Using Essential Oils in Skilled Nursing and Assisted Living Facilities

Using Essential Oils in Skilled Nursing and Assisted Living Facilities
by Tammi Davis, MD

Essential oils are aromatic volatile compounds that are found in many plants. In nature, plants use these oils to ward off pests, protect against viral, bacterial and fungal infections, and to attract insects for pollination. Essential oils have a very strong aromas that interact with our olfactory system to influence the part of the brain responsible for mood, emotions, and memory. Different oils have different chemical constituents that activate the brain in various ways For example, citrus essential oils such as orange, grapefruit, lemon, and bergamot can be very uplifting to the mood. Lavender essential oil is often used to create a feeling of relaxation and may be beneficial to aid in sleep.

Generally, in order to affect mood, the essential oils are diffused into the air with a small ultrasonic or nebulizing diffuser that distributes the particles into a fine mist. The use of aromatherapy is becoming more common. Many hospitals offer aromatherapy as a complementary treatment especially in oncology centers, and they have been used in hospital ERs to reduce the stress level of the staff. Many of the oils have antiviral and antibacterial properties and act to purify the air. The oils can also be added to a carrier massage oil and offered as a massage to induce relaxation.

Unfortunately, we often find people in nursing homes that are agitated, depressed, anxious, or suffering from insomnia. Diffusing various essential oils could help uplift the mood of some of the skilled nursing facility residents, may help calm agitated residents, and could promote relaxation and sleep. Many elderly have decreased hearing, sight, and taste. Aromatherapy can add another dimension to their daily routine of a skilled nursing or assisted living facility by awakening another sense. Some patients with dementia may have decreased sense of smell and they may benefit from massage with essential oils, particularly in the new emphasis on development of "memory-care" assisted living facilities.  Many essential oil companies test their oils with gas chromatography and mass spectroscopy to ensure that there are no adulterants or impurities in the oil. Oils that are not pure are associated with a higher risk of skin irritation and skin sensitivity when applied topically.

It seems very logical to me that a nursing home that smells of wild orange, lemon, bergamot, or lime would be very pleasing indeed! In addition, this could be a very effective marketing tool in attracting new residents and patients. Furthermore, improving the quality of care can improve the health outcomes and contribute to a better bottom line and business valuation for skilled nursing and assisted living facilities.

Tammi Davis, MD, is a Board-Certified Family Physician, based in Baltimore County, MD, whose practice include alternative medicine, medical acupuncture, supplements and aromatherapy.   Her website is http://www.tammidavismd.com.

Skilled Nursing Facility Sale Prices Hit New Highs in 2014

According to Irvin Levin Associates, sale prices in the post-acute and senior housing market set a record of the high prices paid:

• $76,500 per bed for Skilled Nursing Facilities, a 4.4% Increase over 2013 ($73,300/bed)
• $188,700/unit for Assisted Living Facilities, a 25.3% rise over 2013 ($150,600/unit)
• $246,800/unit for Independent Living Communities, 28.6% increase over 2013 ($191,950/unit)

Graphs of the average price paid for skilled nursing facilities per bed, respective CAP rates and corollary multiples are below:

Intermediary Fee Structures for Skilled Nursing Facility Sale Transactions

The common commission or fee structure for brokers or intermediaries for nursing home sales is 2% of the selling price, applied to the purchase price and paid at closing. If the transaction involves a single facility, then the fee can vary from 2% to 4%, although 2% is most customary commission percentage used in the nursing home industry. If the transaction involves multiple facilities, that is a portfolio deal, a sliding scale fee model is typically used, consistent with the Lehman Formula concept. Thus, in the nursing home sales industry when a multiple facility transaction is involved, for sellers’ to pay a 2% or higher commission, without resorting to use of using a sliding commission schedule or a maximum commission fee paid, is rare. Sometimes in multiple facility nursing home sales deals up to $25,000,000, a flat 1% fee is used. Beyond that the Lehman formula and variations thereof is customarily used.

