Cottage Senior Living
The leadership of Cottage Senior Living (CSL) assembled at a strategic
planning retreat away from their headquarters in Huntsville, Alabama to prepare a
plan to move the business “to the next level.” For the president of the company,
Cliff White, the goal of reaching the next level involved growth that focused on
identifying locations for acquisition and development. In addition to White,
attending the retreat were: Sandy Brackin Vice President of Operations, Cheryl
Westlake, Director of Operations; Alan Hangartner, Vice President of Marketing
and Sales; Greg Dykes, Regional Managing Director – South; Selena Jackson,
Regional Managing Director – North; and Holly Mitchell, Senior Accountant.
To begin the retreat, White articulated Cottage Senior Living’s vision as the
“development of housing and service offerings that attract empty nesters who
choose to live an active, vibrant, and engaged lifestyle.” He further explained,
“Our product is differentiated from the traditional markets for independent living
(IL), assisted living (AL), memory care (MC), and skilled nursing facility (SNF)
by focusing on non-subsidized, private-pay customers in tertiary markets.”
White continued, “Moving toward the goals of the retreat, our task today is
to answer three questions: 1) How to grow? 2) Where to grow? and 3) Do we have
the organizational capacity to grow? Answering the ‘how to grow’ question
involves assessing additions to existing capacity, offering services we presently do
not, and expanding our same product into other geographic markets (horizontal
integration). The ‘where to grow’ question involves the consideration of new cities
and perhaps new states. And both questions, how to grow and where to grow,
require us to examine our organizational capacity to grow.”
The Cottage Story
Cottage Senior Living, also known as “the Cottages,” was headquartered in
Huntsville, Alabama. The founders of Cottage Senior Living, Peg Thompson and
Wade White, met in Doylestown, Pennsylvania in 1980 while consulting as turnaround specialists focused on continuing care retirement communities (CCRCs)
and more specifically, the Pine Run Community, a for-profit CCRC. The Pine Run
Community opened in 1976, and was one of the first retirement communities to be
developed and the only one at that time with a full service, 200-bed regional health
center devoted to senior care.1 Thompson and White married and spent the
remainder of the 1980s creating the assisted living service model, something that
did not exist prior to 1980. Thompson and White sought distressed retirement
communities, especially religiously-affiliated CCRCs and spent the mid-1980s
1
through the mid-1990s making deals. Their first venture was a management
contract to operate the “Regency” Community in Huntsville, Alabama. The
Regency Community became the company’s headquarters. During the 1990s,
Cottage Senior Living developed CCRCs in Florence, Alabama; Russellville,
Alabama; Corinth, Mississippi; Lawrenceburg, Tennessee; Mountain Brook,
Alabama; and acquired CCRCs in Hoover, Alabama; Decatur, Alabama; Hartselle,
Alabama; and Huntsville, Alabama (see Exhibit 1 for Cottage Senior Living’s
market area).
Exhibit 1. Cottage Senior Living Service Area
Cliff White, Wade and Peg’s eldest child, returned to the family business in
2009 after completing an MBA at the American University in Washington, DC.
Beginning in 2011, White served as president of Cottage Senior Living, LLC.
Among Cliff White’s accomplishments was the development of The Commons, a
54-unit active adult community in Huntsville, Alabama where he implemented
several information technology (IT) projects to improve operational efficiency and
management reporting. White focused much attention on innovating assisted
living. He was a member of the Urban Land Institute Senior Housing Council and
the American Seniors Housing Association and was a Certified Public Accountant.
The Industry
The long-term care industry was composed of health-service, social service,
and residential service organizations that provided rehabilitative, restorative, and
ongoing skilled nursing care to disabled and elderly patients who required
assistance with daily living.2 The assisted living industry was comprised of a
variety of senior care services; generally divided into two major subcategories: (1)
2
continuing care retirement communities and (2) homes for the elderly. The
primary difference between the two subcategories was the presence of nursing
care. Continuing care retirement communities provided on-site nursing facilities
whereas homes for the elderly did not. Future growth of the industry would be
spurred by 77 million Baby Boomers and the increasing life expectancy of the
elderly population. Approximately 1 million Americans lived in senior care
facilities and the number was expected to double by 2030.
Competition in the assisted living industry was intense. The four largest
providers in the industry (Brookdale Senior Living, Sunrise Senior Living,
Emeritus Corporation, and Atria Senior Living Group) controlled only about 13
percent of the market share. The remaining 87 percent was comprised of a variety
of not-for-profit and for-profit enterprises. The largest source of revenue for
providers came from private payers representing almost two-thirds of total
revenue. Medicaid provided about 10.5 percent, Medicare about 6.2 percent, and
private insurance about 3 percent. The remaining 14 percent came from a variety
of sources including other government programs and assigned Social Security.
Great variety occurred in the demographic make-up of retirement communities.
Approximately 69 percent of residents were female and 31 percent were male. The
typical resident of a senior living community was an 85-year-old female.
Individuals over the age of 85 made up the largest percentage of residents in senior
living facilities.3 More specifically, the industry was comprised of a variety of
facilities differentiated by the intensity of care provided as summarized in Exhibit
2.
Exhibit 2. Senior Living Communities in Order of Increasing Intensity of Care2

