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For HNWIs • Due Diligence
Senior Housing Due Diligence Checklist for HNWIs: Complete Framework
Comprehensive due diligence framework for high net worth investors acquiring senior housing properties. Cover financial analysis, operational review, regulatory compliance, physical inspections, and operator evaluation to mitigate risk and validate investment assumptions.
20 min read•For HNWIs • Investors
What this article explains:
- •Topic: Senior housing due diligence checklist for high net worth investors
- Who this is for: HNWIs, family offices, and institutional investors acquiring senior housing properties
- Problems addressed: Hidden property risks, operational issues, regulatory non-compliance, and financial surprises
- Systems involved: Financial analysis frameworks, operational review protocols, and physical inspection standards
- Why this matters now: Comprehensive due diligence prevents costly acquisition mistakes and validates investment assumptions
Phase 1: Financial Due Diligence (Weeks 1-2)
Historical Financial Performance
- Trailing 36-month P&L statements: Analyze revenue trends, expense ratios, and NOI growth
- Monthly occupancy reports: Track seasonal patterns, move-in/move-out trends, average length of stay
- Rate analysis: Review historical rate increases, pricing by unit type and care level
- Revenue per occupied room (RevPOR): Compare to market comps; identify pricing power
- Ancillary revenue streams: Second-person fees, level-of-care charges, therapy services
- Bad debt analysis: Historical collection rates, aging receivables, write-offs
Operating Expense Analysis
- Labor costs (50-60% of revenues): Staffing ratios, turnover rates, wage rates vs market
- Food & dining (8-12%): Cost per resident per day; meal quality vs budget
- Utilities (4-6%): Electricity, gas, water, sewer trends
- Insurance (3-5%): General liability, professional liability, property coverage
- Administrative (8-12%): Management fees, marketing, office expenses
- Target operating expense ratio: 65-75% for well-run properties
Capital Expenditures & Reserves
- Historical capex spend: 3-year average capital expenditures vs replacement reserve requirements
- Deferred maintenance: Identify items seller deferred; quantify required investment
- Replacement reserves: Verify adequate reserves ($300-$500/unit/year industry standard)
- Upcoming major capex: Roof replacement, HVAC upgrades, parking lot repaving
Phase 2: Operational Due Diligence (Weeks 2-3)
Operator Evaluation
- Management team experience: Executive director tenure, regional oversight structure
- Track record: Portfolio performance, operational metrics, financial stability
- Licensing & certifications: Administrator licenses, healthcare certifications
- References: Interview other property owners, vendors, regulators
- Technology systems: EMR, billing, CRM, scheduling software capabilities
Staffing Analysis
- Staffing ratios: Caregiver-to-resident ratios by shift; compare to state requirements and industry best practices
- Turnover rates: Annual turnover by position; benchmark against 50-70% industry average
- Compensation benchmarking: Wages vs local market; benefits packages
- Training programs: Onboarding, continuing education, dementia care training
- Recruiting capabilities: Pipeline, time-to-fill, retention strategies
- Overtime analysis: Excessive overtime indicates understaffing or poor scheduling
Clinical Quality Metrics
- Incident reports: Falls, medication errors, elopements, behavioral incidents
- Hospitalization rates: Frequency and root causes of resident transfers to hospital
- Infection control: UTI rates, pneumonia, COVID protocols
- Pressure ulcer prevention: Stage 2+ wounds; prevention protocols
- Medication management: Error rates, audit results, pharmacy relationships
Resident Satisfaction & Reputation
- Family surveys: Satisfaction scores, NPS, areas for improvement
- Online reviews: Google, Yelp, Caring.com, A Place for Mom ratings and comments
- Complaint history: State ombudsman complaints, resolution patterns
- Retention rates: Voluntary vs involuntary discharges; average length of stay
Phase 3: Regulatory & Legal Due Diligence (Weeks 2-4)
Licensing & Certification
- State license: Current assisted living or residential care license; renewal dates
- License transfer process: Timeline for change-of-ownership approval (30-180 days typical)
- Certification requirements: Memory care endorsements, specialty certifications
- Life safety approvals: Fire marshal, building department sign-offs
Survey History & Compliance
- Last 3 years of state surveys: Review inspection reports, deficiency citations, plans of correction
- Severity of citations: Identify high-level deficiencies or patterns requiring operational improvements
- Correction status: Verify all deficiencies have been resolved and accepted by state
- Life safety code violations: Fire safety, egress, emergency preparedness issues
- Pending investigations: Any open complaints, investigations, or enforcement actions
Litigation & Claims History
- Litigation search: Past 5 years of lawsuits, settlements, judgments
- General liability claims: Slip-and-fall, resident injury, wrongful death claims
- Employment claims: Wage and hour disputes, discrimination claims
- Contract disputes: Vendor disputes, resident contract litigation
- Insurance coverage: Verify adequate general liability, professional liability, D&O coverage
Phase 4: Physical Due Diligence (Weeks 3-4)
Property Condition Assessment (PCA)
- Third-party engineering report: Engage qualified engineer for comprehensive inspection
- Major building systems: HVAC (age, condition, maintenance history), roofing, plumbing, electrical
- Life safety systems: Fire sprinklers, alarm systems, emergency lighting, exit signage
- ADA compliance: Wheelchair accessibility, grab bars, door widths, turning radii
- Deferred maintenance schedule: Quantify immediate, near-term (1-3 years), and long-term (5+ years) capex
- Replacement reserve requirements: Verify adequate reserves for major system replacements
Environmental Site Assessment
- Phase I ESA: Environmental liability screening; historical use, contamination risk
- Phase II ESA (if needed): Soil and groundwater testing if Phase I identifies concerns
- Asbestos/lead paint: Testing and abatement plans if property predates 1980
- Mold assessment: Visual inspection; moisture intrusion history
Red Flags: Walk-Away Indicators
- Occupancy <70%: Indicates fundamental operational or market problems requiring turnaround expertise
- High-severity survey deficiencies: Immediate jeopardy citations or pattern of serious compliance failures
- Pending litigation with material exposure: Wrongful death, abuse/neglect claims with significant damages
- Deferred maintenance >$1M: Major systems (roof, HVAC) at end of life requiring immediate replacement
- Environmental contamination: Phase II ESA reveals soil/groundwater contamination requiring costly remediation
- License suspension risk: Pending state enforcement action threatening license revocation
- Negative cash flow: Persistent operating losses indicating pricing, occupancy, or expense management problems
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