KIVOV CONSULTING - EMMA.MSRB.org.

_________________________________________________________________________ 475 K Street NW, Suite 1005Washington, DC 20001202-321-4780202-540-9882(f)[email protected]

KIVOV CONSULTING Retirement Housing & Long-Term Care Affiliated with Joseph Howell Consulting, LLC

STRATEGIC POSITIONING ANALYSIS For

THE GROVES IN LINCOLN

LINCOLN, MA

APRIL 2012

Prepared for

MASONIC HEALTH SYSTEM OF MASSACHUSETTS

The Groves in Lincoln

Strategic Positioning Analysis April 2012 Page 1

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KIVOV CONSULTING Retirement Housing & Long-Term Care

TABLE OF CONTENTS

I. Introduction and Project Background……………………………………… 2

II. Site and Neighborhood Analysis………………………………………………. 8

III. Market Area………………………………………………………………………………. 16

IV. Demographic Analysis……………………………………………………………….. 20

V. Competitive Analysis…………………………………………………………………. 34

VI. Pricing and Positioning Analysis………………………………………………… 47

VII. Demand Analysis……………………………………………………………………….. 61

VIII. Retirement Housing and Long-Term Care Industry Overview…. 67

IX. Conclusions & Strategic Recommendations…………………………….. 73

Appendix……………………………………………………………………………………. 86



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I. INTRODUCTION & PROJECT BACKGROUND A. Understanding of Engagement Masonic Health System of Massachusetts (MHS) has engaged Kivov Consulting to conduct a thorough strategic positioning analysis of The Groves in Lincoln, a luxury continuing care retirement community located in Lincoln, Massachusetts. The property consists of 168 independent living units with a mix of apartments in two distinct buildings and cottages, and a main community center with common areas and amenities. It is a full-service CCRC with long-term care services available. The health care services are provided through a Visiting Nurse Association (VNA) owned and operated by MHS; there are no long-term facilities on The Groves campus. The property has struggled to fill units since its official opening in July 2010 and in particular in the past year. As of the end of March 2012 it has just 77 occupied independent living units (out of a total of 168), an occupancy rate of 46%, and occupancy has yet at any time to reach 50%. There are a total of 98 reservation deposits, but the likelihood of converting the additional 21 deposits into actual sales and move-ins is uncertain. Sales have been particularly slow in the past year, and in the six full months since September 2011 there have been just 7 new net reservations (an average of just over 1 per month) and 10 move-ins. Exacerbating the slow sales pace has been an inordinate number of cancellations of reservations. In the past six months The Groves actually has secured 13 new deposits, but also has suffered 7 withdrawals of existing reservations. Additionally, some brief momentum that appeared to have been built at the end of 2011 appears to have been lost: there were 8 new reservation deposits in the fourth quarter of 2011 and a net of 5 new reservations after 3 cancellations, but the first quarter of 2012 has yielded just 5 new reservations and 4 cancellations. Given the situation, MHS is fully examining the property and the situation in an attempt to get things turned around as rapidly as possible. Management believes it has identified some issues that have contributed to the underperformance of the property. Specifically, there are questions as to whether the property is appropriately priced for what it provides. Other issues, however, may exist. Management is looking to build consensus internally and with stakeholders in identifying the primary issues that are leading to the underperformance, the depth and gravity of these challenges, and the steps that will need to be taken in order to address and hopefully resolve these issues. Before a comprehensive repositioning plan can take shape and in order for strategic initiatives to address the challenges to be developed, the challenges need to be more clearly and thoroughly identified and assessed.



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MHS is looking for this strategic positioning analysis to lay the foundation for and begin the process of developing a strategic approach to addressing the main challenges and turning around the performance of the property. Therefore, the primary purpose of this analysis is to thoroughly examine and analyze the pricing and positioning of The Groves in the market and relative to its competition, as well as the fundamental dynamics of the market, in order to identify both internal and external factors that are adversely impacting the subject. Beyond this, the analysis is to then present conclusions on the impact and ramifications of these challenges and deficiencies, and where possible provide strategic recommendations for addressing and hopefully overcoming or at least mitigating these challenges, with the overall objective of improving the performance of the property. The strategic positioning analysis then could be utilized as the basis from which to formulate a more detailed repositioning plan. The strategic positioning analysis is intended for use by executive management and ownership of MHS in its deliberations about how to proceed at The Groves and next steps that should be undertaken. We understand it also will be shared with bond holders, investors, and other key stakeholders in the project. The report therefore is being developed as a full narrative document that is appropriate for distribution to these third parties. B. Subject Property History and Background The Groves in Lincoln originally was envisioned and conceived by Deaconess Abundant Life Communities, a Massachusetts based non-profit health care and long-term care/continuing care provider. Deaconess and its partners created the concept for the property, developed and began the construction of the property, and began the pre-sales effort for the property, before eventually partnering with MHS. Reportedly, Deaconess ran into significant financial difficulties during construction. The organization reached out to MHS, and a partnership ensued. MHS in November 2009 took ownership of 80% of the project – which it still current holds – and completed the construction and opened the property. Deaconess remains a 20% owner and partner in the project, despite the location of Newbury Court a competitive (but also technically a “sister”) property just a few miles away in Concord. By all accounts, MHS owns and operates The Groves and Deaconess is much more of a silent partner. Pre-sales efforts by Deaconess began back in 2006-2007 and reportedly went very well. When it became a partner, MHS reportedly was told by Deaconess that the property was 82% sold. Data provided by MHS shows 100 net sales on record as of the end of January 2010. Unfortunately, it turns out that many of these “sales” were not solid. MHS management estimates that as much as 60% of the presales commitments became cancellations. As a result, at opening in July 2010 there were far fewer move-ins than originally anticipated. In the first month of occupancy there were 15 move-ins; August saw 10 more move-ins, followed by 5



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each in September and October. The data shows there actually were more cancellations than sales throughout 2010, by a margin of 40 to 31. By then end of 2010 approximately 28% of the community (47 units) was occupied and there were 92 net sales on record; there were 6 more move-ins in January 2011, but then sales and move-in activity hit a wall, and there has been only limited progress since the beginning of 2011. Over 2011 the community netted 27 new move-ins to bring occupancy to 44% by the end of the year. Even more alarming was that cancellations effectively were cancelling out new sales. It should be noted that in only one month since January of 2010 were more than 4 sales recorded and the average number of sales per month since January 2010 is 2.1. Over this same period, the average number of cancellations per month has been 2.3. Thus, on net, the community has lost 0.2 sales per month since the beginning of 2010. Table 1 displays the historic occupancy data and Table 2 the sales velocity data provided by MHS.

Table 1

Month Move-Ins Occ. Units Occ. %

July-10 15 15 8.9%

August-10 10 25 14.9%

September-10 5 30 17.9%

October-10 5 35 20.8%

November-10 8 43 25.6%

December-10 4 47 28.0%

December-11 4 74 44.0%

March-12 2 76 45.2%

Historic Occupancy Data

The Groves



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Table 2

Month New Sales Cancellations Net Sales

January-10 0 2 100

February-10 1 2 99

March-10 1 3 97

April-10 1 0 98

May-10 2 2 98

June-10 9 3 104

July-10 4 12 96

August-10 2 4 94

September-10 2 6 90

October-10 2 2 90

November-10 3 3 90

December-10 3 1 92

January-11 1 0 93

February-11 2 1 94

March-11 3 5 92

April-11 4 1 95

May-11 1 1 95

June-11 0 2 93

July-11 0 2 91

August-11 3 1 93

September-11 0 1 92

October-11 1 2 91

November-11 4 0 95

December-11 3 1 97

January-12 2 1 98

February-12 1 3 96

March-12 2 0 98

MONTHLY AVG. 2.1 2.3 94.9

Historic Sales Velocity

The Groves

From the start The Groves was somewhat of a unique property and lacking in continuity. It had three distinct product lines: traditional entrance fee CCRC apartment units (Russell Building); entrance fee cottages; and a mid-market/moderate income targeted rental units (Flint Building). Additionally, from the start the property was utilizing a virtual or in-home continuing/long-term care concept. There was no assisted living or nursing care facilities on



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campus, just the independent living units. All care was to be provided by the VNA that was owned and operated by MHS, and within residents’ homes in their independent living units. Collectively, the property was being positioned and marketed as a luxury, upscale CCRC. Choice and flexibility – hallmarks of the evolving concept of continuing care and retirement housing for today’s consumer – were considered the cornerstone of the concept. Beyond the distinct product options and the in-home care delivery, MHS even offered a number of different independent living service packages in which the key supportive services (meals and housekeeping) varied. MHS’ management found, however, that while choice was indeed a concept that was resonating with consumers, too much choice at the property was in fact confusing some consumers and that much more education was needed. Prospects were pricing the Flint Building units against market rate rental apartments in the market. As a result, management added an entrance fee option for these units, with entrance fees set at prices well below market and those of the Russell Building units. Additionally, while the virtual/in-home care concept was cutting edge, it was possibly ahead of its time, and somewhat beyond many consumers in the market that wanted – or believed they needed – to see “bricks and mortar” long-term care facilities on campus, as is the case at The Grove’s competitors. Clearly, much more education, and a different approach, was needed to sell this concept. During 2011, management at MHS and The Groves began selling the concept of the VNA and the homecare services as a model with superior care delivery and better economics for residents. This appeared to develop some traction in the market. The Groves also offers for a transfer arrangement to the Alzheimer’s care and nursing facilities at Newbury Court to meet the demands of prospects that prefer actual long-term care facilities to which to transfer. Today (as of the end of March 2012) 77 of the 168 independent living units at The Groves are occupied, an occupancy rate of 46%. Beyond this there are 21 depositors on record that have yet to move in. A number of these, however, date back to 2007 and 2008 and seem highly unlikely to be converted to move-ins. Eight of the deposits have been placed since mid 2010 when MHS was the primary owner and operating entity. These seem to provide a better opportunity for conversion to occupancy, although only one at this time has a set move-in date. For the remaining depositors, the likelihood of move-in and potential timing of move-in is uncertain. Entrance fee price points for the cottages and Russell apartment units have been set high to reflect the premier location within Lincoln, a highly affluent town in which home values are extremely strong. The community offers all units through three different entrance fee refund plans, with 90% refund, 50% refund, or 0% refund options. The Groves is considered a Type B – or modified contract – community, as all continuing care contracts utilize a fee-for-service base, but allow for some health care benefit. Specifically, residents that transfer to the Alzheimer’s



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care and/or nursing components of Newbury Court are entitled to care in these facilities at discounted prices of 80% of the prevailing market rate per diems. Additionally, residents utilizing MHS’s VNA in-home care receive a discount off of market rates. Identifying that one particular challenge for the property appears to be well above market pricing of its cottage units, management moved aggressively to address this by offering a $100,000 price reduction and $50,000 incentive (to be used towards in-unit upgrades). Results reportedly have been inconclusive. While the price reductions did seem to generate more lead activity, sales did not experience a measurable positive impact. Admittedly, this initiative was instituted only recently, and there has not been a concerted and ongoing program promoting these incentives. Management at this time is uncertain whether such a program provided over an extended timeframe would yield positive results. Another looming challenge of which management is aware is a planned construction project that will build an overpass from Route 2 along The Groves campus. As a result, part of the campus – and a number of units in Flint Building – will be adjacent to a massive construction site for several years. The impact on the marketability of these units is uncertain, but it seems likely to be dramatic. How and what can be done to mitigate the impact of the construction project, and to find a way to make these units viable during this project, are strategies that will need to be developed going forward.



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II. SITE & NEIGHBORHOOD ANALYSIS A. Site & Location The Groves in Lincoln is located along Route 2 (Cambridge Turnpike) in Lincoln, Massachusetts. The property is located on the south side of Route 2 just before it forks with the Cambridge Turnpike leading into downtown Concord, and the Concord Turnpike, which bypasses the town center. The property site is approximately three miles west of the Route 2 exchange with I-95 and less than two miles from downtown Concord. Map 1 provides a broader depiction of the site location relative to its surroundings. Lincoln is a small, but highly affluent bedroom community of Boston. Its picturesque setting, classic and attractive New England style homes, accessibility to Boston, and high incomes make it a very desirable location. The town is just over a 20-mile drive (and depending on traffic a 30-plus minute drive) from downtown Boston. Its convenience to I-95 and location along Route 2 also is a major benefit as this facilitates commuting patterns and access to and from Lincoln and surrounding greater Boston areas. The property is situated along a primary artery that is at points largely undeveloped. Most developed uses that exist in the more immediate vicinity of the subject are residential. As a result, surrounding land uses on the whole are compatible with the subject. We do note that immediately adjacent to the subject property are several tiny, worn, single family detached homes, including one across the street that appears semi-dilapidated. This is in stark contrast to the rest of the residential development in the immediate area, which is predominately attractive. The project enjoys strong drive-by exposure due to its location along Route 2, which is a primary east-west artery serving the region. Visibility along the road is fine, as there is ground level signage at the entrance to the community. Ingress and egress, however, are awkward. While a right turn into the property traveling east on Route 2 is simple and direct, the left turn into the property traveling west on Route 2 is not direct. More significantly, exiting the property a left turn is not permitted, forcing all traffic to travel east on Route 2. Due to a lack of turns off of Route 2, it can easily take nearly two miles traveling east on Route 2 before traffic is able to turn around and head back to the west on Route 2.


Map 1

The Groves Site Location



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Accessibility of the property, however, is a strength due to the location along Route 2 and proximity to I-95. As noted, Route 2 is a primary east-west artery in the area. It interchanges with I-95 approximately three miles to the east, before continuing into and its apex around Somerville. To the west Route 2 leads to an exchange with I-495, approximately 12 miles driving distance from the subject. Past I-495, Route 2 continues west through Leominster, and beyond to I-91 and northwestern Massachusetts. Aside from Route 2, east-west travel in the vicinity of the subject property is less direct and quick. Consequently, the proximity to I-95 is a key to the accessibility of the subject. Interstate 95 provides for relatively direct (although not always quick, depending on the time of day and traffic) access to Route 3 and I-93 to the northeast, and past this continues into the North Shore communities, a popular day trip and vacation destination. To the south I-95 provides a connection to the Massachusetts Turnpike and then provides access to the affluent and desirable Route 9 corridor communities (including Natick, Wellesley, Newtown, and Brookline) before heading towards the South Shore communities of the Boston area. In summary, I-95 is the key artery connecting much of the suburbs of the Boston area. B. Subject Property The Groves is a full service CCRC with 168 independent living units including apartments and cottages, as well as a main community center with amenities and common areas. An even 100 of the units are within Russell Building, the main multi-story structure of the campus and within which the community center is situated (technically the residential areas are connected by the main community center). Thirty units are located within a distinct structure, the Flint Building. There are also 38 cottage units situated around the campus. There are no physical long-term care facilities on the campus; rather, all health and long-term care is provided within residents’ independent living units, through the VNA owned and operated by MHS. The Groves also has a transfer arrangement with the assisted living and nursing care centers on the Newbury Court campus, a sister community (but also a competitor) owned by Deaconess a few miles away in Concord. The Groves provides a modified, Type B entrance fee contract which is based on a fee-for-service concept, but allows for a health care benefit of discounted VNA home care rates or a discount at the long-term care components at Newbury Court. Entrance fee contracts come with three different refund options: 90% refund, 50% refund, and 0% refund plans. The ingress into the community off of Route 2 (which as noted is not ideal) leads to a short access road that winds its way slightly uphill to the community. An attractive stone barrier lines the access road. The access road runs to the middle of the campus, and delivers traffic to the front of the main building with the community center and Russell House apartments. This is a relatively attractive multi-story structure of three and four stories, with yellowish vinyl siding, white trim, and a gray tile slanted roof. Single-story cottages of a similar architectural design



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and look (but with a mix of exterior colored vinyl siding including yellow, tan, and blue) are situated around the campus. A large portico extends out from the main entrance and provides for a covered drop-off. There is some landscaping, but not much grounds. All told, the property sits on approximately 30 acres, and there is a relatively attractive, densely wooded area to the back of the site plan. On the whole, however, the campus and setting are not particularly striking. Overall the exterior appearance and “curb appeal” of the subject is good; it is attractive, but not striking, and a little lacking in some of the upscale exterior design elements that might be expected from a top of the market luxury community. The main entrance opens into a grand lobby area with high ceilings, tabled ceiling design features, recessed lighting, and nice décor. This is a strength of the community. Reception is to the right from the entrance and common areas are situated all around the lobby, which forms the hub of the community. Resident halls extend out in either direction from the main hub of common areas. Straight back from the entrance across the lobby is the main dining/restaurant. This is attractive, and does capture the look of a restaurant rather than a dining facility, with very high vaulted ceilings, and separate rooms to break up the space. This too is a strength of the property. Other common areas and amenities of note on the main floor include a casual dining café, a poker room (that was converted from a Wi-Fi café that received only limited use), an arts and crafts room, a library. These areas are decent spaces, but not to the level of the restaurant or lobby. A unique design feature is an elevated second story walkway that cuts through the main lobby, overlooking the entrance and lobby on one side and the main dining room on the other. A story below entrance on the lower level there are additional commons areas. This includes an auditorium/great room below the dining room. This space is attractive, but a little small for the community (it reportedly holds 100 people). There is also an indoor pool, and a somewhat small fitness room with a separate studio room. There are outdoor walking areas that connect to the trail system in Lincoln. Another significant amenity at the subject is an underground parking garage. The apartment units within Russell Building are solid but not spectacular. The offerings range in size from a one bedroom floor plan of 770 square feet to a two bedroom with den floor plan of 1,440 square feet. Units feature 10’ ceilings, recessed lighting, and crown molding. A number of the kitchens, however, are somewhat closed off making the layout and plan seem less modern. Finishes are relatively basic consisting of laminate type counters, white appliances, Pergo-wood flooring in the kitchen in some units, and vinyl floors in baths. All units do contain a stacked washer and dryer. The cottages are attached structures that are situated around the campus. Most are attached in quads, with some duplexes. Cottage units are spacious, with attractive, modern layouts and



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floor plans featuring large, open entertaining kitchens and vaulted ceilings in some units. Many feature a loft design with a second level that has a loft landing and can be used as a guest room (although there is no enclosed, private room). Some units have an attic rather than the loft. All units feature ground floor master bedroom and bathroom and living area. The main floor living areas range from approximately 1,400 to 2,400 square feet; the largest unit also has a 1,000 square foot basement with option to finish. According to floor plans and information provided by management, the cottage units come in four advertised floor plans ranging in size from 1,800 to 3,400 square feet. Finishes in the cottages – aside from vaulted ceilings, recessed lighting, and crown molding – are somewhat lacking for luxury priced and positioned product: standard carpeting, Pergo-wood floor in some kitchens, laminate counters, and white appliances. All cottages come with an integral garage; depending on location throughout the campus, some of the garages are side loading rather than front loading. The Flint Building does not fit with the rest of the campus and product. It reportedly was a result of the zoning and land use process that required an allocation of affordable units at the property. Reportedly 12 of the 30 units in Flint are set aside for low income use, although the parameters and guidelines for this are not clear. What is clear is that the Flint Building is a second rate product compared to the rest of The Groves. The building and its units are built to a moderate income apartment standard. Units with the original finishes still in place have plastic borders on the bottom of walls and no crown molding or any other upscale features or fixtures of note; MHS has upgraded some units to remove the plastic strip and add crown molding. Also as noted, there is a pending construction project (the Route 2 overpass) that will alter the landscape of the campus and specifically will directly impact a handful of units in Flint Building. Over the course of the overpass construction project – which by all estimates could be a three to as many as five year timeframe – this handful of units in Flint Building will effectively be adjacent to a massive construction site. Whether the impacts of this project can be mitigated and these units will have any marketability – and/or if there is a way to temporarily reposition or convert these units to another beneficial use – during this period is an issue that will need to be addressed moving forward. Entrance fees under the 90% refund plan at The Groves range from approximately $463,000 to $775,000 for Russell apartment units and are in the $900,000s for the cottage units. This translates to the high $500s per square foot for the Russell apartments and mid $400s to low $500s per square foot for all but the largest cottage unit. The weighted average Russell apartment unit entrance fee is nearly $669,000 and the weighted average cottage is just under $947,000. The weighted average unit across all of these market rate units has a 90% refundable entrance fee of over $745,000. The 30 units in Flint Building range in size from 732 to 1,127 square feet. The well below market entrance fees under the 90% refund plan range



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from $195,000 to $375,000, and average approximately $265,000, or $285 per square foot. The per square foot price on average is less than half that of the Russell apartments. As noted, there is flexibility at the subject with regard to monthly service packages. Residents may choose an “all inclusive” package that provides for regular weekly housekeeping and a full meal plan with a debit system that allows for $480 per month in dining debit. The $480 can be used in either the main restaurant or café, at the resident’s desire, with items offered on the menus on an a la carte basis. The monthly service fee for the “all inclusive” package ranges from $2,780 to $5,050 for Russell apartments, from $5,180 to $6,260 for the cottages, and from $2,420 to $3,740 for the Flint apartments. Residents have the choice to opt out of housekeeping services and to opt for a half meal plan or opt out completely, with the monthly service fees adjusted downward accordingly. There also is an option to opt out of a wellness package ($160 per month) that is part of the “all inclusive” package. C. Surrounding Neighborhood & Amenities The surrounding neighborhood around the subject is an attractive, affluent, residential suburban area, comprised predominately of low density residential development. There are lots of small, tertiary roads that are densely wooded at frontage, with homes set back. There are many large home sites and properties and nice (although general not spectacular estate) homes are the norm. In some areas there are larger, estate-like properties. Much of the area to the west of the subject is only moderated developed and low density. Even along Route 2 heading east from Lincoln/Concord towards Boston there is limited development, and the major thoroughfare appears mostly densely wooded and exurban until reaching I-95. To the west of the subject there is little development of note. Tracy’s (a gas station/convenience store) on Route 2 just after the fork with Route 2A, is approximately one mile from the subject. After this, Route 2 is primarily a parkway cutting through large swaths of undeveloped land. Along Route 2A to the northwest lies Concord Center, with downtown Concord just under two miles from subject. Downtown Concord is a classic, historic town center, surrounded by attractive single family homes. The quaint historic town center goes on for a few blocks with a steady procession of galleries, stores/shops, and a few restaurants. A Rite Aid pharmacy is past the town center. Further past this nearly 2.5 miles from subject at Sudbury Road and Thoreau Street is a retail/commercial concentration including Concord Shopping Center, which is anchored by a local supermarket, an Ace Hardware, and a CVS pharmacy. Around this is a Starbuck’s, several convenience stores and gas stations, and Concord Depot, which contains a series of stores.