3

*
Included means incorporated into the residential fee-for-service structure
Independent living settings were adult communities that usually imposed
age restrictions, offered social activities, provided security, offered access to
transportation services, but did not provide medical services. Although no
uniformly accepted definition of assisted living facilities (ALFs) existed, ALFs
were considered “multi-family properties with personalized support services for
seniors.”4 A relatively new development in the long-term care industry was the
Continuing Care Residential Community or CCRC. CCRCs attracted private-pay
residents5 “of high socioeconomic status, who were independent upon entering the
CCRC.”6 CCRCs offered a variety of services providing a progression of care
from independent living to nursing facilities in a single campus setting focusing on
wellness activities and amenities.7,8,9 The progression of services offered by
CCRCs acknowledged the inevitable decline of independent older adults during
the last few years of life, making CCRCs the “final station” of an older adult’s
life.10 A skilled nursing facility (SNF) was defined by the Social Security Act as
an institution (or a distinct part of an institution) that was primarily engaged in
providing skilled nursing care and related services for residents who required
medical or nursing care, or rehab services for the rehabilitation of injured,
disabled, or sick persons, and was not primarily for the care and treatment of
mental diseases; and had in effect, a transfer agreement with one or more
hospitals. Nursing facilities offered the most intense level of long term care and
were for individuals requiring around the clock care.11 Memory care facilities
catered to the needs of individuals with Alzheimer’s disease or a related disorder
(ADRD)12 and was an emerging development within CCRCs.13 Memory care and
skilled nursing facilities were categorized as Specialty Care Assisted Living
Facilities or SCALFs.
From an industry perspective, Medicaid was the primary payer of long term
care services inasmuch as more than 60 percent of the patients in nursing homes
4
were Medicaid recipients and that Medicaid patients comprised almost 20 percent
of residents in assisted living facilities.14 The Cottages did not market to or admit
Medicaid recipients.
The CSL Regulatory Environment
The Cottages operated three types of facilities – Assisted Living, Memory
Care, and Active Adult as “group” facilities or “congregate” facilities. The word
congregate used as an adjective to describe long-term-care facilities is a synonym
of the word group and thus appeared to refer to the same thing;15 however, state
regulations distinguish between the terms as they applied to health care facilities.
Because the Cottages operated facilities in three states, agencies in each state
regulated the facilities; however, the majority of the Cottages’ facilities were
located in Alabama and as a result the company was profoundly affected by
regulations of the Alabama Department of Public Health (ADPH). ADPH
regulations differentiated between group assisted living and congregate assisted
living facilities. Group assisted living facilities were authorized to care for three to
sixteen adults. Congregate assisted living facilities were authorized to care for 17
or more adults. Regulations addressed staffing requirements and the qualification
of key members of the staff. The key regulatory parameters, shown in Exhibit 3,
indicate that in general, ALFs had fewer staffing requirements than SCALFs and
both ALFs and SCALFs had similar building requirements.
5
Exhibit 3. Key Regulation Parameters within the Cottages Footprint15

6

The CSL Market and Product Lines
Sandy Brackin, Vice President of Operations, distributed information on
occupancy by facility. Exhibit 4 shows the number, type of unit, and occupancy of
each location in the Cottages portfolio of facilities. All units were single
occupancy, meaning each unit housed one resident. Brackin stated, “As you may
note, our occupancy is highest at one of our smaller facilities – Russellville and
lowest at our largest facility – Huntsville.” Brackin continued, “Average
occupancy for five years for all facilities was 87 percent.”
Exhibit 4. The Cottages Portfolio

White offered a brief review of the financing of the Cottages Portfolio.
White noted, “Our properties were financed by a roughly 50/50 relationship of
equity and debt. The debt was in the form of conventional mortgages and HUD
232 loans.”17 Exhibit 5 indicates the distribution of conventional and HUD 232
loans18 used in financing the Cottages facilities. White continued, “The average
original loan per unit was $39,400 with a standard deviation of about $16,000.”
Exhibit 5. Source of Debt Financing by Location

7

Prior to the retreat, White had directed Holly Mitchell to prepare a
simplified income statement for a set of representative properties for the most
recent three years. Mitchell’s work product is shown in Exhibit 6. Mitchell
distributed the income statement and commented, “The representative properties
selected were 1) the average of Florence and Mountain Brook – assisted living
facilities with the same number of units, 2) Russellville -small assisted living, 3)
Hartselle – small assisted living plus memory care, and 4) Decatur – assisted
living.” Mitchell continued, “A typical Cottages property produces average
operating revenue per occupied unit of $32,848 per year and operating expenses
average $26,181 producing an operating margin of about $7,000 per occupied unit
per year. The fixed expenses per occupied unit include depreciation, amortization,
and interest expense.”
Exhibit 6. Income Statement per Occupied Apartment

