate
inflationary rate for the property cost component of the Medicaid rate is
estimated since this portion of the rate is relatively fixed.
' The private-pay rates are influenced by costs and free-market competitive
forces. Changes in the private-pay rates do not necessarily correlate to
changes in Medicaid rates or actual changes in operating expenses.
' However, under market equilibrium conditions where supply and demand for
beds are in balance, changes in private-pay rates tend to parallel
inflationary increases for expenses. Because the competitive market is
currently in balance and is expected to remain fairly stable throughout
the projection period, we have applied a 3.60 percent annual inflation
rate to the private-pay rate projections; this rate approximates the
aggregate inflation rate of the operating expenses.
r
33 Tellatin, Louis & Andreas, Inc.
' Comp etitive Analysis Conclusion
Based on the foreg oing analysis of competitive facilities and related
market trends, we have concluded the following stabilized rates and
occupancy character istics for the subject facility.
' Table C-9
SUMMARY OF CONCLUDED OCCUPANCY, PAYOR MIX AND RATES
FOR THE SUBJECT OVER THE PROJECTION PERIOD
' Inflation Rates
Private 3.60%
Medicare 3.60%
Medicaid Variabl e 3.60%
Medicaid Capital N/A
Annual ------- Payor Mixes ------- -------- Average Daily Rates ---------
Year Occupancy
End Rate Private
Mix Medicare Medicaid Medicaid
Mix Mix Private Medicare Variable Medicaid
Property
1995 86.2% 7.5% 12.3% 80.2% $118.00 5250.00 $97.29 55.56
1996 88.6% 7.3% 12.3% 80.4% 122.25 259.00 107.96 5.56
1997 91.0% 7.2% 12.2% 80.6% 126.65 268.32 111.57 5.56
1998 88.0% 6.8% 12.3% 80.9% 131.21 277.98 116.15 5.56
1 1999 89.8% 6.7% 12.2% 81.1% 135.93 287.99 120.07 5.56
2000 91.2% 6.6% 12.3% 81.1% 140.82 298.36 124.23 5.56
2001 89.6% 6.2% 12.2% 81.6% 145.89 309.10 129.06 5.56
' 2002 91.2% 6.1% 12.3% 81.6% 151.14 320.23 133.54 5.56
PROJECTED STABILIZED RATES, PAYOR MIX AND OCCUPANCY
Payor Average
Mix Rate
Private-pay 8 Other 7.5% $118.00
Medicare 12.3% 250.00
Medicaid 80.2% 102.85
Total
Occupancy Rate
100.0% $122.08
86.2%
The stabilized occupancy rate, payor mix and average daily rates for the
disparate payment sources are tethered to current and probable future
market conditions and the historical trends of the subject and competitive
facilities. These projections are consequential in developing well-
supported value evidence for the valuation methods.
A deficiency in the occupancy rate, Medicaid reimbursement or payor mix
can assist the measurement of external obsolescence estimated in the cost
approach. The analyses of these factors suggest that there is no
significant external obsolescence resulting from factors of occupancy,
payor mix or rate formation.
The census projections are the foundation in the estimation of revenue in
the income capitalization approach. The sale comparison approach matches
several elements of the competitive analysis to the comparison processes
' of the sale data. Of particular importance are the Medicaid property cost
rate, payor mix and occupancy level.
34 Tellatin, Louis & Andreas, Inc.
7?
HIGHEST AND BEST USE ANALYSIS
Highest and best use may be defined as:
' The most profitable likely use to which a property can be put.
The opinion of such use may be based on the highest and most
profitable continuous use to which the property is adapted and
' needed, or likely to be in demand in the reasonably near
future. However, elements affecting value that depend upon
events or a combination of occurrences which -- while within
the realm of possibility -- are not fairly shown to be
reasonably probable should be excluded from consideration.
Also, if the intended use is dependent upon an uncertain act
' of another person, the intention cannot be considered.
• That use of the land which may reasonably be expected to
produce the greatest net return to land over a given period of
' time. The legal use which will yield to land the highest
present value, sometimes called "optimum use."
The highest and best use of the land if vacant and available for use may
' be different from the highest and best use of the improved property. This
will be true when the improvement is not an appropriate use and yet makes
' a contribution to total property value in excess of the value of the site.
In estimating highest and best use, there are essentially four stages of
analysis.
1
LEGALLY PERMISSIBLE
Wh
.
-
at uses are permitted by zoning and
deed restrictions on the site in question?
' 2. PHYSICALLY POSSIBLE - To what use is it physically possible to
put the site in question?
' 3. FINANCIALLY FEASIBLE - Which possible and permissible uses
will produce any net return to the owner of the site?
4. MAXIMALLY PRODUCTIVE - Among the feasible uses, which use will
' produce the highest net return or the highest present worth?
Highest and best use may be either that of the land alone (assuming the
' improvements are demolished) or that of the land as presently improved.
Highest and Best Use - As If Vacant
h
T
e 6.8-acre site of the subject is irregular, and the topography is level
to gently sloping, presenting no physical limitations for improvements
containable within the dimensions of the site. The site is located in a
small office district. The "OA" Office/Apartment zoning of the property
permits offices and apartments plus other uses detailed in Exhibit C in
' the addenda. The zoning designation is the most restrictive aspect of
this analysis. Given these considerations
it is our opinion that the
,
highest and best use of the subject site, if vacant and available for an
alternative development, is as a use that conforms to the zoning
' designation.
I 35 Tellatin, Louis & Andreas, Inc.
' Highest and Best Use - As Improved
The subject site is developed with a 313-bed, nursing home, which has been
in operation for 29 years. The improvements were specifically designed
' for a nursing home and have minimal value for any other use. As discussed
in the analysis of competitive facilities, the occupancy levels for area
nursing homes are adequately high, and the forces of supply and demand
indicate favorable market conditions into the future. Given these
conditions, the highest and best use of the property is its continued use
as a nursing home facility.
' Highest and Best Use - Conclusion
The as-improved highest and best use of the subject property is its
' present use as a nursing home facility. There is no alternative use of
the site alone, or of the improved property that will generate a
sustainable net operating income, and/or community benefit, that will
' exceed the return achieved-under the current use. Thus, we conclude that
the highest and best use is as a nursing home facility.
1
1 36 Tellatin, Louis & Andreas, Inc.
' VALUATION PROCEDURES
The appraisal problem is defined and relevant data are collected in order
' to understand the forces and influences affecting the value of the subject
property. Typically, three appraisal approaches are used to derive
separate indications of value. These three perspectives incorporate
fundamental concepts and principles in the estimation of the market value
' of the business enterprise for the subject property.
The Cost Approach
i The cost approach relies on the basic principles of substitution, balance
and externalities. The current reproduction or replacement cost of the
improvements is estimated, and the depreciation is deducted. Depreciation
' results from three sources: physical deterioration, functional
obsolescence, and economic obsolescence. A summation of the market value
of the land, assumed vacant, along with the depreciated cost of the
improvements and equipment, provides an indication of the total value of
' the tangible property. This technique does not measure the value of the
business assets that are the product of a certificate of need (tantamount
to a franchise), assembled workforce, and other economic benefits accrued
' from non-realty and non-personal-property assets.
The Sales Comparison Approach
'
The sales comparison approach invokes the principle of substitution, which
states that a buyer will not pay more for one nursing facility than for
another that is equally desirable. The sales comparison approach produces
an estimate of value by comparing the subject property to recent sales of
similar nursing homes. The comparison process analyzes differences in
location, physical qualities, occupancy, payor mix, Medicaid
' reimbursements and other economic factors. Adjustments are applied to the
sale prices to reflect the different physical and economic elements of the
subject. The adjustments are based on various techniques that apply
linear regression and matched-pair analyses of sale data, economic-
inferred factors and intuitive rationale. The adjusted prices narrow the
price range into an indication of value for the subject.
' The Income Capitalization Approach
The income capitalization approach is based on an estimate of the most
' probable net operating income over a projected holding period. The
initial-year net operating income is capitalized into an indication of
value through direct capitalization process. The capitalization rate is
a ratio of income to value. A discounted cash flow analysis is also
performed to measure the present value of the estimated net operating
income over the holding period and the terminal value. A discount rate is
applied to the cash flow stream. The income is measured by estimating its
most likely payor mix
rate structure and occupancy level
The o
erati
,
.
p
ng
expenses are based on inflation-adjusted historical expenses for the
subject and comparable facilities, and are relative to any proposed
' changes in staffing and acuity levels. The capitalization rate as well as
the discount rate or internal rate of return are derived from comparable
nursing home sale data.
37 Tellatin, Louis & Andreas, Inc.
' COST APPROACH
The cost approach method values a property by (1) estimating the
reproduction cost new of the improvements, (2) deducting the estim ated
' depreciation, and (3) adding the market value of the land to arrive at a
value indication for the real estate. The steps in the cost approach are
summarized as follows.
1) Estimate the value of the land as though vacant and available
to be developed to its highest and best use.
' 2) Estimate the reproduction or replacement cost of the
improvements and equipment as of the effective date of the
valuation.
3) Estimate and deduct the amount of accrued depreciation in the
improvements and equipment to arrive at a value indication for
' the improvements.
4) Add the depreciated cost of the improvements and equipment to
the land value to arrive at a total indicated value of the
' property.
' Land Valuation
The most common and usually the most accurate method of land valuatio n is
based on a comparison of the value characteristics of the subject site
' with those value characteristics of land parcels that have recently been
sold. The prices paid for the comparable properties are reduced to a unit
price, such as price per acre or square foot, and are adjusted for the
following elements of comparability:
Elements of Comparison
Property Rights Conveyed: This adjustment considers
differences in property rights and licensure. The subject is
valued on the basis of fee simple interest with all necessary
licenses held by the same ownership as the real and personal
property. If a sale involves a partial real estate interest,
or conveyance of only the property and not the licenses or
' other business assets, an adjustment is necessary to account
for this deficiency. In this instance, all the sales involve
full conveyance of property rights; thus, no adjustments are
warranted for conveyance of property rights issues.
Financing Adjustments: Occasionally, properties are sold with
seller financing. Sellers often provide substantially lower
' interest rates than commercial or government lenders. In
instances where sellers finance the sale at interest rates
below market levels, prices are usually somewhat inflated to
' compensate for the lower interest rate. In order to adjust
favorably financed transactions, the mortgaged amount is
discounted at an appropriate market mortgage rate to reflect
a cash equivalent price. None of the sales in this analysis
' involved seller financing.
38 Tellatin, Louis & Andreas, Inc.
Conditions of the Sale: Transactions resulting from
distressed conditions, or when the seller or buyer is under
extraordinary motivation, pose a problem in the comparison
' process. In this instance, we have eliminated such
transactions from the selection and analysis of comparable
sale data.
' Market Conditions: Adjustments are applied to sales
transacted in prior years under different market conditions
where the general price level differs from the present level.
' The land sales used in this analysis occurred between August
1994 and December 1995. We have adjusted the sales in
occurring in 1994 for general trends in the market.
Location: Adjustments are applied to each sale to compensate
for significant locational differences between the subject and
the land sales. Relative accessibility, visibility and
' desirability of neighborhoods are considered in this
adjustment.
' Zoning and Legal Restrictions: Although efforts are made to
compare the subject site to sales having the same or similar
zoning classifications, there is often insufficient data for
sales with similar zoning. In these cases, differently zoned
sites are also applied in the comparative process, and
adjustments are made according to allowable densities and to
the degree of permissiveness. Zoning classifications affect
1 property values, which typically increase in the following
general order: agriculture, single-family residential,
apartments, industrial and commercial.
' Size: Normally, larger parcels command lower unit prices than
smaller but otherwise comparable parcels. This relationship
is similar to a quantity discount typically found in most
other transactions. This aspect has been isolated from the
other physical adjustments.
Physical Characteristics: Adjustments are made for
differences in shape, topography and soils. Sites with very
irregular configurations or ones with narrow shapes have less
' utility and are more difficult to develop to full potential;
consequently, they possess less value. Terrain, degree of
slope, soil conditions and drainage qualities play significant
parts in the cost of developing a site. Those sites with
' fewer physical problems command higher unit values.
Adjustments are also applied for differences in utility
services. Sites lacking in any of the standard local services
are typically discounted to reflect the cost of extending the
service or to provide the site with its own system.
An investigation of land sales in the vicinity of the subject disclosed
only a few recent comparable sales that are useful in this analysis. The
sale prices have been confirmed through government records. In Table L-1,
these comparables are summarized and adjusted according to the
aforementioned elements of comparison.
39 Tellatin, Louis & Andreas, Inc.
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40 Tellatin, Louis & Andreas, Inc.
Table L-1 on the preceding page summarizes the salient land sale data and
the price adjustments applied to each sale. The adjusted prices range
from $0.92 to $3.88 per square foot, and produce a $2.07 mean. Because no
one sale is considered the most or least comparable to the subject, we
' have placed emphasis on the adjusted mean for the conclusion.
Based on a comparative analysis of the sale data, the indicated value of
I the subject site (assumed vacant and available for development to its
highest and best use) is as follows.
' $592,000
or
' 296,208 square feet @ $2.00 Per Square Foot -- Rounded
Improvement Valuation
The next step in the cost approach is to estimate the Reproduction Cost
New (RCN) of the improvements. RCN is defined as the cost of reproducing
a new replica property with the same or closely similar materials on the
basis of current prices.
' Building costs, usually derived from nationally recognized construction
cost reports, are available to the public on a subscription basis.
Marshall and Swift, Boeckh, and F.W. Dodge are commonly used cost
' services. Cost data can also be obtained from actual construction costs
of similar buildings recently erected in the community.
There are two methods of estimating cost using construction cost reports.
' The comparative-unit method is used to derive an estimate of cost in
dollars per square foot, as based on known costs of similar buildings
after adjustment for time and physical differences. The segregated-cost
method is more complex since it involves estimating unit costs for the
various building components as installed. Both methods are normally
expressed in dollars per square foot.
' The RCN estimates of the improvements for the subject property are derived
from the Marshall Valuation Service, a nationally recognized construction
cost reporting service. In this instance, the segregated cost method,
' involving individual cost estimates for each building component, is
applied. The RCN of the subject improvements is summarized as follows.
11
41 Tellatin, Louis & Andreas, Inc.
G
Summary of Reproduction Cost New
No. of Price per Total
Components Units Unit (1) Cost
Site Preparation and Excavation:
Site Preparation 264,030 $0.21 $55,446
Excavation 63,000 0.27 17,010
Fill 88,010 0.26 22,883
Foundation:
Class D, Masonry Veneer 88,010 1.80 158,418
Frame:
Class C or D, Steel Stud 35,204 4.40 154,898
Floor Structure:
Reinforced Concrete on Fitt 50,541 2.87 145,052
Precast Concrete 3,500 7.08 24,780
Concrete on Steel Deck & Joist 26,969 9.17 247,309
Vapor Barrier and Perimeter Tile 50,541 0.45 22,743
Exterior Walls:
Wood/Metal Stud Brick 52,806 15.94 841,728
Sheathing 52,806 0.78 41,189
Insulation 52,806 0.75 39,605
Roof Structure:
Wood Deck on Wood Trusses or Joist 52,806 3.98 210,168
Steel Joist & Deck with Gypcrete 11,735 6.88 80,735
Roof Cover:
Elastomeric, Single Ply 11,735 2.62 30,745
Composition Shingles 52,806 1.10 58,087
Interior Construction:
Frame Partitions 88,010 18.19 1,600,902
Ceilings:
Gypsum 22,003 1.24 27,283
Suspended Acoustical Tile 66,008 5.59 368,982
Floor Coverings:
Vinyl Tile 76,569 3.64 278,710
Carpet and Pad 6,161 3.17 19,529
Ceramic Tite 3,520 8.25 29,043
Quarry Tile 1,760 8.25 14,522
Electrical:
Electrical, Lights & Alarms 88,010 8.99 791,210
Emergency Generator 1 16,000.00 16,000
HVAC:
Electric Baseboard 7,041 3.45 24,291
Individual Through-wall Heat Pumps 61,607 2.57 158,330
Zoned Warm & Cold Air 19,362 8.54 165,353
Plumbing:
All Fixtures, Supply/Drain Piping 88,010 8.32 732,243
Fire Protection:
Sprinklers 88,010 1.75 154,018
Elevators:
Three-story 1.00 40.000.00 40.000
Subtotal Superstructure: 88,010 $74.66 $6,571,209
BASEMENT CONSTRUCTION
Exterior Walls:
Reinforced Concrete 4,200 $9.60 $40,320
Concrete Block 4,200 7.03 29,526
Floor Structure:
Reinforced Concrete on Fill 7,000 2.87 20,090
Interior Construction:
Concrete Block Partitions 7,000 4.95 34,650
Vinyl Tile 7,000 3.64 25,480
Ceilings 7,000 1.24 8,680
HVAC 7,000 3.69 25,830
Plumbing 7,000 4.73 33,110
Electrical and Lighting 7,000 3.00 21,000
Sprinklers 7,000 1.75 12,250
Subtotal Basement: 7,000 $35.85 $250,936
Total Building Construction Cost: $6,822,145
42 Tellatin, Louis & Andreas, Inc.
Summary of Reproduction Cost New, Continued
No. of Price per Total
Components Units Unit (1) Cost
OTHER IMPROVEMENTS
' Concrete Sidewalks 8,000 54.00 532,000
Asphalt Parking 50,000 2.75 137,500
Signage 1 3,000.00 3,000
Area Lighting 20 450.00 9,000
' Flagpole 1 1,400.00 1,400
Storage Buildings 3 5,000.00 15,000
Landscaping 1 40,000.00 40,000
' Total Other Improvements 5237,900
Total Improvement Cost New $7,060,045
Architect Fees and Supervision (7.3X) 515,383
Total Construction Cost $7,575,428
' Plus Developer's Profit & Start Up Cost 15% 1,136,314
Total Reproduction Cost New $8,711,742
Cost Allocation:
Total RCN Building (2) $8,418,186
Total RCN - Other Improvements (3) $293,557
(1) Marshall - Swift, Section 45 - Segregated Cost Method unit
values, adjusted for time, location, number of floors and
' average story height.
-
(2) RCN Formula: 1.073 x 1.15 x $6,822,145 -
$8,418,186
(3) RCN Formula: 1.073 x 1.15 x 5237,900 = $293,557
In addition to normal construction costs, there ar e indirect costs
' associated with each project. Indirect costs, estimated at 15.0 percent
of the total construction cost, include start-up costs, license fees and
expenses, and developer's profit.
Start-up costs include the expenses incurred between the opening date
(when construction is completed) to the time when the occupancy rate of
' the property reaches a productive level. A productive
revenues cover all expenses including debt service. level occurs when
The developer's profit includes the profit motivation factor. A
' developer's incentive lies-in the prospect of producing property value in
excess of the hard or direct costs.
n
Accrued Depreciation
Accrued depreciation is a loss in value from the reproduction or
replacement costs of the improvements due to any cause as of the date of
the appraisal. Several methods are practiced when estimating accrued
depreciation. These methods are the economic age-life method, the
modified economic age-life method, and the breakdown method. The
breakdown method is applied where each cause of depreciation is separately
measured and the amount of each is totaled to estimate a lump sum amount
43 Tellatin, Louis & Andreas, Inc.
I
' for accrued depreciation. Loss in value emanates from one or more of
three sources: physical deterioration, functional obsolescence and
external or economic obsolescence.
7
Physical deterioration is divided into the categories of
curable and incurable physical deterioration. Curable
deterioration refers to components in need of repair on the
date of the appraisal. This category is measured as the cost
of restoring an item to new or reasonably new condition. The
subject has been well maintained, requiring no substantive
repairs or replacements resulting from curable deterioration.
Incurable physical deterioration reflects items of
deterioration that cannot be practically or economically
corrected at the date of the appraisal. Incurable items are
classified as short-lived and long-lived. Short-lived
components have a physical economic life that is shorter than
the remaining economic life of the structure. The
deterioration of these components is measured individually,
and the calculations are presented as follows.
Incurable
Effective Expected Physical
RCN Age/Years Life/Years Dep reciation
$109,614 19 25 583,307
493,858 19 25 375,332
488,971 19 25 371,618
421,770 19 25 320,545
199,211 19 25 151,400
107,346 19 25 81,583
180,710 19 25 137,340
Component
Roof Coverings
Interior Construction
Ceilings
Floor Coverings
Electrical
NVAC Equipment
Plumbing
1
Total RCN 8 Depreciated
Value of Short-lived
Building Components 52,001,480
$1,521,125
Note: The RCN of the various components only includes the costs for
the short-lived items and excludes items such as ductwork, and
interior walls and partitions that will never be replaced.
Long-lived components are expected to have remaining economic
lives that are equal to or exceed the remaining economic life
of the entire structure. The calculation of physical
incurable deterioration of long-lived components is a
multiple-step process. First, curable physical and incurable
physical short-lived components are deducted from the RCN,
leaving the cost of the long-lived components. The ratio of
effective age to estimated physical life is applied to the
costs of the long-lived components to indicate the physical
incurable depreciation. The chronological age of the subject
property is 24 years, and the total physical life of the
improvements is estimated at 60 years. The calculation of
physical incurable deterioration of long-lived components is
presented as follows.
1 44 Tellatin, Louis & Andreas, Inc.
1
Total RCN of the Building $8,418,186
Less RCN of Short-Lived Items (2,001,480)
' RCN of Long-Lived Items $6,416,706
Less Long-Lived Physical
1 Depreciation 40.0% $2,566,682
' Functional obsolescence is a loss in value resulting in
defects in design, materials or changes in standards. The
obsolescence can be curable or incurable. Defects are
curable if the replacement cost is the same as or less than
the anticipated increase in value. Curable functional
obsolescence is measured as the cost to correct the condition
through addition, substitution or modernization. In some
instances, the obsolescence may be attributable to excessive
or overly adequate designs or materials.
Incurable functional obsolescence is caused by a deficiency or
L a superadequacy. It is measured as the capitalized net income
loss attributable to the deficiency. In the case of a
superadequacy, it is measured as the RCN of the component,
minus physical deterioration, plus the present value of any
added cost of ownership. Our inspection of the subject
property indicates that no apparent significant functional
obsolescence exists.
External obsolescence is a loss in value resulting from forces
external to the property, e.g., changing neighborhoods,
traffic flow, governmental codes, and economic events. There
are two methods used to measure external obsolescence. The
net income loss attributable to the negative influence can be
capitalized at an appropriate rate to quantify the amount of
obsolescence. The other method is to compare sales of similar
properties that are -subject to the negative influence with
' others that are not. This comparison indicates the amount of
obsolescence.
The subject is well located and should be able to maintain a
profitable occupancy level in the extended future;
neighborhood and regional factors that are impacted by social,
economic, and political forces should continue to be favorable
to the present use of the property. Thus, no external
obsolescence is evident.
The estimated depreciation of the site improvements is 45.0 percent.
Based on the foregoing conclusions, the estimated value of the
improvements is presented as follows.
1 45 Tellatin, Louis & Andreas, Inc.
SUMMARY OF IMPROVEMENT VALUATION
Total RCN of the Building $8,418,186
Less:
Physical Deterioration:
Physical Curable 0
Physical Incurable --
Short Lived 1,521,125
-- Long Lived 2,566,682
Functional Obsolescence:
Curable 0
Incurable 0
External Obsolescence
Incurable 0
Total Depreciation of the Building 4,087,807
Total Indicated Value of the Building $4,330,000
Total RCN of Site Improvements 293,557
Less Depreciation
Physical Immediate Curable 0
Physical Incurable 132,101
Functional Obsolescence 0
External Obsolescence 0
Total Depreciation of the Site Improvements 132,101
r Indicated Site Improvement Value $161,000
Total Improvement Value $4,491,000
Equipment Valuation
The subject facility contains the furniture, fixtures and equipment (FF&E)
necessary for the operation of a 313-bed nursing home. These equipment
items are valued separately from the land and improvements in this
approach. The valuation of the equipment is based on a reproduction cost
less depreciation method. In order to estimate a value for the FF&E, we
have relied on observations made while conducting a cursory inventory as
well as the items normally found in a hypothetical, yet typical, 100-bed
licensed nursing home facility. We employed various resources for this
effort, including the Marshall & Swift and R.S. Means data references,
supplier catalogues, and the actual costs of newly built facilities. From
our experience in appraising nursing homes, we have made adjustments to
reflect qualitative and quantitative features such as facility size,
condition, age, and other factors.
It is our opinion that to replace the subject FF&E with new, comparable
' items of similar utility would cost approximately $5,000 per bed. The
per-bed cost has been estimated based on an inspection of the furniture
and equipment contained in each area or department of the nursing home and
a review of existing property listings.
Since the FF&E are an integral part of the nursing home operation, they
are more valuable under continued use than if they were removed and sold
separately. Thus, the value is considered the "contributory value in use"
which is consistent with the premise of the going-concern value. The
1 46 Tellatin, Louis & Andreas, Inc.
estimated aggregate value of the FF&E, net of estimated depreciation, is
calculated as follows.
FURNITURE, FIXTURES AND EQUIPMENT VALUATION
Furniture, Fixture & Equipment Valuation:
Replacement Cost New Per Bed and Total $5,000 $1,565,000
Depreciation from All Causes 45.0% (704,000)
Indicated Value of the FF&E $861,000
Summation
The final step in the cost approach is the summation of the various
components estimated. Thus, a value estimate for the subject property is
indicated as follows.
Land Value $592,000
Improvements Value 4,491,000
Furniture, Fixtures & Equipment Value 861,000
Total Cost Approach Value $5,944,000
47 Tellatin, Louis & Andreas, Inc.
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II
INCOME CAPITALIZATION APPROACH
The income capitalization approach is based on the premise that the value
of the subject property is represented by the present worth of anticipated
net operating income. The projected net operating income, based on an
analysis of the quality, quantity, and duration of the income expectancy,
is capitalized into an indication of value by using a capitalization rate
developed from market data. The steps in this valuation procedure are as
follows.
1) Estimate the potential gross revenue for the subject
property based on current room rates for the subject and
comparable nursing_homes.
2) Deduct revenue lost from vacancy and uncollectible
billings.
3) Estimate and deduct non-capital expenses typically
incurred in the operation of the nursing home, to arrive
at a net operating income attributable to the facility.
4) Capitalize the net operating income into a value
indication by using an appropriate capitalization rate.
Revenue and Expense Analyses
Specific revenue and expense data for the last three years for the subject
property were obtained from management's financial statements, and this
history is shown on Table H-1 on the following page.
48 Tellatin, Louis & Andreas, Inc.
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49 Tellatin, Louis & Andreas, Inc.
Revenue Analysis: The projected potential income for the subject is
developed by estimating its stabilized payor mix, average daily rates, and
revenue from ancillary services. Most of the revenue projections are
developed in the analysis of the competitive facilities. In that section,
comparative analyses are performed of the historical and current occupancy
rates, actual payor mixes, rate structures of the subject and its
competition as well as the impact of state and federal legislation. These
analyses culminate in the projections for occupancy, payor mix, and rate
structure for the subject.
Revenue is also derived from ancillary services and miscellaneous sales.
This category includes: physical therapy, occupational therapy, speech
therapy, numerous other therapy services, examinations, pharmaceutical
sales, personal care services, and special food and beverage sales.
Historical per-patient-day revenues from these sources during the past
three years are presented in Table H-1. Ancillary revenues directly
correspond to the level of private-pay and Medicare Part B because
Medicaid does not cover these services. Management has been extremely
aggressively in this area of the operations because of poor performances
in other areas. We have projected ancillary revenues that are more
typical of most nursing home operations.
Expense Analysis: The operating expenses include the cost of providing
nursing care; dietary, laundry, housekeeping, medical and social services;
physical maintenance; utilities; administrative management; property
taxes; and insurance. Under normal management and occupancy levels, these
expenses represent 80.0 to 90.0 percent of the gross revenues.
Operating expenses will vary by facility, and are influenced by local
labor market conditions, occupancy levels, levels of care, and quality of
services. As evidenced by the Medicaid reimbursement ceilings in many
states, rural locations tend to have lower staffing costs. Facilities with
higher occupancy rates enjoy greater economies of scale and tend to have
lower per-patient-day variable and fixed expenses. Facilities offering
elevated levels of care will incur higher nursing and ancillary costs.
Quality of service varies greatly among nursing homes. Most often the
private-pay facilities offer higher staffing ratios, more activities, and
more expensive meals than facilities dependent chiefly on Medicaid
reimbursements.
In order to estimate the stabilized operating expenses of the subject
nursing home, we have relied upon historical expenses of the subject and
the expenses for comparable facilities. Table H-1 summarizes the
historical operating expenses of the subject for the last three years.
These expenses were obtained from management's financial statements, and
they are assumed to accurately represent the financial operation of the
subject.
On the following page, Table E-1 summarizes the expenses for facilities
that are also profiled in the competitive analysis; these expense
statistics were compiled from 1994 and 1995 Medicaid cost reports. The
expenses recorded in the Medicaid cost reports and the subject expenses
are inflated to year-end August 31, 1995 dollars in order to make a more
accurate comparison. Table E-2 presents additional comparative analysis
showing the inflated expenses from Table E-2 in terms of the differentials
1 between the subject expenses and the comparable means, minimums and
maximums of the line item ranges, and standard deviations.
1
50 Tellatin, Louis & Andreas, Inc.
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51 Tellatin, Louis & Andreas, Inc.
Table E-2
COMPARATIVE ANALYSIS OF INFLATION-ADJUSTED EXPENSES
Differ- -- Comparable Expenses -- Standard
Departmental Expenses Subiect ential Mean Low High Deviation
1 Administrative & General $8.79 ($1.70) 510.50 57.49 $14.97 $2.53
Management Fee 3.76 (3.44) 7.20 0.00 10.47 3.68
Social Services & Activities 2.29 (0.73) 3.02 2.55 3.42 0.29
Nursing 54.24 7.55 46.69 39.47 51.03 4.68
Ancillary 20.01 6.46 13.56 1.43 29.73 9.12
Dietary 10.53 (0.97) 11.50 9.22 14.72 2.27
Laundry & Linen 3.11 1.05 2.06 1.43 2.93 0.57
Housekeeping 6.07 2.32 3.76 2.68 5.48 1.00
Plant Operations 8.23 1.71 6.52 5.19 9.24 1.51
Property Insurance 0.99 0.36 0.62 0.52 0.68 0.06
Property Taxes 0.94 (0.20) 1.14 0.00 2.01 0.76
Total Operating Expenses $118.96 512.41 $106.55 596.54 5134.83 $14.26
A general description of the cost items included in each of the general
expense categories, as broken down by management's financial statements,
is summarized in the following paragraphs. Each expense category includes
a table that presents: the inflation-adjusted 1994 and 1995 expenses for
the subject; the mean, low and high for the expense comparables; and the
projected first-year operating expenses for the subject. In general, the
historical expenses are given emphasis over the comparable expenses since
changes in expenses directly impact the Medicaid reimbursements in
Pennsylvania based on our assumptions i n the Medicaid rate projections.
Administrative and General: This category includes the wages
of the administrator, the assist ant administrator, and the
office clerks, as well as business supplies, telephone,
postage, legal fees, liability insurance, marketing,
advertising, licenses, education, travel and accounting.