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Also a relatively short distance from the subject (approximately four miles and seven to eight minutes driving time) to the south is Lincoln Station, the small town center of South Lincoln. This small town center has a supermarket, bistro, and post office, and is along railroad tracks and true to its name is a functioning train station. Surrounding the town center are attractive homes, horse farms, and large pieces of land. Much of the area to the south of the subject is comprised of winding roads through rolling hills, and is quite picturesque. To the east of the subject on Route 2A (which runs roughly parallel to Route 2) it is densely wooded along the road frontage and very low density residential. Route 2A passes Hanscom Field and Air Force Base, and historic sites such as the Paul Revere Capture site and Minute Man National Historic Park and visitor center. Inside of I-95 along both Route 2A and in particulate Route 2 the area becomes a little more modest, and more densely developed with moderate size, mature homes, on typical one-quarter to one-third acre lots. Parts of Lexington have a more modest, working class residential look. There also is a greater concentration of commercial/retail development in this area, including a Shaw’s supermarket, several retail plazas, in-line retailers, and the like. Big box retail and a concentration of comparison shopping retail options requires a somewhat more lengthy drive from the site. The Burlington Mall, at I-95 and US Highway 3, is the nearest full service mall, nearly a nine mile drive from the subject. A Simon Mall, Burlington Mall features more than 185 retailers, a recently renovated food court, and is anchored by mid-market to more upscale department stores Nordstrom, Lord & Taylor, Macy’s, and Sears. Health care is much more accessible, as Emerson Hospital is just three miles straight line drive from the subject along Route 2 in Concord. The aging looking hospital is surrounded by professional offices including some medical office uses with various physicians and practices. The non-profit run acute care center has 168 staffed beds. Based on data from the American Hospital Directory online (www.ahd.com), in the cost reporting year ending September 2010, the hospital reported over 6,400 discharges and nearly $500 million in patient revenue. Clinical and specialty services at Emerson Hospital include cardiovascular, emergency, neurosciences, oncology, orthopedic, radiology/imaging, rehabilitation, intensive care, and wound care, as well as psychiatric and skilled nursing units. While not part of a larger healthcare network, Emerson Hospital has clinical collaborations with several leading Boston area medical institutions including Brigham and Women’s Hospital, Childrens Hospital Boston, Hospice of the North Shore and Greater Boston, Lahey Clinic (specializing in pain management, neurosurgery, spine surgery, and urology), Mass General Hospital, and Tufts Medical Center (specializing in nephrology). The greater Boston area is known as a bastion of some of the world’s most advanced and high quality health care research and services, including some of the

http://www.ahd.com/



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aforementioned facilities/networks and others. Much of this is within a reasonable distance (although not the immediate market area) of the subject.



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III. MARKET AREA The primary market area represents the geographic area surrounding the subject site from which we anticipate that the majority of prospects and move-ins would originate and within which the direct competition for the subject is located. Primary market areas vary in size depending on:

The product type and services and care being offered (the more specialized a product or service, the larger the area from which it attracts prospects);

The size of the subject property (larger properties have greater critical mass and typically larger marketing budgets allowing them to reach more prospects and attract them from a larger area; Erickson Living communities are a good example of this dynamic).

The amount of competition or alternative housing and care options in the area (the fewer alternatives, generally the larger the area from which a community will attract residents); and

The density of the area (urban markets are smaller in size and rural markets are larger) Market areas are typically defined by physical barriers (such as bodies of water or other major topographical features and primary arteries) and psychosocial barriers/boundaries, such as changing neighborhoods, socioeconomic make-up of areas, and the like. Rings or radii often are utilized as primary market areas for retirement housing and long-term care communities; while such a market area is not necessarily invalid, it is generally an oversimplification. The best indicator of a market area for an existing community is the geographic origin of its current residents or recent admissions. While trends can change and certainly a shift in the marketing philosophy or approach can impact from where future move-ins originate, this data at least provides an actual, historical accounting. Thus, our determination of the market area focuses on this actual geographic origin data. For the purposes of this analysis, we determined the market area for the subject to be a polygon surrounding the subject and demarcated by major roadways and intersections. Based on the polygon virtually the entire market area is contained within a 10-mile radius of the subject, and much of it within eight miles or less of the subject. The primary market area polygon has seven points. It extends further to the southeast and northwest, running along the Route 2 corridor:

To the east it extends into Arlington, to the intersection of Massachusetts Avenue and US Highway 3, approximately 8.5 miles from the subject.



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To the east/northeast it extends to the intersection of I-95 and US Highway 3, approximately 5.5 miles from the subject.

To the north it extends to US Highway 3 and Treble Cove Road, short of Billerica, approximately 7.5 miles from the subject.

To the northwest the market area boundary is I-495 and State Road 119, just over 10 miles from the subject. This is furthest point from the subject.

To the west the boundary is State Road 117 and Gleasondale Road, in the town of Stow, approximately 9.5 miles from the subject.

To the south it extends to the intersection of State Road 30 (Commonwealth Road) and Rice Road, just north of the Massachusetts Turnpike and outside of Cochituate, approximately 8.5 miles from the subject site.

To the southeast the market area boundary is along US Highway 20 (Main Street) at Waverley Avenue in Watertown, approximately 8.5 miles from the subject.

Map 2 depicts the primary market area (within the blue polygon) for The Groves, with the site location marked by the highlighted icon near the center. As noted, the depiction of the market area is based in large part upon actual geographic origin of existing residents at the subject. According to this data (which exhibits the ZIP code of origin for 73 resident households at the property), 43 of these households, or 59%, originated from municipalities located within the boundaries of our defined market area. The largest portion of these resident households came from the more immediate backyard: 18% from Lincoln and another 16% from Lexington. Beyond this, all other municipalities in the primary market area accounted for no less than 1.4% (1 household) and no more than 5.5% (4 households) of resident households. Table 3 displays the geographic origin data of current resident households of the subject. Beyond the resident origin data, the market area as defined takes into account highly relevant physical features of the area. It extends further from the subject to the southeast and northwest, running along the Route 2 corridor. This reflects that access to the subject is quickest and most direct along this route and in these directions. Access is much less direct to the north and south, and not surprisingly resident origin patterns were not as strong in these directions. Thus the market area does not extend as far in these directions. Additionally, the market area is drawn so that it remains north of The Massachusetts Turnpike and west of US Highway 3. We believe that both of these primary arteries create a real physical barrier in the area and appropriately serve as demarcations for the market.



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Table 3

Municipality Households % of HHs Municipality Households % of HHs

Lincoln 13 17.8% Centerville 1 1.4%

Lexington 12 16.4% Franklin 1 1.4%

Concord 4 5.5% Maynard 1 1.4%

Winchester 4 5.5% Natick 1 1.4%

Acton 2 2.7% Needham 1 1.4%

Bedford 2 2.7% Newton 1 1.4%

Brookline 2 2.7% Randolph 1 1.4%

Cambridge 2 2.7% Reading 1 1.4%

Wayland 2 2.7% Sherborn 1 1.4%

Wellesley 2 2.7% Somerville 1 1.4%

Weston 2 2.7% Stoneham 1 1.4%

Arlington 2 2.7% Watertown 1 1.4%

Belmont 1 1.4% Waltham 1 1.4%

Carlisle 1 1.4% Out of State 9 12.3%

Total 73 100.0%

Within PMA 43 58.9%

Origin by Municipality of Resident Households

The Groves

We note that the nearly 60% of move-ins that have originated from within the primary market area is somewhat low but not completely out of line by industry standards. In our experience, often approximately 65% to 75% of move-ins to the subject originate from within the defined primary market area. What is of even more note with the subject’s resident origin patterns – due to the irregularity of the finding – is the low number of move-ins from out of state. Many CCRCs attract as many as 20% to 25% or more of move-ins from out of state, due primarily to the presence in the market of adult children or other family members that are influential in their parents decision to relocate into community that is proximate to family. The Groves has to date has attracted only 12% of its move-ins from out of state. Reasons for this are not readily apparent. Given the small sample size, it is possible that this is just an anomaly and would increase over time.


Map 2

The Groves Primary Market Area


IV. DEMOGRAPHIC ANALYSIS This section examines the demographics of the defined primary market area. Demographic data features current year (2011) estimates and five-year future projections (2016). The estimates and projections are developed by Nielsen Claritas, one of the country’s largest demographers. Nielsen Claritas demographic data utilizes the US Census 2000 as its base and then applies proprietary interpolations and adjustments. It is our understanding that all of the data from the 2010 Census has not yet been completely integrated into the modeling. Due to a lack of certain detail in the data in its 2011/2016 estimates and projections, we utilize both the 2009/2014 data (which has greater detail and specificity by age and income cohorts) and the 2011/2016 data sets. We perform some interpolations as necessary to extend the level of detail and precision provided in the 2009/2014 data to the 2011/2016 data, building the new data for 2011/2016 on top of the data foundation, and to develop certain data points as necessary for our analysis. A. Population and Household Trends Population and Household data and trends show that the market area is relatively mature and has a strong concentration of older adults. It also is experiencing little growth, which is typical of older towns in Massachusetts, in which there is little land available for new residential development and often zoning, land use, or other ordinances designed specifically to limit growth in many townships. Table 4 shows population trends and Table 5 displays household trends in the market area; key data and findings are summarized below.

The total population in the primary market area in the current year is estimated to be approximately 262,000 persons.

The total population will increase by just approximately 4,000 over the next five years, realizing an average annual increase of just 0.3%.

The total population age 65 and older in the market area is approximately 39,600 in the current year, comprising 15.1 percent of the total population. This is significantly higher than the corresponding national concentration of the 65+ population of 12.6% (per the 2005-2009 American Community Survey).

The 75+ population in the market area is estimated at nearly 19,600 in the current year, comprising 7.5% of the total population. Again, this is well above the corresponding national concentration of the 75+ population of 6.1% (per the 2009 ACS).

The 65+ population is projected to grow by 2.7% per annum over the next five years to a projected total of over 44,800 by 2016.

The 75+ population is projected to increase by 0.8% per annum through 2016 to a projected total of just under 20,400.

The strongest projected growth by percentage is in the 65 to 69 age cohort (5.3% per annum), followed by the 60 to 64 age cohort (3.7% per annum) and the 70 to 74 age cohort (3.4% annually). The 75 to 79 age cohort shows some modest projected growth, but the 80 to 84 age cohort is projected to experience a contraction over the next five years. This is in line with national trends as across the country the 75 to 84 age segment



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is decreasing or showing no growth in most markets; this is due to the birth dearth that occurred nationally coming out of the Great Depression.

Table 4

Population

# % of Total # % of Total # % of Total (2000-2011) (2011-2016)

Total 255,524 100.0% 262,089 100.0% 266,103 100.0% 0.2% 0.3%

55 to 59 13,541 5.3% 18,969 7.2% 20,807 7.8% 3.6% 1.9%

60 to 64 10,419 4.1% 15,450 5.9% 18,301 6.9% 4.4% 3.7%

65 to 69 9,414 3.7% 11,351 4.3% 14,352 5.4% 1.9% 5.3%

70 to 74 9,112 3.6% 8,635 3.3% 10,108 3.8% -0.5% 3.4%

75 to 79 7,741 3.0% 7,413 2.8% 7,625 2.9% -0.4% 0.6%

80 to 84 5,334 2.1% 5,789 2.2% 5,752 2.2% 0.8% -0.1%

85+ 5,163 2.0% 6,397 2.4% 7,004 2.6% 2.2% 1.9%

55+ 60,724 23.8% 74,004 28.2% 83,949 31.5% 2.0% 2.7%

65+ 36,764 14.4% 39,585 15.1% 44,841 16.9% 0.7% 2.7%

70+ 27,350 10.7% 28,234 10.8% 30,489 11.5% 0.3% 1.6%

75+ 18,238 7.1% 19,599 7.5% 20,381 7.7% 0.7% 0.8%

% Annual Change

Older Adult Population by Age and Year

The Groves Primary Market Area2000 2011 2016

There are approximately 100,600 households in the market area in the current year.

As with population, there will be relatively nominal growth in the number of households in the market over the next five years, with total households increasing by just 0.2% per annum.

There are approximately 24,200 households age 65 and older in the market area, comprising 24.1% of all households. The number of 65+ households is projected to increase by 0.8% per annum over the next five years, adding approximately 600 such households each year.

There are just over 11,900 households age 75 and older in the market area, comprising 11.8% of all households. The number of 75+ households is projected to increase by 0.6% per annum through 2016, adding approximately 70 such households annually.

As with the population data, the strongest growth amongst older adults is projected in the 65 to 69 age cohorts. Also as with population, the 75 to 79 age cohort is projected to experience relatively nominal growth and 80 to 84 age cohort is projected to contract, reflecting national trends.



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Table 5

Households

# % of Total # % of Total # % of Total (2000-2011) (2010-2016)

Total 97,261 100.0% 100,627 100.0% 101,758 100.0% 0.3% 0.2%

55 to 59 8,211 8.4% 11,044 11.0% 11,995 11.8% 3.1% 1.7%

60 to 64 5,764 5.9% 9,152 9.1% 10,751 10.6% 5.3% 3.5%

65 to 69 6,074 6.2% 6,925 6.9% 8,681 8.5% 1.3% 5.1%

70 to 74 5,247 5.4% 5,382 5.3% 6,249 6.1% 0.2% 3.2%

75 to 79 5,435 5.6% 4,729 4.7% 4,823 4.7% -1.2% 0.4%

80 to 84 3,487 3.6% 3,866 3.8% 3,801 3.7% 1.0% -0.3%

85+ 2,329 2.4% 3,324 3.3% 3,655 3.6% 3.9% 2.0%

55+ 36,547 37.6% 44,422 44.1% 49,955 49.1% 2.0% 0.8%

65+ 22,572 23.2% 24,226 24.1% 27,209 26.7% 0.7% 0.8%

70+ 16,498 17.0% 17,301 17.2% 18,528 18.2% 0.4% 0.4%

75+ 11,251 11.6% 11,919 11.8% 12,279 12.1% 0.5% 0.6%

Older Adult Households by Age and Year

The Groves Primary Market Area2000 2011 2016 % Annual Change

B. Household Composition The following displays the relationship between households and population in the market area by age group. As shown in Table 6, the headship ratio in the market is 0.38, meaning that there are 0.39 households per person. This is equivalent to an average household size of 2.60 persons per household. In most markets, as households age, household size typically becomes smaller (and thus the headship ratio increases); we note that this pattern essentially holds true in the market area with the exception of an increase in household size from the 80 to 84 to 85+ age cohorts.

Table 6

Age HHs Pop. HH Size Ratio

Total 100,627 262,089 2.60 0.38

65 to 69 6,925 11,351 1.64 0.61

70 to 74 5,382 8,635 1.60 0.62

75 to 79 4,729 7,413 1.57 0.64

80 to 84 3,866 5,789 1.50 0.67

85+ 3,324 6,397 1.92 0.52

2011 Headship Ratios




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Household tenure in the market area is weighted towards homeownership and reflects national trends. According to the data, a little over two-thirds of all households are homeowners while approximately 33% are renters. (Nationally homeownership is approximately 67%.) As is typical in most markets, and as shown in Table 7, homeownership is higher amongst older adult households than it is amongst the overall population. Amongst households age 75 and older, a slightly higher 69% are owner occupied. This data is impacted by the high ratio of renters (44%) amongst the 85 and older population; homeownership is in the 70% to 80% range for households aged in their 60s and 70s. This is based on year 2000 Census data.

Table 7

Age

# % # % # %

All Households 66,202 67.5% 31,852 32.5% 98,054 100.0%

55-64 12,038 82.6% 2,529 17.4% 14,567 100.0%

65-74 9,366 80.8% 2,228 19.2% 11,594 100.0%

75-84 6,411 72.6% 2,425 27.4% 8,836 100.0%

85+ 1,499 56.1% 1,175 43.9% 2,674 100.0%

75+ 7,910 68.7% 3,600 31.3% 11,510 100.0%

Household Tenure (2000 Census)

TotalOwner Renter


An examination of households by household type (again as of the year 2000 Census data) displays that amongst households at or above poverty level, nearly three in four are married couples while just 16% are unrelated individuals (Table 8). As households age, this relationship shifts. Approximately half of households age 75+ are married couples and 37% are unrelated individuals.

Table 8

Household Type

Pop % Pop % Pop %

Total At/Above Poverty 236,265 100.0% 17,480 100.0% 14,958 100.0%

Married Couple 174,145 73.7% 12,228 70.0% 7,422 49.6%

Male Householder 7,096 3.0% 522 3.0% 511 3.4%

Female Householder 17,979 7.6% 1,028 5.9% 1,494 10.0%

Unrelated Individuals 37,045 15.7% 3,702 21.2% 5,530 37.0%

Population by Household Type (2000 Census)

75+All Households 65-74




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Table 9 shows the breakdown of households by living arrangement and households living alone for the 65 and older population in the market area as of the year 2000. (Data is not available for the 75+ cohort specifically or for the current year.) The bottom panels summarize the population living alone and show that 26% of persons age 65+ in the market area live alone. Additionally, approximately 43% of all 65+ households are single persons living alone.

Table 9

Household Arrangement Pop %

Total Population 36,929 100.0%

In Households 34,082 92.3%

In Family Households

Male Householder 9,881 26.8%

Female Householder 2,807 7.6%

Spouse 8,712 23.6%

Parent 1,105 3.0%

Other Relatives 1,124 3.0%

Non-Relatives 114 0.3%

Total In Family HHs 23,743 64.3%

In Non-Family Households

Male HHer Living Alone 2,150 5.8%

Male Hher Not Living Alone 162 0.4%

Female Hher Living Alone 7,461 20.2%

Female Hher Not Living Alone 260 0.7%

Non-Relatives 307 0.8%

Total In Family HHs 10,340 28.0%

In Group Quarters 2,847 7.7%

Household Arrangement # %

Total Population 36,929 100.0%

Population Living Alone 9,611 26.0%

Total Households 22,572 100.0%

Population Living Alone 9,611 42.6%

65+ Population by Household Arrangement and

Living Alone (2000 Census)

65+ Living Alone Summary





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C. Household Income The following examines older adult households by income within the market area. The data shows that on the whole older adult households in the market are relatively affluent and have strong income. We note that the very high reported incomes of Lincoln are somewhat tempered on aggregate by the inclusion of somewhat less affluent municipalities within the defined market area. Table 10 and Table 11 display 65+ and 75+ households in the market by income, respectively; Table 12 displays the median income by age cohort. Some of the key findings are summarized below:

Of the 24,226 households age 65 and older in the market in the current year, approximately 53% (12,800 households) are estimated to have incomes in excess of $50,000 and 8,963 households (or 37%) are estimated to have an annual income in excess of $75,000.

The number of age 65+ households with incomes in excess of $50,000 will increase by over 2,800 over the next five years to over 15,600 by 2016, representing 58% of all 65+ households. This represents an increase of 4.4% per annum.

The number of age 65+ households with incomes in excess of $75,000 will increase by over 2,400 over the next five years to nearly 11,400 by 2016, representing over 42% of all 65+ households. This represents an increase of 5.4% per annum.



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Table 10

Income

# % # % # % (2000-2011) (2011-2016)

<$10,000 2,091 9.3% 1,735 7.2% 1,717 6.3% -1.5% -0.2%

$10,000 - $14,999 1,831 8.1% 1,154 4.8% 1,073 3.9% -3.4% -1.4%

$15,000 - $19,999 1,742 7.7% 1,444 6.0% 1,371 5.0% -1.6% -1.0%

$20,000 - $24,999 1,515 6.7% 1,415 5.8% 1,404 5.2% -0.6% -0.2%

$25,000 - $29,999 1,459 6.5% 1,255 5.2% 1,363 5.0% -1.3% 1.7%

$30,000 - $34,999 1,258 5.6% 1,210 5.0% 1,209 4.4% -0.3% 0.0%

$35,000 - $39,999 1,198 5.3% 1,175 4.8% 1,164 4.3% -0.2% -0.2%

$40,000 - $49,999 2,123 9.4% 2,039 8.4% 2,274 8.4% -0.4% 2.3%

$50,000 - $59,999 1,612 7.1% 1,719 7.1% 1,852 6.8% 0.6% 1.6%

$60,000 - $74,999 1,780 7.9% 2,118 8.7% 2,398 8.8% 1.7% 2.6%

$75,000 - $99,999 2,122 9.4% 2,432 10.0% 2,890 10.6% 1.3% 3.8%

$100,000 - $149,999 1,977 8.8% 3,046 12.6% 3,781 13.9% 4.9% 4.8%

$150,000+ 1,864 8.3% 3,484 14.4% 4,714 17.3% 7.9% 7.1%

Total 22,572 100.0% 24,226 100.0% 27,209 100.0% 0.7% 2.5%

$35,000+ 12,676 56.2% 16,014 66.1% 19,073 70.1% 2.4% 3.8%

$50,000+ 9,355 41.4% 12,800 52.8% 15,635 57.5% 3.3% 4.4%

$75,000+ 5,963 26.4% 8,963 37.0% 11,385 41.8% 4.6% 5.4%

$100,000+ 3,841 17.0% 6,530 27.0% 8,495 31.2% 6.4% 6.0%

Households 65+ by Income

% Annual Change2000 2011 2016


Of the approximately 11,900 households age 75 and older in the market in the current year, approximately 43% (5,134 households) are estimated to have incomes in excess of $50,000 and approximately 3,430 households (or 29%) are estimated to have incomes in excess of $75,000.