EBITDA (earnings before interest, taxes, depreciation, and amortization)
was a general estimate of cash flow.19 Mitchell distributed a schedule that showed
EBITDA generated per occupied unit (shown in Exhibit 7). She added, “Average
annual cash flow per occupied unit was $6,298 with a range from approximately
$4,000 per unit to almost $9,700.” She reminded the attendees that taxes were not
included in the calculation of EBITDA since the Cottages was organized as a
Limited Liability Company or LLC, and concluded, “LLCs are pass-through
8
entities for tax purposes that do not incur income tax liabilities as an enterprise,
rather tax liabilities are passed to the enterprise’s owners in proportion to their
ownership, similar to partnerships and Subchapter S corporations.”20
Exhibit 7. EBITDA per Occupied Apartment

Legend:
FLO/MBK = facilities in Florence, AL and Mountain Brook, AL
RCL = facility in Russellville, AL
HAR = facility in Hartselle, AL
DEC = facility in Decatur, AL
ALL = all CSL facilities
The CSL Operations and Staffing
Model
As White continued to facilitate the retreat, he recognized Brackin who
explained, “Concerning organizational capacity, one of our strengths is that the
Cottages operates its facilities in a franchise type arrangement – each facility is
established as a legal entity for purposes of owning real estate; then we as the
parent company – the Cottages – provide branding, a standardized staffing plan,
and a standardized operating plan.21 Each facility pays the Cottages a management
fee that is five percent of gross revenue. Each facility’s staff members are
employees of the Cottage’s and we administer payroll and employee benefits. I
believe we certainly should continue this model since it has served the company
well since its inception.”
The staffing model specified the credential and experience requirements for
facility administrators. For ALFs, an administrator was required to have a high
school diploma and relevant work experience.22 The staffing model implemented
the regulatory framework (presented previously in Exhibit 3). For example, a
Licensed Practical Nurse (LPN) or Registered Nurse (RN) was required as a staff
member for the administration of medications and an RN was required to perform
intake assessments and monthly assessments in all SCALF facilities. The standard
procedures model might be modified based on the physical plant differences
9
among facilities. For example, if a facility had three buildings, then the one foodservice staff member transported food between buildings rather than simply
plating food in a single facility.
Mitchell distributed a handout (see Exhibit 8) that showed the overall
staffing plan for CSL as well as the functions and the number of full-time
equivalents for each function. Mitchell noted, “For facilities that did not show the
function of housekeeping, residential services personnel are assigned the tasks.”
10
Exhibit 8. CSL Management Structure by Location