' Administrative and General
1993 Inflation-adjusted Subject S's/PD % of Rev Total
$10.12 9.1% 51,025,809
1994 Inflation-adjusted Subject 8.97 7.2% 822,701
Inflation-adjusted Comparable Mean 10.50 8.3% --
Inflation-adjusted Lowest Comparable 7.49 6.3% --
Inflation-adjusted Highest'Comparable 14.97 10.4% --
Stabilized Projected Expense $9.00 7.0% 5886,311
Note: Assumed annual rate of inflation is: 3.0%
Central Office / Management Fee: This expense category
includes overall supervision, financial services, long-range
planning and governmental relations; these services are
generally conducted off premises at corporate offices. The
cost for management services is usually based on a percentage
of gross revenue. According to a survey of our clients who
include several of the largest operators in the nation,
1 typical management expenses will approximate 6.0 to 7.5
percent of gross revenues, or $5.50 to $8.00 per patient day.
52 Tellatin, Louis & Andreas, Inc.
We have reviewed recent management contracts with Integrated
1 Health Services, Inc. and Diversified Health Care/Service
Master in independent owners. In every case, the base
management fee is 7.0 percent of revenue, and the management
company shares in the after debt-service income, and property
appreciation in the event of sale. Like Beverly Enterprises,
these companies are skillful in promoting therapy services.
The relationship is inverse: higher revenues -- lower
management fee, and lower revenues -- higher management fee.
A management fee of 7.0 percent of effective gross revenue is
considered reasonable for the subject nursing home. This
percentage includes adequate profit incentive for the
management to assume the business risks of operating the
nursing home business and pays an adequate return to the
intangible aspects of the enterprise.
Management Fee Sys/PD % of Rev Total
1993 Inflation-adjusted Subject $3.49 3.3% 5353,980
1994 Inflation-adjusted Subject 3.76 3.1% 344,627
Inflation-adjusted Comparable Mean 7.20 5.7%
Inflation-adjusted Lowest Comparable 0.00 0.0% --
Inflation-adjusted Highest Comparable 10.47 8.4% --
bili
d P
d
57
Sta
ze
rojecte
Expense
.67 6.0% 5755,338
Social Services and Activities: This category includes the
wages of a social worker and an activities director plus
supplies for activities. The social worker typically admits
and discharges patients in coo rdination with families and
local hospitals. Social services and activities combine to
provide programs responsive to the spiritual, social, and
recreational needs of patients.
Social Services and Activities Sls/PD % of Rev Total
1993 Inflation-adjusted Subject 52.16 1.9% $219,483
1994 Inflation-adjusted Subject 2.34 1.9% 214,602
Inflation-adjusted Comparable Mean 3.02 2.4%
Inflation-adjusted Lowest Comparable 2.55 2.0% --
Inflation-adjusted Highest Comparable 3.42 2.9% -
1 Stabilized Projected Expense 52.20 1.7% $216,654
Note: Assumed annual rate of inflation is: 3.0%
Nursing: This expense category typically represents 35.0 to
45.0 percent of total revenues, or nearly one-half of all
operating expenses. It includes the wages of the nurses and
nurses' aides, medical supplies, non-prescription drugs and
training.
Nursing expenses have increased dramatically over the past
few years. Two reasons often cited for the escalation are
the shortage of nurses, and the greater acuity levels being
cared for within most nursing homes. The two conditions have
stabilized over the past year, and
remain fairly stable indefinitely. they are expected to
Future increases in
nursing expenses , beyond the general inflation rate, will be
1 53 Teflatin, Louis & Andreas, Inc.
caused by higher acuity levels as hospitals discharge
1 patients sooner and ICF patients are directed to assisted-
living facilities.
I Nursing Sts/PD % of Rev Total
1993 Inflation-adjusted Subject $53.27 47.1% $5,401,072
1994 Inflation-adjusted Subject 55.67 44.2% 5,106,975
Inflation-adjusted Comparable Mean 46.69 37.5%
1 Inflation-adjusted Lowest Comparable 39.47 31.6%
Inflation-adjusted Highest Comparable 51.03 43.4%
Stabilized Projected Expense 552.00 41.1% 55,120,908
Note: Assumed annual rate of inflation is: 4.0%
Ancillary: These services include speech therapy, physical
therapy, occupational therapy, and certain patient supplies
and drugs. This expense varies with the level of care;
facilities that provide care to a higher percentage of
Medicare patients tend to incur more ancillary expenses.
Ancillary S's/PD % of Rev Total
1993 Inflation-adjusted Subject 516.76 14.8% 51,699,363
1994 Inflation-adjusted Subject 20.54 16.3% 1,884,520
Inflation-adjusted Comparable Mean 13.56 10.4%
Inflation-adjusted Lowest Comparable 1.43 1.2%
Inflation-adjusted Highest Comparable 29.73 20.7% --
Note: Assumed annual rate of inflation is: 4.0%
t
11
In order to maintain balance with the projected Medicare and
ancillary revenues, the following calculations are made to
project the ancillary expenses.
ANCILLARY COSTS CALCULATIONS
Projected Medicare Rate
Less Routine Cost Portion of the Medicare Rate
Revenues Attributable to Ancillary
Direct Expense Margin
Costs Attributable to Ancillary
Multiplied by Medicare Days
Divided by Total Patient Days
Medicare Ancillary Costs Per Patient Day
Projected Ancillary Revenue, Medicare Part B & Private
Direct Expense Margin
Medicare Part B and Private Ancillary Costs
Total Ancillary Expenses Per Patient Day
As a Percentage of Effective Gross Revenue
Total Ancillary Expense
5250.00
115.00
5135.00
0.85
5114.75
12,113
98,479
$14.11
$5.00
0.85
54.25
518.36
14.4%
51,808,503
54 Tellatin, Louis & Andreas, Inc.
F1
First, Medicare revenues can be divided into routine and
ancillary costs. We have projected $250.00 for the Medicare
rate, and the routine costs are estimated based on the
projected expenses plus an estimate for capital reimbursement
too $115.00 for routine costs.
The routine costs are subtracted from the Medicare rate to
determine the revenues attributable to ancillary services.
Next, a direct expense margin is applied to the revenues.
Medicare reimburses ancillary services on a cost basis, and
the costs include overhead. Although the determining factors
are very complicated, overhead is essentially the source of
profit within the Medicare rate. Providers must maintain
accurate records to maximize reimbursement, and operator
sophistication can greatly affect reimbursement. The expense
margin is derived from conversations with knowledgeable
providers and reimbursement consultants who have indicated
that 70.0 to 80.0 percent is a typical range dependent mainly
upon the size of the-therapy areas and age of the facility.
We have applied 85.0 percent for Medicare Part A ancillary
expenses, and 85.0 percent for private and Medicare Part B
ancillary expenses. Next, ancillary expenses must be
converted from a Medicare per diem rate to a per diem based
on total patient days in order to be uniform since all of the
expenses are projected based on total patient days.
Additionally, ancillary revenue is generated from Medicare
Part B and private-pay sources; these revenues are projected
based on total patient days based mainly on historical
performance. Similarly, the same expense margin is applied
as for ancillary revenue. These same calculations are made
throughout the discounted cash flow analysis.
ietar : This expense department includes the cost of raw
food, staff wages, supplies, maintenance and consulting fees.
Raw food costs will typically represent 40.0 to 50.0 percent
of the total expense. Dietary expenses are often higher in
facilities that attract high proportions of private-pay
patients. This expense category should be fairly stable, as
long as the occupancy level remains stable as well, inflation
aside.
Dietary
1993 Inflation-adjusted Subject
1994 Inflation-adjusted Subject
Inflation-adjusted Comparable Mean
Inflation-adjusted Lowest Comparable
Inflation-adjusted Highest Comparable
Stabilized Projected Expense
Note: Assumed annual rate of inflation is:
Vs/PD % of Rev Total
$10.17 9.1% 51,030,580
10.74 8.6% $984,894
11.50 9.2% --
9.22 7.5% --
14.72 12.6% --
$10.50 8.2% $1,034,030
3.0%
Laundry and Housekeeping: These categories include supplies,
salaries, and employee benefits and are fairly self-
explanatory. The level of occupancy and the size efficiency
significantly affect this-relatively fixed per-patient-day
55 Tellatin, Louis & Andreas, Inc.
I
expense. Under stabilized conditions, these expenses should
remain stable relative to inflation.
Laundry and Linen $Is/PD % of Rev Total
1993 Inflation-adjusted Subject $3.63 3.3% $368,111
1994 Inflation-adjusted Subject 3.17 2.5% 290,603
Inflation-adjusted Comparable Mean 2.06 1.6% --
Inflation-adjusted Lowest Comparable 1.43 1.1% --
Inflation-adjusted Highest Comparable 2.93 2.5%
Stabilized Projected Expense $3.00 2.3% $295,437
Housekeeping $Is/PD % of Rev Total
1993 Inflation-adjusted Subject $5.71 5.1% $578,561
1994 Inflation-adjusted Subject 6.20 5.0% 568,363
Inflation-adjusted Comparable Mean 3.76 3.0% --
Inflation-adjusted Lowest Comparable 2.68 2.3%
Inflation-adjusted Highest Comparable 5.48 4.7%
Stabilized Projected Expense $5.90 4.6% $581,026
Note: Assumed annual rate of inflation is: 3.0%
Plant Operations: This category includes utilities, wages
for maintenance staff, contract and outside services and
supplies. Utility expenses constitute about 50.0 percent of
plant operating expenses. Plant operating expenses will vary
depending on the age and level of deterioration of the
structural and mechanical components, the average number of
square feet per bed, the efficiency of the insulation and
HVAC systems, and the amount of air-conditioning supplied to
the building. These expenses are relatively fixed, and
fluctuations in the occupancy should have a minor effect on
the total expenses. Generally, newer facilities with cost-
efficient HVAC systems and high occupancies achieve lower
per-patient-day expenses. We believe that the plant cost of
the subject facilities should approximate its inflation-
adjusted historical level, under stabilized occupancy.
j Plant Operations $Is/PD % of Rev Total
1993 Inflation-adjusted Subject $7.61 6.8% $771,454
1994 Inflation-adjusted Subject 8.39 6.7% 769,790
Inflation-adjusted Comparable Mean 6.52 5.3% --
Infiation-adjusted Lowest Comparable 5.19 4.1%
Inflation-adjusted Highest Comparable 9.24 7.9%
Stabilized Projected Expense $7.90 6.2% $777,984
Note: Assumed annual rate of inflation is: 3.0%
Property Taxes and Insurance: The property taxes were given
a more complete discussion in the descriptive secti on of this
report. Property insurance is a relatively stable expense.
Reserves for Replacement: Reserves for replacing s hort-lived
building components and furn iture, fixtures, and equipment
are usually established to even out cash flows over the
course of the investment. Replacing HVAC equipment,
r1
56 Tellatin, Louis & Andreas, Inc.
1 installing new carpeting, and resurfacing of the parking lot,
etc., involve substantial capitalized costs that do not occur
on a consistent basis. Therefore, establishing a reserve for
these eventual costs is considered prudent. We have
estimated reserves for replacement at $300 per bed.
Based on the foregoing analyses of revenue and operating expenses, the
stabilized net operating income is calculated as follows.
Table P-1
PROJECTED STABILIZED INCOME AND EXPENSES FOR THE SUBJECT
Calculation of Annual Patient Days:
Number of Beds:
313
Potential Days: 114,245
Occupancy Rate: 86.2%
Projected Patient Days: 98,479
Patient Payor Average Total
Revenue Source Days Mix Rate Revenue
Private 7,386 7.5% 1118.00 $871,548
Medicare Part A 12,113 12.3% 250.00 3,028,250
Medicaid 78,980 80.2% 102.85 8,122,910
Total Room and Board 98,479 100.0% $122.08 $12,022,708
Plus Ancillary Revenue
Plus Other Revenue 98,479
98,479 5.00
0.75 492,395
73,859
Effective Gross Revenue $12,588,962
% of Expenses Total
Operating Expenses Revenue / P.D. Expenses
Administrative & General 7.0% $9.00 5886,311
Management Fee 7.0% 8.95 881,227
Social Services & Activities 1.7% 2.20 216,654
Nursing 41.1% 52.00 5,120,908
Ancillary 14.4% 18.36 1,808,503
Dietary 8.2% 10.50 1,034,030
Laundry & Linen 2.3% 3.00 295,437
Housekeeping 4.6% 5.90 581,026
Plant Operations 6.2% 7.90 777,984
Property Insurance 0.6% 0.80 78,783
Property Taxes (Included in Cap Rate )
Reserves for Replacements 0.7% 0.95 93,900
Total Operating Expenses 94.3% $119.48 $11,766,719
Net Operating Income from the Business Enterprise $707,327
The NOI reflects income from the business operation. We have separated
the income attributable to the ancillary services since this income is
almost entirely derived from intangible assets, assembledge workforce and
' management skills. It requires minimal use of the real estate. The
estimated NOI from the ancillary services is calculated as follows.
I I
11
57 Tellatin, Louis & Andreas, Inc.
NOI From the Business Enterprise
Ancillary Revenue PDs
Medicare Part A Ancillary 12,113
Medicare Part B and Private 98,479
Total Ancillary Revenue
NOI From Ancillary, Using a 10% NOI Margin
Adjusted NOI
Rate
$135.00
$5.00
$707,327
Total Rev.
$1,635,255
492,395
$2,127,650
$212,765
5494,562
58 Tellatin, Louis & Andreas, Inc.
Direct Income Capitalization Process
Capitalization is simply the conversion of income to value. The direct
capitalization method converts a single year's income expectancy into a
value indication. This method does not distinguish between the return on
and the return of capital. Because the overall rate is derived from
similar investment properties, a satisfactory return on and of capital is
inherent in the capitalization process.
1
The overall capitalization rate reflects current market rates of return on
similar property investments. This rate incorporates the following.
(1) A return on the equity investment;
(2) Debt service;
(3) Principal build-up;
(4) Anticipated changes in income and value;
(5) Recapture of depreciating components of the property;
(6) Physical quality of the property; and
(7) Other economic factors.
Direct capitalization may be based on several revenue and income sources
that require respective multipliers and rates to convert to value. Income
sources typically include: potential gross income, effective gross
income, net operating income, equity income and mortgage income. The
respective multipliers and rates for each of these income sources are:
potential gross income multiplier (PGIM); effective gross income
multiplier (EGIM); overall capitalization rate (RO); equity capitalization
rate, or equity dividend rate (Re); and mortgage capitalization rate (Rm).
In this instance, the following capitalization techniques are applied.
(1) Direct Overall Capitalization -- Based on comparable sale data.
(2) Band of Investment -- Applying mortgage and equity rates.
(3) Debt Service Coverage Method -- Applying debt coverage ratio.
1
L
59 Tellatin, Louis & Andreas, Inc.
Direct Overall Capitalization Method
A summary of several overall capitalization rates derived from recent
sales of comparable nursing homes in Pennsylvania is presented in the
following table.
SLIMMARY OF COMPARABLE SALE OVERALL CAPITALIZATION RATES
1
Sale Year Private Overall
No. Built Mix Sale Price N.O.I. Rate
1 1978 10% $5,992,500 $855,759 14.3%
2 1975 18% 4,900,000 632,593 12.9%
3 1991 16% 5,000,000 498,860 10.0%
4 1983 43% 4,400,000 598,700 13.6%
5 1973 23% 15,700,000 2,451,242 15.6%
'
Totals 1980 22% $35,992,500 $5,037,154
Arithmetic Mean
Weighted Mean 13.3%
14.0%
Median 13.6%
Low 10.0%
High 15.6%
1 National Average: TUA Database, 1991 to Current 13.9%
Additional information concerning these sales is presented in the sale
data section. The sale prices are adjusted to reflect a cash equivalent
price and surplus land if necessary. Adjustments are made to portray
projected stabilized revenue and expenses and to show inclusions for
reserves for replacements of $300 per bed.
The net operating income of a nursing home can fluctuate widely from year
to year since the operating margins are narrow. Since we have analyzed
only one year for each of these sales, a wide range in overall
capitalization rates is indicated. To compensate for these yearly
fluctuations, we have placed more emphasis on the average overall rate
' derived from this group.
The following issues relate to the quality of the subject -- its
' operations, physical qualities, location, competitive market, as well as
Medicaid and Medicare reimbursement trends.
Lower-than-average overall capitalization rate:
• None
Nigher-than-average overall capitalization rate:
• Inconsistent financial performance
Overall capitalization rate in the middle of the range:
• Typical physical qualities
• Stable and typical neighborhood
• Relatively stable-projections for the census, rates and
earnings expectations
60 Tellatin, Louis & Andreas, Inc.
These issues isolate risk that is specific to the subject. Overall, the
subject appears to have moderate risk, and an overall capitalization rate
in the middle portion of the range derived from the comparable sales is
considered appropriate. Based on the foregoing reasons, we have selected
a 13.5 percent overall capitalization rate for the subject.
Band of Investment Capitalization Method
' The band of investment is a method of deriving an overall rate of return
from the annual mortgage constant (Rm) and equity capitalization rate (Re),
sometimes referred to as an equity dividend rate. The mortgage constant
' is a ratio of the annual debt service (principal plus interest) to the
amount borrowed for a given interest rate and amortization term. It is
the rate that provides a return on -- and of -- the borrowed funds or
lender's position. The equity dividend rate is the first-year cash throw-
' off to the equity position divided by the amount of equity cash invested.
It is also referred to as the cash-on-cash rate of return or "current"
yield expected by the equity position.
Given market information on the percentage that borrowed money contributes
to the investment (the loan-to-value ratio), the percentage that equity
money contributes, the mortgage terms (interest rate and amortization
period), and the equity investor's expected rate of return for investment
in properties of the subject's type, the band of investment method
provides another means of selecting an overall capitalization rate. The
process involves weighing proportions for the mortgage and equity
positions by the respective currently required cash rates of return.
The band of investment formula, using a first-year, stabilized, equity
dividend rate is:
(M x Rm) + ( (1-M) x Re) = Ro.
Where:
M = Loan-to-Value Ratio
1-M = Equity Contribution
' Rm = Annual Mortgage Constant
Re = Equity Dividend Rate
In selecting the appropriate mortgage rate and terms, consideration is
given to typically available conditions in the market. Locations,
physical plants, and earnings qualities dictate the type of financing
available. Newer, higher-quality facilities, and well-established
facilities located in stable or improving markets that show the least
risk, command superior financing terms such as those offered by insurance
companies, some banks, credit corporations, and even bond underwriting.
The later is usually available for larger amounts. Older facilities with
average to below average locations and/or economic prospects can turn to
new programs offered by HUD, mortgage conduits, REITs, and banks. Even
for the same facility and loan amount, rates and terms will vary widely
among the different lenders. In considering the appropriate mortgage rate
and terms for the subject, we have assumed that a typical loan-to-value
ratio is sought (70.0 to 75.0 percent range), and the borrower has no
extraordinary borrowing advantages, such as cross collateralizing to other
superior properties, or providing substantial corporate or personal
guarantees.
61 Tellatin, Louis & Andreas, Inc.
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Conventional bank financing is plentiful in the current market for new
construction and short-term (under five years) financing. Terms and rates
differ greatly from low-floater bonds with letters of credit, to gap
financing, to five-year fixed rates. Insurance companies are less of a
factor and chase high-end product only. Recently, insurance companies
have been retreating from mortgage lending; Prudential Insurance, once
considered a major lender, has completely withdrawn from the market.
Others are very cautious, but these insurance companies offer some of the
best rates and terms.
Currently, mortgage conduit programs for long-term care properties are
very active including at least six programs being marketed nationally --
each with more than $100 million in funds. Conduit programs are typically
quoting nursing home rates ranging from 300 to 365 basis points over
corresponding Treasury bonds, currently yielding 6.2 percent on 10-year
bonds; the conduits are quoting loan-to-value ratios of 75.0 percent, and
debt service coverage ratios in the range of 1.40 to 1.60. (Conduit
sources: C. S. First Boston, Nomura Securities, Deutsche Bank, First
Union and NationsBank: all clients of Tellatin, Louis & Andreas, Inc.)
REITs are currently quoting rates at levels 25 to 75 basis points higher
than conduits, but are allowing higher loan-to-value ratios, and lower
debt service coverage ratios.
Based on the remaining economic life of the subject, and its physical,
location and economic characteristics, the following mortgage terms have
been concluded for the subject.
Interest Rate 9.05%
Loan or Analysis Term 7
Amortization Years 20
Annual Mortgage Constant 10.84%
Loan-to-Value Ratio 75.0%
The equity capitalization rate is determined by extracting estimated
equity dividend rates from the comparable sale data. In some cases, the
actual financing terms are included in the calculations. If the financing
terms are unknown, the following terms are applied: 75.0 percent loan-to-
value ratio for the loan amount, the five-year Treasury Bond rate (as of
the date of sale) plus 300 basis points for the interest rate, and a 20-
year amortization period. The estimated equity dividend rates for the
comparable sales are summarized as follows.
62 Tellatin, Louis & Andreas, Inc.
SUMMARY OF EQUITY DIVIDEND RATE CALCULATIONS
Totals &
Weighted
Sale Number 1 2 3 4 5 Averages
Sale Price $5,992,500 $4,900,000 $5,000,000 54,400,000 515,700,000 $35,992,500
Mortgage Ratio 75.0% 75.0% 75.0% 75.0% 75.0% 75.0%
Mortgage Amount $4,494,375 53,675,000 $3,750,000 $3,300,000 $11,775,000 526,994,375
Mortgage Constant 10.24% 12.26% 12.23% 12.26% 10.18% 11.01%
Annual Debt Service $460,218 5450,702 $458,680 $404,712 $1,198,653 52,972,964
Net Operating Income $855,759 $632,593 $498,860 $598,700 $2,451,242 $5,037,154
Pre Tax and Reserve
Cash Flow
Position
E
uit 5395,541 $181,891 $40,180 $193,988 $1,252,589
51
498
125 $1
225
000 $1
250
000 51
100
000 53
925
000 $2,064,190
58
998
125
q
y ,
,
,
,
,
,
,
,
,
, ,
,
Equity Dividend Rate 26.4% 14.8% 3.2% 17.6% 31.9% 22.9%
Rather than rel ying solely on equity capitalization rates ex tracted from
just five sales, additional support is provided from selecte d sales that
are located throughout the nation and occurring from 1991 t hrough 1994.
By using the same rate extraction technique, equity dividend rates were
determined for 141 sales. These sales represent only part of the database
maintained by Tellatin, Louis & Andreas, Inc. The resul ts of these
calculations are presented as follows.
' 1991
to
Equity Dividend Rates 1994 1991 1992 1993 1994
Low 2.7% 2.7% 6.3% 6.5% 7.6%
Nigh 62.1% 49.4% 51.7% 41.6% 62.1%
Average 23.2% 21.2% 23.7% 24.9% 23.8%
Standard Deviation 11.0% 10.6% 11.3% 9.2% 13.2%
# of Sales in Sample 141 44 41 36 20
The five nursing home sales presented in the sales comparison analysis
' provide limited insight into market equity dividend rates. The national
equity dividend rates indicate a consistent average in recent years
ranging from 21.2 percent in 1991 to 24.9 percent in 1993. While the
' national average has been consistent, the standard deviation shows the
inconsistency in investors' return requirements and acquisition
strategies.
' Again, the same factors that influence the overall capitalization rate
also impact the equity dividend rate. These factors include the physical
qualities of the building, the location, and the economic characteristics.
Besides these factors, the equity rate is impacted by the degree to which
it is leveraged. In most nursing home sale transactions, we have noted
that the greater the percentage of debt to price, the higher the equity
dividend rate. We have estimated an appropriate equity dividend rate of
22.0 percent.
Based on the analysis of the current debt and equity markets for similar
' properties, the overall capitalization rate has been estimated by the band
of investment technique as follows.
63 Tellatin, Louis & Andreas, Inc.
'
Capital Current Weighted
Contribution Yield Rate
Mortgage Contribution M x R, _
Equity Contribution 1-M x Re =
' ------ ------
Total 100.0% Ro
Mortgage Contribution 75.0% x 10.84% = 8.13%
Equity Contribution 25.0% x 22.00% = 5.50%
'
------ ------
Total 1
00.0% 13.63%
Debt Service Coverage Method
' The debt service coverage involves the calculation of an overall
capitalization rate from the annual mortgage constant, the loan-to-value
ratio, and the lender's required debt coverage ratio. The lender's debt
service coverage is a ratio of the net operating income divided by the
' annual debt service. Many lenders impose minimum debt service coverage on
a loan in addition to a maximum loan-to-value ratio. The minimum debt
' service coverage ratio (DSCR) varies according to each specific property,
economic conditions, and the geographic area. For example, well-occupied
shopping centers, apartment. complexes, and office buildings usually
require a 1.25 to 1.30 DSCR. -A nursing home warrants a higher ratio
because of the elevated risk associated with operating a management-
' intensive, health care enterprise. Many lenders are reluctant to lend on
property that they cannot manage on their own, if need be. Moreover, much
' of the value of a nursing home is tethered to its reputation in the
community and the ability of its management to handle staffing, state
inspectors, and a myriad of social and medical services. Given the
restrictive financing requirements of commercial real estate lenders,
particularly where risk is perceived (as is the case with the subject
property type), a DSCR that exceeds typical commercial real estate ratios
is appropriate. The derivation of the overall capitalization rate
' employing the debt service coverage method is presented as follows.
Ro = Loan-to-Value Ratio x Annual Mortgage Constant
x Debt Service Coverage Ratio (DSCR)
or
' Ro = M x Rm x DSCR
Ro = 75.0% x 10.84% x 1.60 = 13.0%
64 Tellatin, Louis & Andreas, Inc.
Summary and Conclusion of the Overall Capitalization Rates
'
The overall capitalization rates developed in this analysis are summarized
as follows.
' Direct Overall Rates From:
Indicated Rate from Comparable Sales 13.50%
Band of Investment Method 13.63%
Debt Service Coverage Ratio Method 13.00%
Average 13.54%
Preliminary Overall Capitalization Rate 13.50%
Plus Effective Tax Rate 1.27%
' Selected Overall Capitalization Rate 14.77%
In conclusion, the analysis produces a rather narrow range of indication
of overall capitalization rates for the subject. Since considerable
comparable sale data is available for comparison, the direct overall rate
developed from the comparables is given the greatest weight in arriving at
a single concluded rate. _ Therefore, it is our opinion that a 14.77
percent overall capitalization rate is appropriate for the subject
property. The indicated value of the subject is calculated as follows.
Net Operating Income s Overall Rate = Property Value
$494,562 14.77% = $3,350,000
Indicated Value
$3,350,000
n
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11
Less Value of the FF&E 861. 000
Indicated Value of the Real Estate 52.489 .000
I 1 65 Tellatin, Louis & Andreas, Inc.
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RECONCILIATION AND FINAL CONCLUSION OF VALUE
Cost Approach
Income Capitalization Approach
$5,083,000
$2,489,000
' The Cost Approach is most effective when the improvements are new, or
nearly new, and are fully utilized for the designed intent. This method
includes estimates of land value, reproduction cost and depreciation. The
' cost estimate is based on Marshall and Swift component cost figures and
reflects average-quality construction. The depreciation is based on an
age-mortality concept and does not necessarily reflect specific market
' depreciation. The value indicated from the cost approach is not
influenced by the intangible components, and reflects a clear indication
of the real estate value.
' The Income Capitalization Approach, most appropriate in valuing a nursing
home, yields value indications that reflect current economic conditions in
the marketplace. Since the revenues, the expenses, and the overall rates
' are closely tied to the actual results of the subject property and
comparable data, we consider the value indication of this approach
reliable as an indication of the business enterprise. The technique
incorporate some elements of the intangible aspects of the enterprise.
There is no clean technique to extract the intangible component from the
overall value. However, we have conducted lengthy analyses to prove that
the value of the business enterprise exceeds the value of the real estate.
' The earnings from ancillary services were removed from the net operating
income since this income is clearly derived from non-realty assets.
J
The Sales Comparison Approach reflects prices paid for similar nursing
home enterprises. Since nursing home sales incorporate the transfer of
substantial non-realty assets, FF&E and intangibles, there is no certain
technique to segregate just the real estate component. Therefore, this
technique is not applied in the valuation of the subject real estate.
The income capitalization technique indicates a lower value than the cost
approach; thus, the facility operates below a level which adequately
compensates the tangible assets. It is our opinion that the value of the
real estate should not greatly exceed the depreciated cost to replace the
property. The subject has had a historical of labor problems, and
operating losses. The large size of the facility cause management
problems; span of control is compromised, resulting in staffing problems,
and admission of large patient volume, which are sometimes unprofitable.
Based on the foregoing considerations, it is our opinion that the "as is"
market value of the fee simple interest in the subject real property, as
of September 1, 1994, is as follows.
$4,500,000
66 Tellatin, Louis & Andreas, Inc.
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CERTIFICATION
W e certify that, except as otherwise noted in this appraisal report,
e and belief:
wled
f
k
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th
b
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g
our
es
o
e
o
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and are our personal,
unbiased professional analyses, opinions, and conclusions.
We have no present or prospective interest in the property that is the
subject of this report, and we have no personal interest or bias with
respect to the parties involved.
This appraisal is not based on a requested minimum valuation, a specific
valuation, or the approval of a loan.
The compensation to the undersigned is not contingent upon the reporting
of a predetermined value or direction in value that favors the cause of
the client, the amount of the value estimate, the attainment of a
stipulated result, or the occurrence of a subsequent event.
The reported analyses, opinions, and conclusions were developed, and this
report has be prepared, in conformity with the Code of Ethics and
Standards of Professional Practice of the Appraisal Institute, the Uniform
Standards of Professional Appraisal Practice of the Appraisal Foundation.
This report sets forth all of the limiting conditions (imposed by the
' terms of this assignment or by the undersigned) affecting the analyses,
opinions, and conclusions contained in this report.
No one provided significant professional assistance to the persons signing
C this report.
James K. Tellatin, MAI, and Sterling E. Short inspected the facility.
'
This report is subject to the requirements of the Appraisal Institute
relating to review by its duly authorized representatives.
As of the date of this appraisal, James K. Tellatin, MAI has completed the
requirements of the continuing education program of the Appraisal
Institute.
James a atin A Sterling E. S rt
Principal
Pennsylvania Certified General Real
Estate Appraiser, #GA-001496-R
67 Tellatin, Louis & Andreas, Inc.
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? EXHIBIT A
ENGAGEMENT LETTER
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March 5, 1996
Mr. Jim Tellatin
Tellatin, Louis & Andreas, Inc.
15455 Conway Road, #355
Chesterfield, MO 63017
J
BEVERLY
ENTERPRISES
Re: Ad Valorem Appraisals
Dear Jim:
leased to
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thi
h
ng, we are p
s morn
one conversa
on
Per our telep
award your firm with the above assignment. I have attached a
schedule of the properties involved in this assignment. We have
agreed on the following:
• You will complete appraisals of the facilities in this
assignment. They are to include land and building, only.
• You will deliver three copies of the final appraisals
to me no later than Monday, April 15, 1996.
• Please contact the administrators prior to your
inspections.
• The date of value on this assignment will be as of
September 1, 1995. I have enclosed financial statements
for the years ending 12/31/93, 12/31/94 and from 01/01/95
through 08/31/95.
s Your fee, inclusive of all out-of-pocket expenses shall
be $13,500.00 ($4,000 each for the nursing homes and
$750 each for each of the chateaus). Should litigation
be necessary, you will be compensated accordingly.