The number of age 75+ households with incomes in excess of $50,000 will increase by approximately 630 over the next five years to 5,767 by 2016, representing 47% of all 75+ households. This represents an increase of 2.5% per annum.

The number of age 75+ households with incomes in excess of $75,000 will increase by over 500 over the next five years to approximately 3,960 by 2016, representing 32% of all 75+ households. This represents an increase of 3.1% per annum.



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Table 11

Income

# % # % # % (2000-2011) (2011-2016)

<$10,000 1,307 11.6% 1,057 8.9% 990 8.1% -1.7% -1.3%

$10,000 - $14,999 1,191 10.6% 745 6.2% 647 5.3% -3.4% -2.6%

$15,000 - $19,999 1,081 9.6% 946 7.9% 858 7.0% -1.1% -1.9%

$20,000 - $24,999 953 8.5% 884 7.4% 854 7.0% -0.7% -0.7%

$25,000 - $29,999 832 7.4% 789 6.6% 785 6.4% -0.5% -0.1%

$30,000 - $34,999 676 6.0% 722 6.1% 728 5.9% 0.6% 0.2%

$35,000 - $39,999 625 5.6% 649 5.4% 647 5.3% 0.3% -0.1%

$40,000 - $49,999 1,013 9.0% 994 8.3% 1,003 8.2% -0.2% 0.2%

$50,000 - $59,999 629 5.6% 826 6.9% 858 7.0% 2.9% 0.8%

$60,000 - $74,999 678 6.0% 873 7.3% 947 7.7% 2.6% 1.7%

$75,000 - $99,999 878 7.8% 978 8.2% 1,047 8.5% 1.0% 1.4%

$100,000 - $149,999 679 6.0% 1,154 9.7% 1,312 10.7% 6.4% 2.7%

$150,000+ 707 6.3% 1,301 10.9% 1,603 13.1% 7.6% 4.6%

Total 11,249 100.0% 11,919 100.0% 12,279 100.0% 0.5% 0.6%

$35,000+ 5,209 46.3% 6,776 56.8% 7,417 60.4% 2.7% 1.9%

$50,000+ 3,571 31.7% 5,134 43.1% 5,767 47.0% 4.0% 2.5%

$75,000+ 2,264 20.1% 3,434 28.8% 3,962 32.3% 4.7% 3.1%

$100,000+ 1,386 12.3% 2,456 20.6% 2,915 23.7% 7.0% 3.7%

Households 75+ by Income

% Annual Change2000 2011 2016


Median household income is much stronger for “younger old” households than for “older old” households. Specifically, the median household income by five-year age cohort ranges from a high of nearly $113,000 for households age 55 to 59 to approximately $32,700 for households age 85 and older.

The median household income declines with age, with the most significant drop from the 60 to 64 age cohort (approximately $106,300) to the 65 to 69 age cohort (approximately $68,300).

All age cohorts show a projected increase in median income of between 2% to 3% – or 0.6% to 1.0% per annum – over the next five years.



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Table 12

Age 2000 2011 2016

# # # (2000-2011) (2011-2016)

55 to 59 $92,239 $112,914 $118,109 2.0% 0.9%

60 to 64 $87,114 $106,306 $109,663 2.0% 0.6%

65 to 69 $54,235 $68,336 $71,785 2.4% 1.0%

70 to 74 $47,963 $60,658 $63,539 2.4% 0.9%

75 to 79 $35,201 $45,353 $47,659 2.6% 1.0%

80 to 84 $31,287 $39,195 $40,339 2.3% 0.6%

85+ $26,016 $32,725 $34,217 2.3% 0.9%

Median Household Income of Older Adult Households by Age

% Annual Change


D. Home Value Nielsen Claritas provides current year estimates and future year projections of home value. This data is based on US Census data and interpolated and adjusted by Nielsen Claritas. It is not considered as reliable or valid of an indicator of home values/prices in a market as is actual sales data. We note, however, that it can be a good indicator of relative value or affluence of one area as compared to another. The Nielsen Claritas home value data displayed in Table 13 shows that the estimated median home value across the market in the current year is approximately $496,000. This is an increase of approximately 52% since the year 2000, which takes into account the significant gains in the residential real estate values experienced in the early to mid 2000s then tempered for the pullback in values and struggles of the home market in the past few years. The median value in the market is projected to increase to over $558,000 by 2016. This is an increase of approximately 13%, or 2.5% per annum, over the next five years. It is estimated that nearly half of all homes in the market area have a value of $500,000 or greater. This is a meaningful benchmark in that entrance fees for the Russell apartment units at the subject start in the $460,000s and suggest that prospects would need to have home values in excess of $500,000 to afford the entrance fee at the subject. (While many prospects have total assets well in excess of entrance fees, it is our experience that the majority of prospects would prefer to utilize the proceeds generated from the sale of the primary home to fund the entrance fee payment rather than liquidate and utilize assets for this purpose. Thus, the home value often is critical in determining a prospect’s capacity to “afford” the entrance fee.) We note that this data was not available by age cohort or for older adults. In our experience, however, home values for the older adult population tend to be higher than those for the



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overall population as many homeowners in these age cohorts have bought up over the years. Older adults also as a rule will have significantly more equity in their homes than younger homeowners.

Table 13

Home Values # % # % # % Period Per Annum

<$60,000 495 0.7% 338 0.5% 302 0.4% -10.7% -2.1%

$60,000 - $99,999 641 1.0% 243 0.3% 218 0.3% -10.3% -2.1%

$100,000 - $149,999 2,414 3.6% 618 0.9% 472 0.7% -23.6% -4.7%

$150,000 - $199,999 6,362 9.6% 1,470 2.1% 1,111 1.6% -24.4% -4.9%

$200,000 - $299,999 19,044 28.8% 7,628 10.8% 5,749 8.1% -24.6% -4.9%

$300,000 - $399,999 15,242 23.0% 12,778 18.2% 10,864 15.3% -15.0% -3.0%

$400,000 - $499,999 8,881 13.4% 12,594 17.9% 11,662 16.4% -7.4% -1.5%

$500,000 - $749,999 8,112 12.3% 21,149 30.1% 22,388 31.4% 5.9% 1.2%

$750,000 - $999,999 2,822 4.3% 7,350 10.4% 10,754 15.1% 46.3% 9.3%

$1,000,000+ 2,189 3.3% 6,200 8.8% 7,677 10.8% 23.8% 4.8%

Total 66,202 100.0% 70,368 100.0% 71,197 100.0% 1.2% 0.2%

Median Home Value $327,200 $496,154 $558,302 12.5% 2.5%

$150,000+ 62,652 94.6% 69,169 98.3% 70,205 98.6% 1.5% 0.3%

$250,000+ 46,768 70.6% 63,885 90.8% 66,220 93.0% 3.7% 0.7%

$300,000+ 37,246 56.3% 60,071 85.4% 63,345 89.0% 5.5% 1.1%

$400,000+ 22,004 33.2% 47,293 67.2% 52,481 73.7% 11.0% 2.2%

$500,000+ 13,123 19.8% 34,699 49.3% 40,819 57.3% 17.6% 3.5%

2011-2016 Growth

Home Value Distribution (Census Data)

201620112000


To lend further insight into this issue, and in an attempt to gather what may be more accurate home value data that what is provided by Nielsen Claritas, we also examined active listings and recent home sales in the market as compiled and provided online by Realtor.com. This listings clearinghouse is not necessarily all inclusive, but is supposed to provide a mirror of the generally comprehensive listings data available to realtors via multiple listings and MRIS data (at the very least it is a conglomeration of listings data provided by many of the larger realtors and brokerages in most areas). Listings can be searched for by defined geographies. Realtor.com also provides records of recent sales (the past six months) within a defined geography. For the purposes of this analysis we examined both listings and recent sales, and gathered data both for Lincoln specifically, and more importantly for the overall market area. To approximate the geography of the market area we included in our search process the following municipalities that are situated within the primary market: Lincoln, Lincoln Center, Concord, West Concord, Lexington, Stony Brook, Kendal Green, Weston, Hastings, Silver Hill, Waltham,



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Cherry Brook, Bedford, Wayland, South Waltham, Waverley, Sudbury, North Sudbury, Belmont, Maynard, Carlisle, Acton, West Acton. Overall, the data shows that home values are extremely high in Lincoln, and much stronger than those of the market area overall (although across the market area home values are still strong on aggregate, and somewhat higher than the indicated in the Nielsen Claritas data). Table 14 shows that the median active list price in Lincoln was $1,100,000. This is based on a very small inventory of only 45 homes. Across the market area the median price of an actively listed unit was approximately $639,000. The compilation of recent sales, however, shows notably lower prices. In a small sample of 21 sales in Lincoln the median sale price from October 2011 through March 2012 was $683,000; across the market area the median sale price over the same six month period was approximately $509,000, much more in line with the Nielsen Claritas median home value. Additionally, only approximately 13% of homes sold were for in excess of $1 million; this is the core of the market for the subject’s cottage units with 90% refund entrance fees that begin in the $900,000s. This data is displayed in Table 15. The 837 sales recorded over the past six months is an average of nearly 140 sales per month. Assuming this sales pace moving forward, the 1,264 active listings in the market would equate to 9.1 months of inventory. Table 16 provides a comparison of listings to recorded sales throughout the primary market area. The data shows that on average, the sale price has been approximately 80% of the list price (comparing the two medians).



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Table 14

Percentile Lincoln Market Area

Listings 45 1,264

Percentile Value Value

Low Value $228,000 $85,000

2nd Quartile $599,000 $410,000

Median $1,100,000 $638,750

4th Quartile $1,727,500 $1,148,000

High Value $8,590,000 $19,500,000

Value % Above % Above

$250,000+ 97.8% 93.4%

$400,000+ 86.7% 75.9%

$500,000+ 77.8% 65.1%

$600,000+ 71.1% 53.6%

$750,000+ 62.2% 41.5%

$1,000,000+ 51.1% 27.4%

$1,500,000+ 31.1% 13.9%

Value Range % Within % Within

<$250,000 2.2% 6.6%

$250,000 - $499,999 20.0% 28.2%

$500,000 - $749,000 15.6% 23.7%

$750,000 - $999,999 11.1% 14.1%

$1,000,000 - $1,499,999 20.0% 13.4%

$1,500,000+ 31.1% 13.9%

The Groves Market Area

Active Home Listings



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Table 15

Percentile Lincoln Market Area

Sales 21 837


Low Value $195,000 $54,000

2nd Quartile $521,500 $345,375

Median $683,000 $508,635

4th Quartile $930,000 $750,000

High Value $2,018,000 $5,825,000


$250,000+ 95.2% 87.1%

$400,000+ 85.7% 66.3%

$500,000+ 81.0% 51.1%

$600,000+ 61.9% 39.9%

$750,000+ 28.6% 25.2%

$1,000,000+ 19.0% 13.1%

$1,500,000+ 4.8% 3.9%


<$250,000 4.8% 12.9%

$250,000 - $499,999 14.3% 36.0%

$500,000 - $749,000 52.4% 25.9%

$750,000 - $999,999 9.5% 12.1%

$1,000,000 - $1,499,999 14.3% 9.2%

$1,500,000+ 4.8% 3.9%

Recently Sold Homes




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Table 16

Percentile Listings Sales

Number 1,264 837


Low Value $85,000 $54,000

2nd Quartile $410,000 $345,375

Median $638,750 $508,635

4th Quartile $1,148,000 $750,000

High Value $19,500,000 $5,825,000


$250,000+ 97.8% 87.1%

$400,000+ 86.7% 66.3%

$500,000+ 77.8% 51.1%

$600,000+ 71.1% 39.9%

$750,000+ 62.2% 25.2%

$1,000,000+ 51.1% 13.1%

$1,500,000+ 31.1% 3.9%


<$250,000 2.2% 12.9%

$250,000 - $499,999 20.0% 36.0%

$500,000 - $749,000 15.6% 25.9%

$750,000 - $999,999 11.1% 12.1%

$1,000,000 - $1,499,999 20.0% 9.2%

$1,500,000+ 31.1% 3.9%

Home Listings Versus Recent Sales




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V. COMPETITIVE ANALYSIS This analysis focuses exclusively on service-enriched independent living, and will not address the competitive marketplace for long-term care. All residents at the subject are admitted as independent living; furthermore, whatever is done to address and provide for long-term care to residents of The Groves, the ongoing success and viability of the subject will be predominately dependent on independent living. A. Independent Living The independent living competitive analysis focuses specifically on service enriched or “congregate” style communities, in which a range of supportive services, typically to include meals, housekeeping services, transportation, and others, are provided to residents as part of the monthly fee. The analysis includes both rental arrangement communities and entrance fee communities as in our experience both models are part of the overall universe of options that would be considered by the target market and would represent competition for the subject. The competitive inventory also includes both freestanding service enriched independent-living communities as well as those that are part of a larger property and provide either a partial, pseudo, or full continuum of care, including lifecare and fee-for-service CCRCs. Not considered to be directly competitive – and thus not included in this analysis – are age-qualified properties without supportive services in which residents pay strictly for the real estate component, either with for-sale or rental structures. These properties target the active adult market. In our experience, while service enriched independent living is not nearly as need-driven as assisted living, there may be some element of need or frailty that is underlying prospective residents’ decision to move in beyond the lifestyle choices that are the primary motivation behind relocation into active adult housing. The retirement housing industry typically utilizes need for assistance with instrumental activities of daily living (IADLs) – which includes activities such as meal preparation, cleaning/housekeeping, driving/transportation, and the like – as a barometer for service enriched independent living. The active adult target market tends to be younger and healthier than prospects for service enriched independent living, and these two sub-markets of independent living are relatively discrete. Also not included in this analysis are low- and moderate-income housing options, including subsidized and tax credit communities; rather, this analysis focuses exclusively on a market rate product that serves the age- and income-qualified target market. On the whole the market area is relatively sophisticated, but not heavily developed with retirement communities and service enriched independent living product. We have identified four competitive service enriched independentliving providers within the market area. Three of



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these are CCRCs and one is a rental provider. All four possess some partial continuum of care beyond just independent living as the rental community provides for both independent and assisted living and the CCRCs are all full service with a complete continuum of care. We also include in our analysis a fourth CCRC, North Hill, located a few miles outside of the market area in Needham. This community is in the midst of a massive repositioning and campus redevelopment effort. Despite its location outside of the market area, it was named by sales and marketing personnel at The Groves as a competitor, and we believe it does exert some competitive influence on The Groves and its market. All four of the competitive CCRCs are non-profit owned and three of the four are single-entity organizations. Deaconess Abundant Life – which is MHS’s partner in The Groves – is the other provider present in the competitive market, and the only one that is a multi-property organization. All four of the CCRCs are well established in the market, having opened between 1982 and 1994. All four also have undergone expansions and/or relatively extensive renovation efforts over time. One of the four – Brookhaven at Lexington – is a true lifecare community, and a second – North Hill – offers both a lifecare as well as a fee-for-service contract option. Carleton-Willard Village is a Type B community with a modified contract that allows for some health care benefit, while Newbury Court is strictly a Type C, fee-for-service community. The five service enriched independent living communities in the analysis provide a total of 1,001 units. Overall the market is performing extremely well and appears to be quite healthy; at the time of our analysis the aggregate occupancy rate across the inventory was 93.8%. This is well above the industry-wide average of 87.6% according to data from The State of Seniors Housing 2011 published by the National Investment Center for the Senior Housing and Care Industry (NIC) in collaboration with the American Seniors Housing Association (ASHA), American Association of Homes and Services for the Aging (AAHSA), and other industry partners. Beyond this, all of the communities individually are performing extremely well, with the exception of North Hill. We note that occupancy at this community may be artificially low due to ongoing redevelopment process. According to sales personnel, a number of units have been taken offline and the total operating inventory is now 290 units (reduced from 309). Beyond this, as a number of units recently turned over they have been held open to facilitate the redevelopment. Historically, occupancy at this property reportedly has been much stronger. The aggregate occupancy across the rest of the competitive inventory excluding North Hill was 96.5%. Table 17 inventories and displays the occupancy data for the competitive providers in this analysis.



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Table 17

Community City Distance Year Open Ownership

(In Miles) Units Occupied Occupancy

Brookhaven at Lexington Lexington 4.8 1989 Non-Profit Private 240 235 97.9%

Carleton-Willard Village Bedford 4.7 1982 Non-Profit Private 148 145 98.0%

Newbury Court Concord 3.1 1994 Non-Profit Private 230 216 93.9%

North Hill Needham 11.3 1984 Non-Profit Private 290 253 87.2%

Norumbega Point at Weston Weston 7.1 N/A Private 93 90 96.8%

Total 1,001 939 93.8%

Occupancy Data

Competitive Independent Living Communities

Inventory of Facilities


Table 18 displays the levels of care provided at each community and the contract types and plans available at the CCRCs. As noted, two communities provide for lifecare contracts and two provide for a fee-for-service arrangement. There is a variance with regard to refundability on entrance fee plans available in the market with the most popular option being a 90% refund plan (available at three of the four CCRCs); this plan tends to be more popular in more affluent markets in which home values are high and prospects have significant assets available to afford entrance fees. Traditional declining plans are offered at two of the properties, and in fact this is the only option at Carleton-Willard.

Table 18

Community

CCRC IL AL ALZ SNF A B C Declining Refund Rental

Brookhaven at Lexington Yes Yes Yes Yes Yes a 0 0 No 90% No

Carleton-Willard Village Yes Yes Yes Yes Yes 0 a 0 100 Mo No No

Newbury Court Yes Yes Yes Yes Yes 0 0 a Yes 50%/90% No

North Hill Yes Yes Yes Yes Yes a 0 a 100 Mo 90% No

Norumbega Point at Weston No Yes Yes No No 0 0 a No No Yes


Levels of Care and Contracts

The Groves Market AreaLevels of Care Provided Contract Types Plans and Refund Options

Table 19 provides a summary of independent living product and unit types and sizes available at the communities. It shows that all five communities provide multifamily/apartment product, and only two provide cottages or some form of single family product (none of which is detached). Table 19 also displays the range of unit sizes by unit type at the competitive communities, and exhibits that there is a significant variance in unit size across, although Brookhaven has the markets largest apartment units. Table 20 shows units sizes by unit type



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for single family (both attached and detached) product; made evident by the table is the lack of single family product in the market.

Table 19

Community

Multi/Apts SF Attached SF Detached Studio 1BR 1BR/Den 2BR 2BR/Den

Brookhaven at Lexington 216 24 No 553 747 929 1,123 - 1,180 1,318 - 1,713

Carleton-Willard Village 63 85 No X 612 - 810 758 - 830 1,020 1,525

Newbury Court Yes No No X 756+ 1,090+ 1,120 - 1,356 N/A

North Hill 309 No No N/A N/A N/A N/A N/A

Norumbega Point at Weston 93 No No X 542 - 812 X 879 - 1,000 X

Apartment Unit Types and Sizes


Independent Living Product and Unit Sizes (Apartments)

The Groves Market AreaIL Product

Table 20

Community

1BR/Den 2BR 2BR/Den Jumbo

Brookhaven at Lexington X 1,149 1,348 X

Carleton-Willard Village 705 - 800 940 1,410 X

Newbury Court X X X X

North Hill X X X X

Norumbega Point at Weston X X X X


Independent Living Product and Unit Sizes (Cottages)

The Groves Market AreaCottage/Villa Unit Types and Sizes

Table 21 (apartment units) and Table 22 (villa/cottage units) display the standard service package included in the monthly fee at the competitive communities. As shown, transportation, activities, and all utilities are standard across the entire inventory of properties. There also is general consensus with the provision of primary supportive services as standard in the service fee is weekly housekeeping and one main meal per day. The one exception is Norumbega Point – an independent and assisted living facility somewhat more targeted towards frail elderly than the CCRCs in the market – that also provides for daily breakfast.



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Table 21

Community

Health Care Meals Housekeeping Transportation Activities Utilities Cable TV

Brookhaven at Lexington Included Weekly Weekly Yes Yes All ?

Carleton-Willard Village Benefit Weekly Weekly Yes Yes All No

Newbury Court Fee Weekly Weekly Yes Yes All No

North Hill Included Weekly Weekly Yes Yes All ?

Norumbega Point at Weston None Weekly Weekly Yes Yes All No


Services Included in Monthly Fee - Apartment Units

The Groves Market AreaServices

Table 22

Community

Health Care Meals Housekeeping Transportation Activities Utilities Cable TV

Brookhaven at Lexington Included 1/Day Weekly Yes Yes All ?

Carleton-Willard Village Benefit 1/Day Weekly Yes Yes All No

Newbury Court X X X X X X X

North Hill X X X X X X X

Norumbega Point at Weston X X X X X X X


Services Included in Monthly Fee - Cottage Units

The Groves Market AreaServices

Map 3 depicts the location of the competitive communities relative to the subject. The following provides a brief summary of pertinent information and observations from our visit of the four competitive CCRCs within this analysis.

