AMA - Highest and Best Use

Dr. Lee in Michigan asks,

My question concerns the highest and best use of soon-to-be vacant commercial space.

It seems as if there are many assisted living facilities in my area and it's not really a business model I know very much about. However, I do have quite a bit of experience in value engineering and developing real estate. If I have 6,000 square feet of vacant commercial space (roughly 60 x 100) with all utilities available, would this be large enough to repurpose into an assisted living space in which I could build out and rent to an operator? The current, soon-to-be-former use is a combination warehouse and office space.

What else do I need to be thinking about with respect to the property's potential for this use versus any other use (besides zoning)?

Lee this is a great question.

You are correct that the property has the potential to be repurposed. Whether the building would be a good starting point for an assisted living project depends on several factors. The regulations that govern assisted living are unique to each state and province. In the realm of residential assisted living, some states limit the number of beds. In the case of Michigan where you are located, these homes are called adult foster care homes.

there are several different classifications. There are rules for homes having up to 6 residents, homes up to 12, up to 20 and above 20. The state publishes a handy 24 page document that provides some basic information. But in order to fully understand the requirements you will need to consult an architect who has experience in building these types of facilities in the state of Michigan.

But before you even go down that path, there are a few things I can tell you from being involved in the construction of these types of facilities.

The first thing you should determine is the supply and demand situation in your community. This involves visiting the existing homes in the area and making an assessment of their occupancy. You may find that the market is saturated with offerings compared with the current demand. However, the market segments into many different types of facilities. It might be over-supplied in one area and undersupplied in another.

The assisted living business is first and foremost a service business built on top of a real estate business. The financial performance it is dominated by the service side of the business.

You will find that the cost of your construction is not the determining factor in the success of your project. The 6,000 SF footprint you outlined should be enough to build a viable product. The homes we design are a little larger at 8,500 SF. But you should be able to come up with an efficient design that would fit in a smaller envelope.

The service offering can vary widely in price to the end customer. Some facilities focus on insurance paid and subsidized services. Some focus on customer paid. The pricing model might be a fixed price all you can eat type of offering, or it might be a la carte pricing. Talk to people who are in the industry and can give you a sense for how the economic model is constructed in your community.

If your facility is going to specialize in memory care, that might command a premium in the market compared with basic services. If you see a need for a particular segment that is under served, you could discover an opportunity. For example, maybe there is no senior housing that caters to those on a vegetarian diet or a vegan diet. Maybe there is no kosher house and the demand exists for say kosher or halal cooking.

The key to building a successful venture in this regard involves finding the operator that you are going to trust to run the business successfully, to qualify for and maintain the state license.