As always, I look forward to working with you on this job. Please
call me with any questions or comments.
Sincere ,
lissa Karron
anager of Real Estate Services
cc: Thad Thompson/RETS
Joe O'Brien, Esquire
3E',,'E=+LY ENTEPPPISES. !NC.
5111 Pcgers Averje • Fort Smith. ,Arksn?3S 729j° • ??? ?5L ^%'
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AD VALOREM APPRAISAL ASSIGNMENT
Phoenixville Congregate Living Center, #0084
833 S. Main Street
Phoenixville, PA 19460
215/935-9120 16 Beds
Phoenixville Convalescent Center, #0266
833 S. Main Street
Phoenixville, PA 19460
215/933-5867 144 Beds
Blue Ridge Haven Convalescent Center West, #0285
770 Poplar Church Road
Camp Hill, PA 17011
717/763-7070 313 Beds
Blue Ridge West Chateau, #2071
10 House Avenue
Camp Hill, PA 17011
717/763-1679 16 Beds
Michael Manor, #3926
' 741 Chambersburg Road
Gettysburg, PA 17325
717/334-6764 106 Beds
1
BEVERLY ENTERPRISES. INC.
51 1 1 ;oaers Avenue • Fort Smith, Arkansas 72919 • (501) 452-6712
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? EXHIBIT B
? LEGAL DESCRIPTION
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? ZONING REGULATIONS
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(27-331)
Part 14
0-A Office-Apartment District
(27-331)
§331. Purpose. The purpose of the 0-A, Office-Apartment District is
to provide reasonable standards for the harmonious development of
apartments, business and professional offices, and other uses and accessory
uses which are compatible with high-density housing; to avoid undue
congestion in the streets; and to otherwise create conditions conducive to
carrying out these and the other purposes of this ordinance. (Ordinance
378-80, March 18, 1980, Article XIV, 51401)
5332. Procedural Requirements. All applications for permits pursuant
to this Part shall be submitted to thi Zoning Officer who shall have the
option of submitting such applications-to the Planning Commission or to the
Township Board of Commissioners for recommendations prior to issuing a
permit. All applications shall be reviewed by the Plan Review Board prior
to the issuance of any permit. (Ordinance 378-80, March 18, 1980, Article
XIV, §1402)
5333. Permitted Uses. A building may be erected or used, and a lot
may be used or occupied, for any of the following purposes and no other:
1. Business, professional, and financial offices and office
complexes.
2. Medical, dental, photographic, or similar laboratories, and
clinics or hospitals.
3. Studios for instruction in music, arts, science, radio, and
television.
4. Municipal buildings and public uses including recreation
facilities.
5. Public utility facilities.
6. Fraternal clubs, lodges and social and recreation clubs.
7. Commercial recreation facilities.
8. Churches, or similar places of worship, parish houses and
convents.
9. Research, testing, laboratories and facilities.
10. Colleges and universities.
11. Hotels and motels.
12. Convalescent homes.
13. Apartments, in conformance with the following:
a. One- (1) story buildings containing not more than eight (8)
dwelling units.
b. Two- (2) story buildings containing not more than twelve (12)
dwelling units.
-423-
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(27-333(13), cont'd) (27-333(13), cont'd)
c. Three- (3) story buildings containing not more than eighteen
(18) dwelling units.
d. In any building in excess of three (3) stories, the number of
dwelling units is unlimited.
14. Accessory use on the same lot with and customarily incidental to
any of the above permitted uses.
(Ordinance 378-80, March 18, 1980, Article XIV, 51403)
5334. Conditional Uses. The following conditional uses and no other
may be allowed or denied by the Township Board of Commissioners after
recommendations by the Planning Commission pursuant to the express
standards and criteria set forth in Article 24, Section 2405 and Article 23
of this ordinance. (Part 24, Section 615, and Part 23 of this ordinance]
1. Retail stores and personal service shops.
2. Private schools.
(Ordinance 378-80, March 18, 1980, Article XIV, 51404)
5335. Height Restrictions When Abutting Residential Zone. When a
permitted use abuts any Residential District in the Township or in an
adjacent municipality, the following height restrictions shall apply: an
angle of 32 degrees shall be established at a point of the property line
which abuts the Residential District or the adjacent right-of-way line of a
street abutting the Residential District, as the case may be, measured from
a horizontal plane having an elevation equal to the average elevation of
the ground, after construction, along the entire side of the proposed
building or structure nearest to the Residential District. The proposed
building or structure may have any type or style of roof not otherwise
prohibited, and may vary in its height, provided that it shall not
intersect with or infringe upon the established 32-degree angle, and
provided that its highest point, excluding chimneys, spires, towers,
elevator penthouses, tanks, railings and similar projections, shall not
exceed 125 feet in height, measured from the aforesaid horizontal plane.
The definition of "Building Height" found in Part 2, Section 12 of this
ordinance shall not be applicable to this Section 335. (Ordinance 378-80,
;larch 18, 1980, Article XIV, §1405)
§336. Height Restrictions When Not Abutting a Residential Zone. In
all cases where Section 335 of this Part is not applicable, no building
shall be erected to a height in excess of one hundred twenty-five (125)
feet. (Ordinance 378-80, March 18, 1980, Article XIV, §1406)
§337. Lot Coverage.
1. Buildings including accessory buildings shall not cover more than
the following percentage of the area of the lot:
a. Non-residential buildings - 40%
b. Apartments
- 35%
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(27-337, cont'd) (27-337, cont'd)
2. Special coverage provisions: when provisions are made to provide
all or part of the required off-street parking within the building,
coverage shall be increased as follows:
% of Required Parking
Within the Building
25Z
50X
75z
100X
Increase in Coverage
5%
10%
15%
20%
3. Each lot shall be maintained with a vegetative material in the
following percentages:
a. Non-residential buildings - 35'C
b. Apartments - 40%
(Ordinance 378-80, March 18, 1980, Article XIV, 51407)
§338. Yard Regulations, Office Uses. Each lot shall have yards of
not less than the width and depth indicated below. However, when the yard
abuts a Residential District or Residential Use in the Township or an
adjacent municipality, the yard depth and width must be one hundred (100) -
feet and the buffer yard as required in Section 340 must be provided:
1. Front yard - thirty (30) feet
2. Side yard - total thirty (30) feet, fifteen (15) feet each
3. Rear yard - twenty
(Ordinance 378-80, March 18,
(20) feet
1980, Article XIV, 51408)
§339. Yard Regulations, Apartment Uses. Each lot shall have yards of
not less than the width and depth indicated below. However, when the yard
abuts a Residential District or Residential Use in the Township or an
adjacent municipality, the yard depth and width must be one hundred (100)
feet and the buffer yard as required in Section 340 must be provided:
1. Front yard - thirty (30) feet
2. Side yard - total thirty (30) feet, fifteen (15) feet each
3. Rear yard - twenty (20) feet
4. Interior yards - open space between buildings shall be provided as
follows:
a. When front to front, rear to rear, or front to rear, parallel
buildings shall have fifty (50) feet between faces for one-story
buildings, and five (5) additional feet for each additional story. If
the front or rear faces are obliquely aligned, the above distances may
be decreased a maximum of ten (10) feet at one end if increased by the
same or a greater distance at the other end. Where service drives or
bank grade changes or collector walks are introduced in this space,
the yard distance shall be at least twenty-five (25) feet.
I Revised June 1982 -425-
(27-339(4), cont'd)
(27-339(4), cont'd)
b. Between end walls of buildings, a yard space of at least
twenty-five (25) feet for each one-story building, and five (5)
additional feet for each additional story, shall be required.
c. Between end walls and front or rear faces of buildings a yard
space of at least thirty (30) feet for one story, and five (5)
additional feet for each additional story, shall be required.
d. When two (2) adjacent buildings differ in the number of
stories, the space shall be not less than one-half of the sum of the
minimum required distance between two buildings of the lower height
and two buildings of the greater height.
e. Outer and inner courts shall be permitted when such courts
are not less than fifty (50) feet in width or not less than the
dimension of the full height of the highest building wall enclosing
the court, whichever is greater.
(Ordinance 378-80, March 18, 1980, Article XIV, §1409; as amended by
Ordinance 411-82, June 15, 1982)
4340. Buffer Yards. Buffer yards shall be required when an office,
commercial or apartment use abuts a residential use in the Township or in
an adjacent municipality. Buffer yards shall be at least fifty (50) feet
in width and shall extend the full length of the part of the lot which
abuts a residential use.
1. No structure, parking lot or loading zone shall be permitted in
the buffer yard.
2. The buffer yard shall be planted and maintained with a vegetative
material, including a row of trees not more than forty (40) feet apart.
The following types of trees shall not be planted in buffer areas:
a. Poplar, all varieties;
b. Willow, all varieties;
c. White or Silver Maple (Acer saccharinum);
d. Aspen, all varieties; and
e. Common Black Locust.
3. The buffer yard may be crossed by access roads and service drives
not more than thirty-five (35) feet in width, provided that the center line
of the road or drive shall cross the lot and buffer yard at an angle of not
less than sixty (60) degrees.
4. The buffer yard shall be considered as a part of the required
yard.
(Ordinance 378-80, March 18, 1980, Article XIV, §1410)
§341. Accessory Buildings.
1. No accessory building shall be permitted in front yard areas.
2. Accessory buildings shall be permitted to extend into side yards
but shall be not closer than five (5) feet to the side yard line.
1 -426- Revised June 1982
(27-341, cont'd) (27-341, cont'd)
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3. Accessory buildings shall be permitted to extend into rear yard
areas but shall not be closer than five (5) feet to the rear yard line.
4. An accessory building shall not exceed one (1) story in height.
(Ordinance 378-80, March 18, 1980, Article XIV, §1411)
§342. Location. The site shall adjoin at least one (1) of the major
thoroughfares in the Township or be reasonably close so that the access
drive or drives can be satisfactorily arranged to avoid traffic congestion
on local residential streets. (Ordinance 378-80, March 18, 1980, Article
XIV, §1412)
1343. Loading and Unloading Space. Each lot shall include sufficient
space for the loading and unloading of supplies and equipment to and from
vehicles. The public right-of-way shall not be used for this purpose. The
minimum space shall be fifteen (15) feet by fifty (50) feet by fourteen
(14) feet high. (Ordinance 378-80, March 18, 1980, Article XIV, 51413)
§344. Signs.
1. All signs must comply with the following:
a. Free standing signs shall be a maximum of thirty (30) square
feet in surface area, non-luminous or non-reflective, and may be
backlighted or floodlighted.
b. Letters may be attached to a structure when they identify a
business or process carried on within the structure, and may be
backlighted or floodlighted.
2. When the circumstances necessitating the erection and use of a
sign or letters are no longer present, such sign or letters shall be
removed from the premises.
(Ordinance 378-80, March 18, 1980, Article XIV, 51414)
§345. Off-Street Parking.
1. Off-street parking shall be provided in accordance with the off-
street parking part of this ordinance. [Part 21 of this ordinance]
2. All parking shall be located at least eight (8) feet from the
dwellings or offices. Curbing shall be installed to enforce this
regulation. The required parking spaces shall be situated on the same lot
within two hundred (200) feet of the dwellings or offices to be served.
3. Outdoor parking spaces and approaches shall be deemed to be part
of the open space of the lot on which they are located.
(Ordinance 378-80, Mach 18, 1980, Article XIV, §1415)
1 -427-
1
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150'] IOq
Iwo 200'
BUILDING HEIGHT
A.
e.
ROAD
DETERMINANT
A. TYPICAL CONDITION -GROUND
ABOVE ROAD OR R..
B. TYPICAL CONDITION -GROUND
BELOW ROAD OR FL.
-428-
1
1
1
1
? EXHIBIT D
NURSING HOME SALES
F-1
LI
A
SALE NUMBER ONE
Clivedon Convalescent Center
6400 Greene Street
Philadelphia (Philadelphia County), Pennsylvania 19119
(215-844-6400)
Sale Data
Sale Date: January 31, 1994
Number of Beds: 180
Total Price: $5,992,500
Financing: All cash to the seller
Seller:
Buyer: Comstock Healthcare, Inc.
Courtland Healthcare, Inc.
Confirmation: Public Records and participating
broker
Cash Equivalent Price: $5,992,000
Property Data
Land Area: 1.3 acres
Gross Building Area: 69,955 square feet
Year Built: 1978
Building Description: A three-story concrete block and
brick veneer skilled nursing facility
Condition: Average to Good
Economic Data
Occupancy Rate: 97.2 percent -- 1994
Private-pay Mix: 3.2 percent -- 1994
Medicare Mix: 6.7 percent -- 1994
Effective Gross Revenue: $7,883,596
Operating Expenses: 7,027,837
Net Operating Income: $ 855,759
Expense Margin: 89.1 percent
i Cash Eouivalent Price Indicators
Price per Bed:
Price per Square Foot: $33,292
$85.66
Gross Revenue Multiplier. 0.76
Overall Capitalization Rate: 14.3 percent
Comments and Comparisons: This Philadelphia facility was purchased
jointly with Maplewood Manor Convalescent Center, and the sale price
herein reported represents the buyer's allocation. The revenue and expense
data were obtained from the buyer's first-year Medicaid cost report, to
which we have added a reserve for replacement expense of $300 per bed.
SALE NUMBER TWO
Northwood Nursing & Convalescent Home
4621 Castor Avenue
Philadelphia (Philadelphia County), Pennsylvania 19124
(215-744-6464)
Sale Data
Sale Date: December 19, 1994
Number of Beds: 148
Total Price: $4,900,000
Financing: All cash to the seller
Seller: Northwood Nursing & Convalescent Home
Inc.
Buyer. Northwood Nursing Center L.P.
Confirmation: Public record, Medicaid cost report
and participating broker, price
included $100,000 non-compete
agreement
Cash Equivalent Price: $4,900,000
Property Data
Land Area: 18,880 square feet
Gross Building Area: 43,860 square feet
Years Built: 1964, with additions in 1971 and 1984
Building Description: Two-story masonry nursing home
building
Condition: Average to good
Economic Data
Occupancy Rate: 89.5 percent - 1994
Private-pay Mix: 11.6 percent
Medicare Mix: 6.7 percent
Effective Gross Revenue: $6,116,789
Operating Expenses: 5,484,196 (estimated)
Net Operating Income: $ 632,593 (see comments)
Expense Margin: 89.7 percent
Cash Eq uivalent Price Indicators
Price per Bed: $33,108
Price per Square Foot: $166.33
Gross Revenue Multiplier: 0.80
Overall Capitalization Rate : 12.9 percent
Comments and Comparisons: This facility is also located in the city of
Philadelphia. According to information supplied by a broker involved in
' this transaction, the buyer's expectation for first year net operating
income were $950,000. This expectation did not allow for reserves for
replacement, and it did not include management fees. We adjusted the
expenses to include a 5.0 percent management fee and replacement reserves
of $300.00 per bed. In so doing, the indicated NOI is $590,600. Our
estimated revenue and expenses are based on actual rates, mixes and
occupancy levels at the time. The expenses were based on amounts reported
in the Medicaid cost report, plus management, reserves for replacement and
contractual allowance estim ates.
u
SALE NUMBER THREE
Curry Memorial Home
Road 2, Box 60
Waynesburg (Greene County), Pennsylvania 15370
(412-627-3153)
Sale Data
Sale Date: December 1994
Number of Beds: 121
Total Price: $5,000,000
Financing: All cash to the seller
Seller:
Buyer: Greene County
Guardian Care, Inc.
(Guardian Foundation - Greene Care)
Confirmation: John Frazier, Greene County
assessor's office and participating
broker
Cash Equivalent Price: $5,000,000
Property Data
Land Area:
Gross Building Area: 8.1 acres
56,000 square feet
Year Built: 1991
Building Description: One-story, brick exterior
Condition: Good
Economic Data
Occupancy Rate: 96.4 percent
Private-pay Mix: 3.5 percent
Medicare Mix: 12.8 percent
1 Effective Gross Revenue: $4,432,044
Operating Expenses: $3,933,184
Net Operating Income: $ 498,859
Expense Margin: 88.7 percent
Cash Equivalent Price Indicators
Price per Bed: $41,322
Price per Square Foot: $89.29
Gross Revenue Multiplier: 1.13
Overall Capitalization Rate: 10.0 percent
Comments and Comparisons: Waynesburg is a small town in a rural area in
western Pennsylvania, approximately 30 miles southwest of Pittsburgh. This
sale was recorded January 25, 1995 (Book 137, Page 1056, Greene County
Recorder of Deeds). The buyers recently lost an appeal for tax-exempt
status on this property, which was formerly tax-exempt because it was a
county-owned property. The sale price recorded for the real property
included in this transaction was $4 ,317,000.
We were unable to obtain revenue and expense information on this sale from
the participating parties, the broker, or the most recent Medicaid cost
report, which was unavailable for review at the time we visited state
offices in the course of this appraisal assignment. The revenue and
expenses were based on report occupancy and rate information surveyed by
the Department of Health - State Center for Health Statistics & Research.
1
L?
I
71
LJ
SALE NUMBER FOUR
Hillcrest Nursing Center
400 Hillcrest Avenue
Grove City (Mercer County), Pennsylvania 16127
Sale Date:
Number of Beds:
Total Price:
Financing:
Seller:
Buyer:
Confirmation:
Cash Equivalent Price:
Sale Data
February 1, 1995
121
$4,400,000
All cash to the seller
Hillcrest Nursing Center
HNCA, Inc. (Concord Health Group,
Inc.)
Public Records
$4,400,000
Property Data
Land Area:
Gross Building Area:
Year Built:
Building Description:
1
Condition:
?I
?J
Occupancy Rate:
Private-pay and Medicare Mix:
Effective Gross Revenue:
Operating Expenses:
Net Operating Income:
Expense Margin:
J
5.0 acres
52,102 square feet
1983
Part one-, part
story masonry
exterior walls
Good
Economic Data
two-, and part three-
structure with brick
90.7 percent
26.0 percent
$5,300,000 (estimated)
4.701.300 (estimated)
$ 598,700 (see comments)
88.7 percent
Cash Equivalent Price Indicators
Price per Bed:
Price per Square Foot:
Gross Revenue Multiplier:
Overall Capitalization Rate:
$36,364
$84.45
0.83
13.6 percent
Comments and Comparisons: Grove City is a small, rural community located
approximately 30 miles north of Pittsburgh, with good access to
Interstates 79 and 80. The statement of value filed (deed reference 95-DR-
1128) for the real property in this transaction indicated a sale price of
$3,000,000, which indicates a consideration of $1,400,000 for equipment
and intangibles. According to a broker familiar with this transaction, the
buyer's first year expectation of net operating income was $900,000.
However, this expectation did not allow for typical management fees or
reserves for replacement. We adjusted the operating expenses to account
for these overlooked items.
SALE NUMBER FIVE
Norristown One
205 East Johnson Highway
East Norristown (Montgomery County), Pennsylvania
Norristown Two
2004 Old Arch Road
East Norristown (Montgomery County), Pennsylvania
Kingston West
i 615 Wyoming Avenue
Kingston (Luzerne County), Pennsylvania
Sale Data
Sale Date:
Number of Beds:
Total Price:
Financing:
Seller:
Buyer:
l
Confirmation:
Cash Equivalent Price:
Land Area:
Gross Building Area:
Year Built (Avg.):
Building Description:
Condition:
August 9, 1993
391
$15,700,000
All cash to the seller
Manor Care, Inc.
The Advancement
Healthcare
Public records
$15,700,000
of Geriatric
Property Data
5.1 acres (total)
135,660 square feet
1973
A two-story, a three-story, and a
four-story masonry structure, each
with brick veneer
Average to Good
Economic Data
Occupancy Rate: 96.0 percent
Private-pay and Medicare Mix: 23.0 percent
Effective Gross Revenue: $14,721,804
Operating Expenses: 12,270,562
Net Operating Income: $ 2,451,242
Expense Margin: 83.3 percent
Cash Equivalent Price Indicators
Price per Bed: $40,153
Price per Square Foot: $115.73
Gross Revenue Multiplier: 1.07
Overall Capitalization Rate: 15.6 percent
Comments and Comparisons: This was a three-property transaction that took
place in 1993. The income and expenses were obtained from Medicaid cost
reports and include management fees. We added $300.00 per bed to the
operating expenses as a reserve for replacement allowance. Kingston is a
suburb of Wilkes-Barre/Scranton in the northeast part of the state. East
Norristown is a northwestern suburb of the city of Philadelphia.
t
i
EXHIBIT E
YIELD RATE CALCULATIONS
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17
? EXHIBIT F
QUALIFICATIONS
1
JAMES K. TELLATIN, MAI
I EXPERIENCE
Mr. Tellatin has specialized in the appraisal of real
estate since 1977. Mr. Tellatin has appraised
virtually all types of real estate in 46 states and
Canada. Types of property appraised include
industrial plants, office towers, shopping centers,
hotels, hospitals, apartments, farms, governmental
buildings, educational facilities, nursing homes,
retirement living centers and resorts. Moreover, he is
consulting with the new government of Hungary on
valuations of state-owned asset dispositions.
EMPLOYMENT
' Mr. Tellatin is a principal in Tellatin, Louis &
Andreas, Inc. Prior to creating the firm, he formed
his own appraisal firm in 1984. In the past, Mr.
Tellatin has held the following positions: Director of
Appraisal Services, Turley Martin Company; Senior
Appraiser, Marshall and Stevens Inc.; Staff
Appraiser, Doane Agricultural Service Inc.
EDUCATION
Mr. Tellatin earned a Bachelor of Science degree in
' Geography and Economics from Southwest Missouri
State University, Springfield, Missouri, in 1976. In
addition, he has studied at Dartmouth College,
Memphis State University and abroad in France and
' Switzerland.
Mr. Tellatin has completed the education
' requirements for the MAI, Member Appraisal
Institute designation from the Appraisal Institute, and
has also been certified for real estate appraisal by the
' states of Arkansas, Arizona, California, Indiana,
Illinois, Iowa, Kansas, Michigan, Missouri,
Oklahoma and Tennessee.
COURT TESTIMONY
Mr. Tellatin has prepared reports for numerous
courts and boards. He has also testified as an expert
witness before various courts in several states and
Federal Bankruptcy Courts.
STERLING E. SHORT
EXPERIENCE
Mr. Short has been involved in the commercial real
estate industry since 1987, and in the appraisal sector
since February 1989. Real property appraised
encompasses a range of property types such as vacant
land, industrial warehouse and distribution centers,
freestanding retail facilities and shopping centers,
retirement apartments and nursing homes,
apartments, office buildings, motels and hotels, as
well as other miscellaneous property types. The bulk
of his assignments has entailed appraising nursing
homes. The appraisals have functioned as support for
clients in financing, litigation support, bankruptcy
proceedings, and internal review.
EMPLOYMENT
Mr. Short joined Tellatin, Louis & Andreas, Inc. in
February 1989. Previously, he was employed by
Home Savings Association of Kansas City, F.A.
where he participated in loan origination conducted
on a national basis primarily on apartments, motels
and hotels, and shopping centers.
EDUCATION
Mr. Short received his undergraduate degree,
Bachelor of Arts in accounting and English, from
Westminster College in Fulton, Missouri.
Mr. Short is an MAI Candidate, and he has
completed several courses offered by the Appraisal
Institute in pursuit of this professional designation.
Tellatin, Louis & Andreas, Inc.
15455 Conway Road
Suite 355
Chesterfield, Missouri 63017
Telephone: 314/530-0009
Facsimile: 314/530-0046
June 10, 1996
Ms. Melissa Karron
Manager of Real Estate Services
Beverly Enterprises, Inc.
5111 Rogers Avenue
Fort Smith, Arkansas 72919
File Reference: 96-2467
RE: Blue Ridge Haven Convalescent Center -- West
770 Poplar Church Road
East Pennsboro Township, Cumberland County, Pennsylvania
"As Is" Market Value Appraisal of the Real Estate
As of September 1, 1995
Dear Ms. Karron:
In accordance with the signed engagement letter dated March 5, 1996 (shown as
Exhibit A in this report), we have appraised Blue Ridge Haven Convalescent Center
-- West, a 313-bed skilled nursing facility.
The purpose of the appraisal is to estimate the "as is" market value of the fee
simple interest in the real estate to determine the reasonableness of the ad
valorem taxation. A description of the property, together with information
providing a basis for estimates, is presented in the accompanying report. This
appraisal is subject to the definitions, assumptions, conditions and
certification contained in the attached report. We believe to have prepared this
appraisal in compliance with the Code of Professional Ethics, and the Uniform
Standards of Professional Appraisal Practice of the Appraisal Foundation.
Based on the data, analyses and conclusions presented in the attached report, it
is our opinion that the "as is" market value of the subject real estate, as of
September 1, 1995, is:
FIVE MILLION ONE HUNDRED THOUSAND DOLLARS
$5,100,000
Respectfully submitted,
TELLATIN, LOUISA ANDREAS, INC.
es Sterling E. rt
rincipa
TABLE OF CONTENTS
Assumptions & Limiting Conditions
Profile of Salient Data
Subject Photographs
INTRODUCTION
• Identification of the Property
• History of the Property
• Purpose of the Appraisal
• Property Inspection
• Function of the Appraisal
• Interest Appraised
• Definition of Market Value
• Scope of the Appraisal
DESCRIPTIVE DATA
• Regional Analysis
• Neighborhood Analysis
• Subject Property Description
• Market Analysis
HIGHEST AND BEST USE ANALYSIS
VALUATION ANALYSIS
• Valuation Procedures
• Cost Approach
• Income Capitalization Approach
• Reconciliation and Final Conclusion of Value
CERTIFICATION
EXHIBIT SECTION
• Exhibit A - Engagement Letter
• Exhibit B - Legal Description
• Exhibit C - Zoning Regulations
• Exhibit D - Nursing Home Sales
• Exhibit E - Yield Rate Calculations for Comparable Sales
• Exhibit F - Qualifications
i
iv
v
1
1
1
1
1
1
2
2
4
9
14
20
38
40
41
51
70
71
ASSUMPTIONS AND LIMITING CONDITIONS
Title to Real Estate
No investiga tion of legal title has been made, and we render no opinion as
to ownership of the property or condition of the title. We assume that:
a) The title of the property is marketable;
b) Unless otherwise indicated in this report, the
property is free and clear of all liens,
encumbrances, easements and restrictions;
C) The property does not exist in violation of any
applicable codes, ordinances, statutes or other
government regulations;
d) The property is under responsible ownership and
competent management, and is available for its
highest and best use.
Sketches and Maps
Sketches and maps in this report are for aiding the reader in visualizing
the property and are based on field investigations made by the appraiser.
Dimensions and descriptions are based on public records and information
furnished by others. These sketches and maps are not meant to be used as
references in matters of survey.
Information and Data
Information supplied by others that is considered in this valuation is
from sources believed to be reliable and is considered to be reasonable,
but no further responsibility is assumed for its accuracy. We reserve the
right to make such adjustments to the value reported as may be required by
a consideration of additional or more reliable data that may become
available.
Unexpected Conditions
We assume that there are no hidden or unexpected conditions of the
property that would adversely affect value.
Distribution of Value
t The distribution of total value between land and improvements applies only
under the stated program of utilization. Separate values for land and
improvements may not be used in conjunction with any other appraisal and
are invalid if so used.
Legal or Specialized Expertise
No opinion is intended to be expressed for matters requiring legal
expertise, specialized investigation or knowledge beyond that customarily
used by appraisers.
i Tellatin, Louis & Andreas, Inc.
Sale or Purchase
All opinions of value are presented as Tellatin, Louis & Andreas, Inc.'s
considered opinion, based on the facts and data appearing in the report.
We assume no responsibility for changes in market conditions or for the
inability of the owner to locate a purchaser at the appraised value.
Limitations on Marketability Due to Status of License
The value of the subject assumes that the license for the nursing home is
in good status with the Pennsylvania Department of Public Welfare, and
that the license is transferable to a qualified buyer. While the
Department of Public Welfare scrutinizes potential buyers, this appraisal
maintains that there is a large enough number of potential buyers as to
impose no limitation on marketability. Additionally, it is assumed that
the license will remain as a part of the subject business enterprise along
with the real estate, equipment, assembled work force, etc.
Advertising
Neither all nor any part of the contents of this appraisal report shall be
conveyed to the public through advertising, public relations, news, sales
or other media without the written consent and approval of Tellatin, Louis
& Andreas, Inc.
Plagiarism
' Neither all nor any part of the contents of this appraisal report shall be
plagiarized for any purpose by the client or anyone else who obtains a
copy of the report directly, or indirectly without the written approval of
1 an officer of Tellatin, Louis & Andreas, Inc.
Court Testimony
Testimony or attendance in court by reason of this appraisal shall not be
required unless arrangements for such services are subsequently made.
Date of Value
The date of value to which the conclusions and opinions expressed in this
report apply is set forth in the letter of transmittal. The dollar
amount of any value opinion herein rendered is based on the purchasing
power of the U.S. dollar as of that date. The value conclusions reflect
consideration of typical financing conditions as of the date of value. The
appraiser assumes no responsibility for economic or physical factors
occurring subsequent to the date of value that may affect the opinions
stated herein.
Title Report
No title report has been made available. We assume no responsibility for
such items of record not disclosed by customary investigation.
ii Tellatin, Louis & Andreas, Inc.
Inspection
James K. Tellatin, MAI, and Sterling E. Short have personally inspected
the subject property.
Mineral Rights
' The value of mineral rights, if any, have not been considered in this
appraisal unless otherwise noted.
Structural Deficiencies
The appraiser found no obvious evidence of structural deficiencies.
However, no responsibility for structural soundness or conformity to city
or county building and safety codes can be assumed without an independent
structural engineering report.
Termite Damage
The appraiser found no obvious evidence of termite damage or infestation.
However, a thorough inspection by a competent termite inspector has not
been performed for the appraiser.
F
1
t
Soil Conditions
No detailed soil studies of the subject property are available to the
appraiser. Therefore, statements in this report regarding soil qualities
are not conclusive, but are considered consistent with information
available to us.
Hazardous Substances
Hazardous substances, if present in the property, can introduce an actual
or potential liability that will adversely affect its marketability and
value. Such liabilities may be in the form of immediate recognition of
existing hazardous conditions. Future liability could stem from the
release of contaminants such as asbestos fibers, toxic vapors from urea
formaldehyde foam insulation, or radon gases, through aging or building
renovations.
In the development of an opinion of value, no consideration has been given
to such liability or its impact on value. The professional staff of
Tellatin, Louis & Andreas, Inc., is not qualified to make an investigation
to determine the possible presence of toxic materials requiring either
immediate or future correction. There are experts in this special field
who can conduct such investigations and provide guidance regarding the
impact of toxic materials that may be present in the subject property.
iii Tellatin, Louis & Andreas, Inc.
PROFILE OF SALIENT DATA
NAME: Blue Ridge Haven Convalescent Center -- West
LOCATION: 770 Poplar Church Road
East Pennsboro Township, Cumberland County,
Pennsylvania
CURRENT FEE OWNER: Cumberland County Industrial Development
Authority
INTEREST APPRAISED: The tangible and business assets of the
business enterprise including the fee simple
ownership in the real estate.