Brookhaven at Lexington: Brookhaven is located in Lexington, just under 5 miles southeast of the subject property. It is the only CCRC in the analysis located inside (east) of I-95. It is located in a relatively attractive neighborhood and proximate to commercial and retail development. Brookhaven is a true lifecare CCRC. It has 240 independent living units and on campus Alzheimer’s-dedicated care and nursing care components. There is no assisted living facility; this level of care is provided to residents as needed in-home. The property originally was sponsored by two hospitals (including Woburn Hospital which went bankrupt around opening) and is owned by a private, single entity non-profit and self-managed. A short access drive leads into the campus, past the nursing center (Amherst-Brandeis) and eventually leads to a multi-story building of gray-tan vinyl siding with white trim, that is built in grade. This is the original independent living building on the campus,



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which opened in 1989. This connects via the two-story community center to a newer building that was added during an expansion in the mid 2000s. The newer building is a four-story structure with an underground parking garage. The exterior look is similar to, although nicer and more modern than, the older building, consisting of a mix of stone, vinyl siding of mixed colors, and a gray tile roof. A large portico provides for a covered drop-off point at the main entrance, in front of which is some landscaping. An elevated bridge/walkway cuts over the access road to a small neighborhood of cottages on a hill. The entrance into the community is unspectacular: there is a low ceiling with some recessed lighting, with the lobby and a reception area to the right. The lobby/reception area has a vaulted ceiling, sitting, and a grand piano. Halls extend off of this to either side. To the left from the entrance is a casual café with counter service and then a distinct bistro. Interior décor overall is relatively warm and attractive, and appropriate for upscale retirement community. Throughout the community and residential space are wide, attractive corridors that are well lit and feature modern, patterned carpeting. Overall common areas are arguably the nicest overall in the market. In addition to the casual café and bistro is a formal dining restaurant that is partitioned into separate rooms and is attractive. This features a full restaurant style approach with a new menu each night. There is also an indoor pool and an above average fitness room with cardio equipment, a larger room with newer machines, and a separate dance/aerobics studio. There is also a wellness center and overall wellness offerings are strong. The library has fireplace, but otherwise is comparable to that of The Groves. Of the 240 units, 216 are apartments. The apartment units vary in size, floor plan, and finishes depending on the building. Most units in the older building are pretty standard, with off-white décor, some type of laminate counter, vinyl style floor, moderate height ceilings, new appliances, decent cabinetry, and no real upgrade finishes or features. In the newer building finishes are upgraded to include granite counters. The newer building also contains nicer and larger units (including large two bedroom and two bedroom with den floor plans. The 24 Fairfield patio homes (cottages) generally match the architecture of the main building. They are an attached product, built in quads, and are single level. There is no garage, with parking on surface spaces out front. Overall this product would be considered fair and certainly not standout. Apartment floor plans range in size from studios of 553 square feet to two bedroom with den units of over 1,700 square feet. The cottages come in two floor plans of 1,149 or 1,348 square feet, the larger being a two bedroom with den floor plan. Exclusively a lifecare community, Brookhaven even goes above and beyond the traditional lifecare benefits. As a result, it is known to be very stringent about its health entrance criteria. Available long-term care includes one hour per day of hands on direct



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personal care/assisted living, included within the lifecare rate. Babson is the Alzheimer’s-dedicated component with 20 private one bedroom suites. There is also a 49-bed nursing facility (which presently is operating with 37 beds as the community has been renovating this component to convert semi-private units into private units. A semiprivate bed in the nursing center is included in the lifecare contract; a private unit costs about an additional $100 per day. Brookhaven offers just one contract: a 90% refundable plan. Entrance fees range from $344,000 to $717,000 for apartment units and from $597,000 to $657,000 for the patio homes. A second occupant adds $39,500 to the entrance fee. The monthly service fees range from $5,010 to $8,110 for apartments and from $6,290 to $7,335 for patio homes. In addition to lifecare, services provided for the monthly fee include one meal per day, weekly housekeeping, transportation, activities, and all utilities. The daily meal can be used in any of the three dining venues. At the time of our survey the community was 98% occupied with just approximately five units available. A wait list is maintained and needs to be cycled through for each unit that becomes available; sales staff indicated that a household could move in today but would need to settle specifically for a smaller two bedroom unit. When asked about a comparison to The Groves, sales staff was not overly negative but focused on the issue of whether The Groves will become a nursing home over time and posed the question “why not just stay at home” to receive in-home care. They promoted the community and interaction at Brookhaven that would be compromised at The Groves.

Carleton-Willard Village: Carleton-Willard is located just under five miles northeast of the subject in Bedford. It is the oldest of the CCRCs in the market, having opened in 1982, and overall it shows. Compared to the rest of the continuing care inventory in the market Carleton-Willard is aging and somewhat modest and dated looking in design and appearance. The community also, however, enjoys an excellent and well-established reputation – particularly for its health care – and to date the aging physical plant and appearance has not hurt its performance. It also is a single-entity, non-profit provider. The community was built in several phases. After opening in 1982, 25 new independent living units were added in 1993. In 2000 an addition brought a new wellness center, indoor pool, and associated common areas to the campus. In the 2000s the Alzheimer’s-dedicated facility (Ross-Worthen Center) was built. Carleton-Willard is located in the midst of a residential neighborhood. Across the street is the David Fitch House and historic mill site. The property is set on a sprawling campus with numerous buildings throughout. It is an attractive site and community with lots of trees and natural vegetation, and the cottage homes feel like they are off in their own



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distinct, private neighborhood. An access road leads past Winthrop Terrace and Badger Terrace cluster homes before coming to a concentration of multi-story buildings. An older looking four-story building of brick with shingle siding connects to a three-story brick building. There is also a separate yellow two-story administrative building. Overall, the community and the buildings are showing its age, and there is limited curb appeal. Due to a shortage of parking spaces cars are slammed into surface parking lots and along the access road. At the main entrance to the community center is a very basic overhang/awning off a circular drive with some landscaping and trees out front. The interior décor is designed to look like a turn of the century village. There is a low ceiling area at the entrance with reception to the left and a corridor to the right. Carpeting is in reds and yellows, and the style looks dated (although the carpeting itself and the interior in general appears to be in good shape and is not visibly worn). The village center is back from the entrance. The “main street” concept consists of a main wide carpeted corridor, with sitting areas to the left and storefronts to the right with common areas such as the resident store and beauty salon. Common areas and amenities continue off of this corridor. Overall, the common area and amenity offerings are just fair. An “art gallery” is just a landing with artwork. There is an auditorium partitioned into 3 rooms. There is a decent indoor pool with a small fitness center with dated equipment. The main dining room is restaurant style, but looks much more like a retirement community dining facility than a restaurant, and serves both independent and assisted living residents intermixed. The bistro also has a dated look and counter service. Overall appearances are somewhat dated and finishes and features are lacking. Outdoors there is a croquet court and putting green. There are 148 independent living units at the property, 63 of which are apartment units and 85 of which are cluster homes (attached single-family villa style product). The cluster homes are attached in four-plexes and even 8-unit structures. They feature vinyl siding, gray tile roof, a porch/balcony, and otherwise are unremarkable looking. Apartment units range in size from approximately 600 to over 1,500 square feet; many of the larger units are the result of two units being combined to create a combo unit for which there is not necessarily a floor plan. The cluster homes include small one bedroom models of approximately 700 to 800 square feet, a standard two bedroom plan of 940 square feet, and a two bedroom with den plan of just over 1,400 square feet. There also are some slightly larger units again that were the result of combination and for which floor plans do not exist. Carleton-Willard is a Type B community. It features only one contract, a 100-month declining plan, and never has had a refundable plan. The health care benefit of the Type B contract provides for 60 days of “free” long-term care per annum; thereafter long-



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term care is provided at 80% of the prevailing market rates. The community does accept direct admissions into its assisted living, Alzheimer’s care and nursing care components at market rates. Entrance fees range from approximately $96,000 to $342,000 for the older apartments, from $192,000 to $510,000 for the cluster homes, and from $302,000 to $484,000 for the newer apartments. The monthly service fee ranges from approximately $2,600 to just over $4,900. Included in the monthly fee is one meal per day, weekly housekeeping, transportation, activities, all utilities, and the health care benefit. Cable TV is not included. The daily meal can be taken in either the main dining room or the bistro. At the time of our analysis the community was 98% occupied. According to sales personnel, typically it stays at capacity, and is in the process of culling through its wait list to fill some vacancies that were the result of high turnover during the winter. Sales staff indicated they expect to fill the vacancies and be back at 100% occupancy within a few months. When asked about The Groves the Director of Marketing noted that it was a great concept for a couple of mixed health, but opined that the aging in place will lead to high acuity residents in home, and that this will eventually create a nursing home environment within independent living.

Newbury Court: Located approximately three miles west of the subject, Newbury Court is technically a sister community, but in reality also a direct competitor to the subject. The property is owned and operated by Deaconess Abundant Life Communities, the original sponsor and minority partner with MHS in The Groves. Unlike The Groves, however, Newbury Court is a traditional concept CCRC with long-term care facilities on campus. There also are 12 affordable apartments in small buildings on campus that Deaconess maintains and provides through its benevolent fund. Originally opened in 1994, the community has had several expansion phases and has consistently evolved. An expansion completed in 2009, which was the culmination of a five-year master planning effort, added new independent living units, and saw the merger of two distinct campuses and resident associations with the new combined, single-entity campus renamed to Newbury Court. The community is located just off of Route 2 in a densely developed commercial stretch highlighted by Emerson Hospital (the property is in fact located behind the hospital). It situated on a tertiary road and receives just modest drive by traffic, and is not visible from Route 2. Ingress/egress is direct, but there is not much of an access road, and vehicular traffic enters immediately into the campus and up to a main building with small brick buildings (the affordable apartments) around it. Technically, there are two main buildings that are now connected and has the appearance of one, large building. The new building (and new main entrance) is a four-story building with brick ground



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floor, multi-colored stucco/masonry exterior, white trim, and bay balconies. A large portico extend over a circular drive. Overall the building is attractive and shows well, with superior curb appeal to that of The Groves. Although the property is built on 35 acres, the setting is unremarkable, and it does not feel like much of a campus beyond the two multi-story buildings. The main entrance and interior is warm, but not really upscale, and doesn’t really stand out, and has low ceilings. Interior halls are nicely done, with wide corridors and nice architectural features and finishes, especially in the center building with the common areas and the new residential building. As for common areas and amenities, the community’s offerings are decent and it has the basics, but nothing is standout. The main dining room is nice and features a forward and rear room with dinner in both and the more casual forward room available for lunch. There is an outdoor terrace off of the dining room with a view of a river and wooded undeveloped area at the back of the site. The community has decent a decent therapy/wellness space, a fitness room of above average size and equipment with a separate studio across from it, and a very small indoor pool (approximately only 20-feet in length) that uses jetstream machine to simulate swimming. Both buildings have a café and sitting areas, and share some common elements. Newbury Court’s independent living units are all multifamily apartments. There is a wide range of offerings; the collateral provides for only a sampling of the floor plans. Apartments range in size from one bedroom units of approximately 750 square feet to two bedroom with den floor plans of over 1,350 square feet. There are a number of two bedroom deluxe and den floor plans in the vicinity of 1,200 square feet. Units are new and modern looking, with a white on white appearance, and with new appliances. They are, however, pretty basic and modest with regard to finishes and features: laminate counters, vinyl floor, and 8’ ceiling height. Most do have balconies, and they do feature crown molding. Newbury Court is a fee-for-service community. It primarily promotes a 90% refund plan, although it does also offer a 50% refund option and even a declining refund options (which reportedly is rare amongst residents). All necessary care is provided at market rates. There is no assisted living facility on campus; rather, this care is provided in-home within the independent living units as needed; there is an Alzheimer’s care facility (The Gardens) and a nursing facility (Rivercrest). These are the two facilities with which The Groves has a transfer arrangement for its residents. Entrance fees under the 90% refund plan range from $315,000 to $690,000 and monthly service fees from $3,049 to $5,543. Included in the monthly fee is the standard service package of one meal per day, weekly housekeeping, transportation, activities, and all utilities except Cable TV.



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There also is an option for a service package that does not include meals or housekeeping. At the time of our analysis the community reported that a “handful” of two bedroom units were available. There was a wait list for everything else, and in particular the largest two bedroom with den units.

North Hill: Although technically located outside the market area, approximately 11 miles south of the subject in Needham, North Hill has an impact on the market. More significantly, its competitiveness with the subject and impact on the subject’s market is set to increase substantially as it is in the midst of a massive repositioning effort that when complete will create an entirely new community. The repositioning has already begun to generate buzz and positive momentum in the marketplace, and North Hill has been saturating the area with advertising and new collateral promoting “True North”, the completely “reborn” property. The total investment in the property for the repositioning effort is reportedly $100 million. The effort is being led by a top notch team, including JSA Architects, Creating Results heading the marketing and media, and Ziegler underwriting the bond. North Hill is tucked away in an attractive residential community close to the Needham Heights town center. There is an unmanned guard gate, then a very long access road winds deep into the property well away from the road frontage; this is easily the most dramatic ingress and egress of any property in the area. The campus is comprised of a number of multi-story buildings perched up on a hill. The existing buildings were built in 1984 and show their age; they are ‘C’-class looking product of brick exterior with trim. There is a main semi-circular independent living building and a mirrored large nursing home across from it. At this time there is no assisted living facility on campus. The center of campus is mostly concrete, and consists in large part of surface parking lots; it is attractively wooded around the main buildings. The current common areas are fair, and lag those of the rest of the market. The main dining room does have a nice view overlooking a valley of homes behind the property and there also is a decent bistro. There are low ceilings and dark woods at the main entrance, with a sitting area to the side. Corridors around the main entrance already have been refurbished and look better and newer than the rest of the community. All of this, however, is set to change in the coming years as a result of the repositioning. North Hill’s repositioning is a five-year undertaking with a total investment of approximately $100 million that includes a new master plan that will alter the entire campus. As the first steps in this plan, the community is making major improvements to existing common areas and conducting renovation of existing independent living units in



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the main building. The next step will be the creation of new commons areas and amenities. This will include a the creation of a central “commons” park in the middle of the campus, as well as brand new dining, fitness/wellness, and other spaces. Subsequent phases in the repositioning process will include the construction of a new, state of the art “enhanced living” center that will house an assisted living and an Alzheimer’s-dedicated component and afterwards a new, replacement nursing center that will attached to the enhanced living center. The final phase will be the development of a brand new, state of the art 45-unit independent living apartment building. This is not expected to begin for a few years, and nothing has been released to this point regarding floor plans or potential pricing. The existing independent living units that are being renovated (which is happening as units turnover) are being redeveloped into luxury product with high-end features and finishes. It is a gut renovation, creating modern spaces with open kitchens, granite counters, stainless steel appliance, high-quality wood cabinets, wood floors throughout the unit, upscale lighting fixtures, and baths with European tile and backsplash. North Hill is a lifecare community and offers two contract options: a 90% refund plan and a 100-month declining plan. Pricing is not advertised; prospects need to inquire about specific unit types/floor plans and the specific pricing for these units. According to sales personnel the community is presently operating with 290 independent living units, down from its previous capacity of 309, as a result of the redevelopment process. Also, units that have turned over recently have been held as vacant to facilitate the redevelopment process. This has resulted in an artificially high number of vacant units (37), resulting in a low occupancy rate of 87%. In addition to the new 45-unit being to be added to the campus, additional units are anticipated to be created as a result of the ongoing redevelopment. Consequently, at the completion of the repositioning process – which is targeted for 2015 – North Hill will have 375 independent living units. The community is located on Babson College land, and provides an extensive continuing education program; there is an entire brochure dedicated to continuing education/lifelong learning options and classes, and at least three colleges are involved. When prompted, sales personnel did not market against The Groves, rather they stressed the benefits of North Hill’s lifecare contract.


Map 3



VI. PRICING AND POSITIONING ANALYSIS This section examines and assesses the competitiveness and marketability of the subject compared to its primary competitors in the market. We focus first on the product positioning of the subject relative to its competition and then secondly the pricing relative to competition. Reconciling the product positioning and pricing provides the basis for assessing the value of each property in the market and relative to its competition. A. Product Positioning Overall, The Groves appears to be a relatively solid and competitive property that has a number of strengths. Amongst the strengths of the property are its location, its interior appearance and entrance area, its dining venues and program, and its range of independent living offerings, all of which stand out as exemplary in the market. The poor performance of the property, we believe, is related directly to a few deficiencies that while small in number, are significant and substantial in impact. The most apparent product positioning issues are the continuum concept and delivery and the property’s reputation and image in the market. Also of note, but to a lesser extent, is substandard ingress and egress. In most other categories the property ranks as at least decent and competitive with its peers. This analysis highlights the standout features – both good and bad – of the subject. To analyze community positioning within the market, we provide a comparison of The Groves to its primary competitors across a number of key positioning attributes that we have placed into sub-categories. For each attribute we have awarded a grade ranging from an A (exemplary) to an F (atrocious). Each grade is then converted to a number and based on this a numerical score is calculated, just like a grade point average. This numerical score is termed an Attribute Score (AS) and allows for the comparison and ranking of communities by attribute and also overall. The overall average AS for a community is akin to an overall grade, with a 4.00 being the highest possible (but in reality unrealistic and virtually impossible) score, representing an A average, a 3.70 representing an A-, a 3.30 representing a B+, a 3.00 representing a B, and so on. This is, of course, somewhat subjective, but does help to illustrate the picture of the relative positioning and competitiveness of the properties. In this exercise, we provide AS scores and rankings for each community for the current year, representing product and positioning “as-is”. Given the ongoing repositioning of North Hill and the impact this is likely to have on the market, and also the importance of understanding how the subject – without any significant changes – would stack up in the market in the near-term future, we also provide an examination of future positioning by estimating scores for 2015. These assume that repositioning efforts that are in process have been completed and the community is benefiting from its new construction, additions, and renovations. Figure 1 provides a summary of the AS rankings for the current year (as-is) and Figure 2 displays the projected scores and property rankings for 2015. For each community an individual AS score-



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sheet providing grades and comments for each attribute is attached as an appendix at the back of this report. As this analysis displays, Brookhaven clearly is positioned as the premier CCRC in the market, and is set to remain in the perch for the foreseeable future (short of a premier new development project entering the market). The property’s average attribute score (AS) of 3.40 ranks well ahead of the rest of the market. At this time The Groves ranks second amongst the inventory with an AS of 3.08, right in line with Newbury Court (3.07 AS). Carleton-Willard and North Hill are inferior products that lag behind the rest of the market. The picture will change some over the coming years, however, as North Hill completes it repositioning. At this time, we project that North Hill will rank as one of the most complete and solid properties in the market. Based on our projected average AS of 3.25, North Hill will surpass every property except for Brookhaven, and assume a solid second position, comfortably ahead of The Groves and Newbury Court. While the exact score and ranking is conjecture as this is a subjective process and we can only anticipate the final results of the repositioning at North Hill, it does seem certain that it will become an upper echelon provider in the market. The remaining communities all are relatively solid, but will be falling further behind in the market. This analysis also reinforces that on the whole The Groves is a solid property and has a lot of positives. Beyond this, should the subject engage in its own repositioning effort, and be able to develop and implement initiatives to address and overcome its deficiencies, it has every opportunity to establish an upper echelon position, and be counted amongst the stronger properties in the market.



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Figure 1

Attribute Bro

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(As

Is)

Site/Location Attributes

Location/Neighborhood B+ A A B+ B

Proximity to Infrastructure A- B- A- B B+

Access ibi l i ty A- B+ B+ B+ B+

Vis ibi l i ty & Exposure B+ A- B- B B+

Ingress/Egress B+ C- B B A-

Site/Location Attributes Subtotal B+ B B+ B B+

Property Attributes

Setting/Campus Appeal B- B B A- B

Exterior/Curb Appeal B+ B+ B C C

Interior Appearance B+ A- A- B- C+

Health Care Product A- * B B- C-

Property Attributes Subtotal B+ B+ B B- C+

Common Areas Attributes

Entrance and Reception B- A- B- C B-

Dining Venues A- A- B+ C C+

Amenity Offerings A- B+ B B+ B-

Common Area/Amenities Appearance B+ B+ B B- C+

Common Areas Attributes Subtotal B+ B+ B C+ C+

ILU Attributes

Independent Living Offerings A- A- B B- C

Apartment Product Des ign/Finish B+ B B- B- C-

Cottage/SF Product Des ign/Finish B B * C *

ILU Attributes Subtotal B+ B+ B- C+ C-

Contracts & Services

Contract Options B+ B B C+ B-

Continuum Concept and Del ivery A- C B+ A B

Dining Program B A B C+ C+

Services & Programming B+ B B+ B B

Contracts & Services Subtotal B+ B B B- B-

Sponsor & Background

Sponsor/Financia l Health A- B B A- B

Property Reputation A- C B- A- B-

Impact/Intangibles A- C B B A

Sponsor & Background Subtotal A- C+ B- B+ B+

Average Score 3.40 3.08 3.07 2.87 2.64

Total Grade B+ B B B- B-

Positioning Comparison of Competitive Communities (2012)



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Figure 2

Attribute Bro

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Location/Neighborhood B+ B A A B+

Proximity to Infrastructure A- B+ B- A- B

Access ibi l i ty A- B+ B+ B+ B+

Vis ibi l i ty & Exposure B+ B+ A- B- B

Ingress/Egress B+ A- C- B B

Site/Location Attributes Subtotal B+ B+ B B+ B

Property Attributes

Setting/Campus Appeal B- B+ B B A-

Exterior/Curb Appeal B+ B+ B+ B C

Interior Appearance B+ B+ A- A- B-

Health Care Product A- A- * B B-

Property Attributes Subtotal B+ B+ B+ B B-


Entrance and Reception B- B A- B- C

Dining Venues A- A- A- B+ C

Amenity Offerings A- B B+ B B+

Common Area/Amenities Appearance B+ B+ B+ B B-

Common Areas Attributes Subtotal B+ B+ B+ B C+

ILU Attributes

Independent Living Offerings A- B- A- B B-

Apartment Product Des ign/Finish B+ A- B B- B-

Cottage/SF Product Des ign/Finish B * B * C

ILU Attributes Subtotal B+ B B+ B- C+

Contracts & Services

Contract Options B+ B- B B C+

Continuum Concept and Del ivery A- A- C B+ A

Dining Program B C+ A B C+

Services & Programming B+ B B B+ B

Contracts & Services Subtotal B+ B B B B-

Sponsor & Background

Sponsor/Financia l Health A- B B B A-

Property Reputation A- B+ C B- A-

Impact/Intangibles A- A C B B

Sponsor & Background Subtotal A- B+ C+ B- B+

Average Score 3.40 3.25 3.08 3.07 2.87

Total Grade B+ B+ B B B-

Positioning Comparison of Competitive Communities (2015)



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B. Pricing Analysis The Groves offers a modified Type B contract with three entrance fee plans: 90% refund, 50% refund, and traditional declining (0% refund) options. Table 23 displays the subject’s pricing by floor plan for the 90% refund plan.

