Want to develop assisted living? Some cautionary advice.

"Deinstitutionalization" is in. Though those who understand and appreciate well-run nursing homes may differ, majority sentiment these days seems to favor keeping people out of them except as a last resort.

The Clinton Administration's proposed health care reform package encapsulates this

thinking: Its long-term care scheme would emphasize "home and community-based" care and relegate nursing home funding primarily to sub-acute care. What if this turns out to be a trend in coming years? What if long-term care investors would rather "join them than fight them." Or what if they simply want to follow "the smart money;" which way should they turn? Recently NURSING HOMES asked a pair of long-term care investment advisors what they would recommend to nursing home administrators and operators who may be considering the "what if's."

Joseph G. Beck, Principal, Shattuck, Hammond Partners

"I don't see many nursing home operators moving into assisted living right now. Many operators grew up in an environment of providing health care services. Assisted living is a different proposition. It is considered to be more a real estate transaction than even nursing homes are. With assisted living, investors place more value on appraisals and on demonstrated market demand. Assisted living is a more a market-driven product than an entitlement-driven product; there is very little public money out there right now for assisted living, as opposed to Medicaid and Medicare for nursing homes. In short, assisted living is viewed more like a hotel than a hospital.

"Still, if nursing homes don't feel ready quite yet to move into sub-acute, there is investment money for assisted living available. Probably the most important sources right now are the REITs (real estate investment trusts) and the REMICs (real estate mortgage investment conduits). REITs have been filling the capital vacuum left by the banks and the insurance companies that withdrew from the real estate market in the 1980s. Sale-leaseback arrangements are available to nursing homes and others considering assisted living, with interest rates at around 9-11%.

REMICs are less costly than REITs, but they are less flexible, as well; it is much more difficult to raise additional capital, if needed, with a REMIC, because these are closed-lien mortgages that have been packaged for sale. Still, they're talking about limited-recourse and non-recourse-to-the-owner approaches, so they may be very attractive. In fact, REMICs may be the next 'hot' financing tool for assisted living.