PROPERTY TYPE: Skilled nursing facility
LAND AREA: 6.8 acres
PRINCIPAL IMPROVEMENTS: Part one-story, wood-frame and brick
structure, and part three-story, metal frame
and brick structure used as a skilled nursing
facility containing 88,010 square feet and
313 licensed beds; erected in 1966 with
substantial additions occurring in 1968,
1970, and 1975.
HIGHEST AND BEST USE: Present use - skilled nursing facility
1st-Year
PATIENT CENSUS: Current Projection
Occupancy rate 75.1% 78.1%
Private-pay mix 11.3% 8.0%
Medicare Mix 8.8% 11.9%
Average private-pay rate $122.59 $125.00
Medicare rate $282.00 $230.00
Medicaid rate $116.00 $116.00
Medicaid capital rate $5.56 $5.56
"AS IS" MARKET VALUE
OF THE REAL ESTATE: $5,100,000
VALUATION DATE: September 1, 1995
INSPECTED BY: James K. Tellatin, MAI, and Sterling E. Short
DATE OF INSPECTION: April 11, 1996, and April 2, 1996
iv Tellatin, Louis & Andreas, Inc.
r
i
t
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SUBJECT PHOTOGRAPHS
Front Building Elevation
v Tellatin, Louis & Andreas, Inc.
Front Building Elevation
Y ,3 "
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r
1
SUBJECT PHOTOGRAPHS
Typical Corridor
vi Tellatin, Louis & Andreas, Inc.
Typical Patient Room
I
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Nurses' Station
Kitchen
vii Tellatin, Louis & Andreas, Inc.
SUBJECT PHOTOGRAPHS
?1
t
17,
1
1
IDENTIFICATION OF THE PROPERTY
The property is an existing 313-bed, skilled nursing facility known as
Blue Ridge Haven Convalescent Center -- West located at 770 Poplar Church
Road in East Pennsboro Township, Cumberland County, Pennsylvania.
Fee simple title in the real property is vested in Cumberland County
Industrial Development Authority. The legal description is presented as
Exhibit B in the addenda.
HISTORY OF THE PROPERTY
This facility is owned by Cumberland County Industrial Development
Authority It is our understanding that the facility is not currently for
sale, and the current owners intend to continue operating the facility.
Beverly, a publicly traded, for-profit corporation, operates numerous
facilities in the state, and is the largest operator of nursing facilities
in the nation, with more than 700 under ownership or lease.
This property was designed and constructed specifically for nursing home
use. It has been operated continuously as a nursing home since 1966, and
several additions have been made increasing the capacity to 313 beds. The
facility has been well maintained, and based on our inspection, it does
not suffer from deferred maintenance.
PURPOSE OF THE APPRAISAL
The purpose of this appraisal is to estimate the "as is" market value of
the real estate as of September 1, 1995.
PROPERTY INSPECTION
The subject facility was inspected by James K. Tellatin, MAI, on April 11,
1996, and by Sterling E. Short on April 2, 1996. During the inspections,
Dennis McGowen, the administrator, was interviewed regarding the
operational aspects of the facility. Additionally, Steve Boring, the
maintenance supervisor, was interviewed regarding the physical aspects of
the facility, and he guided the tours.
FUNCTION OF THE APPRAISAL
l
It is our understanding that the appraisal will be used by Beverly
Enterprises, Inc. for reviewing the current ad valorem assessment of the
real estate.
INTEREST APPRAISED
The interest appraised is the fee simple interest in the real estate. The
value of the intangible and personal property assets of the going concern
are excluded from this appraisal.
1 Tellatin, Louis & Andreas, Inc.
I
' DEFINITION OF MARKET VALUE
In accordance with Federal Reserve System (12 CFR Part 225), Federal
Deposit Insurance Corporation (12 CFR Part 323), The Office of the
Comptroller Of Currency (12 CFR Part 34), the regulatory definition for
market value is defined as follows:
"The most probable price which a property should bring in a competitive
and open market under all conditions requisite to a fair sale, the buyer
and seller each acting prudently and knowledgeably, and assuming the price
is not affected by undue stimulus. Implicit in this definition is the
f titl
i
d th
e
ng o
e pass
consummation of a sale as of a specified date an
from seller to buyer under conditions whereby:
A) Buyer and seller are typically motivated;
B) Both parties are well informed or well advised, and
acting in what they consider their best interests;
C) A reasonable time is allowed for exposure in the
open market;
D) Payment is made in terms of cash in U.S. dollars or
in terms of financial arrangements comparable
thereto; and
E) The price represents a normal consideration for the
property sold unaffected by special or creative
financing or sales concessions granted by anyone
associated with the sale."
SCOPE OF THE APPRAISAL
The scope of the appraisal has included a personal inspection of the
nursing home, as well as the collecting, analyzing and reporting of
geographic, legal, social and economic factors pertaining to the valuation
of the nursing home. These factors and analyses include the following.
• Social, political, economic and physical factors and trends of
the region and neighborhood as they impact the nursing home
appraised.
• An inspection of the subject property and review of local
taxation and zoning as they relate to the subject.
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s o
• A survey an
as they relate to census, revenue and expense characteristics
in the operation of the nursing home.
• A review and analysis of Pennsylvania and Federal Medicaid and
Medicare reimbursement policies, licensing requirements and
Certificate of Need (CON) policies.
• Gathering, confirming and analyzing comparable nursing home
' revenues, expenses and sale data relevant to developing a
1 2 Tellatin, Louis & Andreas, Inc.
' well-substantiated estimate of value by the application of the
income capitalization and direct sales comparison approaches.
' The scope of this appraisal is believed to be in conformance with the Code
of Professional Ethics and the Uniform Standards of Professional Appraisal
Practice of the Appraisal Foundation.
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' REGIONAL ANALYSIS
The regional analysis focuses primarily on the socioeconomic trends.
Population data best explain current socioeconomic conditions.
' Demographic factors most relevant to the valuation analysis include
changes in the elderly population, levels of income and poverty, and
employment composition. The optimum market area for a nursing home is one
' that has a growing number of elderly persons with relatively high levels
of income and wealth, and that also contains sufficient labor at
reasonable wages. Income and wealth levels directly relate to the current
' and historical economic conditions of the region. Axiomatically, nursing
homes that serve market areas with declining population, low income
levels, and low housing values will generally achieve low private-pay
mixes and have greater difficulty attracting qualified staff members.
This analysis will focus on the important socioeconomic trends for the
long-term care industry.
Blue Ridge Haven Convalescent Center -- West is located in East Pennsboro
Township, Cumberland County, Pennsylvania in the southeastern portion of
the state -- 85 miles west of Philadelphia. Cumberland County is a part
of the Harrisburg-Lebanon-Carlisle Metropolitan Statistical Area (MSA),
which includes the Pennsylvania counties of Cumberland, Perry, Dauphin and
Lebanon. The region is situated within the Susquehanna River Valley where
the terrain is generally hilly. The climate is humid continental with
' cold winters and hot, humid summers.
Major highways servicing the area include: Interstates 76 (Pennsylvania
Turnpike), 81, 83, 283, and 581; U.S. Highways 11, 15, 22, and 322; and
numerous state routes. Within the MSA, there are five bridges crossing
the Susquehanna River; Taylor Bridge is due east of the subject providing
easy access to the Harrisburg commercial business distri ct. Capital City
' Airport provides commercial air and freight service. There are several
railroads serving the MSA.
The population trends for the total population are prof iled in Table R-1
as follows.
' Table R-1
Regional Population Trends 1980 to 2000
Harrisburg
Lebanon
Carlisle Cumberland
Pennsylvania MSA County
' Total Population
1980 11,863,895 555,158 178,541
1990 11,881,643 587,986 195,257
1995 12,083,907 614,351
2000 206,495
12,334,083 639,456 217,192
Annual Rate of Population Change
1980 to 1990 0.01% 0.58% 0.90%
1990 to 1995 0.34% 0.88% 1.13%
' 1995 to 2000 0.41% 0.80% 1.02%
Data Source: CACI Marketing Systems.
4 Tellatin, Louis & Andreas, Inc.
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According to the CACI data shown above, Cumberland County experienced an
increase in population from 1980 to 1990, and the population trend
continued from 1990 to 1995. The population is projected to increase at
an annual rate of 1.02 percent through 2000. Compared to the entire MSA,
Cumberland County is anticipated to incur slightly greater population
growth, and the county growth rate is more than twice the state
projection.
The population trends, according to age group and other data pertaining to
age demographics, are profiled in Table R-2 as follows.
Table R-2
Age Distribution and Elderly Population Trends 1990 to 2000
Harrisburg
Lebanon
Carlisle Cumberland
Pennsylvania MSA County
Population Age 65-74
1990 1,070,021 47,684 15,340
1995 1,076,909 50,562 16,747
2000 995,140 49,843 16,785
Population Age 75-84
1990 587,249 26,022 8,018
1995 647,795 28,930 9,089
2000 709,698 32,743 10,701
Population Age 85+
1990 171,836 8,086 2,783
1995 201,308 9,422 3,105
2000 246,226 11,352 3,664
Annual Growth: 75+
1990 to 1995 2.27% 2.37% 2.46%
1995 to 2000 2.40% 2.83% 3.33%
% of Population 75+
1995 7.0% 6.2% 5.9%
2000 7.9% 7.2% 7.0%
Median Age - 1995 36.3 36.2 35.8
Data Source: CAC1 Marketing Systems.
Age demographics are important to isolate and analyze relative to
projections for the long-term care industry. The growth of the elderly
population should correlate to growth in nursing home demand. The Demand
Analysis within the Market Analysis will address these issues in more
detail. The 75+ age group is the greatest user of long-term care, and
Cumberland County is projected to experience growth in this age group from
1995 to 2000 at 3.33 percent as compared to growth from 1990 to 1995 at
2.46 percent. Annual growth of.3.33 percent is moderately high compared
to most areas of Pennsylvania and the nation. The increasing trend for
the overall population has some influence on the elderly population
trends. Cumberland County has a slightly lower percentage of 75+
residents than all of Pennsylvania, and the median age is slightly lower
too. The "graying of America" is a trend that will not start to boom
until 2010; the "Baby Boomers" are still 35 to 50 years old.
Since earnings margins are generally greater from private-pay revenue
sources, the level of wealth for the community, and specifically the
5 Tellatin, Louis & Andreas, Inc.
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market area of the property appraised, warrants closer examination. While
there are no demographic figures available indicating net worth averages
for any geographic area, wealth levels can be inferred through the
following demographic data.
• Household and/or per capita income
• Percentage of households in poverty
• Average home values
• Percentage of owner-occupied dwelling units
• Educational attainment
Typically, the cost of a single-year stay in a skilled nursing facility
ranges from $30,000 to $50,000 for private-pay patients. Funding a
lengthy stay by all but the wealthiest persons usually necessitates the
use of all regular income sources including social security, pensions,
interest, rents, dividends and other income. Additional monies are often
obtained through the sale of assets, including principal residences, other
real and personal property, and liquidation of investments. All of these
resources must be exhausted, or spent down, to qualify for Medicaid. All
other things equal, facilities located in market areas that have high
income levels and property values typically achieve higher private-pay
mixes than nursing homes located in poorer areas.
Demographic data providing insight as to the economic status of the region
are profiled in Table R-3 as follows.
Table R-3
Economic Data 1980 to 2000
Harrisburg
Economic and Other Data:
Household Income Distribution
$25,000 to $49,000
$50,000 to $99,999
5100,000 to 1149,999
5150,000+
Average Household Income - 1995
Percent of Households in Poverty
Median Home Value - 1990
Home Value : Household Income Ratio
% Owner-Occupied Dwellings
Percent Housing Units Built
Before 1970
1970 to 1980
1980 to 1990
% Adults Bachelor Degree, or Higher
Lebanon
Carlisle Cumberland
Pennsylvania MSA County
35.4% 39.8% 40.1%
20.8% 22.2% 24.5%
3.0% 2.4% 2.7%
1.6% 1.1% 1.3%
$40,040 $39,804 542,357
11.4% 8.0% 5.7%
$69,689 $75,379 $85,016
1.74 1.89 2.01
52.3% 51.9% 54.9%
71.8% 63.9% 59.5%
15.8% 20.1% 21.0%
12.4% 16.0% 19.5%
11.3% 12.0% 15.3%
Data Source: CACI Marketing Systems.
The average household income for Cumberland County is 105.8 percent of the
state average indicative of a modest standard of living. The percentage
6 Tellatin, Louis & Andreas, Inc.
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of the population living in poverty is lower than the state average. Real
estate values play an important role in measuring the level of wealth in
an area because many potential nursing home patients own their residences
and are often forced to sell this major asset in order to fund their long-
term care. Thus, housing values and historical appreciation are important
considerations. In Cumberland County, the home values are fairly high
indicating a median value of $85,016. Also, the cost of housing/living
relative to household income affects personal savings which could
potentially provide funds for nursing services. The Pennsylvania ratio
for median home value to average household income is 1.74:1, and the ratio
for Cumberland County is 2.01:1. Cumberland County has a higher
percentage of new housing units as compared to all of Pennsylvania which
parallels to the overall population trend. The county population is more
educated in comparison to the state average based on college graduates.
Most of these economic data suggest that the region will achieve a
comparable or higher ratio of private-pay patients when compared to the
state average.
The Harrisburg MSA has an economy dominated by state government, but it is
also well diversified in other areas. Cumberland County comprises a
region of the MSA commonly known as the West Shore. Major, local, non-
government employers in the region are listed as follows; employers
located in Cumberland County are italicized.
Major Employers
Product/Services city Employees
Hershey Foods Corporation Food, Food Processing Hershey 6,500
M.S. Hershey Medical Center Hospital/Healthcare Hershey 5,550
Navy Ships Parts Control Center Ship Parts (Federal Government) Mechanicsburg 4,900
AMP Electronics Harrisburg 4,500
Hershey Entertainment & Resort Entertainment/Lodging Hershey 4,151
Defense Distribution, East Region Army Material Distribution New Cumberland 4,136
Kinney Shoes Shoes Harrisburg 2,600
Polyclinic Medical Center Hospital/Healthcare Harrisburg 2,442
Capital Health System Medical Services Harrisburg 2,337
Giant Foods Food Retailing Carlisle 2,316
The state government employs 27,589 workers. The regional economy has
been stable for the last few years influenced by the state government and
other stable companies. Current unemployment in Cumberland County is 3.5
percent; the statewide unemployment rate is 6.1 percent.
In summary, the region has been experiencing moderate population and
economic growth. The relatively average income of the region, coupled
with the projected growth trend, portrays an average to good future for
the local long-term health care providers.
7 Tellatin, Louis & Andreas, Inc.
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REGIONAL MAP
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NEIGHBORHOOD ANALYSIS
The subject is located in the western portion of the MSA in Pennsboro
Township just to the north of Camp Hill. The subject facility uses Camp
Hill for its mailing address. The delineated boundaries of the
neighborhood include the 17011 ZIP code which encompasses Camp Hill and
extends north into East Pennsboro Township. The Susquehanna River, and
the Conodoguinet River, are geographical
even more predominantly
,
influences on the neighborhood. Access to the neighborhood is easily
achieved via the nearby highways: Interstate 81 runs about six miles to
the north of the subject; Interstate 83 cuts through downtown Harrisburg
and crosses the Susquehanna River within a mile to the south of the
subject; and U.S. Highways 11 and 15 traverse through Camp Hill as the
main routes. These routes allow the subject to draw potential patients
from a primary market area spanning a seven- to ten-mile radius
encompassing most of eastern Cumberland County, as well as western Dauphin
County (Harrisburg). Poplar Church Road is a moderately-traveled arterial
that has been developed with offices, and medical offices/clinics relating
to Holy Spirit Hospital. The neighborhood is approximately 3.5 miles west
of the Harrisburg central business district. The neighborhood is
1 characterized as mature urban/suburban area.
Table N-1 presents salient demographic data for the 17011 ZIP code area,
which encompasses the subject neighborhood.
Table N-1
Population Trends 1980 to 2000
Primary
Cumberland Zip Code
County 17011
Total Population
1980 178,541 31,666
1990 195,257 33,023
1995 206,495 34,000
2000 217,192 35,274
Annual Rate of Population Change
1980 to 1990 0.90% 0.42%
1990 to 1995 1.13% 0.58%
1995 to 2000 1.02% 0.74%
Data Source: CACI Marketing Systems.
According to CACI, the population within the neighborhood increased from
1980 to 1990. The population trend continued from 1990 to 1995, and it is
anticipated to increase through 2000 at an annual rate of 0.74 percent.
The neighborhood has been growing at an increasingly greater rate, but
this rate should stabilize beyond 2000 simply because of the lack of
vacant land.
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9 Tellatin, Louis & Andreas, Inc.
The population trends, according to age group and other data pertaining to
age demographics, are profiled in Table N-2 as follows.
Table M-2
Age Distribution and Elderly Population Trends 1990 to 2000
Primary
Cumberland Zip Code
County 17011
Population Age 65-74
1990 15,340 3,379
1995 16,747 3,538
2000 16,785 3,351
Population Age 75-84
1990 8,018 1,878
1995 9,089 2,063
2000 10,701 2,389
Population Age 85+
1990 2,783 597
1995 3,105 698
2000 3,664 854
Annual Growth: 75+
1990 to 1995 2.46% 2.21%
1995 to 2000 3.33% 3.27%
% of Population 75+
1995 5.9% 8.1%
2000 7.0% 9.5%
Median Age - 1995 35.8 39.5
Data Source: CACI Marketing Systems.
The neighborhood experienced 2.21 percent in annual growth for the 75+ age
group from 1990 to 1995. This trend is anticipated to accelerate to 3.27
percent, annually, from 1995 to 2000. This growth rate is relatively high
in comparison to statewide growth rates. The neighborhood contains a
higher percentage of 75+ residents as compared to Cumberland County, and
the median age is higher. Overall, these demographics reflect a mature
neighborhood with an elderly population who are the original home owners
in many cases.
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Demographic data providing insight as to the economic status of the
neighborhood are profiled in Table N-3 as follows.
Table M-3
Demographic and Economic Data
Primary
Cumberland Zip Code
Countv 17011
Economic and Other Data:
Household Income Distribution
S25,000 to 549,000 40.1% 38.1%
S50,000 to $99,999 24.5% 27.4%
S100,000 to 51491999 2.7% 3.7%
S150,000+ 1.3% 1.7%
Average Household Income - 1995 S42,357 S47,062
Percent of Households in Poverty 5.7% 4.4%
Median Home Value - 1990 S85,016 S90,629
Home Value : Household Income Ratio 2.01 1.93
% owner-Occupied Dwellings 54.9% 62.1%
Percent Housing Units Built
Before 1970 59.5% 67.8%
1970 to 1980 21.0% 16.9%
1980 to 1990 19.5% 15.4%
% Adults Bachelor Degree, or Higher 15.3% 19.1%
Data Source: CACI Marketing Systems.
The average household income for the neighborhood is higher than the
regional and state averages. The percentage of the population living in
poverty is correspondingly low. The median home value to average
household income ratio for the 17011 ZIP code area is 1.93:1 which is
fairly moderate considering the higher income level and urban/suburban
locale. There are more owner-occupied dwellings. The neighborhood
population is slightly more educated in comparison to the Cumberland
County average based on college graduates. Most of these demographic
statistics are neutral or positive indicators for the long-term care
industry relative to attracting private-pay patients and qualified staff.
Development within the neighborhood has continued steadily in the last two
decades because of plentiful vacant land in the northern portion of the
neighborhood, but the availability of vacant land is diminishing. As
mentioned, the Conodoguinet River is a major geographic influence on the
subject in that it winds back and forth through the northern portion of
the neighborhood. The river flows through steep hills making development
difficult. Thus, development activity is more restrictive than might
appear on a road map. The subject facility was developed from 1966 to
1975 during which time several office buildings were developed in the same
district. Still, the predominant land use is residential with
concentrations of commercial use along the main routes such as Poplar
Church Road / 21st Street, Erford Road, 32nd Street, and Market Street.
The homes are of average to good quality construction, and they have been
adequately maintained as exhibited by the exterior appearances. In
general, Camp Hill is known as a fairly preferred residential area.
11 Tellatin, Louis & Andreas, Inc.
Overall, the composition of real estate within the neighborhood
complements the subject facility, and the remaining useful life of the
subject facility should not be restricted by the neighborhood.
Proximity to hospitals is an important locational aspect for a nursing
home since hospitals are primary referral sources. The subject is within
one-quarter mile from Holy Spirit Hospital, a 317-bed regional hospital
that serves the entire MSA, and specifically Cumberland County. There are
also two hospitals in Mechanicsburg, and one hospital in Carlisle. There
are several hospitals in Dauphin County.
1 Parcels adjacent to the subject have been improved with: several small
office buildings and several single-family residences converted office use
-- to the north; a parking lot, several mid-rise office buildings, and a
L high-rise apartment complex -- to the south; a parking lot and mid-rise
office buildings -- to the east; and medical offices, followed by a
branch bank, followed by Holy Spirit Hospital -- to the west. These
adjacent improvements impose no negative influence on the subject.
The neighborhood has been experiencing a slow to moderate growth stage in
its life cycle, and it should continue as a viable locale for the subject
into the near future.
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MAP
?1EIGNBORH00D
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SUBJECT PROPERTY DESCRIPTION
Size:
Plot Plan:
Number of Parcels:
Shape:
Average Depth:
Average Width:
Primary Frontage:
Street Improvements:
Secondary Frontage:
Street Improvements:
Accessibility From Major
Regional Highway(s):
Ingress/Egress Restrictions:
Improvements Setback:
Topography:
Soil Conditions:
Nearby Primary Fault Lines:
Utility services:
Adverse Easements:
Adverse Encroachments:
Flood Plain:
Community Panel Number
Date
Zone (See Map)
Land-to-Building Ratio:
On-site Parking Spaces:
Excess Land:
Surplus Land:
Zoning:
Permitted Uses:
Current Use Compliance:
Environmental Issues:
Site Data
6.8 acres, or 296,208 square feet
See Next Page
Two
Irregular
355 feet
830 feet
755 feet on
Two lanes
streetlight
hydrants
386 feet on
Two lanes,
sewers, and
Poplar Church Road
plus center turning lane,
s, curbs, storm sewers, and fire
House Avenue
streetlights, curbs, storm
fire hydrants
Good
None
115 feet from Poplar Church Road, at the
closest point
45 feet from House Avenue, at the closest
point
Gradually sloping downward from street
grade along Poplar Church Road; sloping
upward along House Avenue; leveling for
the main area of the improvements; sloping
downward away from the improvements at the
rear of the site.
Appear suitable for existing improvements
based on surface evidence
None
Electricity, public water, sanitary sewer,
natural gas, and telephone utility lines
None
None
420359 B
April 15, 1977
Zone "C" which is defined as "areas of
minimal flooding."
3.36:1
Adequate
None
None
"OA" Office/Apartment
See Addenda
Yes
Tellatin, Louis & Andreas, Inc., has no
expertise in the evaluation of
environmental hazards and therefore
expresses no independent opinion as to the
existence or absence thereof.
1 14 Tellatin, Louis & Andreas, Inc.
PLOT PLAN
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FLOOD PLAIN MAP
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Description of Improvements
The nursing home is a part one-story, wood-frame and brick structure, and
part three-story, metal frame and brick structure (all connected),
specifically designed for its present use. The building contains a gross
floor area of 88,010 square feet including basement area. It is licensed
for 313 beds and is currently operating at a capacity of 265 beds due to
two wings containing 48 beds being out of service relative to staffing.
Essentially, the majority of the vacant beds are concentrated in these two
wings in order to control labor costs; these wings are not staffed. The
facility contains 13 patient wings emanating from six nurses' stations.
The corridors in the patient wings are eight feet wide which is standard
for modern facilities. The building is fully protected by a wet-type
sprinkler system plus smoke/heat detectors/alarms.
The facility contains a total of 156 patient rooms including three private
rooms, 151 semi-private rooms, and two four-bed wards. There are eight
central tub and/or shower rooms. The patient rooms have either private
toilet facilities or share adjoining semi-private facilities. Other areas
include:
' 17 Offices 2 Dining Rooms
1 Main Lobby 1 Kitchen
8 Central Tub/Shower Rooms 1 Laundry Room
6 Nurses' Stations 2 Employees' Lounges
6 Medical Supply Rooms 1 Living Room
1 Medical Records Room 1 Beauty/Barber Shop
1 Activities Room 7 Dayrooms
1 Physical Therapy Room Public Restrooms
1 Occupational Therapy Room Linen Closets, Soiled/Clean
1 Speech Therapy Room Mechanical Areas
1 In-Service Room Storage Areas
2 Conference Rooms Janitor Closets
There is a partial basement under the 1968 section, and a partial basement
is also under the 1975 three-story section. The basement contains
storage, mechanical, and resident storage.
r Details of the building components are profiled as follows.
SITE PREPARATION & EXCAVATION: General site preparation and
grading; excavation for the basements.
FOUNDATION: Includes excavation for concrete footings under
exterior walls, interior partitions and columns.
FRAME. Loadbearing exterior walls and partitions for the one-
story structure; steel columns and beams for the three-story
structure.
EXTERIOR WALLS, SUPERSTRUCTURE: Wood frame and brick for one-
story section; metal stud and brick for three-story section.
FLOOR STRUCTURE: Reinforced concrete over fill and vapor
barrier on ground level; precast concrete over the basement
in the one-story section; open-web steel joist and metal deck
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17 Tellatin, Louis & Andreas, Inc.
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supporting concrete over the basement and for upper levels in
the three-story section.
ROOF STRUCTURE: Gable-type with wood trusses, rafters and
plywood deck for the one-story section; flat-type, open-web
steel joist and metal deck for the three-story section.
ROOF COVER: Asphalt shingles, metal gutters and downspouts;
rubber membrane.
INTERIOR CONSTRUCTION: Drywall on wood stud partitions in the
one-story section with some metal stud and drywall partitions;
drywall on metal studs in the three-story section; cubicle
curtains; vinyl wall coverings; metal and wood doors in metal
frames; ceramic tile wainscotting in the bathrooms; wood
hand railings.
CEILINGS: Suspended acoustical tile in most areas; drywall,
taped and painted in the patient rooms in the one-story
section.
i FLOOR COVERINGS: Vinyl tile in the most patient rooms,
hallways and most other common areas; carpet in the lobby,
offices, and some patient rooms; ceramic tile in central bath
and tub rooms, and quarry tile in the kitchen.
ELECTRICAL & LIGHTING: Fluorescent and incandescent fixtures;
wiring in conduit; 3,300 amperes total (two panels); 65-KW
emergency generator.
PLUMBING: Adequate and typical for nursing home occupancy;
two hot water thermal storage units
H.V.A.C.: Combination of electric through-the-wall heat and
air-conditioning units; zoned packaged units; electric
baseboard heat (in only one wing).
FIRE PROTECTION: Wet-type sprinkler system throughout; smoke
and heat detectors and alarm system.
ELEVATOR: One, hydraulic, three-stop, 4,000-pound capacity
elevators.
Site improvements include the following.
• Concrete sidewalks, patios and pads
• Asphalt-paved parking lot and drives with curbing
• Exterior lighting
• Flagpole
• Signage
• Landscaping.
Condition and Functional Features
The subject improvements were erected in 1966 and 1968, 1970, and 1975,
and the improvements were specifically designed for the present use as a
18 Tellatin, Louis & Andreas, Inc.
nursing home. The building is of average-quality construction and
exhibits no structural problems or excessive wear and tear. Based on our
inspection of the buildings and our interviews with Dennis McGowen, the
administrator, and Steve Boring and Gary
the maintenance supervisors
the
,
,
following major capital improvements will be necessary in the very near
future.
• New vinyl tile throughout the facility (actually replaced from
November 1, 1995 through April 1, 1996)
Its interior finishes (wall and floor covers) are adequately attractive
according to contemporary tastes: The building should continue to provide
good service for many years without requiring significant replacement of
structural or mechanical components.
The administrator has informed us that the building is not in any serious
code or licensing violation. The Americans with Disabilities Act (ADA)
essentially requires public properties to be accessible to handicapped
persons. While ADA regulations have forced some real estate properties to
be changed and upgraded for greater accessibility, most nursing homes
already complied to ADA regulations at the time of its enactment since
their clientele typically suffer from handicaps. Tellatin, Louis &
Andreas, Inc., has no expertise in determining compliance with the ADA,
and therefore, we express no independent opinion as to compliance.
The building has an efficient floor plan and design. There is no
measurable functional obsolescence.
In summary, the building has been adequately maintained and does not
suffer excessive deterioration or functional obsolescence. Therefore, the
estimated effective age is 25 years, or its actual blended chronological
age.
Equipment Detail
The subject equipment consists of the normal items of furniture and
equipment, including patient room furniture; kitchen, laundry and
maintenance equipment; office furniture and machines; and related items
used in the operation of a nursing home. Unless otherwise stated, it is
assumed that the equipment is in working order and there is sufficient
quantity to operate the facility.
Assessed Valuation and Current Taxes
The current real estate assessed valuation for the subject is $524,130,
and the common level ratio is 7.3 percent, implying that the market value
of the real estate is $7,179,863, or $22,939 per bed. The 1995 taxes are
$91,460, based on an tax rate of 1.27 percent of the implied market value.
Since the function of this appraisal is to determine the reasonableness of
the assessment, the balance of the report is devoted to this issue. The
income capitalization approach will exclude the property taxes from the
operating expenses, and instead the taxes will be measured by adding the
effective tax rate to the capitalization rate.
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19 Tellatin, Louis & Andreas, Inc.
I MARKET ANALYSIS
The analysis of the competitive facilities is the keystone for the
1 valuation in that the conclusions are integral to the highest and best use
analysis and the appropriate sections of the income capitalization and
sales comparison approaches. An analysis is performed of the nursing home
market conditions affecting the subject. This section profiles the
competitive conditions in the market and the impact of governmental
policies. We have obtained specific census data for the seven nursing
homes that are considered most directly competitive with the subject
facility. In addition, we have utilized census and rate information
available from various state sources. The following analyses of these
elements conclude with projections for the subject during the projection
period.
Competitive Position
The market, as defined by the subject and the competitors, includes most
of Cumberland County, specifically the 17011 ZIP code area. The selection
of the primary competitors is intended to represent a sample of the market
supply emphasizing facilities that are the most competitive to the
subject. Seven facilities are located within the primary market area.
However, these primary competitors do not cons titut e the entire market.
The remainder of the market includes facilities that are considered to be
lesser competition. These other facilities have less affect upon the
subject than the seven primary competitors, but their presence affects the
overall supply and demand of the market. Most of these secondary
1 competitors are at the periphery of the subject market or even in adjacent
markets. Urban markets are difficult to delineate because of populous
neighborhoods with few political or geographic boundaries that limit the
decision process for prospective nursing home patients and their families.
The secondary competitors will affect some of the projections for the
subject.
1 Tables C-1 summarizes the salient data for the seven most competitive
facilities. The current census data for the subject are for the month
ending August 31, 1995.
