The senior housing industry is ripe with opportunities. Many new investors have just acquired their first assisted living facility. They will soon learn from experienced operators and owners that the most important aspect of surviving and thriving in the senior housing business is having a solid management team.
This is true for any asset class within the senior housing industry. Consequently, it is imperative that owners find the right management team and build the right type of management contract.
The Responsibility of the Management Team
Owners, especially new buyers, know what a business is worth. There is a concrete amount paid to acquire that senior housing investment. However, maintaining profitable operations is a completely different matter. As a result, owners rely on their management team after they buy healthcare properties as senior living property investments.
Most investors choose to hire third party management companies. There are a variety of management companies. Each specializes in a particular field, whether that by asset type, region or market.
The main responsibility of managers is to oversee day-to-day operations. They interact with the facility on an intimate level, dealing with the daily circus and instituting initiatives to reach operational goals and budgets.
In order to work together, the owner and manager must enter into a management contract. This is not a lease. It is an agreement that outlines the facility’s objectives, management responsibilities and outlines compensation.
The Management Contract
The management contract is the prime motivator for the manager to perform well. The industry standard management contract calls for managers to be paid five percent of gross revenue each month. As a skilled nursing and assisted living brokerage, the JCH Group does not often recommend this contract model.
Under this model, managers are encouraged to fill the facility to maximum capacity to drive up revenue for a bigger five-percent cut. However, there is no motivation to manage expenses. As a result, though revenue may rise, so may spending, which leaves little profit for the owner.
Instead, owners are encouraged to build a contract where the manager receives a smaller percentage of gross revenue. In addition, owners should incentivize operational goals with bonuses or profit sharing. This way, the manager is motivated to increase revenue while still being held accountable if the net profit is in the red. Aligning the interests of the owner/investor and the management company is crucial to the profitability of any facility.
Consult with the Top Skilled Nursing and Assisted Living Brokerage
The management contract can be negotiated alongside the owner by a senior housing brokerage. It is best to rely on investment specialists before signing the management contract to ensure that there is a system of checks and balances in place in order to protect the owner’s interests. Experienced legal counsel is also a necessity.
The JCH Group is a premier nursing home brokerage specializing in senior living investments, assisted living homes for sale, senior housing valuations, and contract negotiations. No matter your level of experience in the housing business, our team of experts is available for acute insight and sage advice.
To speak with your investments specialist at the JCH Group, contact Nick Stahler at 714-463-1663.