11

*
For headquarters – Vice President and above, for facilities, Managing Director and above
**
The president oversees all information technology functions
12
Developing a Growth Plan
White distributed a document summarizing the market selection criteria
that had proven successful for the company.
CSL’s desired market characteristics included:
Strong demographics – age and income qualified customers (market
penetration in the 5 to 10 percent range) and population growth
exceeding 2 percent year-over-year;
Towns and communities undergoing re-urbanization (“main street
living”) – communities with re-urbanization plans that were being
executed; and
Reasonably priced land near the main street area.
He then presented a single PowerPoint slide showing a regional map with
two circles (see Exhibit 9). White narrated, “The inner circle represents the market
area for CSL as a circle centered on our headquarters in Huntsville with a radius
that includes all of the CSL facilities, the most distant being Montgomery. What if
we extended the radius of the circle by about fifty miles? Our reach would be to
five states – Alabama, Georgia, South Carolina, North Carolina, Tennessee,
Kentucky, and Mississippi.”
Alan Hangartner, CSL VP of Marketing and Sales, “Cliff, as I look at the
map, something strikes me as interesting. . . Look at all the college towns in the
larger circle – Auburn, Clemson, Knoxville, Nashville, Starkville, and Oxford.”
He continued, “I recall reading that college towns are attractive to retirees.”23
Several nodded their heads in agreement.
Selena Jackson, Regional Managing Director – North, reacting to
Hangartner’s comment stated, “Alan, college towns would be interesting ‘where to
grow’ places, but do they meet all three elements of our market characteristics: age
and income qualified customers, main-street living, and reasonably priced land
near the main street area? College towns may meet the first two requirements, but
I am concerned about the third – the availability of reasonably priced land.”
Hangartner responded, “You may be right, but we should consider towns near
these college towns. An example is Opelika, Alabama near Auburn, Alabama,
home of Auburn University.”
“That wouldn’t work for Clemson!” laughed Greg Dykes, Regional
Managing Director – South. He continued, “Plus, I think that South Carolina and
especially North Carolina have significant CON (certificate of need) laws. North
Carolina is quite willing to add more Assisted Living, Memory Care, and SNF
facilities in rural areas, but the metro areas – Charlotte, Raleigh, Greensboro,
13
Durham, Winston Salem and Fayetteville all with more than 200,000 in population
– are challenging.”
The group began identifying potential growth strategies – horizontal
integration, vertical integration, product expansion such as more specialty care
offerings, new payers, and geographic expansion. They knew they had to keep in
mind the regulatory barriers of entering new states, the demographics of potential
new cities, and important considerations such as company’s demographics – size,
personnel capabilities, span of management, geographic limitations; and
competitive variables including employment markets, potential competitors, and
pricing.
White replied, “As we consider the possibilities, we need to focus on the
three questions:
How to grow?
Where to grow?
Do we have the organizational capacity to grow?”
He continued, “Let’s break for lunch and when we reconvene, we can each
identify a strategy that we believe will best enable us to grow the organization.”
14
Exhibit 9. Examining SCL’s Service Area*
*Current Cottage locations are in red.
References
1
About Pine Run. retrieved from: http://pinerun.org/independent-living/ )
2
Warren Greenberg, “Long-Term Care Industry,” The Health Care Marketplace (New York:
Springer, 1998), pp. 91-102.
3
J. Ortiz, Assisted Living Facilities Business Report. U.S. Small Business Administration, April,
(2014). Small Business Market Research Reports, available at:
http://www.sbdcnet.org/small-business-research-reports/assisted-living-facilities .
4
Lynn David and Tim Wang, “The US Senior Housing Opportunity: Investment Strategies,”
Real Estate Issues 33, no. 2 (2008), pp. 33-51.
5
Michael D. Barnett, “Future Expectations among Older Adults in Independent Living
Retirement Communities” (University of Houston, 2010).
6
I. Doron, and E. Lightman, “Assisted-living for Older People in Israel: Market Control or
Government Regulation?” Aging and Society 23, no. 6 (2003), pp. 779-795.
15
7
Wassum, Ryan Michael, “Baby Boomer Living: Designing a Modern Continuing Care
Retirement Community,” Master’s Thesis, California Polytechnic State University, San
Luis Obispo, CA, (2013), available at: http://digitalcommons.calpoly.edu/theses/1070/ .
8
J. C. Hays, A. N. Galanos, T. A. Palmer, D. R. McQuoid, and E. P. Flint, “Preference for Place
of Death in a Continuing Care Retirement Community,” The Gerontologist 41, no. 1
(2001), pp. 123-128.
9
A. K. Smith, L. C. Walter, Y. Miao, W. J. Boscardin, and K. E. Covinsky, “Disability During
the Last Two Years of Life,” JAMA Internal Medicine 173, no. 16 (2013), pp. 1506-1513.
10
Services, C. O. M. M. “Skilled Nursing Facility” (SNF) Definition, 2017. Retrieved from
https://www.cms.gov/Outreach-and-Education/Medicare-Learning-NetworkMLN/MLNMattersArticles/downloads/SE0745.pdf
11
L. Ayalon, and O. Greed, “A Typology of New Residents’ Adjustment to Continuing Care
Retirement Communities,” The Gerontologist 56, no. 4 (2015), pp. 641-650.
12
S. G. Kelsey, S. B. Laditka, and J. N. Laditka, “Dementia and Transitioning from Assisted
Living to Memory Care Units: Perspectives of Administrators in Three Facility Type,”
The Gerontologist 50, no. 2 (2010), pp. 192-203.
13
J. Adler, Memory Care Facilities Fill a Growing Need. Chicago Tribune, (February 1, 2013).
Retrieved from http://articles.chicagotribune.com/2013-02-01/classified/ct-mre-0203-
memory-care-20130201_1_alzheimer-memory-loss-dementia .
14
https://www.ahcancal.org/advocacy/State LongTermPostAcute/Pages/default.
aspx#assistedliving
15
Congregate. In Merriam-Wwebster.com. Retrieved from https://www.merriamwebster.com/dictionary/congregate .
16
Adapted from Alabama Rules of Alabama State Board of Health Alabama Department of
Public Health Assisted Living Facilities (Ala. Code Chapter 420-5-4).
17
The Federal Housing Administration (FHA), part of the US Department of Housing and Urban
Development, provides mortgage insurance on loans made by FHA-approved lenders in
the US and its territories. The Section 232 loan program is administered by the Office of
Residential Care Facilities. The Section 232 loan program is known as HUD 232, “help
finance nursing home, assisted living facilities, and board and care facilities.” HUD 232
loans are offered only by FHA-approved lenders and the loans are insured or
underwritten by the US government. FHA Insurance and Section 232. (n.d.). Retrieved
March 27, 2017, from
https://portal.hud.gov/hudportal/HUD?src=%2Ffederal_housing_administration%2Fhealt
