Assessment of Budget for Assisted Living Facility - Assignment Example

? Assessment of Budget for Assisted Living Facility Introduction In making the decision to invest it is very important that a budget as well as a cash flow projection be prepared to determine whether the business will be profitable as well as to determine when additional cash inflows may be required. Without this kind of information the business cannot survive as it will need to know what to expect in advance and do what is necessary to ensure that operations are conducted smoothly. Assessing the Reasonability of the Ten (10) Year Projections The license fee for the facility was not taken into consideration in the budget. The license fee for the facility proposed is $200 plus $50 for each bed up to a maximum of $1,500 upon application for one year and $100 plus $50 for each bed for renewal each year to a maximum of $750 (Texas Department of Aging and Disability Services (n.d.). Therefore, a total of $1,500 would be paid in the first year and $750 each year thereafter until an adjustment is made. The revenue per unit/person is in keeping with rates obtained from Genworth Cost of Care Survey for 2013 which suggest that the minimum, median, and maximum monthly rates are $933, $3,710 and $8,445 respectively for a one bedroom single occupancy assisted living facility in California (Genworth 2013). The information in Table 1 in the Appendix indicates that these rates would result in minimum, median and maximum income per person per annum of $$11,196, $44520 and $101,340 respectively. Table 1 also indicates that 53 single occupancy units would be available for assisted living over the ten year period. If all units were occupied during the year the total annual revenue from this would be $593,388 at its lowest, $2,359,560 at the median level and $5,371,020 – the maximum per annum. An occupancy level of 93% is assumed for year 2 to year 10 for assisted living. However, this rate appears a little over-ambitious since average rates for 2010 was approximately 87.5% (allassistedlivng.com 2010). Since this is an average rate, a more cautious figure would be around 75% which would result in a projected income of $1,769,670 at the median rate. This is more than the income projected for year 2. However, the rate used by the company for assisted living is higher than that offered by another service provider in the area that offers the same service. This could lead to less than expected occupancy levels for the company and thus lead to a significant reduction in projected revenues (See Table 2 in the Appendix for income at various occupancy levels). In terms of wages, the employees of the facility should not be paid lower than Federal of State minimum wage which is $7.25 and $8 respectively (Minimum-Wage.org 2013). The lowest wage rate to be paid by Blueberry Acres LLC is $7.25. Both the Federal and State Minimum wage are expected to increase to $9 by 2014 (Hicken 2013) – a 24% increase in the Federal minimum wage rate projected. In 2016 the State minimum wage is expected to increase to $10 and it is also hoped that the Federal rate will be tied to the inflation rate (Hicken 2013). The interest rate on the construction loan appears to be too high at 7.5%. The prime lending rate is currently 3.25 and is projected to be the same at the end of March 2014 (Financial Forecast Center 2013). The 7.5% projected is more than twice the prime lending rate. Additionally, the projected length of time for the loan may not be allowed to exceed 20 years. This would change the annual payments to $488,746 representing interest payments of $410,787 and principal repayments of $78,051 in the first 12 months. With the exception of vehicle costs and expenses which are assumed to remain constant, the depreciation rate and other expenses appear reasonable. Vehicle costs should increase by at least 3% - the level of inflation anticipated each year. The budget needs to be adjusted for this error. Assessing the reasonability of the construction contract The assisted care facility is a profit making venture and should be considered as such. The LLC should manage the facility instead of leaving it to someone else. Additionally, the company formed to undertake the project should be separate from the company contracted to construct the building and the contractor should report to the manager of that company. The management of employees should fall under the person who manages the facility. Therefore, the manager should also be employed by the LLC to operate the Facility with the lower level employees directly under his leadership. The contract proposes a delay in the project until the last investor has paid his $100,000. This is ridiculous because all monies collected will not be used at the start of the construction. The non receipt of $100,000 should not be allowed to delay the project. Construction is projected to take 15 months and it is important to start as quickly as possible because any delay will increase the cost of