Table 23

Unit Type # BR BA Size

Entrance Per SF Monthly Mo/SF

Apartment Units (Multifamily)

Baldwin A (Top Floor) 2 1 1 770 $462,800 $601 $2,780 $3.61

Baldwin 2 1 1 800 $462,800 $579 $2,780 $3.48

Cortland A 2 1 1.5 815 $473,200 $581 $2,780 $3.41

Cortland 7 1 1.5 855 $494,000 $578 $3,000 $3.51

Macoun 2 1 1.5 875 $509,600 $582 $3,000 $3.43

Spencer A 1 1/D 1 865 $509,600 $589 $3,000 $3.47

Jonagold A (Top Floor) 4 2 2 980 $608,400 $621 $3,860 $3.94

Jonagold 8 2 2 1,035 $629,200 $608 $3,970 $3.84

Early Mac A 2 2 2 1,060 $629,200 $594 $4,080 $3.85

Macintosh A (Top Floor) 5 2 2 1,060 $629,200 $594 $4,080 $3.85

Gravenstein (Top Floor) 1 2 2 1,085 $629,200 $580 $4,180 $3.85

Macintosh 10 2 2 1,085 $639,600 $589 $4,180 $3.85

Early Mac 2 2 2 1,100 $655,200 $596 $4,300 $3.91

Paula Red A (Top Floor) 8 2/D 2 1,180 $702,000 $595 $4,400 $3.73

Spencer A (Top Floor) 1 2/D 2 1,180 $702,000 $595 $4,400 $3.73

Spencer 2 2/D 2 1,208 $722,800 $598 $4,560 $3.77

Paula Red 16 2/D 2 1,230 $733,200 $596 $4,560 $3.71

Empire A (Top Floor) 7 2/D 2 1,330 $754,000 $567 $4,840 $3.64

Red Rome A (Top Floor) 1 2/D 2 1,330 $754,000 $567 $4,840 $3.64

Red Rome 2 2/D 2 1,390 $764,400 $550 $4,940 $3.55

Gravenstein A+ 1 2/D 2 1,400 $774,800 $553 $5,050 $3.61

Empire 14 2/D 2 1,414 $790,400 $559 $5,050 $3.57

Apartment Total/Average 100 1,145 $668,876 $584 $4,231 $3.70

Cottage Units (Single Family)

Vista Bella 16 16 16 1,800 $920,000 $511 $5,180 $2.88

Ginger Gold 6 6 6 1,800 $941,200 $523 $5,280 $2.93

Northern Spy 6 6 6 2,115 $951,600 $450 $5,500 $2.60

Royal Gala 10 10 10 3,400 $990,000 $291 $6,260 $1.84

Cottage Sub-Total/Average 38 2,271 $946,758 $417 $5,531 $2.44

GRAND TOTAL/AVERAGE 138 1,455 $745,394 $512 $4,588 $3.15

90% Refundable

The Groves

Existing Program & Pricing

Type C Fee for Service Contract Plans



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Entrance Fees for Russell Building apartments under the 90% plan – which is the most popular at the community – range from $462,800 for the Baldwin, a 770-square foot one bedroom unit to $790,400 for the Empire, a two bedroom with den, two bath floor plan of 1,414 square feet. Entrance fees for the cottage units range from $920,000 for the Vista Bella (1,800 square feet) to $990,000 for the Royal Gala (3,400 square feet, including a basement). Entrance fees for the Flint Building units are much more modest, ranging from $195,000 to $375,000. The 90% refund entrance fees are set at a premium of approximately 40% to the 50% refund plan fees and 88% premium to the non-refundable contract entrance fees; in other words, the 50% entrance fees are approximately 72% of the 90% refund plan entrance fees and the non-refundable entrance fees are approximately 53% of the 90% refund plan entry fees. Monthly service fees are the same across all three contract options. Under the all-inclusive package, these range from $2,780 to $5,050 for the Russell units, from $5,180 to $6,260 for the cottages, and from $2,420 to $3,740 for the Russell units. We conducted an extensive pricing analysis comparing The Groves to its primary competitors, the four other CCRCs in this analysis: Brookdale at Lexington, Carleton-Willard Village, Newbury Court, and North Hill. To compare the various contract options offered by each community, we project the total lifetime expected cost of living at each, including independent living, assisted living and skilled nursing. Actuarial statistics were used to project the length of time that the typical new resident will spend at each level of care. This approach provides a sound basis for comparing pricing across contract types and plans: lifecare contracts to fee-for-service ones, and refundable contracts of varying amounts. To provide an “apples to apples” dollar equivalent of the actual cost of the unit to a resident that can be used to compare fees across contract types and plans we calculate an Equivalent Monthly Fee. It is calculated by adding three components: 1) the monthly fee; 2) the imputed interest that could have been earned by investing the refundable portion of the entry fee (assuming a 3.5% interest rate and a 10 year horizon); and 3) the amortization of the non-refundable portion of the entrance fee over a ten year (120 month) period. Lifecare and Type B contracts are then further adjusted to back out the savings on long-term care that will be realized by the typical resident over the time of residency to equate everything to a fee-for-service/Type C contract price. In this final adjustment, we employ actuarial projections of utilization and length of stay within each component and adjust for prevailing market rate costs of long-term care in the market area. We note that the current economic conditions have had a marked impact on the calculation of equivalent monthly fees. In the past, we commonly assumed that consumers would realize approximately a 5.5% to 6% return on long-term investments. Reflecting the current abnormally low interest rate environment, we have lowered the expected rate of return on investments to 3.5%. Traditionally (under more normal circumstances) equivalent monthly fees



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would be in line if entrance fees under the 50% refund plan were set at approximately 75% to 80% of the 90% refund plan and for the declining plan the entrance fees would be set around 60% to 65% of the corresponding 90% refund entry fees. This suggests that these plans – at least to a consumers’ perspective – were of equivalent cost, and to a provider would be generally revenue neutral. With a rate of return of just 3.5%, to be cost equivalent a 50% refund plan entrance fee should be set around 61.5% of the 90% refund entrance fee, and a declining entrance fee should be set around 41.5% of the 90% refund entrance fee (meaning that the 90% refund plan entrance fees would be 2.4 times the cost of those of the declining plan). This makes sense on paper, but admittedly not in reality. Despite the math, this great of a spread would seriously impact marketability and in reality is not realistic or achievable. This pricing analysis focuses specifically on the comparison of, and recommendations for, the 90% refund plan at the subject as this plan is most directly comparable to a fee-simple real estate purchase, and thus provides the most valid comparison to home prices in the market (certainly it is far more valid than comparing a reduced refund or non-refundable fee). All price recommendations for the other contracts would be based off of the 90% refund entrance fees, taking into account the aforementioned economic impacts as well as on the ground realities. Key findings from this analysis are summarized below, followed Table 24 and Table 25 displaying a unit-by-unit analysis of pricing across the communities compared for apartment and then cottage/villa units.

There is no clear price leader in the market; rather there is variance by unit type as to how the communities rank and which one is the most expensive.

The entrance fees for apartment units at The Groves are amongst the highest in the market by unit type and on a per square foot basis are at a significant premium to the rest of the market, including Brookhaven, the premier property in the market. The Groves’ entrance fees on a per square foot basis range from approximately 12% to more than 20% higher than those of Brookhaven for comparable units.

Equivalent monthly fees for most of the subject’s apartment units appear to be relatively reasonable and appropriate, particularly on a per square foot basis. The one bedroom units in particular – due to below market monthly fees – represent a strong value.

Two bedroom apartment units are comparatively more expensive. In fact, the two bedroom and two bedroom deluxe unit types are more expensive than those at Brookhaven based on equivalent monthly fee, and the two bedroom with den unit type is more expensive on a per square foot basis.



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Table 24

Community Contract Refundable Size

Fee Per SF Fee Per SF Fee Per SFOne Bedroom Apartments

Brookhaven Type A 90% 747 $402,000 $538 $3,610 $4.83 $3,816 $5.11

Carleton-Wi l lard Type B 0% N/A $302,200 N/A $3,440 N/A $4,983 N/A

Newbury Court Type C 90% 756 $315,000 $417 $3,049 $4.03 $4,138 $5.47

North Hi l l s Type A 90% N/A N/A N/A N/A N/A N/A N/A

Market Average 752 $339,733 $452 $3,366 $4.48 $4,312 $5.74

The Groves Type B 90% 770 $462,800 $601 $2,780 $3.61 $3,411 $4.43

One Bedroom Deluxe Apartments

Brookhaven Type A 90% X X X X X X X

Carleton-Wi l lard Type B 0% 810 $310,000 $383 $3,440 $4.25 $5,048 $6.23

Newbury Court Type C 90% N/A $447,000 N/A $3,825 N/A $5,371 N/A


Market Average 810 $378,500 $467 $3,633 $4.48 $5,210 $6.43

The Groves Type B 90% 855 $494,000 $578 $3,000 $3.51 $3,783 $4.42

One Bedroom with Den Apartments


Carleton-Wi l lard* Type B 0% 830 $210,100 $253 $3,243 $3.91 $3,976 $4.79

Newbury Court Type C 90% 1,090 $538,000 $494 $4,435 $4.07 $6,296 $5.78

North Hi l l s Type A 90% 994 $560,000 $563 $5,000 $5.03 $6,030 $6.07

Market Average 961 $442,525 $461 $4,201 $4.37 $5,236 $5.45

The Groves Type B 90% 865 $509,600 $589 $3,000 $3.47 $3,837 $4.44

Two Bedroom Apartments

Brookhaven Type A 90% 1,123 $571,000 $508 $4,630 $4.12 $5,624 $5.01

Carleton-Wi l lard Type B 0% 1,020 $368,800 $362 $4,150 $4.07 $6,402 $6.28

Newbury Court Type C 90% N/A N/A N/A N/A N/A N/A N/A


Market Average 1,023 $486,267 $475 $4,527 $4.42 $5,891 $5.76

The Groves Type B 90% 1,085 $639,600 $589 $4,180 $3.85 $5,703 $5.26

Two Bedroom Deluxe Apartments


Carleton-Wi l lard Type B 0% X X X X X X X


North Hi l l s Type A 90% 1,166 $630,000 $540 $5,485 $4.70 $6,854 $5.88

Market Average 1,211 $608,667 $503 $5,094 $4.21 $6,608 $5.46

The Groves Type B 90% 1,100 $655,200 $596 $4,300 $3.91 $5,901 $5.36

Two Bedroom with Den Apartments





Market Average 1,370 $605,100 $442 $5,385 $3.93 $7,521 $5.49

The Groves Type B 90% 1,230 $733,200 $596 $4,560 $3.71 $6,482 $5.27

Two Bedroom Jumbo Apartments






Market Average 1,509 $614,600 $407 $5,691 $3.77 $7,922 $5.25

The Groves Type B 90% 1,414 $790,400 $559 $5,050 $3.57 $7,268 $5.14


Pricing Comparison - Apartment Units

The Groves Market AreaEntrance Fee Monthly Fee Equiv. Monthly Fee



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Similarly, entrance fees for cottage units a per square foot basis are at a significant premium to Brookhaven and appear extremely expensive in comparison to the limited competitive product in the market.

Equivalent monthly fees at the subject’s cottages appear to be a good value in the market on a per square foot basis. We believe, however, that the sticker shock of the well above market entrance fees for these units is overriding the value equation. The entrance fees are as high as they are due in part to the large size of the units in comparison to the competitive product, but also due to very aggressive price points on a per square foot basis.

Table 25


Fee Per SF Fee Per SF Fee Per SFTwo Bedroom Deluxe



Market Average 1,474 $583,400 $396 $5,369 $3.64 $7,930 $5.38

The Groves Type B 90% 1,800 $920,400 $511 $5,180 $2.88 $7,874 $4.37

Two Bedroom Jumbo



Market Average 1,600 $509,800 $319 $4,803 $3.00 $8,563 $5.35

The Groves Type B 90% 2,115 $951,600 $450 $5,500 $2.60 $8,366 $3.96

Two/Three Bedroom Ultra



The Groves Type B 90% 3,400 $999,000 $294 $6,260 $1.84 $9,442 $2.78


Pricing Comparison - Cottage Units


Based on the findings of this analysis, we believe that pricing – and in particular entrance fees for most units – should be adjusted downward to reflect the positioning of the property in the market, as well as home values in the overall market (and not just Lincoln). This is necessary to increase the value of the product relative to the market, and thus improve its marketability. The pricing recommendations are based on the concept of developing market appropriate value pricing, taking into account the positioning of the subject relative to its competition. The recommended appropriate value price points represent the optimal price position for the subject. The following summarizes our illustrative or “appropriate value” pricing recommendations; Table 26 provides our recommended pricing for the subject under the 90% refund plan by floor plan. Following this, Table 27 (apartments) and Table 28 (cottages) display a unit-by-unit analysis of pricing across the communities compared, including for the recommended price points at the subject.



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For the 90% refund plan we recommend an average decrease in the entrance fee across the Russell apartment units of approximately 15% or just over $100,000 on average; this amount varies by floor plan. The weighted average entrance fee under this plan would decrease from approximately $670,000 to $560,000.

Under the same plan we recommend an average decrease in the weighted average entrance fee of approximately $50,000 or 5% from $946,000 to $896,000 across the cottage units. Again, this amount varies by floor plan, with the largest reduction being from $941,200 to $782,500 for the 1,800 square foot Ginger Gold model. We note that the appropriate value pricing of $1,175,000 for the Royal Gala model – an increase from its current price – assumes all 3,400 square feet are finished; if the basement is not finished, an entrance fee of approximately $1,060,000 is more appropriate.

We recommend a reduction of approximately $360 per month to the weighted average monthly fee for Russell apartments, from nearly $4,220 to approximately $3,850. For some units there would be a more significant adjustment while for others the adjustment would be nominal. For the cottages the average monthly fee actually would be nominally increased by about $90 per month or 1.6%.

Traditionally, entrance fees under the 50% refund plan would be set at approximately 80% of the 90% refund plan and for the declining plan the entrance fees would be set around 60% to 65% of the corresponding 90% refund entry fees. Given the abnormally low interest rate environment, however, the 50% refund and declining entry fee plans should to be discounted even further to bring them more in line with the equivalent fees (the overall value equation) for the 90% refund plan. It is unrealistic to get the equivalent fee equal across contracts under current interest rate assumptions, but that gap needs to be bridged somewhat. We recommend the 50% refund fees be set at approximately 65% to 70% and the declining plan entry fees set at approximately half of the 90% refund entry fees.



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Table 26



Apartment Units (Russell)


Baldwin 2 1 1 800 $412,000 $515 $2,790 $3.49

Cortland A 2 1 1.5 815 $423,500 $520 $2,810 $3.45

Cortland 7 1 1.5 855 $444,500 $520 $2,950 $3.45

Macoun 2 1 1.5 875 $455,000 $520 $3,020 $3.45

Spencer A 1 1/D 1 865 $441,500 $510 $2,980 $3.45


Jonagold 8 2 2 1,035 $517,500 $500 $3,520 $3.40

Early Mac A 2 2 2 1,060 $524,500 $495 $3,600 $3.40



Macintosh 10 2 2 1,085 $537,500 $495 $3,690 $3.40

Early Mac 2 2 2 1,100 $544,500 $495 $3,740 $3.40



Spencer 2 2/D 2 1,208 $585,500 $485 $4,050 $3.35

Paula Red 16 2/D 2 1,230 $596,500 $485 $4,120 $3.35



Red Rome 2 2/D 2 1,390 $660,250 $475 $4,620 $3.32

Gravenstein A+ 1 2/D 2 1,400 $665,000 $475 $4,650 $3.32

Empire 14 2/D 2 1,414 $671,500 $475 $4,670 $3.30

Apartment Sub-Total/Average 100 1,145 $562,865 $492 $3,855 $3.37

Single Family/Cottage Units

Vista Bella 16 16 16 1,800 $774,500 $430 $5,240 $2.91

Ginger Gold 6 6 6 1,800 $782,500 $435 $5,250 $2.92

Northern Spy 6 6 6 2,115 $867,500 $410 $5,610 $2.65

Royal Gala 10 10 10 3,400 $1,175,000 $346 $6,460 $1.90



The Groves

Program & Illustrative Pricing

Market Appropriate Value ScenarioType B Fee for Service Contract Plans

90% Refundable



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Table 27


Fee Per SF Fee Per SF Fee Per SFOne Bedroom Apartments


Carleton-Wi l lard Type B 0% N/A $302,200 N/A $3,440 N/A $4,983 N/A

Newbury Court Type C 90% 756 $315,000 $417 $3,049 $4.03 $4,138 $5.47


Market Average 752 $339,733 $452 $3,366 $4.48 $4,312 $5.74

The Groves Type B 90% 770 $462,800 $601 $2,780 $3.61 $3,411 $4.43

The Groves - Recommended Type B 90% 770 $400,500 $520 $2,690 $3.49 $3,088 $4.01

One Bedroom Deluxe Apartments


Carleton-Wi l lard Type B 0% 810 $310,000 $383 $3,440 $4.25 $5,048 $6.23

Newbury Court Type C 90% N/A $447,000 N/A $3,825 N/A $5,371 N/A


Market Average 810 $378,500 $467 $3,633 $4.48 $5,210 $6.43

The Groves Type B 90% 855 $494,000 $578 $3,000 $3.51 $3,783 $4.42


One Bedroom with Den Apartments


Carleton-Wi l lard* Type B 0% 830 $210,100 $253 $3,243 $3.91 $3,976 $4.79



Market Average 961 $442,525 $461 $4,201 $4.37 $5,236 $5.45

The Groves Type B 90% 865 $509,600 $589 $3,000 $3.47 $3,837 $4.44


Two Bedroom Apartments



Newbury Court Type C 90% N/A N/A N/A N/A N/A N/A N/A


Market Average 1,023 $486,267 $475 $4,527 $4.42 $5,891 $5.76

The Groves Type B 90% 1,085 $639,600 $589 $4,180 $3.85 $5,703 $5.26

The Groves - Recommended Type B 90% 1,085 $537,500 $495 $3,690 $3.40 $4,762 $4.39

Two Bedroom Deluxe Apartments





Market Average 1,211 $608,667 $503 $5,094 $4.21 $6,608 $5.46

The Groves Type B 90% 1,100 $655,200 $596 $4,300 $3.91 $5,901 $5.36


Two Bedroom with Den Apartments





Market Average 1,370 $605,100 $442 $5,385 $3.93 $7,521 $5.49

The Groves Type B 90% 1,230 $733,200 $596 $4,560 $3.71 $6,482 $5.27


Two Bedroom Jumbo Apartments






Market Average 1,509 $614,600 $407 $5,691 $3.77 $7,922 $5.25

The Groves Type B 90% 1,414 $790,400 $559 $5,050 $3.57 $7,268 $5.14




Pricing Comparison - Apartment Units



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Table 28


Fee Per SF Fee Per SF Fee Per SFTwo Bedroom Deluxe



Market Average 1,474 $583,400 $396 $5,369 $3.64 $7,930 $5.38

The Groves Type B 90% 1,800 $920,400 $511 $5,180 $2.88 $7,874 $4.37


Two Bedroom Jumbo



Market Average 1,600 $509,800 $319 $4,803 $3.00 $8,563 $5.35

The Groves Type B 90% 2,115 $951,600 $450 $5,500 $2.60 $8,366 $3.96


Two/Three Bedroom Ultra



The Groves Type B 90% 3,400 $999,000 $294 $6,260 $1.84 $9,442 $2.78

The Groves - Recommended Type B 90% 3,400 $1,175,000 $346 $6,460 $1.90 $10,290 $3.03

Entrance Fee Monthly Fee Equiv. Monthly Fee


Pricing Comparison - Cottage Units


To better illustrate the difference in pricing on a floor plan by floor plan basis (since this does vary significantly), Table 29 provides a comparison of existing pricing versus recommended appropriate value pricing for the subject for entrance fees under the 90% refund plan. We note that there is much less variation and delta with regard to monthly service fees.