hcare_facilities%2Fresidential_care%2Ffha_insurance .
18
Multifamily Accelerated Processing (MAP) Approved Lenders. (n.d.) Retrieved March 27,
2017 from https://portal.hud.gov/hudportal/documents/huddoc?id=aprvlend.pdf .
19
B. Hamilton, “EBITDA: Still Crucial to Credit Analysis,” Commercial Lending Review 18, no.
5 (2003), pp. 47-48.
16
20
J. R. Macey, “The Limited Liability Company: Lessons for Corporate Law,” Wash. ULQ 73
(1995), p. 433.
21
S. W. Norton, “Franchising, Brand Name Capital, and the Entrepreneurial Capacity Problem,”
Strategic Management Journal 9, S1 (1988), pp. 105-114.
22
Alabama Board of Examiners of Assisted Living Administrators, Qualifications, available at:
http://www.boeala.alabama.gov/qualifications.aspx
23
T. Lewin, “Elderly Returning to Campus, This Time for Life as Retiree,” The New York Times
(February 19, 1990) retrieved from: http://www.nytimes.com/1990/02/19/us/elderlyreturning-to-campus-this-time-for-life-as-retirees.html
17 Cottage Senior Living
The leadership of Cottage Senior Living (CSL) assembled at a strategic
planning retreat away from their headquarters in Huntsville, Alabama to prepare a
plan to move the business “to the next level.” For the president of the company,
Cliff White, the goal of reaching the next level involved growth that focused on
identifying locations for acquisition and development. In addition to White,
attending the retreat were: Sandy Brackin Vice President of Operations, Cheryl
Westlake, Director of Operations; Alan Hangartner, Vice President of Marketing
and Sales; Greg Dykes, Regional Managing Director – South; Selena Jackson,
Regional Managing Director – North; and Holly Mitchell, Senior Accountant.
To begin the retreat, White articulated Cottage Senior Living’s vision as the
“development of housing and service offerings that attract empty nesters who
choose to live an active, vibrant, and engaged lifestyle.” He further explained,
“Our product is differentiated from the traditional markets for independent living
(IL), assisted living (AL), memory care (MC), and skilled nursing facility (SNF)
by focusing on non-subsidized, private-pay customers in tertiary markets.”
White continued, “Moving toward the goals of the retreat, our task today is
to answer three questions: 1) How to grow? 2) Where to grow? and 3) Do we have
the organizational capacity to grow? Answering the ‘how to grow’ question
involves assessing additions to existing capacity, offering services we presently do
not, and expanding our same product into other geographic markets (horizontal
integration). The ‘where to grow’ question involves the consideration of new cities
and perhaps new states. And both questions, how to grow and where to grow,
require us to examine our organizational capacity to grow.”
The Cottage Story
Cottage Senior Living, also known as “the Cottages,” was headquartered in
Huntsville, Alabama. The founders of Cottage Senior Living, Peg Thompson and
Wade White, met in Doylestown, Pennsylvania in 1980 while consulting as turnaround specialists focused on continuing care retirement communities (CCRCs)
and more specifically, the Pine Run Community, a for-profit CCRC. The Pine Run
Community opened in 1976, and was one of the first retirement communities to be
developed and the only one at that time with a full service, 200-bed regional health
center devoted to senior care.1 Thompson and White married and spent the
remainder of the 1980s creating the assisted living service model, something that
did not exist prior to 1980. Thompson and White sought distressed retirement
communities, especially religiously-affiliated CCRCs and spent the mid-1980s
1
through the mid-1990s making deals. Their first venture was a management
contract to operate the “Regency” Community in Huntsville, Alabama. The
Regency Community became the company’s headquarters. During the 1990s,
Cottage Senior Living developed CCRCs in Florence, Alabama; Russellville,
Alabama; Corinth, Mississippi; Lawrenceburg, Tennessee; Mountain Brook,
Alabama; and acquired CCRCs in Hoover, Alabama; Decatur, Alabama; Hartselle,
Alabama; and Huntsville, Alabama (see Exhibit 1 for Cottage Senior Living’s
market area).
Exhibit 1. Cottage Senior Living Service Area
Cliff White, Wade and Peg’s eldest child, returned to the family business in
2009 after completing an MBA at the American University in Washington, DC.
Beginning in 2011, White served as president of Cottage Senior Living, LLC.
Among Cliff White’s accomplishments was the development of The Commons, a
54-unit active adult community in Huntsville, Alabama where he implemented
several information technology (IT) projects to improve operational efficiency and
management reporting. White focused much attention on innovating assisted
living. He was a member of the Urban Land Institute Senior Housing Council and
the American Seniors Housing Association and was a Certified Public Accountant.
The Industry
The long-term care industry was composed of health-service, social service,
and residential service organizations that provided rehabilitative, restorative, and
ongoing skilled nursing care to disabled and elderly patients who required
assistance with daily living.2 The assisted living industry was comprised of a
variety of senior care services; generally divided into two major subcategories: (1)
2
continuing care retirement communities and (2) homes for the elderly. The
primary difference between the two subcategories was the presence of nursing
care. Continuing care retirement communities provided on-site nursing facilities
whereas homes for the elderly did not. Future growth of the industry would be
spurred by 77 million Baby Boomers and the increasing life expectancy of the
elderly population. Approximately 1 million Americans lived in senior care
facilities and the number was expected to double by 2030.
Competition in the assisted living industry was intense. The four largest
providers in the industry (Brookdale Senior Living, Sunrise Senior Living,
Emeritus Corporation, and Atria Senior Living Group) controlled only about 13
percent of the market share. The remaining 87 percent was comprised of a variety
of not-for-profit and for-profit enterprises. The largest source of revenue for
providers came from private payers representing almost two-thirds of total
revenue. Medicaid provided about 10.5 percent, Medicare about 6.2 percent, and
private insurance about 3 percent. The remaining 14 percent came from a variety
of sources including other government programs and assigned Social Security.
Great variety occurred in the demographic make-up of retirement communities.
Approximately 69 percent of residents were female and 31 percent were male. The
typical resident of a senior living community was an 85-year-old female.
Individuals over the age of 85 made up the largest percentage of residents in senior
living facilities.3 More specifically, the industry was comprised of a variety of
facilities differentiated by the intensity of care provided as summarized in Exhibit
2.
Exhibit 2. Senior Living Communities in Order of Increasing Intensity of Care2