the project. The value of money declines as time passes due to inflation and this is estimated at 3%. Therefore, it would cost 3% more for each year that construction is delayed. However, a timeframe should be set for receipt of contributions from investors. The permit to construct building should be sought after the sale agreement is signed. The environmental reports should be requested soon after. The loan may not be agreed until construction permit is received. This is likely to be a prerequisite for receiving the loan. Assessing the Rate of Return The IRR of the project is calculated as 1.84% in the budget. However, US 10 year Government bond rates are currently at 2.5% (Bloomberg 2013).With the expected increase in clients requiring rooms in assisted living facility the income of Company is likely to increase. The General Contractor and Subcontractor While it may be acceptable for one of the investor to be the general contractor, it is unadvisable for the general manager to be the general contractor as the roles will conflict. The general contractor needs to manage construction activity while the general manager oversees operations of the business and ensure that the general contractor is performing in accordance with the requirements. The decision relating to the hiring of a contractor should be based competitive tendering process. The contractor chosen should have experience building this type of facility. There is nothing wrong with one of the investor’s being the HVAC subcontractor once the choice is based on a competitive tendering process and the subcontractor has the necessary experience. Insurance The LLC should carry liability insurance that covers death or disablement at the facility. Assisted Living Facilities operating in the State of California are not required to have liability insurance (GoPetition 2013). However, there have been calls for liability insurance to be made a requirement for all residential care facilities for elderly people. The company is proactive and has seen it fit to take this into consideration. The liability insurance would also cover employees working on the project in case of injury. The construction industry is one of the industries with the highest level of fatality. Additional insurance may be required to cover property from fire other types of damage. Conclusion An Investment in such a facility is considered to be good considering that the proportion of elderly – persons 60 and over as a proportion of the population is 12.1% in the State of California and 13.7 for the USA. This is expected to increase over the next 18 years by 8,000 per day as the first set of baby boomer turned 65 in 2011 (AARP n.d.). As this set of people retire the need for assisted living will increase and should therefore be a business worth investing in. Business is therefore expected to increase over the 16 years for this LLC. Appendix Calculation of Annual Revenue from Assisted Living at Full Occupancy Levels   Minimum rate Medium rate Maximum rate Monthly 933 3,710 8,445 Annual (monthly x 12) 11,196 44,520 101,340 Number of units 53 53 53 Annual Revenue 593,388 2,359,560 5,371,020 Table 1 Comparison of Different Occupancy Levels   Minimum Median Maximum Annual Revenue at Full Occupancy 593,388 2,359,560 5,371,020 93% Occupancy 551,851 2,194,391 4,995,049 87.5% Occupancy 519,215 2,064,615 4,699,643 75% Occupancy 445,041 1,769,670 4,028,265 Table 2 References AARP. (n.d.). Boomers@65. [Online] Retrieved from http://www.aarp.org/personal-growth/transitions/boomers_65/ AllAssistedLivingHomes.com (2010). Assisted Living Occupancy Rates Increasing. [Online] Retrieved from http://allassistedlivinghomes.com/assisted-living-news/1042-assisted-living-occupancy-rates-increasing.html Bloomberg (2013). United States Government Bonds. [Online] Retrieved from http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/ Financial Forecast Center, The (2013). Prime Loan Interest Rate. [Online] Retrieved from http://forecasts.org/interest-rate/prime-interest-rate.htm Genworth (2013). Genworth 2013 Cost of Care Survey. [Online] Retrieved from https://www.genworth.com/dam/Americas/US/PDFs/Consumer/corporate/130568_032213_Cost%20of%20Care_Final_nonsecure.pdf GoPetiton. (2013). Mandatory Liability Insurance for California’s Assisted Living Facilities. [Online] Retrieved from http://www.gopetition.com/petitions/mandatory-liability-insurance-for-californias-assisted-living-facilities.html Hicken, M. (2013). California Poised to Raise Minimum Wage to $10. [Online] Retrieved from http://money.cnn.com/2013/09/12/news/california-minimum-wage/index.html Reyes, G. (2013). New Law Will Change the Way Limited Liability Companies Form and Operate. [Online] Retrieved from http://www.jdsupra.com/legalnews/new-law-will-change-the-way-limited-liab-09172/ Texas Department of Aging and Disability Services (n.d.). Licensing Standards for Assisted Living Facilities Handbook. [Online] Retrieved from http://www.dads.state.tx.us/handbooks/ls-alf/A/index.htm#rl92.4 Read More