20 Tellatin, Louis & Andreas, Inc.
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Occupancy Rate (Supply and Demand) Analysis
Supply Analysis: The nursing home industry relates supply to demand based
on a ratio of beds per 1,000 elderly residents over age 75. The
Pennsylvania average is 111.7 beds per 1,000/75+ ranking 20th among all
states; the national average is 118.5 beds. Other states range from 62.6
beds for Hawaii to 181.5 beds for Nebraska. Generally, states with warmer
climates that receive an influx of retirees tend to maintain lower ratios
than northern states; essentially, the elderly impose a burden on
southern states to which they have not contributed tax dollars for their
potential need for long-term care. The bed supply ratios for all states
are presented in Table M-1 as follows.
Table M-1
Nursin g Home Bed Ratios Per 1. 000 A ge 65+ and 75+ for 1994
and 1992 Occu pancy Rates
Beds/ Beds/ 1992 Beds/ Beds/ 1992
1,000 1,000 Occu- 1,000 1,000 Occu-
State 65+ 75+ pancy State 65+ 75+ pancy
1 Hawaii 24.4 62.6 94.9% 25 Maryland 50.4 122.4 97.0%
2 Florida 28.1 64.5 95.5% 26 Maine 58.0 125.6 97.6%
3 Nevada 24.9 70.4 91.0% 27 Tennessee 57.6 129.9 97.8%
4 Oregon 34.7 77.3 90.0% 28 Georgia 56.6 132.3 98.2%
5 West Virginia 35.8 81.3 98.6% 29 Kentucky 63.4 141.4 98.6%
6 Arizona 33.9 81.3 91.6% 30 Arkansas 64.9 141.9 94.4%
7 California 35.9 83.3 93.5% 31 Massachusetts 65.1 141.9 97.9%
8 New Mexico 38.5 90.7 98.9% 32 Illinois 65.2 145.7 90.7%
9 Alabama 41.6 94.1 98.6% 33 Texas 64.8 146.9 85.0%
10 Utah 41.9 95.3 86.9% 34 Wyoming 65.1 149.3 96.9%
11 Idaho 42.8 95.3 93.7% 35 Rhode island 67.7 150.2 97.4%
NA District of Columbia 42.7 97.8 98.2% 36 Wisconsin 71.1 151.2 96.1%
12 South Carolina 39.8 99.8 98.8% 37 Ohio 65.7 151.9 95.7%
13 Virginia 42.0 100.5 97.3% 38 Connecticut 68.0 152.7 97.8%
14 New York 45.5 101.9 97.4% 39 Delaware 63.0 154.7 91.0%
15 New Jersey 43.9 102.9 N/A 40 Iowa 76.3 156.9 96.7%
16 Mississippi 47.3 103.9 99.0% 41 Missouri 74.1 157.9 92.1%
17
18 Michigan
North Carolina 45.3
44.6 105.2
106.5 95.6%
96.9% 42
43 North Dakota
Minnesota 78.5
78.2 158.1
162.3 99.5%
98.6%
19 Washington 47.2 107.4 94.1% 44 South Dakota 80.5 165.9 97.6%
20 Pennsylvania 48.4 111.7 95.0% 45 Indiana 74.7 167.8 86.7%
21 Colorado 49.2 113.4 89.0% 46 Oklahoma 78.8 170.2 85.4%
22 Alaska 38.8 113.6 86.7% 47 Nebraska 83.9 170.7 93.3%
23 New Hampshire 52.9 116.7 96.9% 48 Kansas 83.7 174.6 94.6%
24 Vermont 54.9 118.4 97.5% 49 Montana 79.7 177.5 93.0%
NA United States 52.1 118.5 94.9% 50 Louisiana 78.2 181.5 91.6%
The most interesting aspect revealed in the above table relates to the
high occupancy rates throughout the range of bed supplies. Among the ten
states with the highest ratios, the average occupancy was 93.7 percent in
1992. Apparently, an abundant supply of nursing home beds does not
necessarily result in low occupancy rates.
Based on the 75+ population and 2,202 nursing home beds in Cumberland
County, there are 180.6 beds per 1,000/75+ [{Number of beds + (1995 75+
population + 1,000)) _ (2,202 + (12,194 + 1,000)) = 180.6]. Based on
these county and state ratios, the market appears to be imbalanced with an
excessive supply of nursing home beds.
Demand Analysis: The primary market area of the subject long-term health
care facility includes a large portion of eastern Cumberland County,
1 22 Tellatin, Louis & Andreas, Inc.
I
specifically the 17011 ZIP code area. According to CACI projections for
1995 to 2000, the 75+ population within Cumberland County is expected to
increase at an annual compounded rate of 3.33 percent. More specifically
,
the 75+ population within the neighborhood as defined by the 17011 ZIP
code indicates growth of 3.27 percent, annually from 1995 to 2000. The
"graying of America" is prevalent in most states, and these demographics
portray this trend.
Some of the future demand for senior housing/healthcare is expected to be
satisfied by assisted-living facilities and home health care arrangements
as federal and state budgets necessitate policies that provide healthier
patients less expensive alternatives. As a result of these pressures,
nursing home acuity levels will continue to increase placing greater
demands on professional care givers.
Based on the foregoing analysis, the projected annual increase in demand
for geriatric long-term care beds over the projection period is 2.75
I percent annually.
The aggregate occupancy rate for the 2,075 nursing home beds in Cumberland
County during 1994 was 90.7 percent.l The occupancy rates for the
competitive facilities and historical occupancy rates of the subject are
as follows.
Table C-2
SUMMARY OF COMPARABLE NURSING HOME OCCUPANCY RATES
% Fair
Fair Market
# of Market Occupancy Share Market
No. Name Beds Share Rate Captured Penetration
1 Camp Hill Care Center 118 9.2% 91.9% 9.8% 106.4%
2 Leader Nursing & Rehab Center 103 8.0% 92.0% 8.5% 106.5%
3 Blue Ridge Haven Center-East 67 5.2% 91.0% 5.5% 105.4%
4 Leader Nursing & Rehab Ctr.-LP 240 18.7% 92.2% 20.0% 106.8%
5 Susquehanna Ctr.-Nurs. & Rehab 180 14.0% 77.9% 12.6% 90.2%
6 Bethany Village Retirement Ctr 69 5.4% 93.9% 5.8% 108.7%
7 Messiah Village 194 15.1% 94.6% 16.5% 109.5%
Subject Facility 313 24.4% 75.1% 21.2% 86.9%
Market Area
Totals and Averages 1,284 100.0% 86.4% 100.0% 100.0%
High 94.6%
Low 75.1%
Occupancy History for the Subject
12/31/93 88.7%
12/31/94 80.3%
08/31/95 78.4%
Average of Period Reviewed 82.5%
Table C-2 presents calculations for fair market share, fair market share
captured, and the market penetration for each of the competitors. Fair
market share constitutes the respective beds for each facility divided by
' Pennsylvania Department of Health - State Center for Health Statistics
& Research, Data from the Long-Term Care Facilities Questionnaire, January 1,
1994 to December 31, 1994, Report 1.
1
23 Tellatin, Louis & Andreas, Inc.
the total number of beds in the market. In a balanced market, all
competitors will capture fair market shares resulting in market
penetrations of 100.0 percent for each facility. Currently, the subject
captures less than its fair market share indicating a 86.9 percent market
penetration. Besides the subject and Competitor Five, the occupancy
levels are relatively consistent. The historical occupancy for the
subject has been dropping indicating that the subject has struggled to
remain competitive. Management has elected to take off-line 48 beds
within two wings. While these beds are not staffed, if demand warranted,
patients could be put in these beds at any time coinciding with a change
in staffing. The subject facility is relatively large at 313 beds.
Because it is the largest facility in the region, it is often the target
of demonstrators who converge on the state capital for various issues. As
a result, the subject is often portrayed negatively in the local press,
and the bad press has hurt its reputation resulting in a low occupancy and
low private-pay mix.
As previously calculated, Cumberland County has an oversupply of nursing
beds in comparison to the state average -- 180.6 beds versus 11.7 beds per
1,000/75+, respectively. The state ratio is relatively low compared to
most states. Pennsylvani a applies a bed-need methodology on a countywide
basis using an expected occupancy rate of 95.0 percent, and estimated
institutional dependency within five age cohorts. Accordingly, the state
perceives that Cumberland County has a surplus of 753 beds -- including
125 beds that have already been approved. These beds have been approved
since 1990, and the likelihood that these beds will be added is considered
somewhat remote because of the oversupply.
Given growth in demand of 2.75 percent (as previously estimated),
additions to the supply will eventually be necessary to satisfy this
growth. We have employed particular assumptions based on aforementioned
CON methodologies in order to estimate potential additions to the supply.
The occupancy threshold represents the attainment of a market occupancy
level which triggers the need for additional beds. We have selected a
threshold occupancy level of 95.0 percent. The urban market limits the
sensitivity to additions to the supply because of overlapping markets.
Accordingly, we have set the minimum incremental increase in additions to
the supply at 90 beds.
Table C-3 presents the estimated occupancy rates for the subject over the
eight-year projection period and the key assumptions applied to the
calculations.
11
24 Tellatin, Louis & Andreas, Inc.
1
11
Table C-3
SUBJECT OCCUPANCY RATE PROJECTIONS OVER THE PROJECTION PERIOD
Assumptions For Occupancy Changes Over The Projection Period
Annual Growth in Demand: 2.75%
Occupancy Threshold for Added Beds: 95.0%
Minimum Incremental increases to Supply of Beds: 90
Maximum Market Occupancy 96.0%
Total Beds Total Subject Subject Subject
Annual Total Market Added To Market Fair Occupancy Estimated
Demand Beds Bed Previous Occupancy Share of Penetration Occupancy
Year Growth Demanded Supply Supply Rate Demand Rate Rate
Current 1,109 1,284 86.4% 24.4% 86.9% 75.1%
1996 2.75% 1,140 1,284 0 88.8% 24.4% 88.0% 78.1%
1997 2.75% 1,171 1,284 0 91.2% 24.4% 88.0% 80.3%
1998 2.75% 1,203 1,284 0 93.7% 24.4% 88.0% 82.4%
1999 2.75% 1,236 1,284 0 96.0% 24.4% 88.0% 84.5%
2000 3.50% 1,279 1,374 90 93.1% 22.8% 88.0% 81.91%
2001 2.00% 1,305 1,374 0 95.0% 22.8% 88.0% 83.6%
2002 2.75% 1,341 1,374 0 96.0% 22.8% 88.0% 84.5%
2003 3.50% 1,388 1,464 90 94.8% 21.4% 88.0% 83.4%
The subject has begun the latter stage of its expected life whereby it is
experiencing a persistent penetration below the market average.
As a result of these conclusions, the subject occupancy increases over the
projection period with corrections in the occupancy occurring as the
projected additional beds are added to the supply. The intent of this
supply and demand analysis has been to show the impact of additional
supply as it affects the subject occupancy.
Payor Mix Analysis
Estimating the most probable payor mix of the subject is essential in the
valuation of a long-term care facility. In most instances, Medicaid is
less profitable than the other payment forms. Thus, the greatest degree of
competition for patients is in the private-pay market. The payor mix
conclusions are vital to the income analysis and represent a major element
of comparison in the direct sales comparison approach.
The payor mix is affected by local economic conditions, local supply-and-
demand conditions, specific physical features, and characteristics of
location and reputation. Also, Medicaid eligibility requirements vary
from state to state. One important reason for examining the socioeconomic
characteristics of the market area of the subject in the regional and
neighborhood analyses is to assess the market area's current (actual) and
otential) capability of supporting the subject nursing home
future (
.
p
All other things equal, facilities located in market areas that have high
income levels and property values typically achieve higher private-pay
mixes than nursing homes located in poorer areas. The physical condition
of the facility also impacts the ability of a facility to achieve a high
private-pay mix. Obviously, newer, more attractive buildings and sites
have the advantage. The reputation of the facility also contributes
substantially to the payor mix of the subject. Under stable market
25 Tellatin, Louis & Andreas, Inc.
conditions, the current and historical payor mixes of the subject provide
a sound indication of its probable future payor mix. However, any new
facilities opening in the market area will have an impact on the market.
Generally, a new facility will reduce the private-pay percentage of the
other nursing homes in its market area because new facilities tend to
attract higher percentages of private-pay admissions.
Private-Pay Mix: The statewide private-pay mix was 28.4 percent during
1994, and the private-pay mix for all nursing homes in Cumberland County
during all of 1994 was 34.0 percent.2 As discussed in the regional and
neighborhood analyses of this report, the average household income of the
residents in the primary market area of the subject is greater than the
state and regional averages, and correspondingly, the poverty rate is low.
Taken together, these data suggest that there is average to good prospects
for a relatively high private-pay mix in this market.
Table C-4 presents the current private-pay mixes for the subject and
competitive facilities, and the subject's historical private-pay mixes for
the last three years. For the purpose of this appraisal, VA patient days
are classified as private-pay.
Table C-4
SUMMARY OF COMPARABLE NURSING HOME PRIVATE PAY MIXES
Private-Pay
# of Private- Market
No. Name Beds Pay Mix Captured
1 Camp Hill Care Center 118 1.3% 0.4%
2 Leader Nursing & Rehab Center 103 54.5% 15.5%
3 Blue Ridge Haven Center-East 67 24.1% 4.4%
4 Leader Nursing & Rehab Ctr.-LP 240 20.9% 13.9%
5 Susquehanna Ctr.-Nurs. & Rehab 180 17.8% 7.5%
6 Bethany Village Retirement Ctr 69 62.4% 12.1%
7 Messiah Village 194 69.3% 38.2%
Subject Facility 313 11.3% 7.9%
Market Area
Totals and Averages 1,284 30.0% 100.0%
High 69.3% 38.2%
Low 1.3% 0.4%
Private-pay Mix History for the Subject
12/31/93 7.7%
12/31/94 7.0%
08/31/95 9.8%
Average of Period Reviewed 8.1%
Since private-pay patients are the most discretionary in their choices for
long-term care, private-pay mixes give the greatest insight for preference
rankings among competitors. The subject is one of the least-preferred
facilities in the market, because, as mentioned earlier, it is often the
target of industry protests descending on the capital. The private-pay
mix of the subject falls below the market average mix, and the subject
captures 7.9 percent of the private-pay market. Competitor One is an
affiliated facility that also suffers from a poor reputation, and it is
located just to the east of the subject. The distribution of the private-
2
ibid
26 Tellatin, Louis & Andreas, Inc.
located just to the east of the subject. The distribution of the private-
pay demand is evenly imbalanced among the competitors indicating that
prospective patients are distinguishing among facilities. Several
competitors benefits from offering complementary levels of senior housing.
As shown earlier in the supply analysis, market demand will eventually
prompt the addition of new beds. The private-pay capture rate of the new
beds is expected to be greater than the current market average private-pay
mix since the new beds will be featured within new, attractive, well-
located facilities. The private-pay mix of the new beds is estimated at
40.0 percent. The new facility will attract these private-pay patients
from the other competitors reducing the private-pay penetration rates and
mixes of the subject and the other competitors. Other than shifts in the
payor mix caused by added bed supply, the private-pay penetration rate and
payor mix will remain fairly stable for the competitive market in general,
and for the subject specifically, over the projection period.
The prospects for the subject are not good for attracting private-pay
patients. Therefore, we project an 8.0 percent private-pay mix for the
first year which equates to a 5.8 percent share of the private-pay market.
Private-pay attrition is -occurring universally in the nursing home
industry, and the subject is not immune to this phenomenon as demonstrated
by its recent historical census mix trend. The private pay mix of
Cumberland County declined slightly from 34.2 percent in 1993 to 34.0
percent in 1994; similarly, the statewide mix declined from 29.3 to 28.4
percent .3 Private-pay attrition is attributable to a more-educated senior
population who is sheltering assets from Medicaid or choosing alternatives
to skilled nursing care. Also, as a facility ages, its appeal diminishes
in most cases. There is an inverse relationship between the increasing
Medicaid mix and private-pay attrition. The decline from 1993 to 1994 is
considered fairly most compared to most areas of the state. We have
estimated the private-pay mix attrition rate to equal 2.0 percent for the
private-pay mix of the previous year throughout the projection. The
attrition is applied in Table C-7 to the market which in turn affects the
subject payor mix.
VA Mix: Veterans Administration (VA) patients are incorporated in the
previous analysis of the private-pay payor mix. The VA mix will be
included in the private-pay mix and rate projections.
Based on the foregoing analyses, the projected private-pay mix for the
competitive market, and specifically the subject, for the eight-year
projection period is shown on Table C-5.
ibid.
27 Tellatin, Louis & Andreas, Inc.
1
1
Table C-5
ANALYSIS OF PRIVATE-PAY MARKET CAPTURE RATE AND PAYOR MIX PROJECTIONS
No. Name
1 Camp Hill Care Center
2 Leader Nursing 8 Rehab Center
3 Blue Ridge Haven Center-East
4 Leader Nursing 8 Rehab Ctr.-LP
5 Susquehanna Ctr.-Nurs. 8 Rehab
6 Bethany Village Retirement Ctr
7 Messiah Village
Subject Facility
Additions to the Supply
Total Market
1 Camp Hill Care Center
2 Leader Nursing 8 Rehab Center
3 Blue Ridge Haven Center-East
4 Leader Nursing 8 Rehab Ctr.-LP
5 Susquehanna Ctr.-Nurs. 8 Rehab
6 Bethany Village Retirement Ctr
7 Messiah Village
Subject Facility
Private-Pay Days for
Additions to the Supply
Total Market Private-Pay Days
Proiected Private-Pay Capture Rates
1996 1997 1998 1999 2000 2001 2002 2003
0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.3%
15.8% 15.8% 15.8% 15.8% 14.3% 14.3% 14.3% 12.8%
4.5% 4.5% 4.5% 4.5% 4.1% 4.1% 4.1% 3.6%
14.2% 14.2% 14.2% 14.2% 12.8% 12.8% 12.8% 11.5%
7.7% 7.7% 7.7% 7.7% 6.9% 6.9% 6.9% 6.2%
12.4% 12.4% 12.4% 12.4% 11.2% 11.2% 11.2% 10.0%
39.0% 39.0% 39.0% 39.0% 35.2% 35.2% 35.2% 31.5%
5.8% 5.8% 5.8% 5.8% 5.3% 5.3% 5.3% 4.8%
0.0% 0.0% 0.0% 0.0% 9.7% 9.7% 9.6% 19.1%
100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Proiected Private-Pay Patient Days
1996 1997 1998 1999 2000 2001 2002 2003
1.4 75 1.5 1.5 1.3 1.3 1.4 1.2
53.0 53.4 53.7 54.0 49.4 49.4 49.9 45.3
15.1 15.2 15.3 15.4 14.1 14.1 14.2 12.9
47.5 47.8 48.1 48.4 44.2 44.3 44.7 40.6
25.6 25.8 26.0 26.1 23.9 23.9 24.1 21.9
41.5 41.8 42.0 42.3 38.7 38.7 39.1 35.5
130.6 131.5 132.3 133.1 121.6 121.8 122.9 111.6
19.6 19.7 19.8 19.9 18.2 18.2 18.4 16.9
0.0 0.0 0.0 0.0 33.5 33.5 33.5 67.6
335.0 337.2 339.2 341.2 345.4 345.8 348.6 353.9
Subject Private-Pay Capture Rate 5.8% 5.8% 5.8% 5.8% 5.3% 5.3% 5.3% 4.8%
Subject Private-Pay Mix 8.0% 7.8% 7.7% 7.5% 7.1% 7.0% 6.9% 6.4%
Medicare Mix: Medicare is a federal entitlement program that provides
d
i
l
nurs
ng or
e
short-term coverage for those 65 and older who require skil
rehabilitative care on a daily basis.
Effective January 1, 1989, the Catastrophic Health Care Bill (CHCB)
upgraded the extent of coverage for most persons age 65 and over. In
general, Medicare provided short-term coverage for the first 150 days of
skilled nursing home care, requiring the patient to make only a co-payment
of $20.50 for the first eight days, and covering the remaining 142 days
entirely under this act. As a result of this law, most nursing homes
1 experienced large increases in Medicare census.
However, this law has now been rescinded, limiting coverage to only 100
days with Medicare entirely covering the first 20 days and a co-payment of
$92.00 being required from the. patient for the remaining 80 days of
potential coverage. At most facilities, Medicare has diminished to a
level below the peak utilization of 1989, but utilization has not reverted
to the lower pre-1989 level because management has learned how to operate
within the Medicare system and trained staff to provide the necessary
28 Tellatin, Louis & Andreas, Inc.
skilled-care services. Also, nursing home patients are entering nursing
homes in conditions that require greater acute care, and most often,
admissions are referred directly from hospitals. In order to qualify for
Medicare coverage, a nursing home patient must have experienced a three-
day hospital stay immediately prior to admittance to the nursing home.
Most admissions from hospitals are covered by Medicare for the purpose of
observation and assessment for a maximum of the first 20 days.
Thus, the Catastrophic Health Care Bill prompted most nursing home
administrators to pursue more Medicare patients in 1989, and upon
rescission of CHCB, management personnel have attempted to retain this
payor mix given their new and/or enhanced knowledge of the system.
Table C-6 presents the current Medicare mixes for the subject and
competitive facilities, and the subject's historical Medicare mix for the
last three years.
Table C-6
SUMMARY OF COMPARABLE NURS ING HOME MEDICARE MIXES
Medicare
# of Medicare Market Subacute
No. Name Beds Mix Captured Specialty
1 Camp Hill Care Center 118 20.7% 17.0% Yes
2 Leader Nursing & Rehab Center 103 23.5% 16.8% Yes
3 Blue Ridge Haven Center-East 67 9.4% 4.3% No
4 Leader Nursing & Rehab Ctr.-LP 240 16.3% 27.2% No
5 Susquehanna Ctr.-Nurs. & Rehab 180 5.1% 5.4% No
6 Bethany Village Retirement Ctr 69 8.3% 4.1% No
7 Messiah Village 194 6.9% 9.6% No
Subject Facility 313 8.8% 15.6% No
Market Area
Totals and Averages 1,284 11.9%
High 23.5%
Low 5.1%
Pay or Mix History of the Subject
12/31/93 7.6%
12/31/94 11.0%
08/31/95 11.8%
Average of Period Reviewed 10.1%
According to figures published by the American Health Care Association,
Medicare patients represent 6.6 percent of all patients in freestanding
nursing facilities4. The management of the subject aggressively pursues
Medicare patients. It has 61 Medicare-certified beds and adequate
building area for therapy services to maximize overhead cost shifting.
The historical Medicare mix for the subject has been greater than the
market and state average (7.8% -- 1994).
The subject receives its Medicare referrals from several hospitals in the
th
95
area. According to a CON inventory list ere
,
effective July 14, 19
were no approved hospital-based SNF beds not yet licensed in Cumberland
< American Health Care Association, Facts and Trends, The Nursing Facility
Sourcebook. 1995
29 Tellatin, Louis & Andreas, Inc.
County. However, 25 beds were recently added to Seidle Memorial Hospital
in Mechanicsburg, about eight miles to the west. The addition of these
beds will have a minor impact on the subject. Based on these
considerations, the Medicare mix of the subject should remain consistent
with its historical performance.
Given management's inclination for a higher acuity mix, and the
anticipated hospital situation, we expect the subject will continue to
experience a Medicare mix that is consistent with its historical average.
Thus, we project a first-year Medicare mix of 11.9 percent.
Medicaid Mix: Medicaid is the payor of last resort, and the Pennsylvania
Medicaid program pays the least in most cases. The remaining portion of
the payor mix is projected to consist of Medicaid patients.
Table C-7 summarizes the payor mixes for the projection period.
Table C-7
ESTIMA TED PAYOR M IX OF THE SUBJECT OVER THE HOLDING PE RIOD
Payor Mix
Natural Assumptions
Private-pay Over The Proiection
Attrition Factor: Period
-2.0%
Subject Market Medi care Pene tration: 100.0%
Private-pay Capture Rate of New Beds: 40.0%
Natural --------------------- Market Payor Mix Data - -------------- -------
Year Annual
Demand Private --------- Percentages ----------
Attrition Private --- Aver age Number of Days --
Private
End Growth Rate Medicaid Medicare & Other Medicaid Medicare & Other
Current
1996
2.75%
-2.0% 58.0%
58.7% 11.9% 30.0%
11.9% 29.4% 644.0
668.9 132.0
135.6 333.0
335.0
1997 2.75% -2.0% 59.3% 11.9% 28.8% 694.3 139.3 337.2
1 1998 2.75% -2.0% 59.9% 11.9% 28.2% 720.7 143.1 339.2
1999 2.75% -2.0% 60.5% 11.9% 27.6% 747.9 147.0 341.2
2000 3.50% -2.0% 61.1% 11.9% 27.0% 781.9 152.1 345.4
2001
2002 2.00%
2.75% -2.0%
-2.0% 61.6%
62.1% 11.9% 26.5%
11.9% 26.0% 804.1
832.9 155.1
159.4 345.8
348.6
2003 3.50% -2.0% 62.6% 11.9% 25.5% 868.9 165.0 353.9
Subject Subject Subject Subject Subject
New Private Private Medicare Medicare Medicaid
Year Beds In Market
End Market Captured Mix Market
Estimate Penetration mix
Estimate mix
Estimate
C urrent 7.9% 11.3% 73.8% 8.8% 79.9%
1996 0 5.8% 8.0% 100.0% 11.9% 80.1%
1997 0 5.8% 7.8% 100.0% 11.9% 80.3%
1998 0 5.8% 7.7% 100.0% 11.9% 80.4%
1999 0 5.8% 7.5% 100.0% 11.9% 80.6%
2000 90 5.3% 7.1% 100.0% 11.9% 81.0%
2001 0 5.3% 7.0% 100.0% 11.9% 81.1%
2002
2003 0
90 5.3%
4.8% 6.9% 100.0%
6.4% 100.0% 11.9%
11.9% 81.2%
81.7%
Rate Analysis
This section analyzes the market and governmental data that set the most
probable private-pay, Medicaid, and Medicare rates.
30 Tellatin, Louis & Andreas, Inc.
1 Private-pay Rates: Private-pay rates are the only rates that are not
regulated in Pennsylvania; these rates are set by competitive market
forces. The relative differences in neighborhoods, physical qualities of
the nursing home property, level of care, and general reputation of the
facility in the community at large and the health-care community in
particular, directly influence the private-pay rates. This appraisal
embraces these issues by directly comparing these various attributes of
the subject to the competitive facilities. By utilizing this comparison
process and examining actual historical results of the subject nursing
home, we can firmly establish the most probable stabilized average
private-pay rate.
Table C-8 presents the private-pay rates for the subject and the
competitors according to acuity level and room type. Since semi-private
rooms are most abundant, these rates provide the best comparisons; greater
disparity is typical among the rates for private rooms since some
facilities will charge a substantial premium while others will not.
Table C-8
SUMMARY OF COMPARABLE NURSING HOME PRIVATE-PAY RATES
---------------- Private-Pay Rates --------- --------
No.
Name ----- SNF
Private ------
2-Bed ----- ICF
Private ------
2-Bed ----- AL
Private Z ------
2-Bed
1 Camp Hill Care Center $118.00 $115.00 $118.00 $110.00
2 Leader Nursing & Rehab Center 131.00 140.00 125.00
3
4 Blue Ridge Haven Center-East
Leader Nursing & Rehab Ctr.-LP 125.00
138.00 110.00
125.00 125.00
138.00 110.00
125.00
145.00
5 Susquehanna Ctr.-Nurs. & Rehab .320.00 160.00 153.00 124.00 124.00
6 Bethany Village Retirement Ctr 146.00 130.00 146.00 130.00
7 Messiah Village
Subject Facility 120.00
201.00 118.00
127.00 120.00
161.00 118.00
102.00 120.00 118.00
Market Area
Totals and Averages $166.86 $127.00 $137.63 $118.00 5120.00 $129.00
High $320.00 $160.00 5161.00 $130.00 $120.00 $145.00
Low $118.00 $110.00 $118.00 $102.00 $120.00 $1.18.00
Average Private-pay Rate History of
12/31/93 the Subj
$94.72 ect
' 12/31/94 $112.16
08/31/95 5130.62
Current $122.59
1
I
The private-pay rates of the subject are in the middle to lower portion of
the competitive range. The subject is one of the least-preferred
facilities in the market, but management is still pricing private-pay
rates relatively high sacrificing private-pay mix.
The projected average, stabilized, private-pay rate for the subject is
$125 per patient day, or slightly high than its approximate current
average rate.
Medicaid Rate Analysis: The current Medicaid rate for the subject is
$116.00 based on a new case-mix reimbursement that was implemented January
1, 1996. The reimbursement system is administered by the Department of
Public Welfare (hereafter the "Department").
31 Tellatin, Louis & Andreas, Inc.
1
Under this case-mix system, rates are determined prospectively and are
divided into four cost components: resident care, other resident care,
administrative, and capital costs.
Nursing facilities are categorized into peer groups based on the
facility's geographic location and number of certified beds. The
Department sets a per diem rate for each nursing facility that: 1) equals
the nursing facility's resident care peer group price, adjusted to reflect
the resource usage of the nursing facility's Medical Assistance (MA)
residents, limited by a profit cap; and 2) the other resident related peer
group price, limited by a profit cap; and 3) the nursing facility's
administrative peer group price; and 4) an additional facility-specific
capital rate. A separate peer group has been established for hospital-
based nursing
per diem rate facilities.
on a quart The Department adjusts the nursing facility's
erly basis to reflect changes in the nursing
facility's Medicaid case mix. The case mix system adjusts the resident
care costs by the case mix index to reflect the resource use of residents
in each nursing facility. The Resource Utilization Groups-Version III
system (RUGS-III), a 44-group classification system, is used when
determining each facility's case-mix index. Data from the Minimum Data
Set instrument and Pennsylvania Medicaid supplement are used to classify
residents in each nursing facility.
Resident care costs include salaries, benefits, and contract labor for
' nursing, the director of nursing, related clerical staff, practitioners,
the medical director, utilization and medical review, social services,
resident activities, volunteer services, over-the-counter drugs, medical
supplies, therapies (physical, occupational and speech), oxygen, and
beauty and barber. The resident care expenses are case-mix neutralized
prior to the determination of the median peer group setting. The ceiling
i is established at 117.0 percent of the peer group using the most recently
audited Medicaid cost reports, which are from 1992 in most cases. The
facility-specific resident care rate is the lesser of the peer group
ceiling, or the last audited, case-mix neutralized costs, rolled forward
by the DRI factor to December 31, 1995, multiplied by 103.0 percent, plus
30.0 percent of the difference between that product and the peer-group
ceiling. The rate is then adjusted to reflect the case mix index. A
facility-specific price is adjusted for the case-mix index quarterly. As
of January 1, 1996, the subject receives $70.96.
Other resident related costs include salaries and benefits paid to dietary
workers, food, salaries, benefits and supplies for laundry, housekeeping,
plant operations and maintenance. This cost center is not adjusted for
the patient case mix; the cost ceiling is set at 112.0 percent of the
peer group median. The facility-specific other resident related cost
component is the lesser of the peer group ceiling, or the latest audited
cost report rolled forward by the DRI factor, plus 30.0 percent of the
difference between that product and the peer-group ceiling. As of January
1, 1996, the subject receives $29.38.
