Financial Plan

Strategy and Implementation Summary

Many retirement communities appear to be aimed at a somewhat “upscale” market. Homes tend to be townhouses or detached homes with prices starting at $350,000. It is our feeling that this leaves out too much of our potential market. We are thinking in particular of musicians whose current homes, in which they have equity of $200,000 to $400,000, are already too expensive for them in retirement. We believe that they would prefer something at a lower cost, and that they are willing to consider living in an apartment building.

Advantages of Apartment Living

Lower cost of acquisiton or rental
Single-level living space
Elevator and easy move-in
Access to amenities without going outside
Greater sense of community

Disadvantages of Apartment Living

Poor soundproofing; cannot practice
No room for a large piano
Much less space than in a detached home
No place for gatherings, rehearsals etc.

The Musician’s Retirement Community aims to remove these disadvantages by sound-proofing the apartments and by providing practice rooms, rehearsal rooms and performance spaces.

These amenities add cost to the construction, and this extra cost must be taken into consideration.

Current thought is to make the apartments fairly basic and inexpensive, comparable to a working musician’s apartment. A typical refrigerator will be a $400 unit, not a $2,000 unit. Units will not contain fireplaces, real or fake. Heating may be a central oil or gas burner with a tankless hot water system, or alternatively the units could have electric baseboard heating and an electric hot water tank.

There are two alternatives for the operational model:

Corporate ownership of the building; all units are rentals.
Condominium: each unit is owned either by the resident or by an absentee owner who rents to a resident.

Our current thought is to structure this community as a condominium. It is believed that this will make the financing easier, as we can recover the cost of building as we sell the units, instead of over a 10-year period as would be likely for a rental building. In addition, the risk of empty units is spread among the unit owners rather than the corporation.

Note that an important future phase is the assisted-living building. As with most assisted-living communities, this would have rental units only. There are many existing assisted-living communities that provide financial models for us.

Business Entities and Phases

Phase 1: Construction and Sale of Units

An S corporation will be formed for the purpose of constructing the building and selling the units. Potential unit owners and other investors will be given the opportunity to buy shares in the corporation. The corporation will exist until all units are sold, at which point the remaining equity will be delivered to the shareholders.

Example of Rental Market Near Proposed Construction

Zillow.com finds several apartments for rent at “Eastern Trails”, an apartment building at 29 Capron Road, Milford, NH 03055. Rental prices:

375 sq. ft. studio, $999 / month
600 sq. ft. one-bedroom, $1,319 / month
875 sq. ft. two-bedroom, $1,429 / month

Amenities: Cats and small or large dogs allowed. Individual air-conditioning units. Basketball court, lawn, tennis court, barbecue, shared laundry facilities. Electric heating.

In some listings, Zillow estimates rent for a home. In one example, price of home equals 13 times annual rent. This would price a $1,429/month apartment at about $208,000.

Comparable Price of Units

The Musician’s Retirement Community has the extra construction costs of the rehearsal and practice rooms, performance spaces, and kitchen and dining room. Let’s assume that of our fifty units, about half are one-bedroom and half are two-bedroom with only a few “luxury” apartments. We will pick an average retail price point of $300,000 per unit. This corresponds with an average rent of $23,000 per year. Mark finds this very close to the retirement budget he drew up for himself a couple of years ago.

This brings the total selling price of all the units to $15,000,000.

This link Ideal Profit Margin for Property Development says that the ideal profit margin for a condominium development project is 16% to 20%. Assuming a profit margin of 20%, we would like to set the cost of building the project at $12,500,000.

Financial models for Phase 1 are not available yet.

Phase 2: Operation of Condominium

A Trust will be set up for the benefit of the condo owners. Some portion of the sale price of each unit will be deposited into the assets of the trust. Unit owners will elect a Board of Trustees to administer the trust for the benefit of the unit owners.

The Trustees will be responsible for all maintenance of the apartment building including practice rooms, performance areas and cafeteria. It is likely that the Trustees will contract with a maintenance company like Sodexo.

The Appendix contains financial statements for the first year of operation of the condominium.

Phase 3: Assisted Living

The Assisted Living will be in a building connected with the main part, but otherwise will be an entirely separate corporation.