3

*
Included means incorporated into the residential fee-for-service structure
Independent living settings were adult communities that usually imposed
age restrictions, offered social activities, provided security, offered access to
transportation services, but did not provide medical services. Although no
uniformly accepted definition of assisted living facilities (ALFs) existed, ALFs
were considered “multi-family properties with personalized support services for
seniors.”4 A relatively new development in the long-term care industry was the
Continuing Care Residential Community or CCRC. CCRCs attracted private-pay
residents5 “of high socioeconomic status, who were independent upon entering the
CCRC.”6 CCRCs offered a variety of services providing a progression of care
from independent living to nursing facilities in a single campus setting focusing on
wellness activities and amenities.7,8,9 The progression of services offered by
CCRCs acknowledged the inevitable decline of independent older adults during
the last few years of life, making CCRCs the “final station” of an older adult’s
life.10 A skilled nursing facility (SNF) was defined by the Social Security Act as
an institution (or a distinct part of an institution) that was primarily engaged in
providing skilled nursing care and related services for residents who required
medical or nursing care, or rehab services for the rehabilitation of injured,
disabled, or sick persons, and was not primarily for the care and treatment of
mental diseases; and had in effect, a transfer agreement with one or more
hospitals. Nursing facilities offered the most intense level of long term care and
were for individuals requiring around the clock care.11 Memory care facilities
catered to the needs of individuals with Alzheimer’s disease or a related disorder
(ADRD)12 and was an emerging development within CCRCs.13 Memory care and
skilled nursing facilities were categorized as Specialty Care Assisted Living
Facilities or SCALFs.
From an industry perspective, Medicaid was the primary payer of long term
care services inasmuch as more than 60 percent of the patients in nursing homes
4
were Medicaid recipients and that Medicaid patients comprised almost 20 percent
of residents in assisted living facilities.14 The Cottages did not market to or admit
Medicaid recipients.
The CSL Regulatory Environment
The Cottages operated three types of facilities – Assisted Living, Memory
Care, and Active Adult as “group” facilities or “congregate” facilities. The word
congregate used as an adjective to describe long-term-care facilities is a synonym
of the word group and thus appeared to refer to the same thing;15 however, state
regulations distinguish between the terms as they applied to health care facilities.
Because the Cottages operated facilities in three states, agencies in each state
regulated the facilities; however, the majority of the Cottages’ facilities were
located in Alabama and as a result the company was profoundly affected by
regulations of the Alabama Department of Public Health (ADPH). ADPH
regulations differentiated between group assisted living and congregate assisted
living facilities. Group assisted living facilities were authorized to care for three to
sixteen adults. Congregate assisted living facilities were authorized to care for 17
or more adults. Regulations addressed staffing requirements and the qualification
of key members of the staff. The key regulatory parameters, shown in Exhibit 3,
indicate that in general, ALFs had fewer staffing requirements than SCALFs and
both ALFs and SCALFs had similar building requirements.
5
Exhibit 3. Key Regulation Parameters within the Cottages Footprint15

6

The CSL Market and Product Lines
Sandy Brackin, Vice President of Operations, distributed information on
occupancy by facility. Exhibit 4 shows the number, type of unit, and occupancy of
each location in the Cottages portfolio of facilities. All units were single
occupancy, meaning each unit housed one resident. Brackin stated, “As you may
note, our occupancy is highest at one of our smaller facilities – Russellville and
lowest at our largest facility – Huntsville.” Brackin continued, “Average
occupancy for five years for all facilities was 87 percent.”
Exhibit 4. The Cottages Portfolio

White offered a brief review of the financing of the Cottages Portfolio.
White noted, “Our properties were financed by a roughly 50/50 relationship of
equity and debt. The debt was in the form of conventional mortgages and HUD
232 loans.”17 Exhibit 5 indicates the distribution of conventional and HUD 232
loans18 used in financing the Cottages facilities. White continued, “The average
original loan per unit was $39,400 with a standard deviation of about $16,000.”
Exhibit 5. Source of Debt Financing by Location

7

Prior to the retreat, White had directed Holly Mitchell to prepare a
simplified income statement for a set of representative properties for the most
recent three years. Mitchell’s work product is shown in Exhibit 6. Mitchell
distributed the income statement and commented, “The representative properties
selected were 1) the average of Florence and Mountain Brook – assisted living
facilities with the same number of units, 2) Russellville -small assisted living, 3)
Hartselle – small assisted living plus memory care, and 4) Decatur – assisted
living.” Mitchell continued, “A typical Cottages property produces average
operating revenue per occupied unit of $32,848 per year and operating expenses
average $26,181 producing an operating margin of about $7,000 per occupied unit
per year. The fixed expenses per occupied unit include depreciation, amortization,
and interest expense.”
Exhibit 6. Income Statement per Occupied Apartment