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Table 29


Current Recommended Difference % Change


Baldwin A (Top Floor) 2 1 1 770 $462,800 $400,500 ($62,300) -13.5%

Baldwin 2 1 1 800 $462,800 $412,000 ($50,800) -11.0%

Cortland A 2 1 1.5 815 $473,200 $423,500 ($49,700) -10.5%

Cortland 7 1 1.5 855 $494,000 $444,500 ($49,500) -10.0%

Macoun 2 1 1.5 875 $509,600 $455,000 ($54,600) -10.7%

Spencer A 1 1/D 1 865 $509,600 $441,500 ($68,100) -13.4%

Jonagold A (Top Floor) 4 2 2 980 $608,400 $495,000 ($113,400) -18.6%

Jonagold 8 2 2 1,035 $629,200 $517,500 ($111,700) -17.8%

Early Mac A 2 2 2 1,060 $629,200 $524,500 ($104,700) -16.6%

Macintosh A (Top Floor) 5 2 2 1,060 $629,200 $530,000 ($99,200) -15.8%

Gravenstein (Top Floor) 1 2 2 1,085 $629,200 $542,500 ($86,700) -13.8%

Macintosh 10 2 2 1,085 $639,600 $537,500 ($102,100) -16.0%

Early Mac 2 2 2 1,100 $655,200 $544,500 ($110,700) -16.9%

Paula Red A (Top Floor) 8 2/D 2 1,180 $702,000 $584,500 ($117,500) -16.7%

Spencer A (Top Floor) 1 2/D 2 1,180 $702,000 $584,500 ($117,500) -16.7%

Spencer 2 2/D 2 1,208 $722,800 $585,500 ($137,300) -19.0%

Paula Red 16 2/D 2 1,230 $733,200 $596,500 ($136,700) -18.6%

Empire A (Top Floor) 7 2/D 2 1,330 $754,000 $645,500 ($108,500) -14.4%

Red Rome A (Top Floor) 1 2/D 2 1,330 $754,000 $645,500 ($108,500) -14.4%

Red Rome 2 2/D 2 1,390 $764,400 $660,250 ($104,150) -13.6%

Gravenstein A+ 1 2/D 2 1,400 $774,800 $665,000 ($109,800) -14.2%

Empire 14 2/D 2 1,414 $790,400 $671,500 ($118,900) -15.0%

Apartment Sub-Total/Average 100 1,145 $668,876 $562,865 ($106,011) -15.8%


Vista Bella 16 16 16 1,800 $920,000 $774,500 ($145,500) -15.8%

Ginger Gold 6 6 6 1,800 $941,200 $782,500 ($158,700) -16.9%

Northern Spy 6 6 6 2,115 $951,600 $867,500 ($84,100) -8.8%

Royal Gala 10 10 10 3,400 $990,000 $1,175,000 $185,000 18.7%

Cottage Sub-Total/Average 38 2,271 $946,758 $895,842 ($50,916) -5.4%

GRAND TOTAL/AVERAGE 138 1,455 $745,394 $654,554 ($90,840) -12.2%

The Groves

Entrance Fee Pricing Comparison

Current Vs. Recommended Pricing90% Refund Plan

Entrance Fee



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VII. DEMAND ANALYSIS This analysis focuses on the quantitative analysis and measures of demand for service enriched independent living in the market. This process tests the depth in the market and its capacity to support existing product, including the subject, and also can test for the capacity to support a planned addition to the market. A. Independent Living To reconcile supply and demand we utilize standardized quantitative measures of demand, specifically a market penetration rate – which is a measure of all product in the market relative to the size of the qualified target market – and a project capture rate, or a measure of the market share that the subject property must capture in order to fill its units. A summary of these analyses follows. Market Penetration Analysis To calculate the market penetration rate for a market we determine the size of the qualified target market of prospects and the total number of competitive units within the market. The relationship between these – specifically the ratio of the inventory of units to the total qualified target market – represents the market penetration rate. The standard methodology for calculation of the market penetration rate for independent living assumes that the qualified target market consists of all age and income qualified households. In some sensitivity analyses an additional screen of home value or assets may be applied as well; the standard base, however, is simply age and income qualified households. The inventory or supply that is included consists of all competitive units in the market. To calculate this number, the number of units at existing communities in the market area may be adjusted to account for the competitiveness of the community. Depending on the year for which demand is being projected, the analysis may also include planned/proposed competitive units in the market. The general rule of thumb is that these units should be included if it is anticipated that the community will be open or within active sales/leasing by the time of the projected demand year. In the case of the subject property – an existing community – we test demand in the current year and also a future year projection. The industry standard for age and income qualification for independent living in many moderately to more affluent markets is a target market of households age 75 and older with income of $50,000 or greater. Based on the monthly fees of the subject and its competitors, we believe that the $50,000 barometer is appropriate for this market. Specifically, the monthly fees at The Groves (for the all-inclusive package) start at nearly $2,800 for Russell apartments and as low as approximately $2,400 for Flint units. Assuming that resident households will



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spend approximately 60% to 65% of income on independent living services, a $2,800 monthly fee translates to a required annual income of approximately $52,000 to $56,000, and a $2,400 monthly fee to a minimum income target of as low as $44,000. This supports the utilization of $50,000 or greater as the minimum income threshold for the target market. The number of competitive units in the market is adjusted to reflect our interpretation of the direct competitive impact of each property based on factors such as geographic overlap, positioning/pricing and target market. As the target market represents the broader universe of all households that would be qualified for and could afford any of the independent living options in the market, the supply should represent all of the independent living options available to this universe. There is no other adjustment to this qualified target market to account for preference or some other factor that would remove them from the pool that would be eligible to move in to the competitive facilities, generally it is not appropriate to completely discount or remove all of the units at the potentially competitive communities, even those that would not be considered to be of the same caliber of, or highly comparable to or directly competitive with, the subject. As the qualification criteria become more specific and discerning, however, further reducing the number of units deemed competitive by removing more units or entire facilities from the equation is justified. To remain conservative, we discount only modestly the units at the competitive communities. We also include for some units at competitive communities located just outside of the primary market area that we believe exert a partial competitive impact on the subject and should be included. Specifically, for the purposes of this analysis, we include the following existing competitive supply:

Brookhaven: All 240 of its independent living units.

Carleton-Willard: All 148 of its independent living units.

Newbury Court: All 230 of its independent living units.

North Hill: One half (145) of its existing 290 online independent living units. This adjustment reflects that the community is located outside of the market area but does attract some residents from and has a competitive impact on the market area.

Norumbega Point: Half (47) of its 93 units. This adjustment reflects that the property provides a mix of independent and assisted living interspersed throughout its units and that not all of the property is independent living and competitive with the subject.

Projecting forward to 2016 we have not identified any new planned communities to be included. We do, however, include for the new units proposed to be built at North Hill as oart of this community’s repositioning effort. Its capacity reportedly will be increased from 290 to 375 – representing an overall addition of 85 units – as a result of this multi-phase process.



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North Hill: One half (43) of its proposed expansion of 85 independent living units. This adjustment reflects that the community is located outside of the market area but does attract some residents from and has a competitive impact on the market area.

Table 30 displays the market penetration rate analysis for the current year (2012). The analysis shows that including the subject’s 168 units along with the 810 units of competitive supply (a total inventory of 978 units), the market penetration rate for the current year is 18.5%. In our experience, a market penetration rate of 25% is generally achievable in most markets, and in highly sophisticated, well-developed and educated markets, penetration rates at or in excess of 30% are achievable. The market area penetration rate is comfortably below these benchmarks and within industry standards for a healthy market.

Table 30

Household Age 75+

Income Target $50,000+

Tenure All

Home Value All

Market Penetration Rate

Age and Income Qualified Households 5,271

Estimated Directly Competitive CCRC ILUs 763

Estimated Competitive Rental ILUs 47

Planned Competitive Units 0

Subject Property Units 168

Total ILUs in Market 978

Market Penetration Rate 18.5%

Market Penetration Rate Analysis

2012 Independent Living Demand


For the 2016 analysis we include for growth in the qualified target market, but also for proposed competitive products that are anticipated to come on line and impact the market. As noted, we do not anticipate the addition of any new supply in the market over the next five years other than the expansion at North Hill. Taking into account the projected growth in the market and the new product being added, the 2016 analysis yields a moderately lower market penetration rate of 17.3%. This rate again is comfortably below industry benchmarks and



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suggests that the market has the depth to absorb additional product if it is added to the market. Table 31 displays the market penetration rate analysis for 2016.

Table 31

Household Age 75+


Tenure All

Home Value All

Market Penetration Rate

Age and Income Qualified Households 5,717

Estimated Directly Competative CCRC ILUs 763

Estimated Competitive Rental ILUs 47

Planned Competitive Units 43

Subject Property Units 134

Total ILUs in Market 987

Market Penetration Rate 17.3%


Market Penetration Rate Analysis


Project Capture Analysis The second standardized test measures the market share that a project (and its number of units) will need to capture from the qualified, unserved market, or if a number of units is not known, a supportable number can be sized by assuming an achievable market share or capture rate. This analysis is more project specific, thus the income qualification threshold can differ from that of the market penetration analysis. In this case, however, we believe that the same $50,000 minimum income is appropriate for the subject. Again assuming a 60% cost burden ratio for the subject, the monthly fees of approximately $2,400 to $2,800 would be affordable to a household with an income of approximately $50,000. To determine the unserved market, the number of competitive units is subtracted out from the qualified target market. We also adjust the capture analysis to take into account that some units at the subject are/will be filled by in-migration of move-ins from outside of the primary market area. This includes not only areas just outside the primary market (presumably a secondary market), but also areas well outside including from out of state (many of whom move to the area to be closer to adult



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children or other family that may reside in the area). In this analysis we assume that 59% of the units will be filled by the target market with 41% of units filled by in-migration of prospects from outside of the market area. This is a direct reflection of actual resident origin data that shows that 59% of current residents relocated from ZIP codes within the defined primary market area. The analysis displays that The Groves – with its 168 total units – requires a capture of 2.2% of the available (unserved) target market. In our experience, a given independent living project generally has the capacity to capture 3% of the available market share (or capture 3% of the unserved target market) in a market. The capture rate can be as high as 5% for larger projects with significant critical mass and marketing budgets, as well as for properties located in markets with less direct competitive and fewer comparable alternatives for prospects. In markets that are well developed with competitive alternatives the achievable norms for capture rates for individual properties generally are at the lower end of the spectrum. Overall, the 2.2% capture rate for The Groves is comfortably below applicable benchmarks and appears to be reasonable and readily achievable. Table 32 displays the project capture rate analysis for the subject property for the current year.

Table 32

Household Age 75+


Tenure All

Home Value All

Project Capture Rate

Qualified Target Market 5,271

(Less Existing Competitive Supply) (810)

Total Unserved Target Market 4,462

Subject Property Total Units 168

Market Draw Adjustment 59.0%

Total Project ILUs to be Fil led 99

Project Capture Rate 2.2%


Project Capture Rate Analysis


As the subject does not need to fill all 168 units, but rather only the excess vacant inventory, we also conducted sensitivity analysis and calculated a capture rate for the 91 vacant units to be



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filled. We further note that these units ostensibly would be filled over time and not all in one year. Thus, for this sensitivity analysis, we treat the vacant units as if it was a new expansion that would need to be absorbed by the market by 2016. Adjusting for in-migration, absorbing these 91 units would require a capture of just 1.1% of the available target market as of 2016. Again, this would appear to be reasonable and readily achievable. This analysis is displayed in Table 33.

Table 33

Household Age 75+


Tenure All

Home Value All

Project Capture Rate

Qualified Target Market 5,717

(Less Occupied Subject Units) (73)

(Less Existing Competitive Supply) (853)

Total Unserved Target Market 4,792

Subject Property Vacant Units 91

Market Draw Adjustment 59.0%

Total Project ILUs to be Fil led 54

Project Capture Rate 1.1%


Project Capture Rate Analysis




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VIII. RETIREMENT HOUSING AND LONG-TERM CARE INDUSTRY OVERVIEW The following provides a brief overview of the current state of the long-term care/retirement housing industry, with a specific focus on the continuing care product. This summary considers the current market climate, key trends, major dynamics impacting the product/industry, financial environment, and other impacting factors. Overall the seniors housing and long-term care industry is in a period of transition, while it attempts to ride out the current adverse economic conditions and awaits the coming of the Baby Boomers. While there is growth in the senior population in many markets, much of this growth presently is occurring in the younger old age cohorts that are not yet the primary users of long-term care. In fact, as alluded to previously in the demographic analysis, across the country there is actually a decline being experienced in the 75 to 84 age cohort – the core of the 75+ target market for most retirement housing and long-term care and services – due to the birth dearth that occurred emerging from the Great Depression. This trough is expected to continue into the second half of this decade, when 75+ population growth begins to accelerate. By 2021 the first wave of Boomers reaches age 75. And after this point, the growth in all elderly age cohorts – especially those 75 and older – is dramatic and exponential. The demographic trough comes at the same time as one of the worst economies in the history of the country, a severely depressed housing market, and a climate in which access to capital for new development of housing – seniors or general occupancy – is restricted. The result in the seniors housing industry has been a significant slow down in new development activity. Merger and affiliation has dominated transaction activity for the past few years (in part because new development cannot get done and in part because the challenging environment is creating winners and losers and leading some to have to sell or be acquired), and providers are more focused on shoring up operations. Even if/as capital market conditions start to loosen and financing becomes more available – and there are some signs that this is beginning to occur – the next few years are likely to be a period of focus on operations with continued consolidation. There will be companies seeking selective development opportunities rather than a major growth spurt for the industry. As a result, it is likely that in many markets in the short term little or no new competition will be introduced. As conditions improve, however, and some of the current barriers to entry are removed, expansion once again will occur and new competition will enter markets. The end of 2010 and beginning of 2011 witnessed a significant amount of investment with several major portfolios of properties changing hands and REITS becoming more aggressive in acquiring product (such as HCP’s $6.1 billion acquisition of HCR ManorCare and Health Care REIT’s $2.4 billion acquisition of Genesis HealthCare). The strong activity continued through the



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rest of 2011 and, in fact, in total 2011 was the most active year for acquisitions since the market peak in 2007. Recent transactions suggest (not surprisingly) that at present it is a buyer’s market for underperforming assets; for performing properties, however, it is rapidly becoming a seller’s market. Cap rates for performing properties – particularly in multi-property transactions – have been trending downward as the value of cash flowing properties has increased. According to The SeniorCare Investor, 2011 represented a record year in cost per unit sold for larger and more expensive properties. Beyond this, “…the spread between the larger and more expensive sales and the smaller and less expensive ones widened to a record $109,000 per unit, with the upper end of the market averaging nearly $200,000 per unit.” The trend in this direction is anticipated to continue as many industry insiders expect more capital to enter the market, creating more competition on the buy-side for strong, cash flowing assets. A. Continuing Care/Independent Living

State of the Industry: It’s the Economy!

The past few years have been a significant challenge for independent living communities. As a more lifestyle (rather than need) driven, or discretionary product, the independent living product type has suffered far more dramatically from the fall out of the recession and the housing market crash than have more need-driven long-term care products and services such as assisted living and nursing care. Independent living is reliant upon interested and financially qualified households deciding it is time for them to move into a community…and then being able to execute and do so. The first part of that equation – convincing prospects to move in now rather than wait – historically has been the primary marketing challenge for independent living. But in the past few years, even many prospects that want to move in and believe they are ready to, have not been able to as they have not been able to sell their homes, or otherwise free up the assets necessary to fund a move into an independent living/retirement community. Not surprisingly, most acutely impacted have been CCRCs and entrance fee communities with substantial up-front fees that generally are paid for by spend down and liquidation of existing assets. The most typical scenario is that prospects utilize the proceeds from the sale of a primary home to pay for the entrance fee. Due to many prospects inability to sell their homes (or their lack of inclination to sell at reduced values), sales of independent living units at CCRCs has been dramatically impacted. Sales pace of new units has slowed substantially and absorption/presales periods have become more protracted. The result is that many start-ups have not been able to attain their required presales thresholds in a timely manner and thus have not been able to trigger their bond financing and begin construction.



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Established existing communities also are suffering. Many are finding it difficult to keep up with routine turnover due to the stagnant sale market. The result has been depressed occupancy rates, and lower than projected revenues across the industry. The impact has been particularly acute on older properties, particularly those with lifecare contracts. These communities typically rely upon high-margin independent living fees to subsidize the healthcare component of the community, in which operating deficits are common due to the high operating costs and relatively low lifecare monthly fees. For those communities that were already operating at or close to the margin, the cash flow impacts of having fewer occupied independent living units has been dramatic. This consequently has led to a substantial increase in loan defaults and communities being flagged as at risk of default, due to properties falling out of compliance with various bond covenants. (Bond violations are most common in days cash on hand, debt service coverage ratio, and occupancy rate.) Further clouding the picture have been recent high-profile failures and bankruptcies such as at Erickson Retirement Communities, now owned by Redwood Capital Investments and the near bankruptcy of Sunrise Senior Living. The failure of one of the industry’s giants and near collapse of another has made an already skittish industry – and the lending community and the general public upon which it depends – even more cautious. And it is likely there will be significantly more fallout from this – and other potential bankruptcies – in the near future. The impact of the adverse economic conditions has been less acute on rental providers and communities, as their “pay as you go” structure has somewhat inoculated them, although they have not been completely immune. The largest retirement housing provider in the country, Holiday Retirement Corp., has experienced a precipitous drop in occupancy across its portfolio in the past couple of years. (To be fair, much of this may have been a direct result of a change in ownership – Fortress Investments purchased most of the portfolio – and new operating philosophy that included pushing price points.) But generally speaking rental properties have more successfully weathered the storm, in large part due to the fact that prospects do not necessarily need to sell their homes immediately in order to move in. In fact, a number of CCRCs across the country have recently adopted rental program options in an effort to remove the home sale and move-in hurdle from prospects and increase sales/lease up.



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Key Industry Performance Data and Trends

The following details some key industry performance data. This data, except where otherwise noted, is published by the National Investment Center for the Senior Housing and Care Industry (NIC) in conjunction with the American Seniors Housing Association (ASHA), American Association of Homes and Services for the Aging (AAHSA), and other partners in The State of Seniors Housing 2011. Median occupancy at independent living units across the industry was at 87.9%. This

is an improvement from the previous year but over the horizon of the past few years has been trending down.

The overall median occupancy rate in IL communities across the country was 87.6% according to NIC data based on a sample of 530+ communities accounting for over 86,000 units.

The median occupancy for entrance fee CCRCs was 88.1%. Non-profit providers significantly outperformed for-profit providers with a median occupancy of 88.5% to 85.4% across CCRCs.

Median annual resident turnover across independent living communities was 39.7%. In CCRCs the median independent living turnover was just 14.2%; in entrance fee

CCRCs median annual turnover was12.2% while in rental CCRCs it was 29.0%. The median net operating income at independent living communities was

approximately $11,000 per occupied unit. The median operating margin at independent living communities was 38.3%; for

CCRCs it was 28.4%.

Financing and Start Up Environment

The traditional means of financing a start-up non-profit CCRC presents significant challenges in this environment. Before 2008, the vast majority of CCRCs were financed on a non recourse basis with tax exempt financing provided to 501(C)(3) sponsors. The sponsor was required to reach 70% presales (typically requiring seed money in the millions of dollars) and once that happened, tax exempt financing was triggered. There are two issues associated with tax exempt bond financing today. The first is the excessive penalties caused by negative arbitrage and the second is that all non recourse tax exempt transactions will require phase one to stand on its own financially. The impact of negative arbitrage is highly acute with regard to traditional tax exempt bond financing as bond proceeds are drawn down at one time and interest begins to accrue immediately upon closing. Negative arbitrage spreads today are in the range of 6% or even more depending on the rating of the borrower organization and the quality of the



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paper (interest rates are hovering between 7% and 8% for an unrated bond with reinvestment rates of 1% or less). In the recent past negative arbitrage spreads typically were around 1% to 2%. In many instances, personal guarantees (or obligated group financing) are required if the numbers for phase one “don’t pencil out”, and the guarantor will be required to have substantial net worth and liquidity. The situation is forcing many providers to forego tax exempt financing altogether and consider other financing vehicles and strategies such as taxable debt (which will cover less of the cost and require more equity) or “piece-mailing” projects by financing smaller phases through traditional commercial/mortgage banks. Of course, none of these alternatives is easily available in the market, and no matter what strategy is pursued, the strength of the borrower and the project and market is paramount to obtaining any financing. As a result, financing – and start up activity – has virtually come to a halt in the past couple of years. In short, the situation with regard to financing a new construction CCRC is significantly more complex and constrictive to borrowers than it was just a few years ago. This is not to say that today’s financing rules make a new construction project unfeasible. It is to say, however, that the sponsor or its investors likely will have to have access to significant liquidity in order for a project to move forward. Additionally, in all likelihood a proposed first phase of a project will need to be smaller. This is not optimal for operating efficiencies and economies of scale. The result is that the timeline for build out – and the horizon for owners and investors to cash in on their investments and realize desired returns – now needs to be more long-term. With regard to rental communities, while performance has been better, the financing climate is similarly challenging. Capital in general is very hard to come by, with conventional commercial/mortgage lenders remaining on the sideline. FHA mortgage insurance has been a primary catalyst for the vast majority of new retirement housing (and multifamily housing in general) that has been financed in the past couple of years. Unfortunately, HUD does not have a program specifically designed for service enriched independent living. In fact, while it has a program for age qualified apartments (Section 231), HUD will not underwrite and finance any supportive services. Additionally, independent living does not qualify as long-term care that is allowed for under the HUD Section 232 program (which covers assisted living and nursing facilities). The result is that financing for rental independent living – even in markets in which the opportunity appears favorable and low risk – has been difficult to find and secure. As previously noted, there are some signs that a loosening in capital markets and an increase in new development is occurring. Many experts prognosticate that a slight



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uptick from the lows of 2009 to 2010 is likely in the coming years, but that development activity on the whole still will be modest. In its February 2012 issue, The SeniorCare Investor opines: “Yes, development will increase from its lows of 2009 to 2010, but we are a long way from a flood of construction debt available in the market.”