Administrative costs include salaries and benefits paid to the
administrator, office personnel, management fees, home office costs,
professional services, determination of eligibility costs, advertising,
travel /entertainment, telephone, insurance, allowable working capital
interest, legal fees, transportation equipment depreciation,
transportation equipment interest, and amortization of administrative
32 Tellatin, Louis & Andreas, Inc.
I
costs. All facilities within a peer group receive the same payment, set
at 104.0 percent of the audited peer group median; a minimum occupancy
rate of 90.0 percent is applied to this rate component. As of January 1,
1996, the subject receives $9.37 which is the peer group ceiling.
For the first six months- of the case-mix program, the Department's
estimated peer group price ceilings are as shown as follows.
The subject property is in Peer Group 4.
Pennsylvania Department of Public Welfare's
Case Mix Peer Group Prices (Ceilings)
1/1 /96 through 6/ 30/96
Other Total
Peer Resident Resident Adminis- Before
Grou Care Related trative Capital
1 $77.88 $37.60 $9.66 $125.14
2 64.61 27.53 11.98 104.12
3 63.03 28.66 11.95 103.64
4,1,10 76.68 .33.44 9.37 119.49
5 58.61. 24.86 10.33 93.80
6 57.32 25.91 10.39 93.62
8 55.00 25.88 9.64 90.52
9 51.37 23.97 10.05 85.39
' 11 54.70 22.81 8.82 86.33
12 47.71 23.90 9.54 81.15
13 92.09 59.16 20.64 171.89
14 80.41 48.60 14.39 143.40
Payments of capital costs are determined on a facility-specific,
prospective basis and are based on: the fair rental value of the nursing
facility, a selected financial yield rate, and the nursing facility's real
estate taxes, or reasonable payment made in lieu of real estate taxes. In
the event of a change in ownership, the new owner, or provider, will
receive the same capital rate as the old provider.
With regard to the capital cost component of the rates, appraisers
estimate the value of the physical plants (building, land and FF&E) of
each nursing home in the state. The maximum value is $22,000 per bed for
the January 1, 1996 rate, but the ceiling will be increased to $26,000.
According to Mr. Robert Sife with the Pennsylvania Health Care
Association, only 32 of the 636 facilities within the Medicaid system were
appraised -for less than the $22,000 original ceiling. Therefore, most
facilities receive the same capital payment. Property taxes are included
in the capital payment as a direct pass through.
The fair rental value of each facility is determined by applying the going
rates for 60-month average Aaa corporate bonds (Moody's) to the appraised
value of each facility. The rate currently in effect is 8.24 percent.
Using this appraised value methodology, the capital component of the
Medicaid rate effectively pays for the economic or use value of the asset.
The Department believes that this methodology encourages equity build-up,
continuity of ownership, and increased bargaining on the part of nursing
[1
33 Tellatin, Louis & Andreas, Inc.
home owners to obtain low-cost capital financing. This payment
constitutes compensation for all capital costs, including rent,
depreciation, interest on property debt, and return on equity. Si nce the
appraised value of most facilities exceeds the $22,000 per bed limit,
renovation expenses often go unreimbursed. This payment system
discourages capital improvements.
The appraised value of the subject facility for the fair market rental
valuation, effective March 31, 1995 is:
Land $ 620,800
Building 5,952,900
Land Improvements 239.000
Subtotal $6,812,700
Movable Equipment 524.000
Total $7,337,400
Total Per Bed $ 2121.7 66
Real Estate Only Per Bed $ n_,__442_
The appraised value exceeds the $22,000 per-bed limitation, thus the
facility will be paid on the $22,000 basis. The capital payment will be
limited to the 90.0 percent minimum utilization rate since the census
never reaches this level throughout the entire forecast period. Based on
the minimum occupancy of 90.0 percent, and the current 8.24 percent return
factor, the capital component of the rate is $5.56.
Medicare Part A Rate Analysis: Medicare is a federal program administered
by the Health Care Financing Administration (HCFA). Medicare
reimbursements are computed on a cost-based retrospective system whereby
an interim rate is reimbursed through the fiscal year with a year-end
settlement based on the differential between allowable actual costs and
the reimbursements received from the interim rate. Since Medicare
patients must spend three days in a hospital immediately prior to
admittance to a nursing home in order to qualify for the program, their
conditions are typically more acute, requiring greater care than other
nursing home patients. Medicare recognizes the greater costs associated
' with high-acuity patients by including ancillary services in the
reimbursement.
Medicare distinguishes services as either "routine" or "ancillary" --
ancillary services are either Part A or Part B. The routine services are
reimbursed based on the lower of actual costs or charges (most frequently
costs) up to a regional peer group ceiling set at 112.0 percent of the
mean (excluding capital). HCFA has frozen routine cost ceilings, and
several extensions have been made delaying the termination of the freeze.
Within the routine costs, capital costs are computed based on facility-
specific interest costs plus depreciation with no allowance for equity.
Part A routine services are combined with costs for Part A ancillary
services which correlates to the interim Medicare rate. The Part B
ancillary services apply to patients who no longer qualify for Medicare
Part A but who do require and qualify for certain therapy services. These
Part B ancillary services are billed separately from the interim rate.
Most providers combine Part B revenues with private-pay ancillary revenues
in the income statement. Part B ancillaries will be discussed and
projected in the income approach.
34 Tellatin, Louis & Andreas, Inc.
Ir-]
u
Medicare reimburses for Part A based on the lower of cost or charges. As
a part of the costs, overhead is allocated to the therapies based on
building area dedicated to therapy room(s) and other units of measure
which relate to the step-down allocation process. The age of the facility
is a major influence on overhead because newer facilities have greater
capital costs than older facilities; these capital costs are allocated as
a part of overhead. The overhead is essentially the profit on the therapy
services. According to industry reimbursement consultants and
accountants, overhead allocation typically results in a 15.0 to 30.0
percent "profit margin" on the ancillary services.
As of the date of inspection, the Medicare interim rate for the subject is
$282.00, effective November 11, 1995. The previous rate was $274.00.
These rates seem high based on the historical performance as presented in
Table H-1 in the Income Analysis -- $254.19 in 1994 and $210.51 in 1995.
We have used $230.00 for the projected Medicare rate.
Operator sophistication can have a tremendous impact on Medicare
reimbursements. Documentation of services is required for reimbursement,
and if services are rendered but not documented, Medicare will not
adequately reimburse for the services. If documentation is erroneous,
Medicare will make an "exception" to the identified charge, and management
must correct the error in a timely fashion, or Medicare may disallow the
cost of the service. In the past, many small operators have elected to
' forgo participating in the Medicare program as a result of these
documentation requirements. However, since a larger percentage of nursing
home residents are referred to nursing homes from hospitals, Medicare
participation is becoming more essential to maintain occupancy levels.
The advent of computer software programs has improved documentation.
Clearly, the provision of ancillary services for Medicare is one of the
most obvious examples of the business enterprise component in the value
for a nursing home. In general, nursing home operators merely view the
real estate as a platform for providing health care services, and in
general, greater services creates higher profits and more value within the
business enterprise.
Inflation Analysis: The rate of inflation for medical services has
consistently exceeded the overall inflation rate as measured by the
Consumers' Price Index (CPI). In the past, increases in long-term health
costs were are directly tied to additional services required by OBRA in
1990 and to the general shortage of nurses. Essentially, the underlying
costs have increased as well as the provision of health care services.
The Medicaid payment is almost entirely cost driven, while the private-pay
rates are influenced by market forces. The estimated inflationary rate
for the variable components of the Medicaid payment should equal the
aggregate inflation rate of the operating expenses. A separate
' inflationary rate for the property cost component of the Medicaid rate is
estimated since this portion of the rate is relatively fixed.
' The private-pay rates are influenced by costs and free-market competitive
forces. Changes in the private-pay rates do not necessarily correlate to
changes in Medicaid rates or actual changes in operating expenses.
However, under market equilibrium conditions where supply and demand for
beds are in balance, changes in private-pay rates tend to parallel
1 35 Tellatin, Louis & Andreas, Inc.
inflationary increases for expenses. Because the competitive market is
currently in balance and is expected to remain fairly stable throughout
the projection period, we have applied a 3.59 percent annual inflation
' rate to the private-pay rate projections; this rate approximates the
aggregate inflation rate of the operating expenses.
u
1
1-1
L
1
36 Tellatin, Louis & Andreas, Inc.
Competitive Analysis Conclusion
Based on the foregoing analysis of competitive facilities and related
market trends, we have conclude d the following stabilized rates and
occupancy characteristic s for the subject facility.
Table C-9
SUMMARY OF CONCLUDED OCCUPANCY, PAYOR MIX AND RATES
FOR THE SUBJECT OVER THE PROJECTION PERIOD
Inflation Rates
Private 3.59%
Medicare 3.59%
Medicaid Variabl e 3.59%
Medicaid Capital N/A
Annual
Year Occupancy -------
Private Payor Mixes ------- -------- Average Daily Rates
Medicare Medicaid Medicaid ---------
Medicaid
End Rate Mix Mix Mix Private Medicare Variable Property
1996 78.1% 8.0% 11.9% 80.1% $125.00 5230.00 $110.44 $5.56
1997 80.3% 7.8% 11.9% 80.3% 129.49 238.25 111.30 5.56
1998 82.4% 7.7% 11.9% 80.4% 134.14 246.80 114.98 5.56
1999 84.5% 7.5% 11.9% 80.6% 138.95 255.66 118.76 5.56
2000 81.9% 7.1% 11.9% 81.0% 143.94 264.84 123.62 5.56
2001 83.6% 7.0% 11.9% 81.1% 149.11 274.34 127.81 5.56
2002 84.5%
2003 83.4% 6.9%
6.4% 11.9%
11.9% 81.2% 154.46 284.19 132.31
81.7% 160.00 294.39 137.33 5.56
5
56
.
PROJECTED STABILIZED RATES, PAYOR MIX AND OCCUPANCY
' Payor Average
Mix Rate
Private-pay & Other 8.0% $125.00
Medicare 11.9% 230.00
' Medicaid 80.1% 116.00
Total 100.0% $130.29
Occupancy Rate 78.1%
The stabilized occupancy rate, payor mix and average daily rates for the
disparate payment sources are tethered to current and probable future
' market conditions and the historical trends of the subject and competitive
facilities. These projections are consequential in developing well-
supported value evidence for the valuation methods.
A deficiency in the occupancy rate, Medicaid reimbursement or payor mix
can assist the measurement of external obsolescence estimated in the cost
approach. The analyses of these factors suggest that there is no
significant external obsolescence resulting from factors of occupancy,
payor mix or rate formation.
' The census projections are the foundation in the estimation of revenue in
the income capitalization approach. The sale comparison approach matches
several elements of the competitive analysis to the comparison processes
of the sale data. Of particular importance are the Medicaid property cost
rate, payor mix and occupancy level.
37 Tellatin, Louis & Andreas, Inc.
1
HIGHEST AND BEST USE ANALYSIS
Highest and best use may be defined as:
' The most profitable likely use to which a property can be put.
The opinion of such use may be based on the highest and most
profitable continuous use to which the property is adapted and
needed, or likely to be in demand in the reasonably near
future. However, elements affecting value that depend upon
events or a combination of occurrences which -- while within
the realm of possibility -- are not fairly shown to be
' reasonably probable should be excluded from consideration.
Also, if the intended use is dependent upon an uncertain act
of another person, the intention cannot be considered.
• That use of the land which may reasonably be expected to
produce the greatest net return to land over a given period of
time. The legal use which will yield to land the highest
present value, sometimes called "optimum use."
The highest and best use of the land if vacant and available for use may
be different from the highest and best use of the improved property. This
will be true when the improvement is not an appropriate use and yet makes
' a contribution to total property value in excess of the value of the site.
f
In estimating highest and best use, there are essentially four stages o
analysis.
1. LEGALLY PERMISSIBLE - What uses are permitted by zoning and
deed restrictions on the site in question?
2. PHYSICALLY POSSIBLE - To what use is it physically possible to
put the site in question?
3. FINANCIALLY FEASIBLE - Which possible and permissible uses
will produce any net return to the owner of the site?
4. MAXIMALLY PRODUCTIVE - Among the feasible uses, which use will
produce the highest net return or the highest present worth?
Highest and best use may be either that of the land alone (assuming the
' improvements are demolished) or that of the land as presently improved.
Highest and Best Use - As If Vacant
i The 6.8-acre site of the subject is irregular, and the topography is level
to gently sloping, presenting no physical limitations for improvements
containable within the dimensions of the site. The site is located in a
small office district. The "OA" Office/Apartment zoning of the property
permits offices and apartments plus other uses detailed in Exhibit C in
the addenda. The zoning designation is the most restrictive aspect of
this analysis. Given these considerations, it is our opinion that the
highest and best use of the subject site, if vacant and available for an
alternative development, is as a use that conforms to the zoning
designation.
38 Tellatin, Louis & Andreas, Inc.
1
Highest and Best Use - As Improved
The subject site is developed with a 313-bed, nursing home, which has been
in operation for 30 years. The improvements were specifically designed
' for a nursing home and have minimal value for any other use. As discussed
in the analysis of competitive facilities, the occupancy levels for area
nursing homes are adequately high, and the forces of supply and demand
' indicate favorable market conditions into the future. Given these
conditions, the highest and best use of the property is its continued use
as a nursing home facility.
' Highest and Best Use - Conclusion
The as-improved highest and best use of the subject property is its
present use as a nursing home facility. There is no alternative use of
t
ill
e a
genera
the site alone, or of the improved property that w
sustainable net operating income, and/or community benefit, that will
exceed the return achieved under the current use. Thus, we conclude that
' the highest and best use is as a nursing home facility.
L
L
1
39 Tellatin, Louis & Andreas, Inc.
VALUATION PROCEDURES
The appraisal problem is defined and relevant data are collected in order
to understand the forces and influences affecting the value of the subject
property. Typically, three appraisal approaches are used to derive
separate indications of value. These three perspectives incorporate
fundamental concepts and principles in the estimation of the market value
of the business enterprise for the subject property.
The Cost Approach
The cost approach relies on the basic principles of substitution, balance
and externalities. The current reproduction or replacement cost of the
improvements is estimated, and the depreciation is deducted. Depreciation
results from three sources: physical deterioration, functional
obsolescence, and economic obsolescence. A summation of the market value
of the land, assumed vacant, along with the depreciated cost of the
improvements and equipment, provides an indication of the total value of
the tangible property. This technique does not measure the value of the
business assets that are the product of a certificate of need (tantamount
to a franchise), assembled workforce, and other economic benefits accrued
' from non-realty and non-personal-property assets.
The Sales Comparison Approach
The sales comparison approach invokes the principle of substitution, which
states that a buyer will not pay more for one nursing facility than for
another that is equally desirable. The sales comparison approach produces
an estimate of value by comparing the subject property to recent sales of
similar nursing homes. The comparison process analyzes differences in
location, physical qualities, occupancy, payor mix, Medicaid
' reimbursements and other economic factors. Adjustments are applied to the
t
f th
l
i
s o
e
emen
c e
sale prices to reflect the different physical and econom
subject. The adjustments are based on various techniques that apply
linear regression and matched-pair analyses of sale data, economic-
inferred factors and intuitive rationale. The adjusted prices narrow the
price range into an indication of value for the subject.
The Income Capitalization Approach
The income capitalization approach is based on an estimate of the most
' probable net operating income over a projected holding period. The
initial-year net operating income is capitalized into an indication of
value through direct capitalization process. The capitalization rate is
a ratio of income to value. The income is measured by estimating its
most likely payor mix, rate structure and occupancy level. The operating
expenses are based on inflation-adjusted historical expenses for the
subject and comparable facilit.ies, and are relative to any proposed
changes in staffing and acuity levels. The capitalization rate is derived
from comparable nursing home sale data.
1 40 Tellatin, Louis & Andreas, Inc.
COST APPROACH
The cost approach method values a property by (1) estimating the
reproduction cost new of the improvements, (2) deducting the estimated
' depreciation, and (3) adding the market value of the land to arrive at a
value indication for the real estate. The steps in the cost approach are
summarized as follows.
1) Estimate the value of the land as though vacant and available
to be developed to its highest and best use.
' 2) Estimate the reproduction or replacement cost of the
improvements and equipment as of the effective date of the
valuation.
' i
i
i
th
e
on
n
at
3) Estimate and deduct the amount of accrued deprec
improvements and equipment to arrive at a value indication for
the improvements.
4) Add the depreciated cost of the improvements and equipment to
' the land value to arrive at a total indicated value of the
property.
Land Valuation
The most common and usually the most accurate method of land valuation is
based on a comparison of the value characteristics of the subject site
with those value characteristics of land parcels that have recently been
sold. The prices paid for the comparable properties are reduced to a unit
price, such as price per acre or square foot, and are adjusted for the
following elements of comparability:
1
Elements of Comparison
Property Rig hts Conveyed: This adjustment considers
differences in property rights and licensure. The subject is
valued on the basis of fee simple interest with all necessary
licenses held by the same ownership as the real an d personal
property. If a sale involves a partial real estate interest,
or conveyance of only the property and not the l icenses or
other busines s assets, an adjustment is necessary to account
' for this deficiency. In this instance, all the sales involve
full conveyance of property rights; thus, no adjustments are
warranted for conveyance of property rights issues.
Financing Adjustments: Occasionally, properties are sold with
seller financing. Sellers often provide substantially lower
interest rates than commercial or government lenders. In
instances where sellers finance the sale at interest rates
below market levels, prices are usually somewhat inflated to
compensate for the lower interest rate. In order to adjust
favorably financed transactions, the mortgaged amount is
discounted at an appropriate market mortgage rate to reflect
a cash equivalent price. None of the sales in this analysis
involved seller financing..
41 Tellatin, Louis & Andreas, Inc.
1
Conditions of the Sale: Transactions resulting from
distressed conditions, or when the seller or buyer is under
extraordinary motivation, pose a problem in the comparison
process. In this instance, we have eliminated such
transactions from the selection and analysis of comparable
sale data.
' Market Conditions: Adjustments are applied to sales
transacted in prior years under different market conditions
where the general price level differs from the present level.
The land sales used in this analysis occurred between August
1994 and December 1995. We have adjusted the sales in
occurring in 1994 for general trends in the market.
' Location: Adjustments are applied to each sale to compensate
for significant locational differences between the subject and
the land sales. Relative accessibility, visibility and
' desirability of neighborhoods are considered in this
adjustment.
Zoning and Legal Restrictions: Although efforts are made to
' compare the subject site to sa les having the same or similar
zoning clas sifications, there is often insufficient data for
sales with
sites are similar zoning. In
also applied in these cases, differently zoned
the comparative process, and
adjustments are made according to allowable densities and to
the degree of permissiveness. Zoning classifications affect
property values, which typically increase in the following
general order: agriculture, single-family residential,
apartments, industrial and commercial.
' Size: Normally, larger parcels command lower unit prices than
smaller but otherwise comparable parcels. This relationship
is similar to a quantity discount typically found in most
other transactions. This aspect has been isolated from the
other physical adjustments.
Physical Characteristics: Adjustments are made for
differences in shape, topography and soils. Sites with very
irregular configurations or ones with narrow shapes have less
' utility and are more difficult to develop to full potential;
consequently, they possess less value. Terrain, degree of
slope, soil conditions and drainage qualities play significant
parts in the cost of developing a site. Those sites with
fewer physical problems command higher unit values.
' Adjustments are also applied for differences in utility
services. Sites lacking in any of the standard local services
are typically discounted to reflect the cost of extending the
service or to provide the site with its own system.
An investigation of land sales in the vicinity of the subject disclosed
only a few recent comparable sales that are useful in this analysis. The
sale prices have been confirmed through government records. In Table L-1,
these comparables are summarized and adjusted according to the
' aforementioned elements of comparison.
42 Tellatin, Louis & Andreas, Inc.
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1
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43 Tellatin, Louis & Andreas, Inc.
Table L-1 on the preceding page summarizes the salient land sale data and
the price adjustments applied to each sale. The adjusted prices range
from $0.92 to $3.88 per square foot, and produce a $2.07 mean. Because no
one sale is considered the most or least comparable to the subject, we
have placed emphasis on the adjusted mean for the conclusion.
Based on a comparative analysis of the sale data, the indicated value of
the subject site (assumed vacant and available for development to its
highest and best use) is as follows.
$592,000
or
1 296,208 square feet @ $2.00 Per Square Foot -- Rounded
Improvement Valuation
The next step in the cost approach is to estimate the Reproduction Cost
New (RCN) of the improvements. RCN is defined as the cost of reproducing
' a new replica property with the same or closely similar materials on the
basis of current prices.
Building costs, usually derived from nationally recognized construction
cost reports, are available to the public on a subscription basis.
Marshall and Swift, Boeckh, and F.W. Dodge are commonly used cost
services. Cost data can also be obtained from actual construction costs
of similar buildings recently erected in the community.
There are two methods of estimating cost using construction cost reports.
The comparative-unit method is used to derive an estimate of cost in
dollars per square foot, as based on known costs of similar buildings
after adjustment for time and physical differences. The segregated-cost
t method is more complex since it involves estimating unit costs for the
various building components as installed. Both methods are normally
expressed in dollars per square foot.
The RCN estimates of the improvements for the subject property are derived
from the Marshall Valuation Service, a nationally recognized construction
cost reporting service. In this instance, the segregated cost method,
involving individual cost estimates for each building component, is
applied. The RCN of the subject improvements is summarized as follows.
1
11
1 44 Tellatin, Louis & Andreas, Inc.
i
Summary of Reproduction Cost New
No. of Price per Total
Components Units Unit (1) Cost
Site Preparation and Excavation
Site Preparation
264,030
50.21
555,446
Excavation 63,000 0.28 17,640
Fill 88,010 0.27 23,763
Foundation:
Class D, Masonry Veneer 88,010 1.86 163,699
Frame:
Class C or D, Steel Stud 35,204 4.53 159,474
Floor Structure:
Reinforced Concrete on Fill 50,541 2.96 149
600
Precast Concrete 3,500 7.29 ,
25,515
Concrete on Steel Deck & Joist 26,969 9.44 254,591
Vapor Barrier and Perimeter Tile 50,541 0.46 23,249
Exterior Walls:
Wood/Metal Stud Brick 52,806 16.42 867,075
Sheathing 52,806 0.81 42,773
Insulation 52,806 0.77 40,661
Roof Structure:
Wood Deck on Wood Trusses or Joist 52,806 4.10 216,505
Steel Joist & Deck with Gypcrete 11,735 7.09 83,199
Roof Cover:
Elastomeric, Single Ply 11,735 2.70 31,684
Composition Shingles 52,806 1.13 59,671
Interior Construction:
Frame Partitions 88,010 18.73 1,648,427
Ceilings:
Gypsum 22,003 1.27 27,943
Suspended Acoustical Tile 66,008 5.76 380,203
Floor Coverings:
Vinyl Tile 76,569 3.75 287,133
Carpet and Pad 6,161 3.26 20,084
Ceramic Tile 3,520 8.49 29,888
Quarry Tile 1,760 8.49 14,944
Electrical:
Electrical, Lights & Alarms 88,010 9.26 814,973
Emergency Generator 1 16,000.00 16,000
HVAC:
Electric Baseboard 7,041 3.55 24,995
Individual Through-wall Heat Pumps 61,607 2.65 163,259
Zoned Warm & Cold Air 19,362 8.80 170,387
Plumbing:
All Fixtures, Supply/Drain Piping
Fire Protection: 88,010 8.57 754,246
Sprinklers 88,010 1.80 158,418
Elevators:
Three-story 1.00 40.000.00 406000
Subtotal Superstructure: 88,010 576.87 56,765,442
BASEMENT CONSTRUCTION
Exterior Walls:
Reinforced Concrete 4,200 $9.89 141,538
Concrete Stock 4,200 7.24 30,408
Floor Structure:
Reinforced Concrete on Fill 7,000 2.96 20,720
Interior Construction:
Concrete Block Partitions 7,000 5.10 35,700
Floor Cover
Vinyl Tile 7,000 3.75 26,250
Ceilings 7,000 1.27 8,890
HVAC 7,000 3.80 26,600
Plumbing 7,000 4.87 34,090
Electrical and Lighting 7,000 3.09 21,630
Sprinklers 7,000 1.80 12.600
Subtotal Basement: 7,000 136.92 1258,426
Total Building Construction Cost: 17,023,868
1 45 Tellatin, Louis & Andreas, Inc.
i
Summary of Reproduction Cost New. Continued
No. of Price per Total
Components Units Unit (1) Cost
OTHER IMPROVEMENTS
00
8
000 $4
$32
000
.
,
Concrete Sidewalks ,
Asphalt Parking 50,000 2.75 137,500
Signage 1 3,000.00
Area Lighting 20 450.00 3,000
9,000
Flagpole 1 1,400.00 1,400
Storage Buildings 3 5,000.00 15,000
Landscaping 1 40,000.00 40,000
Total Other Improvements $237,900
Total Improvement Cost New $7,261,768
Architect Fees and Supervision (7.3X) 530,109
Total Construction Cost $7,791,877
Plus Developer's Profit 8 Start Up Cost - 15% 1,168,781
Total Reproduction Cost New $8,960,658
Cost Allocation:
ildi
(2
$8
101
667
)
ng
Total RCN Bu ,
,
Total RCN Other Improvements (3) $293,557
(1) Marshall - Swift, Section 45 - Segregated Cost Method unit
values, adjusted for time, location, number of floors and
average story height.
(2) RCN Formula: 1.073 x 1.15 x $7,023,868 = $8,667,101
(3) RCN Formula: 1.073 x 1.15 x $237,900 = $293,557
In addition to normal construction costs, there are indirect costs
associated with each project. Indirect costs, estimate d at 15.0 percent
of the total construction cost, include start-up costs, license fees and
expenses, and developer's profit.
Start-up costs include the expenses incurred between the opening date
(when construction is completed) to the time when the occupancy rate of
the property reaches a productive level. A productive
revenues cover all expenses including debt service. level occurs when
The developer's profit includes the profit motivation factor. A
developer's incentive lies in the prospect of producing property value in
excess of the hard or direct costs.
Accrued Depreciation
Accrued depreciation is a loss in value from the reproduction or
replacement costs of the improvements due to any cause as of the date of
I the appraisal. Several methods are practiced when estimating accrued
depreciation. These methods are the economic age-life method, the
modified economic age-life method, and the breakdown method. The
breakdown method is applied where each cause of depreciation is separately
measured and the amount of each is totaled to estimate a lump sum amount
1 46 Tellatin, Louis & Andreas, Inc.
i
for accrued depreciation. Loss in value emanates from one or more of
three sources: physical deterioration, functional obsolescence and
external or economic obsolescence.
1
w
Physical deterioration is divided into the categories of
curable and incurable physical deterioration. Curable
deterioration refers to components in need of repair on the
date of the appraisal. This category is measured as the cost
of restoring an item to new or reasonably new condition. The
subject has been well maintained, requiring no substantive
repairs or replacements resulting from curable deterioration.
Incurable physical deterioration reflects items of
deterioration that cannot be practically or economically
corrected at the date of the appraisal. Incurable items are
classified as short-lived and long-lived. Short-lived
components have a physical economic life that is shorter than
the remaining economic life of the structure. The
deterioration of these components is measured individually,
and the calculations are presented as follows.
incurable
Effective Expected Physical
Component RCN Age Years Life/Years Depreciation
Roof Coverings $112,727 20 25 $90,182
Interior Construction 508,519 20 25 406,815
Ceilings 503,632 20 25 402,906
Floor Coverings 434,411 20 25 347,529
Electrical 205,076 20 25 164,061
HVAC Equipment 110,636 20 25 88,509
Plumbing 186,140 20 25 148,912
Total RCN 8 Depreciated
Value of Short-lived
Building Components 52,061,141 $1,648,914
Note: The RCN of the various components only includes the costs for
the short-lived items and excludes items such as ductwork, and
interior walls and partitions that will never be replaced.
Long-lived components are expected to have remaining economic
lives that are equal to or exceed the remaining economic life
of the entire structure. The calculation of physical
' incurable deterioration of long-lived components is a
multiple-step process. First, curable physical and incurable
physical short-lived components are deducted from the RCN,
leaving the cost of the long-lived components. The ratio of
effective age to estimated physical life is applied to the
costs of the long-lived components to indicate the physical
incurable depreciation. The chronological age of the subject
property is 25 years, and the total physical life of the
improvements is estimated at 60 years. The calculation of
physical incurable deterioration of long-lived components is
presented as follows.
1
47 Tellatin, Louis & Andreas, Inc.
Total RCN of the Building $8,667,101
Less RCN of Short-lived Items (2,061,141)
RCN of Long-lived Items $6,605,960
Less Long-lived Physical
Depreciation 41.7% $2,752,484
Functional obsolescence is a loss in value resulting in
defects in design, materials or changes in standards. The
obsolescence can be curable or incurable. Defects are
curable if the replacement cost is the same as or less than
the anticipated increase in value. Curable functional
h
diti
on
e con
obsolescence is measured as the cost to correct t
through addition, substitution or modernization. In some
instances, the obsolescence may be attributable to excessive
or overly adequate designs or materials.
Incurable functional obsolescence is caused by a deficiency or
It is measured as the capitalized net income
a superadequacy
.
loss attributable to the deficiency. In the case of a
superadequacy, it is measured as the RCN of the component,
minus physical deterioration, plus the present value of any
added cost of ownership. Our inspection of the subject
property indicates that no apparent significant functional
obsolescence exists.
External obsolescence is a loss in value resulting from forces
external to the property, e.g., changing neighborhoods,
traffic flow, governmental codes, and economic events. There
are two methods used to measure external obsolescence. The
net income loss attributable to the negative influence can be
capitalized at an appropriate rate to quantify the amount of
obsolescence. The other method is to compare sales of similar
properties that are subject to the negative influence with
others that are not. This comparison indicates the amount of
obsolescence.
The subject is well located and should be able to maintain a
profitable occupancy level in the extended future;
neighborhood and regional factors that are impacted by social,
economic, and political forces should continue to be favorable
to the present use' of the property. Thus, no external
obsolescence is evident.
The estimated depreciation of the site improvements is 50.0 percent.
Based on the foregoing conclusions, the estimated value of the
improvements is presented as follows.
r
49 Tellatin, Louis & Andreas, Inc.
SUMMARY OF IMPROVEMENT VALUATION
Total RCN of the Building 58,667,101
Less:
Physical Deterioration:
Physical Curable 0
Physical Incurable --
Short Lived 1,648,914
- Long Lived 2,752,484
Functional Obsolescence:
Curable 0
Incurable 0
External Obsolescence
Incurable 0
Total Depreciation of the Building 4,401,398
Total Indicated Value of the Building 54,266,000
Total RCN of Site Improvements 293,557
Less Depreciation
Physical Immediate Curable 0
Physical Incurable 146,778
Functional Obsolescence 0
External Obsolescence 0
Total Depreciation of the Site improvements 146,778
Indicated Site Improvement Value $147,000
Total Improvement Value $4,413,000
Equipment Valuation
?I The subject facility contains the furniture, fixtures and equipment (FF&E)
necessary for the operation of a 313-bed nursing home. These equipment
items are valued separately from the land and improvements in this
approach. The valuation of the equipment is based on a re
roduction cost
p
less depreciation method. In order to estimate a value for the FF&E, we
have relied on observations made while conducting a cursory inventory as
1 well as the items normally found in a hypothetical, yet typical
100-bed
,
licensed nursing home facility. We employed various resources for this
effort, including the Marshall & Swift and R.S. Means data references,
supplier catalogues, and the actual costs of newly built facilities. From
our experience in appraising nursing homes, we have made adjustments to
reflect qualitative and quantitative features such as facility size,
condition, age, and other factors.