EBITDA (earnings before interest, taxes, depreciation, and amortization)
was a general estimate of cash flow.19 Mitchell distributed a schedule that showed
EBITDA generated per occupied unit (shown in Exhibit 7). She added, “Average
annual cash flow per occupied unit was $6,298 with a range from approximately
$4,000 per unit to almost $9,700.” She reminded the attendees that taxes were not
included in the calculation of EBITDA since the Cottages was organized as a
Limited Liability Company or LLC, and concluded, “LLCs are pass-through
8
entities for tax purposes that do not incur income tax liabilities as an enterprise,
rather tax liabilities are passed to the enterprise’s owners in proportion to their
ownership, similar to partnerships and Subchapter S corporations.”20
Exhibit 7. EBITDA per Occupied Apartment

Legend:
FLO/MBK = facilities in Florence, AL and Mountain Brook, AL
RCL = facility in Russellville, AL
HAR = facility in Hartselle, AL
DEC = facility in Decatur, AL
ALL = all CSL facilities
The CSL Operations and Staffing
Model
As White continued to facilitate the retreat, he recognized Brackin who
explained, “Concerning organizational capacity, one of our strengths is that the
Cottages operates its facilities in a franchise type arrangement – each facility is
established as a legal entity for purposes of owning real estate; then we as the
parent company – the Cottages – provide branding, a standardized staffing plan,
and a standardized operating plan.21 Each facility pays the Cottages a management
fee that is five percent of gross revenue. Each facility’s staff members are
employees of the Cottage’s and we administer payroll and employee benefits. I
believe we certainly should continue this model since it has served the company
well since its inception.”
The staffing model specified the credential and experience requirements for
facility administrators. For ALFs, an administrator was required to have a high
school diploma and relevant work experience.22 The staffing model implemented
the regulatory framework (presented previously in Exhibit 3). For example, a
Licensed Practical Nurse (LPN) or Registered Nurse (RN) was required as a staff
member for the administration of medications and an RN was required to perform
intake assessments and monthly assessments in all SCALF facilities. The standard
procedures model might be modified based on the physical plant differences
9
among facilities. For example, if a facility had three buildings, then the one foodservice staff member transported food between buildings rather than simply
plating food in a single facility.
Mitchell distributed a handout (see Exhibit 8) that showed the overall
staffing plan for CSL as well as the functions and the number of full-time
equivalents for each function. Mitchell noted, “For facilities that did not show the
function of housekeeping, residential services personnel are assigned the tasks.”
10
Exhibit 8. CSL Management Structure by Location