Summary Outlook

The present and immediate future for independent living products – and in particular continuing care – is not favorable. Until the housing market makes a marked recovery and improvement, sales will continue to be slow, resulting in lower occupancies and protracted absorption periods. This will continue to exert pressure on cash flow. Recovery and improvement for the product – much as it will for the economy in general and the housing market in particular – is likely to vary by geography. The good news is that start-up activity in 2009 and 2010 was virtually non-existent, and can only increase in the future. The reality, however, is that while an upswing eventually will take place, it might take longer than hoped. As stated in The SeniorCare Investor, “…unless there are shovel-ready projects today, it is just going to take some time to gear up for new development”. As noted, the short-term is likely to be a period of increased focus on operations and organizational and product repositioning, with organizations pursuing selective development opportunities. Increased growth as an industry will occur toward the second half of this decade as rising demographics begin to create more demand.



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IX. CONCLUSIONS & STRATEGIC RECOMMENDATIONS A. Conclusions Overall, our analysis indicates that The Groves is a solid property that should have a positive future outlook, but presently is facing significant challenges from internal factors that have resulted in the slow fill up and underperformance of the community since its opening. Specifically, the community appears to be overpriced for the product and its value equation is not competitive, there is a lack of a recognizable “bricks and mortar” long-term care, and the property has attained a negative reputation due to its underperformance. These challenges will need to be addressed and overcome (or at least mitigated) in order for the property to improve its performance. Accomplishing this will require a concerted effort, and the development and implementation of strategic initiatives that will take some time. It does not appear that this effort, however, will require major capital expenditures, although should initial efforts to turn around the property prove unsuccessful then more dramatic measures that would require more significant investment of capital and other resources may be required. The most difficult issue for the community to address and overcome will be the negative reputation and intangibles that it has obtained as a result of its struggles. Once there is negativity around a property within a market, it tends to become somewhat of a viscous cycle wherein negative consumer sentiment leads to adverse impact on performance, which in turn creates more negative sentiment, and so on. Reversing this trend may hold the key to the capacity to turn around the performance at The Groves. It also is likely that this is not something that can be accomplished overnight, but rather will require a concerted and ongoing campaign, or perhaps even a major galvanizing event. At the least, a fresh take on and approach to the property, its public relations, and marketing may be necessary. If this can be accomplished, the other major initiatives – resetting pricing to a more appropriate value position in the market and providing for a more tangible continuum of care – seem, while certainly not routine, much more scalable and likely to lead to improvement. We do believe that the key deficiencies of the subject can be adequately addressed and overcome, and that if and when such deficiencies are overcome, the outlook for The Groves is relatively positive. The market and the external dynamics appear to be relatively favorable and should not be an impediment to turning around the property. Consequently, ownership should have the capacity to positively impact the performance of the property and to establish The Groves as a viable going concern moving forward. Vacant units can be sold and the property eventually can be filled to stabilized occupancy. While it does seem reasonable to establish the property as a viable concern and as competitive in the market, it seems unlikely that The Groves could be positioned as the premier community in the market, barring a more comprehensive and capital intensive repositioning effort that would improve areas even



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beyond the main deficiencies. Being premier in the market, however, does not appear to be a pre-requisite for success, as even mid- and lower-level competitors in the market are performing well. The following provides more detail on the key conclusions that have led to the overall judgment on the outlook for the property and to the strategic recommendations that will follow.

1) Overall The Groves is a solid property that is competitive and relatively well positioned, but it is not elite or premier in the market. It has a number of strengths and a relatively limited number of shortcomings; these shortcomings, however, are substantial deficiencies that have had a marked adverse impact on the property. The attribute by attribute examination of the relative positioning of The Groves compared to its primary competitors indicates that The Groves is a solid property. Of the five CCRCs examined, it presently would rank as second according to our average attribute scoring, behind Brookhaven and right in line with Newbury Court. By 2015, with the completion of the massive repositioning effort at North Hill, this community will leap to the upper echelon of the market, leaving the subject along with Newbury Court as more mid-market product options. Features of the subject that are exemplary or well above average for the market are its location (within highly desirable Lincoln), its interior appearance and entrance, dining venues and program, and the breadth of independent living offerings, which include apartments ranging in size from 700+ to 1,400 square feet and luxury-sized cottage units of 1,800 to 3,400 square feet. The number of clear shortcomings is limited. Specifically, the community appears to be at a marked disadvantage in the market with regard to ingress and egress, the continuum concept and delivery, and the property reputation and intangibles. These last two shortcomings, however, are significant, and in our opinion have played a central role in the underperformance of the property.

2) The major deficiencies at The Groves, and the primary challenges that must be addressed moving forward are pricing and value that is not reflective of its position in the market, the lack of on-site long-term care facilities, and perhaps most significantly the negative reputation and image caused and exacerbated by the property’s struggles.

a) The struggles of the community have adversely impacted its reputation and image in the market and are contributing to a cycle of exacerbating challenges and leading to underperformance. This issue cannot be quantitatively measured and therefore is somewhat difficult to assess. It is clear, however, that



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there is an air of concern about the property that is deterring prospective consumers. In our experience, once a negative image of the property is developed by consumers, it can often thrust the property into a downward spiral of image undermining and eroding performance and vice versa. Breaking this cycle and reversing the downward spiral can be quite difficult.

Reversing the downward cycle into which The Groves appears to have fallen may hold the key to the capacity to turn around the performance at the property. Anecdotal evidence suggests that if this issue is not adequately overcome, initiatives to address other deficiencies could have only limited, and not the needed, impact. According to MHS executive management, there have already been recent attempts to address the pricing and value issue of the cottage units at The Groves. Sensing that these units were overpriced, management recently instituted a price reduction of $100,000 to cottage units along with a $50,000 credit to be used towards unit upgrades. Our analysis indicates that such a pricing adjustment was generally appropriate and should have been adequate to reposition the pricing of these units in line with its appropriate value in the market. Despite this, the price reduction and incentives reportedly stimulated only a modest increase in interest and inquiries, and did not positively impact sales pace and activity. (Admittedly, this price adjustment was undertaken only recently, and The Groves has not launched a concerted and targeted ongoing campaign to promote these units and the price reduction.) We also note that sales have been extremely slow for the Flint Building, despite below market pricing that seems on the whole to be reasonable and appropriate for the very basic and inferior product.

It is possible that further price discounting or incentives could lead to positive sales results for both Flint Building and the cottages. We believe, however, that the signs point to the issue not being exclusively one of price or value, but rather the value question is somewhat ancillary to more fundamental, underlying issues that are keeping away buyers. As there also is a measure in place to provide for transfer to off-site long-term care facilities if desired, it seems most likely that the negative consumer perception of the community is the single biggest impediment to new sales. Consequently, we believe that the top priority at The Groves should be repairing and reversing its image. As noted, if this can be accomplished then the other shortcomings appear much more readily fixable; conversely, it implies that even aggressive initiatives and actions to address the other deficiencies may not have the necessary and desired impact until this fundamental obstacle has been overcome.

b) Entrance fees for apartment and cottage units are too high given the product and positioning of The Groves and too expensive relative to the competition.



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Presently, entrance fees under the 90% refund contract at The Groves are concentrated in the high $500s per square foot for its apartment units. These significantly exceed those at Brookhaven – the premier community in the market – for comparable unit types and for the same 90% refund option. We believe that entrance fees need to be set at the very least more in line with or ideally at a moderate discount to those at Brookhaven on a per square foot basis. Similarly, entrance fees on a per square foot basis should not significantly exceed those of Newbury Court but rather should be more in line with this community.

Additionally, the current weighted average entrance fee for a Russell Building apartment unit at The Groves of approximately $669,000 is somewhat high relative to home values in the market. While Lincoln is extremely affluent and home values are high, The Groves competes in market that is much larger than simply Lincoln; in fact it attracts only about one in six residents from Lincoln and the majority of its residents from surrounding communities within approximately 8 to 10 miles. Home values overall across the broader market area are strong, but not nearly as high as those in Lincoln. The median price of homes actively listed in the market area is just under $640,000; furthermore, recorded sales across the market area the past six months exhibit a median sale price of approximately $510,000, about 80% of the median list price. The current premium of the weighted average Russell apartment unit entrance fee is more than 30% above the average home in the market. This premium is too substantial. Ideally, entrance fees for the Russell apartment units at The Groves should be more in line with median sales in the market.

c) Monthly fees appear on the whole to be more in line with the competitive marketplace; the overall value equation, however, exhibits that The Groves is overpriced and does not offer a good value in the market. To compare pricing at communities across different contract types and varying refund amounts, we calculate “equivalent monthly fees” that take into account entrance fees and monthly fees across contract types and refund options, and convert everything into one monthly figure. This is done from the perspective of the consumer, assessing the overall cost to the consumer of the unit over time, calculated on a monthly basis. This analysis shows that at its current price points, the larger units at the subject are consistently priced amongst the more expensive offerings in the market by unit type, and often comparable to or even more expensive than Brookhaven. Much of this is due to the high entrance fees more so than monthly fees, the latter of which seem to be much more in line with appropriate value positioning in the market.

We note that until recently the equivalent monthly fees at The Groves would be at an even greater premium relative to the competition, and the community



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would be even further out of line value-wise. Given the abnormally low interest rate environment, however, which significantly reduces achievable earnings on long-term investments for consumers, the variance in equivalent monthly fees actually is condensed. This somewhat artificially distorts the value inequity of the subject relative to the competition. As a result, The Grove’s equivalent monthly fees appear to be more in line than they are in more normal market conditions, and a greater reduction in the short term likely is warranted as the market will eventually return towards center with regard to interest rates and economic costs for consumers.

d) The virtual continuum model with all health care provided within the independent living unit/home and a lack of distinct, “bricks and mortar” long-term care components may present an obstacle to consumers. In many ways MHS should be applauded for developing a model of virtual long-term care that de-emphasizes traditional facilities and promotes less institutional environments. The concept is very cutting edge and offers fantastic potential, and in many ways appears to be the direction in which the industry likely is heading over the coming years. While something like The Groves may in fact be the model of the future, there is some legitimate question, however, as to whether it is the optimal model in the present. There is some evidence industry-wide to suggest that this concept may be ahead of its time. Beyond this, there even appears to be some anecdotal evidence at The Groves to suggest that at present the virtual concept is somewhat of an obstacle to prospects, who are more comfortable when provided a traditional bricks and mortar option.

From our experience with other properties and with consumers across the industry, the lack of bricks and mortar long-term care on campus tends to lead many to categorize a property more as an independent living provider and less as a continuing care or long-term/health care provider. Communities utilizing a virtual or in-home arrangement can become a hybrid model that risks confusing consumers, especially with the influence of competitors, which will market against this model.

Research of other comparable high-profile, upscale virtual/hybrid models shows that a number that have opened in recent years have struggled. A notable example is Sunrise Senior Living’s Fox Hill in Bethesda, Maryland, an ultra-luxury hybrid concept that opened as the recession was taking hold in December 2008. The property entered sales as an age-qualified condominium with high-end, luxury units and prices, and available long-term care services, but no long-term care facilities on campus. It positioned itself as different than, but competitive with CCRCs in the market. Consumers, however, were not sure what to make of it. Eventually, Sunrise built an assisted living facility on campus, but not before



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the property spent three-plus years in sales unable to attain 50% occupancy, and went bankrupt. Sunrise no longer owns the condominium property. The common threads of most of the underperforming hybrid properties appear to be a confused consumer base and overestimated value and overpriced units. It seems likely that with the issue of provision of long-term/continuing care, a confused – or potentially unconvinced – prospect base is an issue at The Groves as well.

We note that MHS has attempted to mitigate the continuing care issue by providing for a transfer arrangement to the Alzheimer’s center and nursing center at Newbury Court. The Groves’ residency contract, as a Type B, even provides for a health care benefit, with transfers from the subject entitled to care at Newbury Court at 80% of the market rate for these facilities. This is a step, but it seems unlikely that this has completely or adequately addressed this issue with prospective consumers.

3) It appears that the overpass construction project that will impact the campus is set to begin this year; this presents another challenge to be addressed and mitigated. The long-rumored overpass construction appears as though it is now likely to begin some time during 2012, possibly as soon as this summer. The impact that this could have on The Groves campus, and the marketing and sales efforts of the property is uncertain. What is certain, however, is that it will indeed create another not insignificant challenge for the property. Our understanding is that this project will create a construction site immediately adjacent to the back of the campus – by some reports within less than 100 feet of the campus – and as a result a number of the trees lining the back of the campus will be removed. Beyond this, a number of units in Flint Building – management has estimated five in particular – will be most directly impacted, essentially staring straight out at the construction site. As this project could take as long as five years by some estimates, this, unfortunately, is not an issue that simply will go away in short order and can be ignored. Rather, MHS will need to take measures to attempt to mitigate the impact of this project on the campus and residents, and also devise marketing strategies to help overcome this potential hurdle with prospects.

4) There are also some more secondary shortcomings at The Groves that need to be addressed, the most challenging of which could be the positioning of the Flint Building.

a) Ingress and egress to the property is substandard. The vehicular entry to the property is fine traveling east on Route 2 and entering to the right, but taking a left into the property while traveling west is less straight forward. There is no



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stoplight and only a limited turn/access lane. Exiting the property is more troubling; only a right turn, traveling to the east is allowed. As Route 2 is a major thoroughfare, and there are only limited exits, traffic exiting the property can be forced to travel east for a mile or even two miles before being able to turn around. This inconvenience may not be a deterrent to prospective buyers in and of itself, but it is a more significant issue to elderly drivers, and can leave a bad impression.

b) Finishes in units are relatively pedestrian compared to other properties and given the high price points. The lack of upscale/luxury features and finishes in units is a shortcoming of both the Russell apartments and the cottage units, although most glaring with the cottage units that are selling for nearly $1 million. Simply put, at these price points – or with any product that is going to compete in the luxury market and attempt to attract prospects with several million dollars in net worth – upscale finishes need to be included. A $900,000+ cottage that comes with vinyl, carpet, and laminate instead of granite, hardwood/tile, and stainless steel appliances, is like buying an $80,000 Mercedes without a sunroof, navigation system, or stereo. These accoutrements aren’t necessary for survival, but they are necessary to compete at that level; consumers feel “nickeled and dimed” when these upgrade features are not included as standard at high-luxury price points.

c) The Flint building does not fit with the rest of the property and has struggled to find an identity. The Flint Building has been somewhat of a curiosity since opening. Originally presumably a result of zoning or land use requirements to have some units set aside for low income residents, it is of markedly inferior quality to the rest of the independent living product at The Groves and in the market as a whole. Originally Flint opened as a distinct rental component. Eventually, the entrance fee options were provided for these units as well, at price points well below the rest of the product on campus. That seemed to better integrate the building within the property overall and somewhat increased its marketability.

In our experience, a more moderate income positioned and targeted product can and has been successfully integrated into a larger, more luxury oriented community. It is not easy, however. In many cases there is always a little bit of a “us” and “them” perception amongst residents, and it has the potential to be divisive on the campus. There is much greater outlook for success with something like this with a faith-based non-profit with a strong affinity connection such as MHS. As noted, despite the well below market price points, Flint has not become particularly marketable and its units have been slow to sell. It seems likely that the negative image issues of the subject are adversely impacting the



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ability to sell these units as well, and the reality is whether these units can be sold and are viable likely cannot be better determined until the image issue is addressed.

Beyond this, as noted, a number of units (at least five) in the Flint building will be significantly impacted by the pending highway connector construction project adjacent to the building. As a result, these units may be rendered virtually unsellable. These units likely will be lost leaders financially over the coming years and may even need to be repositioned or converted to another use during the construction project.

5) The major challenges must be addressed and strategic initiatives need to be developed to mitigate the adverse impacts from and overcome these challenges if The Groves is to be turned around effectively and its performance is to improve to the point where it is a viable going concern. The primary deficiencies – if not all of the shortcomings – will need to be adequately addressed and overcome if the performance of The Groves is to be turned around. As noted, the first priority will need to be addressing the negative image and reputation that the property has developed, followed by addressing the pricing and access to continuing/long-term care. To this end, comprehensive strategic initiatives will need to be developed and implemented. The following section outlines our primary recommendations for beginning this process and next steps to be taken. Ultimately, these initiatives may need to be developed within a much broader and more comprehensive repositioning plan and undertaking, depending on the financial situation of the property going forward.

6) Market dynamics are positive and indicate support for The Groves and the existing inventory in the market.

a) There is adequate depth and demand in the primary market to support and successfully absorb the complete inventory of independent living product that exists, including The Groves. Our reconciliation of supply and demand demonstrates that there is adequate depth and demand in the market to support The Groves and its 168 existing independent living units as well as the rest of the existing competitive inventory in the market. The total independent living inventory in the market of 987 units (including 820 units estimated as directly competitive and the subject’s 168 units) equates to a market penetration rate of 18.7% of the age and income qualified target market. This is comfortably below industry benchmarks. Furthermore the capture rate – or market share – of the available target market required by the subject’s 168 units



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(adjusted for market draw) is just 2.2%. This is below industry benchmarks and does not suggest any elevated risks with filling the subject’s units. In fact, if this was a proposed new development, we would deem the 168 units to be readily supportable and feasible in the market.

b) The competitive market is performing extremely well and appears to be healthy. The aggregate occupancy rate across the competitive inventory in the market is approximately 94%; excluding North Hill which has begun its redevelopment process and as a result has an artificially high number of vacant units, the aggregate occupancy is over 96%. These figures are well above the industry norm of approximately 88% and indicate a healthy competitive environment. All of the competitive communities in the market area have an occupancy rate well in excess of 90%, including the properties that appear to have more mediocre and potentially vulnerable product.

c) The home sales market in the area reportedly has not been a major impediment to sales at The Groves or in the market. Even in markets that appear to have favorable dynamics and strong underlying fundamentals, the poor housing market has significantly adversely impacted sales activity, and has led to slow fill up for new communities and low occupancy rates. This does not appear to be the case in the subject’s market area.

7) There are no major market-based impediments or reasons that performance cannot be improved. This suggests that if the challenges are adequately addressed and mitigated, and The Groves is appropriately priced and positioned, the vacant units can be sold and it can achieve stabilized occupancy. We conservatively project that if initiatives are developed and implemented that successfully overcome the primary challenges, vacant units can be sold and The Groves can be returned to a path towards achieving stabilized occupancy. We believe it would be reasonable and achievable for the property to experience net absorption velocity of 2.0 to 2.5 units per month going forward. This would be comprised of approximately 0.5 to 0.75 per month for the cottages and 1.5 to 1.75 per month for the apartments. It is critical to stress that these net sales targets are contingent upon addressing the highlighted challenges and should not be projected to occur until measures have been implemented and significant headway has been made in overcoming the challenges. Implementing the initiatives to successfully overcome the noted challenges will take some time. Addressing the reputation issues, for example, will require ongoing, concerted efforts – such as a public relations and education campaign – and certainly is not an overnight fix. Re-setting price points can be enacted and result in some positive



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impact more immediately, although the full impact of this is not likely to be felt until the reputation and image issue has been addressed. A preferable solution for long-term care could be an issue of simply strengthening and better communicating a transfer arrangement, or may eventually require that the sponsor build some bricks and mortar long-term care on campus.

B. Strategic Recommendations and Next Steps Based on the previously detailed conclusions we recommend the following strategic initiatives and action steps to begin the process of addressing the deficiencies at The Groves. Overcoming these challenges and improving the performance of the property is likely to require the development and implementation of much more detailed and comprehensive strategies. This process, in fact, ultimately may need to be a part of a much broader repositioning and/or financial restructuring plan for the subject depending on its financial circumstances.

1) Develop a process for addressing the negative reputation and image issues from which the property is suffering.

The Groves will need to repair and recast its reputation and image, and will need a strategic approach to this process.

This process may take some time and certainly will take a concerted effort. A focused and ongoing campaign likely is required.

A fresh take on and approach to the community’s challenges and in particular its reputation may be of benefit. We recommend considering bringing in an outside public relations/media/marketing firm that specializes in turnaround situations and may be able to lead this process.

2) Develop new pricing that is more in line with the appropriate pricing and value position for the subject.

Detailed analysis of price position and specific pricing recommendations are provided in the pricing analysis section of this report. Our recommended appropriate value pricing for the subject is displayed in the chart below.