It i
i
i
h
s our op
n
on t
at to replace the subject FF&E with new, comparable
items of similar utility would cost approximately $5,000 per bed. The
per-bed cost has been estimated based on an inspection of the furniture
and equipment contained in each area or department of the nursing home and
a review of existing property listings.
Since the FF&E are an integral part of the nursing home operation, they
are more valuable under continued use than if they were removed and sold
separately. Thus, the value is considered the "contributory value in use"
which is consistent with the premise of the going-concern value. The
I
49 Tellatin, Louis & Andreas, Inc.
i
1
1
1
1
i
1
1
1
1
1
1
1
1
1
1
1
1
estimated aggregate value of the FF&E, net of estimated depreciation, is
calculated as follows.
FURNITURE, FIXTURES AND EQUIPMENT VALUATION
Furniture, Fixture & Equipment Valuation:
Replacement Cost New Per Bed and Total f5,000 $1,565,000
Depreciation from All Causes 50.0% (783,000)
Indicated Value of the FF&E 5782,000
Summation
The final step in the cost approach is the summation of the various
components estimated. Thus, a value estimate for the subject property is
indicated as follows.
Land Value $ 592,000
Improvements Value 4,413,000
Real Estate Value $5,005,000
Furniture, Fixtures & Equipment Value 782,000
Total Cost Approach Value $5,787,000
50 Tellatin, Louis & Andreas, Inc.
INCOME CAPITALIZATION APPROACH
The income capitalization approach is based on the premise that the value
of the subject property is represented by the present worth of anticipated
net operating income. The projected net operating income, based on an
analysis of the quality, quantity, and duration of the income expectancy,
is capitalized into an indication of value by using a capitalization rate
developed from market data. The steps in this valuation procedure are as
follows.
1) Estimate the potential gross revenue for the subject
property based on current room rates for the subject and
comparable nursing homes.
2) Deduct revenue lost from vacancy and uncollectible
billings.
3) Estimate and deduct non-capital expenses typically
incurred in the operation of the nursing home, to arrive
at a net operating income attributable to the facility.
4) Capitalize the net operating income into a value
indication by using an appropriate capitalization rate.
Revenue and Expense Analyses
Specific revenue and expense data for the last three years for the subject
property were obtained from management's financial statements, and this
history is shown on Table H-1 on the following page.
51 Tellatin, Louis & Andreas, Inc.
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52 Tellatin, Louis & Andreas, Inc.
Revenue Analysis: The projected potential income for the subject is
developed by estimating its stabilized payor mix, average daily rates, and
revenue from ancillary services. Most of the revenue projections are
developed in the analysis of the competitive facilities. In that section,
comparative analyses are performed of the historical and current occupancy
rates, actual payor mixes, rate structures of the subject and its
competition as well as the impact of state and federal legislation. These
analyses culminate in the projections for occupancy, payor mix, and rate
structure for the subject.
Revenue is also derived from ancillary services and miscellaneous sales.
This category includes: physical therapy, occupational therapy, speech
therapy, numerous other therapy services, examinations, pharmaceutical
sales, personal care services, and special food and beverage sales.
Historical per-patient-day revenues from these sources during the past
three years are presented in Table H-1
Ancillary revenues directly
.
correspond to the level of private-pay and Medicare Part B because
Medicaid does not cover these services. Management has been extremely
aggressively in this area of the operations because of poor performances
in other areas. We have projected ancillary revenues that are more
typical of most nursing home operations.
Expense Analysis: The operating expenses include the cost of providing
nursing care; dietary, laundry, housekeeping, medical and social services;
physical maintenance; utilities; administrative management; property
taxes; and insurance. Under normal management and occupancy levels, these
expenses represent 80.0 to 90.0 percent of the gross revenues.
Operating expenses will vary by facility, and are influenced by local
labor market conditions, occupancy levels, levels of care, and quality of
services. As evidenced by the Medicaid reimbursement ceilings in many
states, rural locations tend to have lower staffing costs. Facilities with
higher occupancy rates enjoy greater economies of scale and tend to have
lower per-patient-day variable and fixed expenses. Facilities offering
elevated levels of care will incur higher nursing and ancillary costs.
Quality of service varies greatly among nursing homes. Most often the
private-pay facilities offer higher staffing ratios, more activities, and
more expensive meals than facilities dependent chiefly on Medicaid
reimbursements.
In order to estimate the stabilized operating expenses of the subject
nursing home, we have relied upon historical expenses of the subject and
the expenses for comparable facilities. Table H-1 summarizes the
historical operating expenses of the subject for the last three years.
These expenses were obtained from management's financial statements, and
they are assumed to accurately represent the financial operation of the
subject.
On the following page, Table E-1 summarizes the expenses for facilities
' that are also profiled in the competitive analysis; these expense
statistics were compiled from 1994 and 1995 Medicaid cost reports. The
expenses recorded in the Medicaid cost reports and the subject expenses
are inflated to year-end August 31, 1996 dollars in order to make a more
accurate comparison. Table E-2 presents additional comparative analysis
showing the inflated expenses from Table E-2 in terms of the differentials
between the subject expenses and the comparable means, minimums and
maximums of the line item ranges, and standard deviations.
53 Tellatin, Louis & Andreas, Inc.
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54 Tellatin, Louis & Andreas, Inc.
Table E-2
COMPARATIVE'ANALYSIS OF INFLATION-ADJUSTED EXPENSES
Differ- -- Comparable Expenses -- Standard
Departmental Expenses Subject ential Mean Low High Deviation
Administrative & General $7.88 (52.93) $10.81 $7.71 $15.42 $2.61
Management Fee 4.09 (3.32) 7.41 0.00 10.79 3.79
Social Services & Activities 2.62 (0.49) 3.11 2.62 3.52 0.30
Nursing
Ancillary 55.21
30.47 6.65
16.37 48.56
14.10 41.05
1.49 53.07
30.92 4.86
9.48
Dietary 11.64 (0.21) 11.85 9.49 15.16 2.34
Laundry & Linen 3.49 1.37 2.12 1.48 3.02 0.58
Housekeeping 6.49 2.63 3.87 2.76 5.64 1.03
Plant Operations 8.90 2.18 6.71 5.35 9.52 1.56
Property Insurance 0.86 0.22 0.64 0.54 0.70 0.06
Property Taxes 1.11 (0.07) 1.17 0.00 2.07 0.79
Total Operating Expenses $132.76 $22.40 $110.36 $99.97 $139.68 $14.79
A general description of the cost items included in each of the general
expense categories, as broken down by management's financial statements,
is summarized in the following paragraphs. Each expense category includes
a table that presents: the inflation-adjusted 1994 and 1995 expenses for
the subject; the mean, low and high for the expense comparables; and the
projected first-year operating expenses for the subject. In general, the
historical expenses are given emphasis over the comparable expenses since
changes in expenses directly impact the Medicaid reimbursements in
Pennsylvania based on our assumptions in the Medicaid rate projections.
Administrative and General: This category includes the wages
of the administrator, the assist ant administrator, and the
office clerks, as well as busi ness supplies, telephone,
postage, legal fees, liability insurance, marketing,
advertising, licenses, education, travel and accounting.
Administrative and General
1994 Inflation-adjusted Subject $'s/PD % of Rev Total
$9.24 7.2% $847,450
1995 Inflation-adjusted Subject 7.88 5.5% 705,872
Inflation-adjusted Comparable Mean 10.81 8.3%
Inflation-adjusted Lowest Comparable 7.71 6.3%
Inflation-adjusted Highest Comparable 15.42 10.4% -
Stabilized Projected Expense $8.00 5.8% $713,800
Note: Assumed annual rate of inflation is: 3.0%
Central Office / Management Fee: This expense category
includes overall supervision, financial services, long-range
planning and governmental relations; these services are
generally conducted off premises at corporate offices. The
cost for management services is usually based on a percentage
of gross revenue. According to a survey of our clients who
include several of the largest operators in the nation,
I typical management expenses will approximate 6.0 to 7.5
percent of gross revenues, or $5.50 to $8.00 per patient day.
55 Tellatin, Louis & Andreas, Inc.
We have reviewed recent management contracts with Integrated
Health Services, Inc. and Diversified Health Care/Service
Master in independent owners. In every case, the base
management fee is 7.0 percent of revenue, and the management
company shares in the after debt-service income, and property
appreciation in the event of sale. Like Beverly Enterprises,
these companies are skillful in promoting therapy services.
The relationship is inverse: higher revenues -- lower
management fee, and lower revenues -- higher management fee.
A management fee of 7.0 percent of effective gross revenue is
considered reasonable for the subject nursing home. This
percentage includes. adequate profit incentive for the
management to assume the business risks of operating the
nursing home business and pays an adequate return to the
intangible aspects of the enterprise.
Management Fee SIs/PD % of Rev Total
1994 Inflation-adjusted Subject 13.76 3.1% (344,627
1995 Inflation-adjusted Subject 3.97 2.9% 355,512
Inflation-adjusted Comparable Mean 7.41 5.7%
Inflation-adjusted Lowest Comparable 0.00 0.0%
Inflation-adjusted Highest Comparable 10.79 8.4% -
Stabilized Projected Expense 59.59 7.0% $855,894
Social Services and Activities: This category includes the
wages of a social worker and an activities director plus
supplies for activities. The social worker typically admits
and discharges patients in coordination with families and
local hospitals. Social services and activities combine to
provide programs responsive to the spiritual, social, and
recreational needs of patients.
Social Services and Activities 5's/PD % of Rev Total
1994 Inflation-adjusted Subject $2.41 1.9% $221,058
1995 Inflation-adjusted Subject 2.62 1.8% 234,946
Inflation-adjusted Comparable Mean 3.11 2.4%
Inflation-adjusted Lowest Comparable 2.62 2.0%
Inflation-adjusted Highest Comparable 3.52 2.9% --
Stabilized Projected Expense $2.60 1.9% $231,985
Note: Assumed annual rate of inflation is: 3.0%
Nursing: This expense category typically represents 35.0 to
45.0 percent of total revenues, or nearly one-half of all
operating expenses. It includes the wages of the nurses and
nurses' aides, medical supplies, non-prescription drugs and
training.
Nursing expenses have increased dramatically over the past
few years. Two reasons often cited for the escalation are
the shortage of nurses, and the greater acuity levels being
cared for within most nursing homes. The two conditions have
stabilized over the past year, and they are expected to
remain fairly stable indefinitely. Future increases in
nursing expenses, beyond the general inflation rate, will be
56 Tellatin, Louis & Andreas, Inc.
1
caused by higher acuity levels as hospitals discharge
patients sooner and ICF patients are directed to assisted-
living facilities.
1
P-j
a
11
[l
t
57 Tellatin, Louis & Andreas, Inc.
Nursing $Is/PD % of Rev Total
1994 Inflation-adjusted Subject 557.90 44.2% $5,311,825
1995 Inflation-adjusted Subject 55.21 38.5% 4,944,317
Inflation-adjusted Comparable Mean 48.56 37.7%
Inflation-adjusted Lowest Comparable 41.05 31.8%
Inflation-adjusted Highest Comparable 53.07 43.6%
Stabilized Projected Expense $56.00 40.9% $4
996
600
,
,
Note. Assumed annual rate of inflation is: 4.0%
e
Ancillary: Th
se services include speech therapy, physical
therapy, occupational therapy, and certain patient supplies
and drugs. This expense varies with the level of care;
facilities that provide care to a higher percentage of
Medicare patients tend to incur more ancillary expenses.
Ancillary 5'
s/PD % of Rev Total
1994 Inflation-adjusted Subject $21.37 16.3% $1,960,112
1995 Inflation-adjusted Subject 30.47 21.2% 2,728,552
Inflation-adjusted Comparable Mean 14.10 10.4%
Inflation-adjusted Lowest Comparable 1.49 1.2%
Inflation-adjusted Highest Comparable 30.92 20.8%
Note: Assumed annual rate of inflation is: 4.0%
In order to maintain balance with the projected Medicare and
ancillary revenues, the following calculations are made to
project the ancillary expenses.
ANCILLARY COSTS CALCULATIONS
Projected Medicare Rate $230.00
Less Routine Cost Portion of the Medicare Rate 120.00
Revenues Attributable to Ancillary $110.00
Direct Expense Margin 0.85
Costs Attributable to Ancillary 593.50
Multiplied by Medicare Days 10,618
Divided by Total Patient Days 89,225
Medicare Ancillary Costs Per Patient Day 511,13
Projected Ancillary Revenue, Medicare Part B & Private 56.00
Direct Expense Margin 0.85
Medicare Part B and Private Ancillary Costs 55.10
Total Ancillary Expenses Per Patient Day $16.23
As a Percentage of Effective Gross Revenue 11.8%
Total Ancillary Expense 51,447,831
First, Medicare revenues can be divided into routine and
ancillary costs. We have projected $230.00 for the Medicare
rate, and the routine costs are estimated based on the
58 Tellatin, Louis & Andreas, Inc.
L?
1
u
C]
1
1
t
1
I
projected expenses plus an estimate for capital reimbursement
of $120.00 for routine costs.
The routine costs are subtracted from the Medicare rate to
determine the revenues attributable to ancillary services.
Next, a direct expense margin is applied to the revenues.
Medicare reimburses ancillary services on a cost basis, and
the costs include overhead. Although the determining factors
are very complicated, overhead is essentially the source of
profit within the Medicare rate. Providers must maintain
accurate records to- maximize reimbursement, and operator
sophistication can greatly affect reimbursement. The expense
margin is derived from conversations with knowledgeable
providers and reimbursement consultants who have indicated
that 70.0 to 80.0 percent is a typical range dependent mainly
upon the size of the therapy areas and age of the facility.
We have applied 85.0 percent for Medicare Part A ancillary
expenses, and 85.0 percent for private and Medicare Part B
ancillary expenses. Next, ancillary expenses must be
converted from a Medicare per diem rate to a per diem based
on total patient days in order to be uniform since all of the
expenses are projected based on total patient days.
Additionally, ancillary revenue is generated from Medicare
Part B and private-pay sources; these revenues are projected
based on total patient days based mainly on historical
performance. Similarly, the same expense margin is applied
as for ancillary revenue. These same calculations are made
throughout the discounted cash flow analysis.
Dietary: This expense department includes the cost of raw
food, staff wages, supplies, maintenance and consulting fees.
Raw food costs will typically represent 40.0 to 50.0 percent
of the total expense. Dietary expenses are often higher in
facilities that attract high proportions of private-pay
patients. This expense category should be fairly stable, as
long as the occupancy level remains stable as well, inflation
aside.
Dietary
1994 Inflation-adjusted Subject
1995 Inflation-adjusted Subject
Inflation-adjusted Comparable Mean
Inflation-adjusted Lowest Comparable
Inflation-adjusted Highest Comparable
Stabilized Projected Expense
Note: Assumed annual rate of inflation is
S's/PD % of Rev Total
$11.06 8.6% $1,014,523
11.64 8.2% $1,042,280
11.85 9.2% --
9.49 7.5% --
15.16 12.6% -
$11.50 8.4% 51,026,088
3.0%
Laundry and Housekeeping: These categories include supplies,
salaries, and employee benefits and are fairly self-
explanatory. The level of occupancy and the size efficiency
significantly affect this relatively fixed per-patient-day
expense. Under stabilized conditions, these expenses should
remain stable relative to inflation.
59 Tellatin, Louis & Andreas, Inc.
' Laundry and Linen $'s PD % of Rev Total
45
1994 Inflation-adjusted Subject 13.26 2.5% !299,3
1995 Inflation-adjusted subject 3.49 2.5% 312,754
Inflation-adjusted Comparable Mean 2.12 1.6%
Inflation-adjusted Lowest Comparable 1.48 1.1%
Inflation-adjusted Highest Comparable 3.02 2.5%
Stabilized Projected Expense $3.25 2.4% (289,981
' T
l
'
ota
s/PD % of Rev
Housekeeping $
1994 Inflation-adjusted Subject $6.38 5.0% $585,462
1995 Inflation-adjusted Subject 6.49 4.6% 581,628
Inflation-adjusted Comparable Mean 3.87 3.0%
Inflation-adjusted Lowest Comparable 2.76 2.2%
Inflation-adjusted Highest Comparable 5.64 4.7% -
Stabilized Projected Expense $6.25 4.6% $557,656
Note: Assumed annual rate of inflation is: 3.0%
Plant Operations: This category includes utilities, wages
for maintenance staff, contract and outside services and
supplies. Utility expenses constitute about 50.0 percent of
plant operating expenses. Plant operating expenses will vary
depending on the age and level of deterioration of the
structural and mechanical components, the average number of
square feet per bed, the efficiency of the insulation and
HVAC systems, and the amount of air-conditioning supplied to
the building. These expenses are relatively fixed, and
fluctuations in the occupancy should have a minor effect on
the total expenses. Generally, newer facilities with cost-
efficient HVAC systems and high occupancies achieve lower
per-patient-day expenses. We believe that the plant cost of
' the subject facilities should approximate its inflation-
adjusted historical level, under stabilized occupancy.
t
T
l
f
'
a
Rev
o
s/PD % o
Plant Operations $
1994 Inflation-adjusted Subject $8.64 6.7% $792,947
1995 Inflation-adjusted Subject 8.90 6.3% 796,576
Inflation-adjusted Comparable Mean 6.71 5.2%
Inflation-adjusted Lowest Comparable 5.35 4.1%
Inflation-adjusted Highest Comparable 9.52 7.9% -
Stabilized Projected Expense $8.75 6.4% $780,719
Note: Assumed annual rate of inflation is: 3.0%
Property Taxes and Insurance: The property taxes were given
a more complete discussion in the descriptive section of this
report. Property insurance is a relatively stable expense.
Reserves for Replacement: Reserves for replacing short-lived
building components and furniture, fixtures, and equipment
are usually established to even out cash flows over the
course of the investment. Replacing HVAC equipment,
installing new carpeting, and resurfacing of the parking lot,
etc., involve substantial capitalized costs that do not occur
60 Tellatin, Louis & Andreas, Inc.
on a consistent basis. Therefore, establishing a reserve for
1 these eventual costs is considered prudent. We have
estimated reserves for replacement at $300 per bed.
Based on the foregoing analyses of revenue and operating expenses, the
stabilized net operating income is calculated as follows.
f]
J
Table P-1
PROJECTED STABILIZED INCOME AND EXPENSES FOR THE SUBJECT
Calculation of Annual Patient Days:
Number of Beds: 313
Potential Days: 114,245
Occupancy Rate: 78.1%
Projected Patient Days: 89,225
Patient Payor Average
Revenue Source Days Mix Rate
Private 7,138 8.0% $125.00
Medicare Part A 10,618 11.9% 230.00
Medicaid 71,469 80.1% 116.00
Total Room and Board 89,225 100.0% 5130.29
Plus Ancillary Revenue 89,225 6.00
Plus Other Revenue 89,225 0.75
Total
Revenue
$892,250
2,442,140
8.290.404
$11,624,794
535,350
66,919
$12,227,063
Effective Gross Revenue
% of Expenses
Operating Expenses Revenue / P.D.
Administrative & General 5.8% 58.00
Management Fee 7.0% 9.59
Social Services & Activities 1.9% 2.60
Nursing 40.9% 56.00
Ancillary 11.8% 16.23
Dietary 8.4% 11.50
Laundry & Linen 2.4% 3.25
Housekeeping 4.6% 6.25
Plant Operations 6.4% 8.75
' Property Insurance 0.6% 0.80
Property Taxes (Included in Cap Rate)
Reserves for Replacements 0.8% 1.05
Total Operating Expenses 90.5% $124.02
Net Operating Income of the Business Enterprise
C
Total
Expenses
$713,800
855,894
231,985
4,996,600
1,447,831
1,026,088
289,981
557,656
780,719
71,380
93.900
$11,065,834
$1,161,228
The NOI reflects income from the business operation. We have separated
the income attributable to the ancillary services since this income is
almost entirely derived from intangible assets, assembledge workforce and
management skills. It requires minimal use of the real estate. The
estimated NOI from the ancillary services is calculated as follows.
1 61 Tellatin, Louis & Andreas, Inc.
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
Net Operating Income of the Business Enterprise $1,161,228
Ancillary Revenue
Medicare Part A 10,618 $110.00 $1,167,980
Medicare Part B and Private 89,225 $6.00 535.350
Total Ancillary Revenue $1,703,330
Multiplied By Gross Profit Margin 15.0% (255,500)
Adjusted NOI $ 905.729
62 Tellatin, Louis & Andreas, Inc.
Direct Income Capitalization Process
Capitalization is simply the conversion of income to value. The direct
capitalization method converts a single year's income expectancy into a
value indication. This method does not distinguish between the return on
and the return of capital. Because the overall rate is derived from
similar investment properties, a satisfactory return on and of capital is
inherent in the capitalization process.
The overall capitalization rate reflects current market rates of return on
similar property investments. This rate incorporates the following.
(1) A return on the equity investment;
(2) Debt service;
(3) Principal build-up;
(4) Anticipated changes in income and value;
(5) Recapture of depreciating components of the property;
' (6) Physical quality of the property; and
(7) Other economic factors.
L
Direct capitalization may be based on several revenue and income sources
that require respective multipliers and rates to convert to value. Income
sources typically include: potential gross income, effective gross
income, net operating income, equity income and mortgage income. The
respective multipliers and rates for each of these income sources are:
potential gross income multiplier (PGIM); effective gross income
multiplier (EGIM); overall capitalization rate (R.); equity capitalization
rate, or equity dividend rate (R.); and mortgage capitalization rate (R,).
In this instance, the following capitalization techniques are applied.
(1) Direct Overall Capitalization -- Based on comparable sale data.
(2) Band of Investment -- Applying mortgage and equity rates.
(3) Debt Service Coverage Method -- Applying debt coverage ratio.
63 Tellatin, Louis & Andreas, Inc.
Direct Overall Capitalization Method
' A summary of several overall capitalization rates derived from recent
sales of comparable nursing homes in Pennsylvania is presented in the
' following table.
' SUMMARY OF COMPARABLE SALE OVERALL CAPITALIZATION RATES
Sale Year Pri vate Overall
No. Built Mix Sale Price N.O.I. Rate
1 1978 10% $5,992,500 $855,759 14.3%
' 2 1975 18% 4,900,000 632,593 12.9%
3 1991 16% 5,000,000 498,860 10.0%
4 1983 43% 4,400,000 598,700 13.6%
5 1973 23% 15,700,000 2,451,242 15.6%
'
Totals 1980 22% 535,992,500 55,037,154
' Arithmetic Mean
Weighted Mean 13.3%
14.0%
Median 13.6%
Lou 10.0%
High 15.6%
National Average: TUA Database, 1991 to Current 13.9%
Additional information concerning these sales is presented in the sale
data section. The sale prices are adjusted to reflect a cash equivalent
price and surplus land if necessary. Adjustments are made to portray
projected stabilized revenue and expenses and to show inclusions for
reserves for replacements of $300 per bed.
The net operating income of a nursing home can fluctuate widely from year
' to year since the operating margins are narrow. Since we have analyzed
only one year for each of these sales
a wide range in overall
,
capitalization rates is indicated. To compensate for these yearly
fluctuations, we have placed more emphasis on the average overall rate
' derived from this group.
The following issues relate to the quality of the subject -- its
operations, physical qualities, location, competitive market, as well as
Medicaid and Medicare reimbursement trends.
Lower-than-average overall capitalization rate:
• None
Higher-than-average overall capitalization rate:
• Inconsistent financial performance
Overall capitalization rate in the middle of the range:
• Typical physical qualities
1 • Stable and typical neighborhood
• Relatively stable projections for the census, rates and
earnings expectations
64 Tellatin, Louis & Andreas, Inc.
?I
These issues isolate risk that is specific to the subject. Overall, the
subject appears to have moderate risk, and an overall capitalization rate
in the middle portion of the range derived from the comparable sales is
considered appropriate. Based on the foregoing reasons, we have selected
' a 14.0 percent overall capitalization rate for the subject.
Band of Investment Capitalization Method
' The band of investment is a method of deriving an overall rate of return
from the annual mortgage constant (Rm) and equity capitalization rate (R
),
e
sometimes referred to as an equity dividend rate. The mortgage constant
is a ratio of the annual debt service (principal plus interest) to the
' amount borrowed for a given interest rate and amortization term. It is
the rate that provides a return on -- and of -- the borrowed funds or
lender's position. The equity dividend rate is the first-year cash throw-
off to the equity position divided by the amount of equity cash invested.
It is also referred to as the cash-on-cash rate of return or "current"
yield expected by the equity position.
Gi
k
t i
f
i
ven mar
e
n
ormat
on on the percentage that borrowed money contributes
to the investment (the loan-to-value ratio), the percentage that equity
money contributes, the mortgage terms (interest rate and amortization
' period), and the equity investor's expected rate of return for investment
in properties of the subject's type, the band of investment method
' provides another means of selecting an overall capitalization rate. The
process involves weighing proportions for the mortgage and equity
positions by the respective currently required cash rates of return.
The band of investment formula, using a first-year, stabilized, equity
dividend rate is:
(M x Rm) + {(1-M) x Re) = Ro.
Where:
M = Loan-to-Value Ratio
1-M = Equity Contribution
Rm = Annual Mortgage Constant
Re = Equity Dividend Rate
In selecting the appropriate mortgage rate and terms, consideration is
' given to typically available conditions in the market. Locations,
physical plants, and earnings qualities dictate the type of financing
available. Newer, higher-quality facilities, and well-established
facilities located in stable or improving markets that show the least
risk, command superior financing terms such as those offered by insurance
companies, some banks, credit corporations, and even bond underwriting.
The later is usually available for larger amounts. Older facilities with
average to below average locations and/or economic prospects can turn to
new programs offered by HUD, mortgage conduits, REITs, and banks. Even
for the same facility and loan amount, rates and terms will vary widely
among the different lenders. In considering the appropriate mortgage rate
and terms for the subject, we have assumed that a typical loan-to-value
ratio is sought (70.0 to 75.0 percent range), and the borrower has no
' extraordinary borrowing advantages, such as cross collateralizing to other
superior properties, or providing substantial corporate or personal
guarantees.
65 Tellatin, Louis & Andreas, Inc.
i
Conventional bank financing is plentiful in the current market for new
construction and short-term (under five years) financing. Terms and rates
differ greatly from low-floater bonds with letters of credit, to gap
financing, to five-year fixed rates. Insurance companies are less of a
factor and chase high-end product only. Recently, insurance companies
' have been retreating from mortgage lending; Prudential Insurance, once
considered a major lender, has completely withdrawn from the market.
Others are very cautious, but these insurance companies offer some of the
' best rates and terms.
Currently, mortgage conduit programs for long-term care properties are
very active including at least six programs being marketed nationally --
each with more than $100 million in funds. Conduit programs are typically
quoting nursing home rates ranging from 300 to 365 basis points over
corresponding Treasury bonds, currently yielding 6.2 percent on 10-year
' bonds; the conduits are quoting loan-to-value ratios of 75.0 percent, and
debt service coverage ratios in the range of 1.40 to 1.60. (Conduit
sources: C. S. First Boston, Nomura Securities, Deutsche Bank, First
Union and NationsBank: all clients of Tellatin, Louis & Andreas, Inc.)
REITs are currently quoting rates at levels 25 to 75 basis points higher
than conduits, but are allowing higher loan-to-value ratios, and lower
debt service coverage ratios.
l
,
Based on the remaining economic life of the subject, and its physica
location and economic characteristics, the following mortgage terms have
' been concluded for the subject.
Interest Rate 9.05%
Loan or Analysis Term 7
Amortization Years 20
Annual Mortgage Constant 10.84%
Loan-to-Value Ratio 75.0%
The equity capitalization rate is determined by extracting estimated
equity dividend rates from the comparable sale data. In some cases, the
actual financing terms are included in the calculations. If the financing
terms are unknown, the following terms are applied: 75.0 percent loan-to-
value ratio for the loan amount, the five-year Treasury Bond rate (as of
the date of sale) plus 300 basis points for the interest rate, and a 20-
year amortization period. The estimated equity dividend rates for the
comparable sales are summarized as follows.
1
u
66 Tellatin, Louis & Andreas, Inc.
RY OF EQUITY DIVIDEND RATE CALCULATIONS
SUMMA
Totals &
Weighted
Sale Number 1 2 3 4 5 Averages
Sate Price $5,992,500 $4,900,000 $5,000,000 54,400,000 $15,700,000 $35,992,500
Mortgage Ratio 75.0% 75.0% 75.0% 75.0% 75.0% 75.0%
' Mortgage Amount $4,494,375 $3,675,000 $3,750,000 $3,300,000 $11,775,000 $26,994,375
18% 11
01%
26% 10
26% 12
23% 12
24% 12
.
.
.
.
.
Mortgage Constant 10.
Annual Debt Service $460,218 5450,702 $458,680 $404,712 $1,198,653 $2,972,964
Net Operating Income $855,759 $632,593 $498,860 5598,700 $2,451,242 $5,037,154
Pre Tax and Reserve
Cash Flow $395,541 $181,891 $40,180 $193,988 $1,252,589 $2,064,190
998
125
000 $8
100
000 $3
925
250
000 51
000 $1
498
125 $1
225
$1
,
,
,
,
,
,
,
,
,
,
,
,
Equity Position
Equity Dividend Rate 26.4% 14.8% 3.2% 17.6% 31.9% 22.9%
Rather than relying solely on equity capitalization rates extracted from
additional support is provided from selected sales that
just five sales
,
are located throughout the nation and occurring from 1991 through 1994.
By using the same rate extraction technique, equity dividend rates were
determined for 141 sales. These sales represent only part of the database
maintained by Tellatin, Louis & Andreas, Inc. The results of these
calculations are presented as follows.
1991
to
Equity Dividend Rates 1994 1991 1992 1993 1994
Low 2.7% 2.7% 6.3% 6.5% 7.6%
High 62.1% 49.4% 51.7% 41.6% 62.1%
Average 23.2% 21.2% 23.7% 24.9% 23.8%
Standard Deviation 11.0% 10.6% 11.3% 9.2% 13.2%
# of Sales in Sample 141 44 41 36 20
The five nursing home sales presented in the sales comparison analysis
provide limited insight into market equity dividend rates. The national
' equity dividend rates indicate a consistent average in recent years
ranging from 21.2 percent in 1991 to 24.9 percent in 1993. While the
' national average has been consistent, the standard deviation shows the
inconsistency in investors' return requirements and acquisition
strategies.
Again, the same factors that influence the overall capitalization rate
also impact the equity dividend rate. These factors include the physical
qualities of the building, the location, and the economic characteristics.
Besides these factors, the equity rate is impacted by the degree to which
it is leveraged. In most nursing home sale transactions, we have noted
that the greater the percentage of debt to price, the higher the equity
dividend rate. We have estimated an appropriate equity dividend rate of
24.0 percent.
Based on the analysis of the current debt and equity markets for similar
properties, the overall capitalization rate has been estimated by the band
of investment technique as follows.