11

*
For headquarters – Vice President and above, for facilities, Managing Director and above
**
The president oversees all information technology functions
12
Developing a Growth Plan
White distributed a document summarizing the market selection criteria
that had proven successful for the company.
CSL’s desired market characteristics included:
Strong demographics – age and income qualified customers (market
penetration in the 5 to 10 percent range) and population growth
exceeding 2 percent year-over-year;
Towns and communities undergoing re-urbanization (“main street
living”) – communities with re-urbanization plans that were being
executed; and
Reasonably priced land near the main street area.
He then presented a single PowerPoint slide showing a regional map with
two circles (see Exhibit 9). White narrated, “The inner circle represents the market
area for CSL as a circle centered on our headquarters in Huntsville with a radius
that includes all of the CSL facilities, the most distant being Montgomery. What if
we extended the radius of the circle by about fifty miles? Our reach would be to
five states – Alabama, Georgia, South Carolina, North Carolina, Tennessee,
Kentucky, and Mississippi.”
Alan Hangartner, CSL VP of Marketing and Sales, “Cliff, as I look at the
map, something strikes me as interesting. . . Look at all the college towns in the
larger circle – Auburn, Clemson, Knoxville, Nashville, Starkville, and Oxford.”
He continued, “I recall reading that college towns are attractive to retirees.”23
Several nodded their heads in agreement.
Selena Jackson, Regional Managing Director – North, reacting to
Hangartner’s comment stated, “Alan, college towns would be interesting ‘where to
grow’ places, but do they meet all three elements of our market characteristics: age
and income qualified customers, main-street living, and reasonably priced land
near the main street area? College towns may meet the first two requirements, but
I am concerned about the third – the availability of reasonably priced land.”
Hangartner responded, “You may be right, but we should consider towns near
these college towns. An example is Opelika, Alabama near Auburn, Alabama,
home of Auburn University.”
“That wouldn’t work for Clemson!” laughed Greg Dykes, Regional
Managing Director – South. He continued, “Plus, I think that South Carolina and
especially North Carolina have significant CON (certificate of need) laws. North
Carolina is quite willing to add more Assisted Living, Memory Care, and SNF
facilities in rural areas, but the metro areas – Charlotte, Raleigh, Greensboro,
13
Durham, Winston Salem and Fayetteville all with more than 200,000 in population
– are challenging.”
The group began identifying potential growth strategies – horizontal
integration, vertical integration, product expansion such as more specialty care
offerings, new payers, and geographic expansion. They knew they had to keep in
mind the regulatory barriers of entering new states, the demographics of potential
new cities, and important considerations such as company’s demographics – size,
personnel capabilities, span of management, geographic limitations; and
competitive variables including employment markets, potential competitors, and
pricing.
White replied, “As we consider the possibilities, we need to focus on the
three questions:
How to grow?
Where to grow?
Do we have the organizational capacity to grow?”
He continued, “Let’s break for lunch and when we reconvene, we can each
identify a strategy that we believe will best enable us to grow the organization.”
14
Exhibit 9. Examining SCL’s Service Area*
*Current Cottage locations are in red.
References
1
About Pine Run. retrieved from: http://pinerun.org/independent-living/ )
2
Warren Greenberg, “Long-Term Care Industry,” The Health Care Marketplace (New York:
Springer, 1998), pp. 91-102.
3
J. Ortiz, Assisted Living Facilities Business Report. U.S. Small Business Administration, April,
(2014). Small Business Market Research Reports, available at:
http://www.sbdcnet.org/small-business-research-reports/assisted-living-facilities .
4
Lynn David and Tim Wang, “The US Senior Housing Opportunity: Investment Strategies,”
Real Estate Issues 33, no. 2 (2008), pp. 33-51.
5
Michael D. Barnett, “Future Expectations among Older Adults in Independent Living
Retirement Communities” (University of Houston, 2010).
6
I. Doron, and E. Lightman, “Assisted-living for Older People in Israel: Market Control or
Government Regulation?” Aging and Society 23, no. 6 (2003), pp. 779-795.
15
7
Wassum, Ryan Michael, “Baby Boomer Living: Designing a Modern Continuing Care
Retirement Community,” Master’s Thesis, California Polytechnic State University, San
Luis Obispo, CA, (2013), available at: http://digitalcommons.calpoly.edu/theses/1070/ .
8
J. C. Hays, A. N. Galanos, T. A. Palmer, D. R. McQuoid, and E. P. Flint, “Preference for Place
of Death in a Continuing Care Retirement Community,” The Gerontologist 41, no. 1
(2001), pp. 123-128.
9
A. K. Smith, L. C. Walter, Y. Miao, W. J. Boscardin, and K. E. Covinsky, “Disability During
the Last Two Years of Life,” JAMA Internal Medicine 173, no. 16 (2013), pp. 1506-1513.
10
Services, C. O. M. M. “Skilled Nursing Facility” (SNF) Definition, 2017. Retrieved from
https://www.cms.gov/Outreach-and-Education/Medicare-Learning-NetworkMLN/MLNMattersArticles/downloads/SE0745.pdf
11
L. Ayalon, and O. Greed, “A Typology of New Residents’ Adjustment to Continuing Care
Retirement Communities,” The Gerontologist 56, no. 4 (2015), pp. 641-650.
12
S. G. Kelsey, S. B. Laditka, and J. N. Laditka, “Dementia and Transitioning from Assisted
Living to Memory Care Units: Perspectives of Administrators in Three Facility Type,”
The Gerontologist 50, no. 2 (2010), pp. 192-203.
13
J. Adler, Memory Care Facilities Fill a Growing Need. Chicago Tribune, (February 1, 2013).
Retrieved from http://articles.chicagotribune.com/2013-02-01/classified/ct-mre-0203-
memory-care-20130201_1_alzheimer-memory-loss-dementia .
14
https://www.ahcancal.org/advocacy/State LongTermPostAcute/Pages/default.
aspx#assistedliving
15
Congregate. In Merriam-Wwebster.com. Retrieved from https://www.merriamwebster.com/dictionary/congregate .
16
Adapted from Alabama Rules of Alabama State Board of Health Alabama Department of
Public Health Assisted Living Facilities (Ala. Code Chapter 420-5-4).
17
The Federal Housing Administration (FHA), part of the US Department of Housing and Urban
Development, provides mortgage insurance on loans made by FHA-approved lenders in
the US and its territories. The Section 232 loan program is administered by the Office of
Residential Care Facilities. The Section 232 loan program is known as HUD 232, “help
finance nursing home, assisted living facilities, and board and care facilities.” HUD 232
loans are offered only by FHA-approved lenders and the loans are insured or
underwritten by the US government. FHA Insurance and Section 232. (n.d.). Retrieved
March 27, 2017, from
https://portal.hud.gov/hudportal/HUD?src=%2Ffederal_housing_administration%2Fhealt
hcare_facilities%2Fresidential_care%2Ffha_insurance .
18
Multifamily Accelerated Processing (MAP) Approved Lenders. (n.d.) Retrieved March 27,
2017 from https://portal.hud.gov/hudportal/documents/huddoc?id=aprvlend.pdf .
19
B. Hamilton, “EBITDA: Still Crucial to Credit Analysis,” Commercial Lending Review 18, no.
5 (2003), pp. 47-48.
16
20
J. R. Macey, “The Limited Liability Company: Lessons for Corporate Law,” Wash. ULQ 73
(1995), p. 433.
21
S. W. Norton, “Franchising, Brand Name Capital, and the Entrepreneurial Capacity Problem,”
Strategic Management Journal 9, S1 (1988), pp. 105-114.
22
Alabama Board of Examiners of Assisted Living Administrators, Qualifications, available at:
http://www.boeala.alabama.gov/qualifications.aspx
23
T. Lewin, “Elderly Returning to Campus, This Time for Life as Retiree,” The New York Times
(February 19, 1990) retrieved from: http://www.nytimes.com/1990/02/19/us/elderlyreturning-to-campus-this-time-for-life-as-retirees.html
17