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Baldwin 2 1 1 800 $412,000 $515 $2,790 $3.49

Cortland A 2 1 1.5 815 $423,500 $520 $2,810 $3.45

Cortland 7 1 1.5 855 $444,500 $520 $2,950 $3.45

Macoun 2 1 1.5 875 $455,000 $520 $3,020 $3.45

Spencer A 1 1/D 1 865 $441,500 $510 $2,980 $3.45


Jonagold 8 2 2 1,035 $517,500 $500 $3,520 $3.40

Early Mac A 2 2 2 1,060 $524,500 $495 $3,600 $3.40



Macintosh 10 2 2 1,085 $537,500 $495 $3,690 $3.40

Early Mac 2 2 2 1,100 $544,500 $495 $3,740 $3.40



Spencer 2 2/D 2 1,208 $585,500 $485 $4,050 $3.35

Paula Red 16 2/D 2 1,230 $596,500 $485 $4,120 $3.35



Red Rome 2 2/D 2 1,390 $660,250 $475 $4,620 $3.32

Gravenstein A+ 1 2/D 2 1,400 $665,000 $475 $4,650 $3.32

Empire 14 2/D 2 1,414 $671,500 $475 $4,670 $3.30

Apartment Sub-Total/Average 100 1,145 $562,865 $492 $3,855 $3.37


Vista Bella 16 16 16 1,800 $774,500 $430 $5,240 $2.91

Ginger Gold 6 6 6 1,800 $782,500 $435 $5,250 $2.92

Northern Spy 6 6 6 2,115 $867,500 $410 $5,610 $2.65

Royal Gala 10 10 10 3,400 $1,175,000 $346 $6,460 $1.90



The Groves

Program & Illustrative Pricing

Market Appropriate Value ScenarioType C Fee for Service Contract Plans

90% Refundable

Beyond the appropriate value pricing recommendations, we note that further adjustments and incentives may be necessary to reflect current “on the ground” conditions. Hopefully, the impediment to sales more than anything is the property’s negative image, and once this is overcome, the appropriate value pricing will be marketable and sellable. This may not be the case, however, and more aggressive action may need to be taken with certain units. Specifically, the Royal Gala cottage likely will need to be further discounted and/or offered with compelling incentives to stimulate sales activity. Once units are sold it can be reset to its appropriate value pricing.



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3) In the short-term, move towards a more traditional model of providing continuing care and delivery of long-term care.

The Groves has a transfer arrangement with the Alzheimer’s care and nursing care facilities at Newbury Court and even provides for a 20% discount off of the market rate at these facilities for its residents. This arrangement, however, does not appear to have been adequate in overcoming consumers’ hesitancy regarding the lack of on-site long-term care at The Groves

We recommend thoroughly re-examining the options for developing a short-term or interim solution to the lack of long-term care facilities on campus. This is most critical with regard to nursing care as the model for providing assisted living via in-home or other more virtual options at a CCRC is well-established. Addressing this could be as simple as an issue of education and

communication, and more aggressively selling to residents the existing transfer arrangement.

One option is to explore another affiliation or transfer arrangement with a different proximate, high-quality nursing facility

Another option to explore may be the development on campus of some long-term care beds, such as perhaps a “small house” model nursing component that does not require the capital investment of a more traditional model facility. Even a small house model, however, will require a not-insignificant capital investment and the entire process would take some time, likely at least a year to two years.

Longitudinally, the “virtual” health care model likely will gain increasing acceptance and possibly even preference with consumers and bricks and mortar long-term care on the campus may not be necessary in the future, once The Groves is able to attain stabilization and ride out the next few years.

4) Enhance features and finishes in the Russell Apartments and in particular the cottages.

We recommend finishes that are in line with those being included in the redeveloped luxury units at North Hill, which include granite counters, stainless steel appliances, wood floors, and the like.

5) Explore more aggressive options for better integrating Flint building into the campus, increasing its marketability, or potentially repositioning it to another use.

The marketability and outlook for these units may not be better understood until the reputation issues are adequately addressed, as this likely is an impediment to sales for this product line as well.



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Flint building may need to be overhauled and in particular the units that will be most directly impacted by the overpass construction project (that as a result may be virtually unsellable) may need to be temporarily converted to another use. At the very least, MHS likely will need to continue to upgrade features and finishes in units and further incentivize buyers. More drastic action may be necessary if this does not build sales momentum.

The units impacted by the overpass project could be temporarily taken off line and converted to another use, then returned to market as for sale units in several years after the completion of the construction project. One option would be to offer them as true affordable rental units, reserved

for low to moderate income households. This benevolent housing could serve as an extension of mission and ministry for MHS, and could generate positive public relations for MHS.

Another option may be to convert some of them into common areas for Flint building such as a wellness suite, fitness room, game room, etc. This would add to the value and marketability of the building and could positively impact sales of other Flint Building units.

6) Identify and quantify existing capital resources that can be used to fund future efforts to improve the performance of the property.

Before moving forward with any significant undertakings, MHS will need to identify the capital (and other) resources available for such purposes. It does not seem likely that significant additional capital will need to be raised and secured to institute the primary recommendations and strategic initiatives, but existing resources should dictate decisions such as how much equity can and should be put into subsequent efforts and how much debt can be secured and comfortably carried if necessary.



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APPENDIX Detailed Community Positioning Score Cards



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THE GROVES

Lincoln, MA

Primary Strengths: + Excellent location with strong exposure, visibil ity, and accessibil ity

+ Attractive product, interior décor and finishes with strong common areas/amenities

+ Array of independent l iving offerings with large units; cottages in particular strong

+ Flexible debit system dining program

Primary Weaknesses: - Unit finishes do not reflect luxury positioning and price points

- Virtual continuum concept of in-unit care ahead of time and disuades consumers

- Low occupancy and known challenges have hurt reputation and damaged image

Attribute Grade Comment


Location/Neighborhood A In Lincoln, a highly des i rable, a ffluent suburb

Proximity to Infrastructure B- Lack of proximate reta i l and neighborhood amenities ; 10 minute drive

Access ibi l i ty B+ Right off of Route 2, 3+ mi les from I-95; north-south not as di rect

Vis ibi l i ty & Exposure A- Signi ficant drive by traffic; hidden from street, s ignage doesn't s tand out

Ingress/Egress C- Right turn only exi ting; di fficul t to get going back west, few mi les to exi t

Site/Location Subtotal B

Property Attributes

Setting/Campus Appeal B 30 acre campus with nice wooded areas around, but not dramatic setting

Exterior/Curb Appeal B+ New looking bui ldings , attractive, but mostly vinyl s iding

Interior Appearance A- Nice interior décor, attractive and modern and upsca le

Health Care Product * No phys ica l health care product on campus

Property Attributes Subtotal B+


Entrance and Reception A- Grand lobby with high cei l ings , attractive and upsca le fixtures and finish

Dining Venues A- Main dining resembles restaurant, vaulted cei l ing, separate rooms

Amenity Offerings B+ Has just about everything, but some s ized a l i ttle smal l

Common Area/Amenities Appearance B+ Many areas other than dining decent but unspectacular

Common Areas Attributes Subtotal B+

ILU Attributes

Independent Living Offerings A- Apts good range in s ize; large cottages (1,400 - 2,400 s f plus unfinished)

Apartment Product Des ign/Finish B High cei l ings plus , but most finishes bas ic; Fl int units subpar

Cottage/SF Product Des ign/Finish B Open attractive floor plans with vaulted cei l ings ; not luxury finishes

ILU Attributes Subtotal B+

Contracts & Services Attributes

Contract Options B Li fecare i s plus in market, but not many options or flexibi l i ty

Continuum Concept and Del ivery C Ahead of i ts time? Leading edge concept lacks bricks and mortar securi ty

Dining Program A A true s trength: debit system with complete a la carte flexibi l i ty

Services & Programming B Standard ful l service packages

Contracts & Services Subtotal B

Sponsor & Background Attributes

Sponsor/Financia l Health B Sponsor regional multi -property, but not as wel l known as should be

Property Reputation C Known to be s truggl ing; chal lenge educating consumers on concept

Impact/Intangibles C Low occupancy = empty bui lding; adverse impact of overpass project

Sponsor & Background Subtotal C+

OVERALL AVERAGE SCORE: 3.08

OVERALL GRADE: B

Overall Summary:

Outlook: Wil l not be premier and could s tuggle unti l i t resolves the health care i ssue, addresses

shortcomings in va lue for a luxury property, and improves performance.

What should be a s trong property, but suffers from a handful of key chal lenges , some

readi ly fixable. The health care del ivery concept may be ahead of consumer acceptance,

and the reputation has taken a hi t due to the community's s truggles .



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BROOKHAVEN AT LEXINGTON

Lexington, MA

Primary Strengths: + Few if any real weaknesses and above average to strong in virtually every aspect

+ Attractive product, interior décor and finishes with strong common areas/amenities

+ Sponsor, performance, and reputation all strong, underscores its market position

Primary Weaknesses: - Unit finishes are subpar for luxury positioning and price points



Location/Neighborhood B+ In moderate income area of Lexington area, close to more upsca le

Proximity to Infrastructure A- Walk to Shaw's supermarket and reta i l plaza

Access ibi l i ty A- On main road, just off Route 2 and <2 mi les from I-95

Vis ibi l i ty & Exposure B+ Decent drive by and vis ible s ignage

Ingress/Egress B+ Easy ingress/egress , no rea l access road

Site/Location Subtotal B+

Property Attributes

Setting/Campus Appeal B- Modest campus , mostly the MF bldgs with adjacent cottage area

Exterior/Curb Appeal B+ 2 main bldgs attached…older i s B, newer i s A-

Interior Appearance B+ Attractive, upsca le décor; entrance unspectacular; ha l l s wide, nice

Health Care Product A- Dedicated 20-bed ALZ (1BR units ); renovated and added P units to SNF



Entrance and Reception B- Low cei l ing at entrance, smal l vaulted area in lobby

Dining Venues A- 3 venues , attractive main dining and s trong bis tro

Amenity Offerings A- Strong wel lness and fi tness offerings , ful l complement of areas

Common Area/Amenities Appearance B+ Good des ign and look, moderate features and fixtures


ILU Attributes

Independent Living Offerings A- Range of apts decent s izes in newer bldg; attached cottages

Apartment Product Des ign/Finish B+ Bas ic features/finishes in older bldg; granite, upsca le in newer

Cottage/SF Product Des ign/Finish B Bas ic features/finishes , decent appearance

ILU Attributes Subtotal B+


Contract Options B+ Li fecare plus

Continuum Concept and Del ivery A- No AL faci l i ty but include 1 hour of personal care; dis tinct ALZ, SNF

Dining Program B 1 meal/day, can use in any of 3 venues

Services & Programming B+ Standards included, l imited flexibi l i ty

Contracts & Services Subtotal B+


Sponsor/Financia l Health A- Single enti ty non-profi t, acute care partners origina l ly

Property Reputation A- Wel l establshed, s ince 1989, and s trong reputation

Impact/Intangibles A- Widely cons idered amongst premier properties in market; wait l i s t

Sponsor & Background Subtotal A-


OVERALL GRADE: B+

Overall Summary:

Outlook:

The premier property in the market by a good dis tance. Strong in vi rtua l ly every attribute

category with few s igni ficant weaknesses . Reputation and appeal has s trengthened

whi le competi tors have fa l tered.

Wi l l continue to remain the premier community into the forseeable future.



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CARLETON-WILLARD VILLAGE

Bedford, MA

Primary Strengths: + Attractive campus and setting on 72 acres

+ Full continuum of care in bricks and mortar and excellent health care reputation

+ Strong sponsor, reputation, and financial health

Primary Weaknesses: - Aging product with l imited curb appeal and dated interior spaces

- Common areas and amenities noticeably inferior to market leaders

- Weak independent l iving offerings and finishes in units



Location/Neighborhood B+ In attractive res identia l neighborhood in Bedford

Proximity to Infrastructure B Supermarkets and reta i l just over 1 mi le in Bedford

Access ibi l i ty B+ Along secondary road; just off Route 3

Vis ibi l i ty & Exposure B Modest drive by on secondary road in res identia l , vis ible s ignage

Ingress/Egress B Decent; short access drive

Site/Location Subtotal B

Property Attributes

Setting/Campus Appeal A- 72 acre campus , densely wooded, cluster homes throughout

Exterior/Curb Appeal C Old and dated looking bui ldings of brick and mixed exterior

Interior Appearance B- Turn of century vi l lage look; good condition but bland, dated decor

Health Care Product B- Aging product but good reputation

Property Attributes Subtotal B-


Entrance and Reception C Low cei l ing at entrance, no grand space, reception to L

Dining Venues C Formal dining looks somewhat insti tutional , serves IL and AL mixed

Amenity Offerings B+ Has a l l the essentia ls

Common Area/Amenities Appearance B- Indoor pool s trong, outdoor croquet; fi tness weak, other areas aging

Common Areas Attributes Subtotal C+

ILU Attributes

Independent Living Offerings B- Mostly smal ler and older units ; SF and MF, but SF smal l s ide

Apartment Product Des ign/Finish B- Bas ic and moderate level ; newer (Withrop) more luxury

Cottage/SF Product Des ign/Finish C Aging and somewhat dated, previous generation, very bas ic product

ILU Attributes Subtotal C+


Contract Options C+ Type B w/ HC benefi t; only decl ining plan option

Continuum Concept and Del ivery A Ful l continuum on campus , dis tinct AL, ALZ, SNF; good reputation

Dining Program C+ 1 meal/day; three venues to use in

Services & Programming B Ful l service package; no flexibi l i ty

Contracts & Services Subtotal B-


Sponsor/Financia l Health A- 110+ year service his tory; s trong his toric performance

Property Reputation A- Opened 1982 and fi rs t accredited CCRC in MA 1988; s tays ful l

Impact/Intangibles B Great his tory and reputation, but not modern and fa l l ing behind

Sponsor & Background Subtotal B+


OVERALL GRADE: B-

Overall Summary:

Outlook:

An aging property that i s beginning to s truggle to keep up with the competi tion and

the market, a l though to this point i t has not s igni ficantly adversely impacted

performance. Inferior to competi tion in many areas .

Needs s igni ficant capita l investment soon to remain competi tive. Without action i t

i s l ikely only a matter of time before performance is negatively impacted.



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NEWBURY COURT

Concord, MA

Primary Strengths: + Excellent location, proximate to infrastructure including adjacent Emerson Hospital

+ Attractive interiors including features, finishes, and décor

Primary Weaknesses: - Lack of visibil ity and drive by exposure as property somewhat burried from frontage

- Unremarkable independent l iving product including limited offerings and finishes

- Not much buzz in the market, not considered premier



Location/Neighborhood A In attractive, affluent res identia l neighborhood in Concord

Proximity to Infrastructure A- Emerson Hospita l around corner; downtown Concord <2 mi le drive

Access ibi l i ty B+ Just off of Route 2, near Route 62 and numerous secondary roads

Vis ibi l i ty & Exposure B- On secondary road, modest vis ibi l i ty from roads ide

Ingress/Egress B Direct ingress , no rea l access road


Property Attributes

Setting/Campus Appeal B Not an extens ive campus; dining room viewof river and wooded area

Exterior/Curb Appeal B Newer bui lding attractive (B+) and older bui lding ok (B-)

Interior Appearance A- Interior features wide corridors , upsca le features and architecture

Health Care Product B

Property Attributes Subtotal B


Entrance and Reception B- Warm but not upsca le; does not s tand out; low cei l ings

Dining Venues B+ Attractive main dining,terrace and river view; casual dining room; 2 cafes

Amenity Offerings B Has a l l the bas ics

Common Area/Amenities Appearance B Good therapy, wel lness , and fi tness ; indoor pool smal l

Common Areas Attributes Subtotal B

ILU Attributes

Independent Living Offerings B Al l apts

Apartment Product Des ign/Finish B- Modern floor plans and new; bas ic finishes , low cei l ings ; crown molding

Cottage/SF Product Des ign/Finish *

ILU Attributes Subtotal B-


Contract Options B Type C with 90% refund preferred, a lso 50% and decl ining

Continuum Concept and Del ivery B+ SNF; no AL unit, personal care provided in ILUs

Dining Program B Standard 1 meal/day, can elect for package with no meals or hk

Services & Programming B+ Ful l service package and option for no hk or meals



Sponsor/Financia l Health B Deaconess s ti l l good reputation and known despite financia l i s sues

Property Reputation B- Not much buzz in market ei ther way; somewhat lesser known

Impact/Intangibles B Performing decently, wait l i s t for most units ; 2BRs ava i lable

Sponsor & Background Subtotal B-


OVERALL GRADE: B

Overall Summary:

Outlook:

A perfectly fine property that i s decent, but unremarkable in many ways . No rea l hook

versus i ts competi tion and nothing that s tands out and di fferentiates . A sol id

a l ternative, but borderl ine top tier.

Likely to remain pos i tioned as decent but borderl ine top tier/second tier property in the

market. The repos i tioning of North Hi l l s wi l l leave Newbury Court towards the bottom.



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NORTH HILLS (As-Is)

Needham, MA

Primary Strengths: + Dramatic ingress on long, attractive access road that is unique in marketplace

+ Significant buzz in the market due to its $100M repositioning effort

Primary Weaknesses: - Aging product with l imited curb appeal and mostly dated interior look

- Subpar common areas and amenities relative to marketplace

- Second rate independent l iving product offerings and finishes



Location/Neighborhood B In upper middle class res identia l community near Needham Heights

Proximity to Infrastructure B+ Needham Heights/downtown Needham few minutes drive

Access ibi l i ty B+ Couple mi les from I-95 exchange; Route 135 and Route 9 for east-west

Vis ibi l i ty & Exposure B+ On decently trafficked road, good vis ibi l i ty from roads ide

Ingress/Egress A- Direct ingress ; dramatic, winding access road sets property deep


Property Attributes

Setting/Campus Appeal B Campus on hi l l ; lots of concrete/parking but wooded around bui ldings

Exterior/Curb Appeal C Older brick bui ldings ; large semi-ci rcular IL bui lding mirrored by SNF

Interior Appearance C+ Corridors refurbished around entrance, but mostly older and dated look

Health Care Product C- Aging insti tutional SNF; no AL

Property Attributes Subtotal C+


Entrance and Reception B- Recently refurbished around entrance, dark woods , low cei l ings

Dining Venues C+ Standard aging CCRC dining room, but great view into va l ley of homes

Amenity Offerings B- Has most amenities but spaces on the smal l s ide

Common Area/Amenities Appearance C+ Aging and dated; modest finishes , somewhat drab in areas

Common Areas Attributes Subtotal C+

ILU Attributes

Independent Living Offerings C Al l apts

Apartment Product Des ign/Finish C- Older product and des ign, modest finishes , not competi tive in market


ILU Attributes Subtotal C-


Contract Options B- Type A with 90% refund or 100 month decl ining

Continuum Concept and Del ivery B SNF; no AL unit, personal care provided in ILUs

Dining Program C+ Standard 1 meal/day

Services & Programming B Standard ful l service package, no flexibi l i ty

Contracts & Services Subtotal B-


Sponsor/Financia l Health B Typica l non-profi t s ingle enti ty, decent ba lance sheet and resources

Property Reputation B- Cons idered an option but never been premier

Impact/Intangibles A Investing $100M into property, top class team working on repos i tioning



OVERALL GRADE: B-

Overall Summary:

Outlook:

A property that was s l iding into i rrelevance (and l ikely worse)…and rea l ized i t.

Undertaking mass ive repos i tioning with $100M investment that wi l l completely

transform the campus and pos i tioning.

Would not have been pretty without the investment. Not only investing a s igni ficant

amount of capita l but a lso working with a top team on the repos i tioning effort.



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NORTH HILLS (Post True North/2015)

Needham, MA

Primary Strengths: + By completion of the campus rebirth (2015) will have many strenghts, few weaknesses

+ Will have most modern and new health care product with a full continuum of offerings

+ The investment is significant, and the repositioning is ear and eye catching

Primary Weaknesses: - Dining program lacks flexibil ity

- Stil l will have somewhat l imited independent l iving offerings, but adding some apts



Location/Neighborhood B In upper middle class res identia l community near Needham Heights

Proximity to Infrastructure B+ Needham Heights/downtown Needham few minutes drive

Access ibi l i ty B+ Couple mi les from I-95 exchange; Route 135 and Route 9 for east-west

Vis ibi l i ty & Exposure B+ On decently trafficked road, good vis ibi l i ty from roads ide

Ingress/Egress A- Direct ingress ; dramatic, winding access road sets property deep


Property Attributes

Setting/Campus Appeal B+ Bui lding centra l commons/park as part of repos i tioning

Exterior/Curb Appeal B+ Replacing SNF and bui lding new AL; new 45-unit IL bui lding, etc

Interior Appearance B+ More refurb, common areas rebui l t, and new spaces opening

Health Care Product A- New product wi l l be s tate of the art



Entrance and Reception B Continuing improvements to entrance and wi l l have new bui lding

Dining Venues A- New main dining and bis tro part of expans ion/repos i tioning

Amenity Offerings B Wil l have ful l s late upon completion of expans ion

Common Area/Amenities Appearance B+ New fi tness and wel lness and few other areas


ILU Attributes

Independent Living Offerings B- Al l apts , but adding new product with larger floor plans , etc.

Apartment Product Des ign/Finish A- Impress ive, extens ive renovation to modern interior, luxury finishes


ILU Attributes Subtotal B


Contract Options B- Type A with 90% refund or 100 month decl ining

Continuum Concept and Del ivery A- Wi l l have ful l continuum with new AL and SNF

Dining Program C+ Standard 1 meal/day

Services & Programming B Standard ful l service package, no flexibi l i ty



Sponsor/Financia l Health B Expans ion adds s igni ficant debt but ra ises substantia l new revenues

Property Reputation B+ Pos i tioning to become a premier property in the market

Impact/Intangibles A Investing $100M into property, top class team working on repos i tioning



OVERALL GRADE: B+

Overall Summary:

Outlook:

The repos i tioning effort i s truly a rebirthing, audacious and broad. By the time i t i s

complete North Hi l l s wi l l have addressed vi rtua l ly a l l of i ts exis ting shortcomings and

wi l l have many s trengths and few true weaknesses .

At completion of the repos i tioning/rebirthing, North Hi l l s wi l l become one of the

premier properties in the market, and wi l l clearly surpass The Groves and others .

KIVOV CONSULTING - EMMA.MSRB.org.

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