67 Tellatin, Louis & Andreas, Inc.
1
' Mortgage Contribution
Equity Contribution
' Total
Capital
Contribution
M x
1-M x
100.0%
Current Weighted
Yield Rate
Rm =
Re =
Ro
Mortgage Contribution 75.0% x 10.84% = 8.13%
Equity Contribution 25.0% x 24.00% = 6.00%
------ ------
Total 100.0% 14.13%
Debt Service Coverage Method
' The debt service coverage involves the calculation of an overall
capitalization rate from the annual mortgage constant, the loan-to-value
ratio, and the lender's required debt coverage ratio. The lender's debt
service coverage is a ratio of the net operating income divided by the
annual debt service. Many lenders impose minimum debt service coverage on
a loan in addition to a maximum loan-to-value ratio. The minimum debt
service coverage ratio (DSCR) varies according to each specific property,
economic conditions, and the geographic area. For example, well-occupied
shopping centers, apartment complexes, and office buildings usually
require a 1.25 to 1.30 DSCR. A nursing home warrants a higher ratio
because of the elevated risk associated with operating a management-
intensive, health care enterprise. Many lenders are reluctant to lend on
property that they cannot manage on their own, if need be. Moreover, much
of the value of a nursing home is tethered to its reputation in the
community and the ability of its management to handle staffing, state
inspectors, and a myriad of social and medical services. Given the
restrictive financing requirements of commercial real estate lenders,
particularly where risk is perceived (as is the case with the subject
property type), a DSCR that exceeds typical commercial real estate ratios
is appropriate. The derivation of the overall capitalization rate
employing the debt service coverage method is presented as follows.
' = Loan-to-Value Ratio x Annual Mortgage Constant
R
o
x Debt Service Coverage Ratio (DSCR)
or
Ro - M x Rm x DSCR
0%
60
13
=
.
Ro = 75.0% x 10.84% x 1.
68 Tellatin, Louis & Andreas, Inc.
1
1
Summary and Conclusion of the Overall Capitalization Rates
The overall capitalization rates developed in this analysis are summarized
as follows.
Direct Overall Rates From:
Indicated Rate from Comparable Sales
Band of Investment Method
Debt Service Coverage Ratio Method
Average
Preliminary Overall Capitalization Rate
Plus Effective Tax Rate
14.00%
14.13%
13.00%
13.71%
14.00%
1.27%
Selected Overall Capitalization Rate 15.27%
In conclusion, the analysis produces a rather narrow range of indication
of overall capitalization rates for the subject. Since considerable
comparable sale data is available for comparison, the direct overall rate
developed from the comparables is given the greatest weight in arriving at
a single concluded rate. Therefore, it is our opinion that a 15.27
percent overall capitalization rate is appropriate for the subject
property. The indicated value of the subject is calculated as follows.
Net Operating Income Overall Rate = Property Value
$905,729 15.27% _ $5,930,000
Indicated Value $5,930,000
Less Value of the FF&E 782.000
Indicated Value of the Real Estate $5,148,000
69 Tellatin, Louis & Andreas, Inc.
11
RECONCILIATION AND FINAL CONCLUSION OF VALUE
The estimated market value of the real estate from the cost and income
capitalization techniques are:
Cost Approach $5,005,000
Income Capitalization Approach $5,148,000
The Cost Approach is most effective when the improvements are new, or
nearly new, and are fully utilized for the designed intent. This method
includes estimates of land value, reproduction cost and depreciation. The
cost estimate is based on Marshall and Swift component cost figures and
reflects average-quality construction. The depreciation is based on an
age-mortality concept and does not necessarily reflect specific market
depreciation. The value indicated from the cost approach is not
influenced by the intangible components, and reflects a clear indication
of the real estate value.
The Income Capitalization Approach, most appropriate in valuing a nursing
home, yields value indications that reflect current economic conditions in
' the marketplace. Since the revenues, the expenses, and the overall rates
are closely tied to the actual results of the subject property and
comparable data, we consider the value indication of this approach
reliable as an indication of the business enterprise. The technique
incorporate some elements of the intangible aspects of the enterprise.
There is no clean technique to extract the intangible component from the
overall value. However, we have conducted lengthy analyses to prove that
the value of the business enterprise exceeds the value of the real estate.
The earnings from ancillary services were removed from the net operating
income since this income is clearly derived from non-realty assets.
The Sales Comparison Approach reflects prices paid for similar nursing
home enterprises. Since nursing home sales incorporate the transfer of
1 substantial non-realty assets, FF&E and intangibles, there is no certain
technique to segregate just the real estate component. Therefore, this
technique is not applied in the valuation of the subject real estate.
i The income capitalization technique indicates a higher value than the cost
approach; thus, the facility operates well enough to compensate the
tangible assets, and provide a return on the intangible components. It is
our opinion that the value of the real estate should not greatly exceed
the depreciated cost to replace the property. However, it is reasonable
that the real estate has not followed a conventional depreciation
schedule. Although we have estimated a 60-year life for the building
improvements (considered relatively long) resulting in a higher
depreciated value than otherwise possible, a buyer of the real estate and
business enterprise would possibly be inclined to pay more for the real
estate than just the depreciated value. Thus, we have concluded a value
in excess of the value indicated by the Cost Approach.
Based on the foregoing considerations, it is our opinion that the "as is"
market value of the fee simple interest in the subject real property, as
of September 1, 1995, is as follows.
$5,100,000
70 Tellatin, Louis & Andreas, Inc.
CERTIFICATION
e certify that, except as otherwise noted in this appraisal report,
to the best of our knowledge and belief:
r The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and are our personal,
unbiased professional analyses, opinions, and conclusions.
We have no present or prospective interest in the property that is the
subject of this report, and we have no personal interest or bias with
respect to the parties involved.
This appraisal is not based on a requested minimum valuation, a specific
valuation, or the approval of a loan.
The compensation to the undersigned is not contingent upon the reporting
of a predetermined value or direction in value that favors the cause of
the client, the amount of the value estimate, the attainment of a
' stipulated result, or the occurrence of a subsequent event.
The reported analyses, opinions, and conclusions were developed, and this
report has be prepared, in conformity with the Code of Ethics and
Standards of Professional Practice of the Appraisal Institute, the Uniform
Standards of Professional Appraisal Practice of the Appraisal Foundation.
This report sets forth all of the limiting conditions (imposed by the
terms of this assignment or by the undersigned) affecting the analyses,
opinions, and conclusions contained in this report.
No one provided significant professional assistance to the persons signing
this report.
James K. Tellatin, MAI, and Sterling E. Short inspected the facility.
This report is subject to the requirements of the Appraisal Institute
relating to review by its duly authorized representatives.
As of the date of this appraisal, James K. Tellatin, MAI has completed the
requirements of the continuing education program of the Appraisal
1 Institute.
?- •? a at M I Ster ing S or
c pal
Pennsyl nia Certified General Real
' Estate ppraiser, #GA-001496-R
71 Tellatin, Louis & Andreas, Inc.
HIgIT A
EX LETTER
EME??'T
E%G p,,G
i
t
t
It
0
q
BEVERLY
March 5, 1996 ENTERPRISES
Mr. Jim Tellatin
Tellatin, Louis & Andreas, Inc.
15455 Conway Road, #355
Chesterfield, MO 63017
Re: Ad Valorem Appraisals
Dear Jim:
Per our telephone conversation this morning, we are pleased to
award your firm with the above assignment. I have attached a
schedule of the properties involved in this assignment. We have
agreed on the following:
• You will complete appraisals of the facilities in this
assignment. They are to include land and building, only.
• You will deliver three copies of the final appraisals
to me no later than Monday, April 15, 1996.
• Please contact the administrators prior to your
inspections.
• The date of value on this assignment will be as of
t
t
l
emen
s
sta
September 1, 1995. I have enclosed financia
for the years ending 12/31/93, 12/31/94 and from 01/01/95
through 08/31/95.
s Your fee, inclusive of all out-of-pocket expenses shall
be $13,500.00 ($4,000 each for the nursing homes and
$750 each for each of the chateaus). Should litigation
be necessary, you will be compensated accordingly.
As always, I look forward to working with you on this job. Please
call me with any questions or comments.
Sincere ,
;el'issa Karron
Manager of Real Estate Services
cc: Thad Thompson/RETS
Joe O'Brien, Esquire
mac. `:;LY ENT2_`.
51" a^aers a.erue • ?ort Srn,th ?r,?r-?_ -?_ _ ?_ ?? - '._
Ll
AD VALOREM APPRAISAL ASSIGNMENT
Phoenixville Congregate Living Center, #0084
1 833 S. Main Street
Phoenixville, PA 19460
215/935-9120 16 Beds
Phoenixville Convalescent Center, #0266
833 S. Main Street
Phoenixville, PA 19460
215/933-5867 144 Beds
Blue Ridge Haven Convalescent Center West, #0285
770 Poplar Church Road
Camp Hill, PA 17011
717/763-7070 313 Beds
Blue Ridge West Chateau, #2071
10 House Avenue
Camp Hill, PA 17011
717/763-1679 16 Beds
Michael Manor, #3926
741 Chambersburg Road
Gettysburg, PA 17325
717/334-6764 106 Beds
A
BEVERLY ENTERPRISES. INC.
;oaers Avenue • Port Smith. Arkansas X2919 • -K1 X52 6 1
1
1
EXHIBIT B
? LEGAL DESCRIPTION
Legal Description
I Not Provided
1
L 17
1
P
A
1
1
1
? EXHIBIT C
' ZONING REGULATIONS
r
d
(27-331) (27-331)
Part 14
0-A Office-Apartment District
5331. Purpose. The purpose of the 0-A, Office-Apartment District is
to provide reasonable standards for the harmonious development of
apartments, business and professional offices, and other uses and accessory
' uses which are compatible with high-density housing; to avoid undue
congestion in the streets; and to otherwise create conditions conducive to
carrying out these and the other purposes of this ordinance. (Ordinance
378-80, March 18, 1980, Article XIV, §1401)
4332. Procedural Requirements. All applications for permits pursuant
to this Part shall he submitted to thI Zoning Officer who shall have the
option of submitting such applications-to the Planning Commission or to the
Township Board of Commissioners for recommendations prior to issuing a
permit. All applications shall be reviewed by the Plan Review Board prior
to the issuance of any permit. (Ordinance 378-80, March 18, 1980, Article
XIV, §1402)
5333. Permitted Uses. A building may be erected or used, and a lot
may be used or occupied, for any of the following purposes and no other:
1. Business, professional, and financial offices and office
complexes.
2. Medical, dental, photographic, or similar laboratories, and
clinics or hospitals.
3. Studios for instruction in music, arts, science, radio, and
television.
4. Municipal buildings and public uses including recreation
facilities.
5. Public utility facilities.
6. Fraternal clubs, lodges and social and recreation clubs.
7. Commercial recreation facilities.
8. Churches, or similar places of worship, parish houses and
convents.
9. Research, testing, laboratories and facilities.
i
i
i
d
10
C
ll
vers
un
es.
eges an
t
.
o
11. Hotels and motels.
12. Convalescent homes.
13. Apartments, in conformance with the following:
a. One- (1) story buildings containing not more than eight (8)
dwelling units.
1 b. Two- (2) story buildings containing not more than twelve (12)
dwelling units
.
-423-
(27-333(13), cont'd)
(27-333(13), cont'd)
C- Three- (3) story buildings containing not more than eighteen
(18) dwelling units.
d. In any building in excess of three (3) stories, the number of
dwelling units is unlimited.
14. Accessory use on the same lot with and customarily incidental to
any of the above permitted uses.
(Ordinance 378-80, March 18, 1980, Article XIV, §1403)
' §334. Conditional Uses. The following conditional uses and no other
may be allowed or denied by the Township Board of Commissioners after
recommendations by the Planning Commission pursuant to the express
standards and criteria set forth in Article 24, Section 2405 and Article 23
1 of this ordinance. (Part 24, Section 615, and Part 23 of this ordinance]
1. Retail stores and personal service shops.
2. Private schools.
(Ordinance 378-80, March 18, 1980, Article XIV, §1404)
' §335. Height Restrictions When Abutting Residential Zone. When a
permitted use abuts any Residential District in the Township or in an
adjacent municipality, the following height restrictions shall apply: an
angle of 32 degrees shall be established at a point of the property line
which abuts the Residential District or the adjacent right-of-way line of a
street abutting the Residential District, as the case may be, measured from
a horizontal plane having an elevation equal to the average elevation of
the ground, after construction, along the entire side of the proposed
building or structure nearest to the Residential District. The proposed
building or structure may have any type or style of roof not otherwise
prohibited, and may vary in its height, provided that it shall not
intersect with or infringe upon the established 32-degree angle, and
provided that its highest point, excluding chimneys, spires, towers,
elevator penthouses, tanks, railings and similar projections, shall not
exceed 125 feet in height, measured from the aforesaid horizontal plane.
The definition of "Building Height" found in Part 2, Section 12 of this
' ordinance shall not be applicable to this Section 335. (Ordinance 378-80,
`larch 18, 1980, Article XIV, §1405)
§336. Height Restrictions When Not Abutting a Residential Zone. In
all cases where Section 335 of this Part is not applicable, no building
shall be erected to a height in excess of one hundred twenty-five (125)
feet. (Ordinance 378-80, March 18, 1980, Article XIV, §1406)
I §337. Lot Coverage.
1. Buildings including accessory buildings shall not cover more than
the following percentage of the area of the lot:
a. Non-residential buildings - 40%
b. Apartments - 35%
1 -424-
' - (27-337, cont'd) (27-337, cont'd)
' 2. Special coverage provisions: when provisions are made to provide
all or part of the required off-street parking within the building,
coverage shall be increased as follows:
% of Required Parking
Within the Building Increase in Coverage
25% sz
50% 10%
75% 15%
100% 20%
3. Each lot shall be maintained with a vegetative material in the
following percentages:
a. Non-residential buildings - 3561 '
b. Apartments - 407.
1 (Ordinance 378-80, March 18, 1980, Article XIV, §1407)
§338. Yard Regulations, Office Uses. Each lot shall have yards of
not less
abuts a than the width and depth indicated below. However, when the yard
Residential District or Residential Use in the Township or an
adjacent municipality, the yard depth and width must be one hundred (100) -
feet and the buffer yard as required in Section 340 must be provided:
' 1. Front yard - thirty (30) feet
2. Side yard - total thirty (30) feet, fifteen (15) feet each
3. Rear yard - twenty (20) feet
(Ordinance 378-80, March 18, 1980, Article XIV, §1408)
§339. Yard Regulations, Apartment Uses. Each lot shall have yards of
not less than the width and depth indicated below. However, when the yard
abuts a Residential District or Residential Use in the Township or an
adjacent municipality, the yard depth and width must be one hundred (100)
feet and the buffer yard as required in Section 340 must be provided:
1. Front yard - thirty (30) feet
2. Side yard - total thirty (30) feet, fifteen (15) feet each
3. Rear yard - twenty (20) feet
4. Interior yards - open space between buildings shall be provided as
follows:
a. When front to front, rear to rear, or front to rear, parallel
buildings shall have fifty (50) feet between faces for one-story
buildings, and five (5) additional feet for each additional stov;. If
the front or rear faces are obliquely aligned, the above distances may
be decreased a maximum of ten (10) feet at one end if increased by the
same or a greater distance at the other end. Where service drives or
bank grade changes or collector walks are introduced in this space,
the yard distance shall be at least twenty-five (25) feet.
I Revised June 1982 -425-
(27-339(4), cont d) (27-339(4), cont'd)
' b. Between end walls of buildings, a yard space of at least
twenty-five (25) feet for each one-story building, and five (5)
additional feet for each additional story, shall be required.
c. Between end walls and front or rear faces of buildings a yard
space of at least thirty (30) feet for one story, and five (5)
additional feet for each additional story, shall be required.
d. When two (2) adjacent buildings differ in the number of
stories, the space shall be not less than one-half of the sum of the
minimum required distance between two buildings of the lower height
and two buildings of the greater height.
' e. Outer and inner courts shall be permitted when such courts
are not less than fifty (50) feet in width or not less than the
dimension of the full height of the highest building wall enclosing
the court, whichever is greater.
(Ordinance 378-80, March 18, 1980, Article XIV, §1409; as amended by
Ordinance 411-82, June 15, 1982)
§340. Buffer Yards. Buffer yards shall be required when an office,
commercial or apartment use abuts a residential use in the Township or in
an adjacent municipality. Buffer yards shall be at least fifty (50) feet
' in width and shall extend the full length of the part of the lot which
abuts a residential use.
1. No structure, parking lot or loading zone shall be permitted in
the buffer yard.
2. The buffer yard shall be planted and maintained with a vegetative
material, including a row of trees not more than forty (40) feet apart.
The following types of trees shall not be planted in buffer areas:
a. Poplar, all varieties;
b. Willow, all varieties;
c. White or Silver Maple (Acer saccharinum);
d. Aspen, all varieties; and
e. Common Black Locust.
3. The buffer yard may be crossed by access roads and service drives
not more than thirty-five (35) feet in width, provided that the center line
of the road or drive shall cross the lot and buffer yard at an angle of not
less than sixty (60) degrees.
4. The buffer yard shall be considered as a part of the required
yard.
(Ordinance 378-80, March 18, 1980, Article XIV, §1410)
§341. Accessory Buildings.
1. No accessory building shall be permitted in front yard areas.
2. Accessory buildings shall be permitted to extend into side yards
but shall be not closer than five (5) feet to the side yard line.
1 -426- Revised June 1982
' . (27-341, cont'd) (27-341, cont'd)
' 3. Accessory buildings shall be permitted to extend into rear yard
areas but shall not be closer than five (5) feet to the rear yard line.
4. An accessory building shall not exceed one (1) story in height.
(Ordinance 378-80, March 18, 1980, Article XIV, 51411)
5342. Location. The site shall adjoin at least one (1) of the major
thoroughfares in the Township or be reasonably close so that the access
drive or drives can be satisfactorily arranged to avoid traffic congestion
' on local residential streets. (Ordinance 378-80, March 18, 1980, Article
XIV, 41412)
4343. Loading and Unloading Space. Each lot shall include sufficient
space for the loading and unloading of supplies and equipment to and from
vehicles. The public right-of-way shall not be used for this purpose. The
minimum space shall be fifteen (15) feet by fifty (50) feet by fourteen
' (14) feet high. (Ordinance 378-80, March 18, 1980, Article XIV, 41413)
4344. Signs.
1. All signs must comply with the following:
a. Free standing signs shall be a maximum of thirty (30) square
feet in surface area, non-luminous or non-reflective, and may be
backlighted or floodlighted.
b. Letters may be attached to a structure when they identify a
business or process carried on within the structure, and may be
backlighted or floodlighted.
2. When the circumstances necessitating the erection and use of a
sign or letters are no longer present, such sign or letters shall be
removed from the premises.
(Ordinance 378-80, March 18, 1980, Article XIV, 41414)
P
ki
4
Off
S
treet
ar
ng.
-
5.
43
1. Off-street parking shall be provided in accordance with the off-
street parking part of this ordinance. (Part 21 of this ordinance]
2. All parking shall be located at least eight (8) feet from the
dwellings or offices. Curbing shall be installed to enforce this
' regulation. The required parking spaces shall be situated on the same lot
within two hundred (200) feet of the dwellings or offices to be served.
3. Outdoor parking spaces and approaches shall be deemed to be part
of the open space of the lot on which they are located.
(Ordinance 378-80, March 18, 1980, Article XIV, 41415)
-427-
12-
wo
x
t?
1
1
1
1
1
1
1
1
1
1
1
IL
ROADI
?r 200'-
BUILDING HEIGHT
A.
s.
DETERMINANT
A. TYPICAL CONDITION • GROUND
ABOVE ROAD OR IL.
B. TYPICAL CONDITION • GROUND
BELOW ROAD OR R..
-428-
1
Ll
t
1
? EXHIBIT D
NURSING HOME SALES
?L
1
1
1
r
SALE NUMBER ONE
Clivedon Convalescent Center
6400 Greene Street
Philadelphia (Philadelphia County), Pennsylvania 19119
(215-844-6400)
Sale Date:
Number of Beds:
Total Price:
Financing:
Seller:
Buyer:
Confirmation:
Cash Equivalent Price:
Land Area:
Gross Building Area:
Year Built:
Building Description:
Condition:
Sale Data
January 31, 1994
180
$5,992,500
All cash to the seller
Comstock Healthcare, Inc.
Courtland Healthcare, Inc.
Public Records and participating
broker
$5,992,000
Property Data
1.3 acres
69,955 square feet
1978
A three-story concrete block and
brick veneer skilled nursing facility
Average to Good
Economic Data
Occupancy Rate: 97.2 percent -- 1994
Private-pay Mix: 3.2 percent -- 1994
' Medicare Mix: 6.7 percent -- 1994
Effective Gross Revenue: $7,883,596
Operating Expenses: 7,027,837
Net Operating Income: $ 855,759
Expense Margin: 89.1 percent
Cash Equivalent Price Indicators
Price per Bed: $33,292
Price per Square Foot:
Gross Revenue Multiplier: $85.66
0.76
Overall Capitalization Rate: 14.3 percent
Comments and Comparisons: This Philadelphia facility was purchased
jointly with Maplewood Manor Convalescent Center, and the sale price
herein reported represents the buyer's allocation. The revenue and expense
data were obtained from the b uyer's first-year Medicaid cost report, to
which we have added a reserve for replacement expense of $300 per bed.
' SALE NUMBER TWO
Northwood Nursing & Convalescent Home
4621 Castor Avenue
' Philadelphia (Philadelphia County), Pennsylvania 19124
(215-744-6464)
Sale Date:
Number of Beds:
Total Price:
Financing:
Seller:
'
Buyer:
Confirmation:
Cash Equivalent Price:
Land Area:
Gross Building Area:
Years Built:
Building Description:
Condition:
Occupancy Rate:
Private-pay Mix:
Medicare Mix:
Effective Gross Revenue:
Operating Expenses:
Net Operating Income:
Expense Margin:
Sale Data
December 19, 1994
148
$4,900,000
All cash to the seller
Northwood Nursing & Convalescent Home
Inc.
Northwood Nursing Center L.P.
Public record, Medicaid cost report
and participating broker, price
included $100,000 non-compete
agreement
$4,900,000
Property Data
18,880 square feet
43,860 square feet
1964, with additions
Two-story masonry
building
Average to good
Economic Data
in 1971 and 1984
nursing home
89.5 percent - 1994
11.6 percent
6.7 percent
$6,116,789
5,484,196 (estimated)
$ 632,593 (see comments)
89.7 percent
' Cash Equivalent Price Indicators
Price per Bed: $33,108
Price per Square Foot: $166.33
Gross Revenue Multiplier: 0.80
Overall Capitalization Rate: 12.9 percent
Comments and Comparisons: This facility is also located in the city of
Philadelphia. According to information supplied by a broker involved in
this transaction, the buyer's expectation for first year net operating
income were $950,000. This expectation did not allow for reserves for
replacement, and it did not include management fees. We adjusted the
expenses to include a 5.0 percent management fee and replacement reserves
of $300.00 per bed. In so doing, the indicated NOI is $590,600. Our
' estimated revenue and expenses are based on actual rates, mixes and
occupancy levels at the time. The expenses were based on amounts reported
in the Medicaid cost report, plus management, reserves for replacement and
contractual allowance estimates.
' SALE NUMBER THREE
Curry Memorial Home
Road 2, Box 60
Waynesburg (Greene County), Pennsylvania 15370
(412-627-3153)
' Sale Data
F
Sale Date:
Number of Beds:
Total Price:
Financing:
Seller:
Buyer:
Confirmation:
Cash Equivalent Price:
Land Area:
Gross Building Area:
Year Built:
Building Description:
Condition:
Occupancy Rate:
Private-pay Mix:
Medicare Mix:
Effective Gross Revenue:
Operating Expenses:
Net Operating Income:
Expense Margin:
December 1994
121
$5,000,000
All cash to the seller
Greene County
Guardian Care, Inc.
(Guardian Foundation - Greene Care)
John Frazier, Greene County
assessor's office and participating
broker
$5,000,000
Property Data
8.1 acres
56,000 square feet
1991
One-story, brick exterior
Good
Economic Data
96.4 percent
3.5 percent
12.8 percent
$4,432,044
$3,933,184
$ 498,859
88.7 percent
Cash Equivalent Price Indicators
Price per Bed: $41,322
Price per Square Foot: $89.29
Gross Revenue Multiplier: 1.13
Overall Capitalization Rate: 10.0 percent
Comments and Comparisons: Waynesburg is a small town in a rural area in
western Pennsylvania, approximately 30 miles southwest of Pittsburgh. This
sale was recorded January 25, 1995 (Book 137, Page 1056, Greene County
Recorder of Deeds). The buyers recently lost an appeal for tax-exempt
status on this property, which was formerly tax-exempt because it was a
county-owned property. The sale price recorded for the real property
included in this transaction was $4,317,000.
We were unable to obtain revenue and expense information on this sale from
the participating parties, the broker, or the most recent Medicaid cost
report, which was unavailable for review at the time we visited state
offices in the course of this appraisal assignment. The revenue and
expenses were based on report occupancy and rate information surveyed by
the Department of Health - State Center for Health Statistics & Research.
SALE NUMBER FOUR
Hillcrest Nursing Center
400 Hillcrest Avenue
Grove City (Mercer County), Pennsylvania 16127
Sale Data
Sale Date:
Number of Beds:
Total Price:
Financing:
Seller:
Buyer:
Confirmation:
Cash Equivalent Price:
February 1, 1995
121
$4,400,000
All cash to the seller
Hillcrest Nursing Center
HNCA, Inc. (Concord Health Group,
Inc.)
Public Records
$4,400,000
Property Data
Land Area: 5.0 acres
1 Gross Building Area: 52,102 square feet
Year Built. 1983
Building Description: Part one-, part two-, and part three-
story masonry structure with brick
exterior walls
Condition: Good
' Economic Data
Occupancy Rate: 90.7 percent
Private-pay and Medicare Mix: 26.0 percent
Effective Gross Revenue: $5,300,000 (estimated)
Operating Expenses: 4,701,300 (estimated)
Net Operating Income: $ 598,700 (see comments)
1 Expense Margin: 88.7 percent
r Cash Eouivalent Price Indicators
Price per Bed: $36,364
1 Price per Square Foot: $84.45
Gross Revenue Multiplier: 0.83
Overall Capitalization Rate: 13.6 percent
' Comments and Comparisons: Grove City is a small, rural community located
approximately 30 miles north of Pittsburgh, with good access to
Interstates 79 and 80. The statement of value filed (deed reference 95-DR-
1128) for the real property in this transaction indicated a sale price of
$3,000,000, which indicates a consideration of $1,400,000 for equipment
and intangibles. According to a brok er familiar with this transaction, the
buyer's first year expectation of net operating income was $900,000.
However, this expectation did not allow for typical management fees or
reserves for replacement. We adjusted the operating expenses to account
for these overlooked items.
SALE NUMBER FIVE
Norristown One
205 East Johnson Highway
East Norristown (Montgomery County), Pennsylvania
Norristown Two
2004 Old Arch Road
East Norristown (Montgomery County), Pennsylvania
Kingston West
615 Wyoming Avenue
Kingston (Luzerne County), Pennsylvania
Sale Data
Sale Date:
Number of Beds:
Total Price:
Financing:
Seller:
Buyer:
Confirmation:
Cash Equivalent Price:
Land Area:
Gross Building Area:
Year Built (Avg.):
Building Description:
Condition:
August 9, 1993
391
$15,700,000
All cash to the seller
Manor Care, Inc.
The Advancement
Healthcare
Public records
$15,700,000
of Geriatric
Property Data
5.1 acres (total)
135,660 square feet
1973
A two-story, a three-story, and a
four-story masonry structure, each
with brick veneer
Average to Good
Economic Data
Occupancy Rate: 96.0 percent
Private-pay and Medicare Mix: 23.0 percent
Effective Gross Revenue: $14,721,804
Operating Expenses: 12,270,562
Net Operating Income: $ 2,451,242
Expense Margin: 83.3 percent
Cash Equivalent Price Indicators
Price per Bed: $40,153
Price per Square Foot: $115.73
Gross Revenue Multiplier: 1.07
Overall Capitalization Rate: 15.6 percent
Comments and Comparisons: This was a three-property transaction that took
place in 1993. The income and expenses were obtained from Medicaid cost
reports and include management fees. We added $300.00 per bed to the
operating expenses as a reserve for replacement allowance. Kingston is a
suburb of Wilkes-Barre/Scranton in the northeast part of the state. East
Norristown is a northwestern suburb of the city of Philadelphia.
J
1
F,
L
' EXHIBIT E
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EXHIBIT F
QUALIFICATIONS
t JAMES K. TELLATIN, MAI
EXPERIENCE
Mr. Tellatin has specialized in the appraisal of real
estate since 1977. Mr. Tellatin has appraised
virtually all types of real estate in 46 states and
Canada. Types of property appraised include
industrial plants, office towers, shopping centers,
hotels, hospitals, apartments, farms, governmental
buildings, educational facilities, nursing homes,
retirement living centers and resorts. Moreover, he is
consulting with the new government of Hungary on
valuations of state-owned asset dispositions.
EMPLOYMENT
Mr. Tellatin is a principal in Tellatin, Louis &
Andreas, Inc. Prior to creating the firm, he formed
his own appraisal firm in 1984. In the past, Mr.
Tellatin has held the following positions: Director of
Appraisal Services, Turley Martin Company; Senior
Appraiser, Marshall and Stevens Inc.; Staff
Appraiser, Doane Agricultural Service Inc.
EDUCATION
1
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1
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Mr. Tellatin earned a Bachelor of Science degree in
Geography and Economics from Southwest Missouri
State University, Springfield, Missouri, in 1976. In
addition, he has studied at Dartmouth College,
Memphis State University and abroad in France and
Switzerland.
Mr. Tellatin has completed the education
requirements for the MAI, Member Appraisal
Institute designation from the Appraisal Institute, and
has also been certified for real estate appraisal by the
states of Arkansas, Arizona, California, Indiana,
Illinois, Iowa, Kansas, Michigan, Missouri,
Oklahoma and Tennessee.
COURT TESTIMONY
Mr. Tellatin has prepared reports for numerous
courts and boards. He has also testified as an expert
witness before various courts in several states and
Federal Bankruptcy Courts.
STERLING E. SHORT
EXPERIENCE
Mr. Short has been involved in the commercial real
estate industry since 1987, and in the appraisal sector
since February 1989. Real property appraised
encompasses a range of property types such as vacant
land, industrial warehouse and distribution centers,
freestanding retail facilities and shopping centers,
retirement apartments and nursing homes,
apartments, office buildings, motels and hotels, as
well as other miscellaneous property types. The bulk
of his assignments has entailed appraising nursing
homes. The appraisals have functioned as support for
clients in financing, litigation support, bankruptcy
proceedings, and internal review.
EMPLOYMENT
Mr. Short joined Tellatin, Louis & Andreas, Inc. in
February 1989. Previously, he was employed by
Home Savings Association of Kansas City, F.A.
where he participated in loan origination conducted
on a national basis primarily on apartments, motels
and hotels, and shopping centers.
EDUCATION
Mr. Short received his undergraduate degree,
Bachelor of Arts in accounting and English, from
Westminster College in Fulton, Missouri.
Mr. Short is an MAI Candidate, and he has
completed several courses offered by the Appraisal
Institute in pursuit of this professional designation.