Really good developers have the ability and the willingness to walk away
Last month while chatting with Imran Javaid, managing director at Capital One Bank, a Senior Housing Forum partner, we got to talking about the differences between experienced and inexperienced developers and operators and what attributes capital providers are looking for in potential clients.
At first it was more or less the basics:
- A track record of successful developments
- Well run communities
- High occupancies
- Good cash flow
- Good reputation in the senior living business sector and in the marketplace
- The ability to build communities on schedule and on budget
- The ability to fill buildings at a rate that meets or exceeds financial projections
The Ability to Walk Away
The one thing I sort of knew but never really thought about was the idea that really good developers have the ability and the willingness to walk away. This means that until the day they start construction, even if there is substantial money into the project, they are willing to walk if they discover something that would put the project or the community in serious jeopardy.
According to Imran, some of the reasons to walk away might include:
- The entitlement and planning process reveals there are hidden costs in the project such as unstable ground, environmental mitigation, hidden fees or expensive traffic mitigation costs.
- An improvement in the economy, and resulting increase in new construction, leads to building costs outpacing potential revenue generation – in other words, there won’t be an acceptable return on the investment.
- Labor costs are too high, or even worse, workers are simply not available at any kind of reasonable costs.
- Other organizations are developing new inventory in your target marketplace at an unsustainable rate.
It is so tough to walk away when you have put tens of thousands of dollars into a project, but the flip side can be a bottomless money pit. Talk to anyone who has been in senior living for any period of time and they can tell you stories about buildings that just plain chew operators up and spit them out millions of dollars later.
Just a few weeks ago I read a story about a community I have been following for decades. It was originally an old remodeled hotel that, while nice, never had a chance of cash flowing. After more than two decades, this building is still doing serious damage to subsequent owners.
It’s More Than That Though
Floundering projects hurt the industry, residents and their families. Perhaps the highest sign of integrity a senior living developer can have is the ability to judge when to walk away from sunk costs.
Have you walked away? Have you wished you walked away? Will you tell?