Revenue Model

Phase 1: Construction and Sale of Units

Phase 1 is a standard condominium development project. We make the following assumptions:

The living units themselves are comparable to units that would be affordable to a median-income ($50,000 or so) individual or couple, like the Eastern Trails apartments. The average base price would be $240,000 without amenities.
The “amenities” consist of the performance space, practice rooms, rehearsal rooms and some sort of cafeteria or dining hall. They add an average of $40,000 to the price of each unit, or total of $2,000,000. This is the added value of a “Musicians Retirement Community” as opposed to a generic Active Adult Retirement Community.
An additional portion of the selling price is seed money for the management trust. At a figure of $20,000 per unit, this starts the trust off with funds of $1,000,000.

The total average selling price of the unit is thus $240,000 + 40,000 + 20,000 = $300,000.

This yields a total price of $15,000,000 for all the units. Deducting the money that will be turned over to the trust gives total revenue of $14,000,000.

According to Ideal Profit Margin for Property Development cited above, a standard profit margin for condominium development is 16% to 20%. Assuming 20%, we are looking to build this project on a budget of $11,667,000. At 16% the figure is about $12,000,000. The $12,000,000 figure gives a cost per unit of $240,000.

Funding will come from two sources: investors and loans.

An appropriate way to set up a corporation would be as a C or S corporation for ease of buying and selling shares. There are advantages and disadvantages:

A C corporation has double taxation with profits taxed at 21%. Dividends paid to shareholders are taxable income to the shareholders, but as long as the profits are held as retained earnings they are not taxable income to the shareholders.

An S corporation avoids double taxation, but profits are taxable income to the shareholders each year. Thus, shareholders pay tax whether dividends are declared or not.

In either case, the corporation would sell shares directly to investors. In addition, bank loans can be available, and would be practical as long as profit margins are higher than interest rates.

As each (average) unit is sold for $300,000, we recognize $240,000 COGS plus $20,000 to the condo trust plus $40,000 profit. (If the corporation is an S corporation, this is a taxable event to the shareholders.)

After all the units are sold and the bills paid, the remaining profits of about $2,000,000 are distributed to the shareholders. (If the corporation is a C corporation, this amount is reduced by $420,000 of corporate income tax paid. The money is not taxable income to shareholders until it is paid out.)

Phase 2: Operation of Condo

The Board of Trustees starts out with $1,000,000 collected from the sale of the units. Each unit owner has a certain percentage interest in this amount. Condo fees are collected each month according to the percentage interest of each unit.

The Board may offer a monthly “meals fee” per resident entitling the resident to a certain number of meals each month at the cafeteria. Some sort of reservation system will be required so that the cafeteria can purchase the appropriate amount of food. Meals can also be purchased individually, reserved in advance.

Additional revenue will come from renting out the performance space to outside groups.

Expenses include maintenance of the common areas and the amenities, and the cafeteria expenses. Actual maintenance, cleaning and food service can be contracted out to a company like Sodexo. The board can also offer cleaning services for individual units for a fee.

The board will also maintain a reserve fund with the goal that special assessments will not be required for major repairs.

It is to be decided whether Trustees will be paid for their work or not. The Trust will not be operated for a profit. Excess revenue will be held in the reserve, and budget shortfalls taken from the reserve.

In the case of liquidation of the condo, the remaining reserve will be distributed to the unit owners by percentage interest.

Phase 3: Assisted Living

Assisted living will be a separate corporation, either non-profit or for-profit.

Financial Highlights

Timetable

Yaer 1: Market research: Identification of likely investors and residents.

Preliminary market research will be done this year. Purchase of available off-the-shelf market research reports on retirement condominiums. Interviews with prospective residents including members of the Boston Piano Amateurs and the Amateur Chamber Players. Expenses: $5,000.

Year 2: Formation of working group. Investigate condominium developers.

Refine the plans to pin down the target price of units and determine costs. More extensive market research. Hiring of market research companies to prepare surveys. Choose condominium developer for the project. Preparation of detailed, researched business plan. Expenses: $25,000.

Year 3: Site selection, permits, etc. Equity Funding.

Formation of corporation with potential residents and investors as stockholders. Detailed plans.

Estimated funding requirement in Year 3: $3,000,000.

Year 4: Construction of apartment building with performance spaces, etc. Sale of units. Establish Condominium Trust.

Dissolve corporation, returning capital and profits to shareholders. Turn management over to the trust.

Estimated funding requirement in Year 4: $9,000,000 to complete project and get ready for sale.

Year 5: Possible Start of Assisted Living Project

Financial details of the Assisted Living project are not addressed at this time.