The Lehman Scale is an industry accepted formula used by investment banks, M&A advisory firms, and business brokers to calculate the commissions or transaction fees on sell-side engagements. The Lehman Scale is calculated based on a percentage of Purchase Price as follows:

·       5% of the first $1,000,000, plus

·       4% of the second $1,000,000, plus,

·       3% of the third $1,000,000, plus,

·       2% of the fourth $1,000,000, plus,

·       1% of the remaining total.

As a practical matter, the exact percentages set forth in the Lehman model are not generally used for nursing home transactions, as indicated above.  However, the principle of a sliding scale formula in multiple facility transactions unquestionably prevails in the nursing home industry.   Thus the basic concept underlying the Lehman formula that the broker charges a smaller percentage for each certain dollar amount that the transaction is worth is prevalent and used in the nursing home sale transactions in the U.S.  Accordingly, the size of the deal dictates how negotiable the percentages used in a sliding scale formula.  Usually the seller will have more negotiating room on fees the bigger the transaction value potentially gets, and as a function of the attractiveness of the business for sale and underlying industry and credit market conditions.

From our experience, reasonable brokerage or finder commissions or fees used in the nursing home industry, as percentages applied to the purchase price, would be in the following ranges below, although we recognize that the transaction value and corresponding fee breaks can vary.  However, we would argue that this variation is usually found under the $25,000,000 value threshold.  In transactions in excess of $25,000,000, the declining fee percentages kick in.

 

In my opinion, because of current low interest rate conditions and high demand for ownership of nursing home facilities, combined with the constrained and diminishing supply of nursing facilities, it is currently a highly robust “sellers’ market” for nursing home facilities. According to Irvin Levin Associates data, nursing home selling prices are at their highest level. Therefore, given these very seller favorable market conditions, it is perplexing why sellers should agree to a fee structure that includes an incentive fee for the intermediary? Moreover, given these highly favorable market conditions, the seller has the leverage to probably lower the commission because of the size of the transaction, as indicated in the foregoing, and the lower market resistance and difficulty in selling skilled nursing facilties. Lastly, under these propitious market conditions, it is also not totally uncommon for sellers to set a “not-to-exceed” cap on the brokerage or transaction fee earned.

Factors that Increase or Decrease Nursing Home Sale Values

As is well-known in the healthcare transactions world, the baseline metric for the valuation of skilled nursing facilities is the amount of Net Operating Income generated by operations, or more specifically, EBITDAR, measured by the sum of Earnings before Interest, Taxes, Depreciation, Amortization and Rent, divided by rates of return specific to the nursing home industry (known as the “Capitalization Rates” or “Cap Rates”). Cap Rates are derived from historical nursing home sales data. This formula is known as the Income Capitalization Model. It is the standard tool used to determine baseline and back of the envelope pricing in the sale of nursing homes. It is based on the premise that asset value is predicated on the amount of free and clear cash flow a business generates per year. The nursing home industry’s historical capitalization rates range from 12.0% to 14.0%.  In the current market, the Cap Rate for the sale of skilled nursing facilities is probably around 12.5%, maybe even lower.

However, a back of the envelope singular calculation is insufficient:  In arriving at a composite valuation, it is necessary to adjust the baseline EBITDAR valuation calculation (determined by the Income Capitalization Model) up and down by estimating the effect of certain internal and external variables on pricing, independent of the financial and operational antecedents.  While it is hard to separate cause from effect here, but that is necessary for analytic purposes because nursing home sale valuations are multifactorial. Accordingly, these primary internal and external variables can increase or detract from value as shown below:

Increasers to Value:

1. Newly constructed building.
2. Spacious facility.
3. Ability to Expand physical plant
4. Visibility from Road
5. Private and Semiprivate Rooms
6. Presence of State Certificate of Need Process or Medicaid Moratorium
7. Located in Deep Demographic market
8. Favorable Medicaid Reimbursement for Capital
9. Close to Acute Care Hospitals

Reducers of Value:

1. Old building, particularly physical plants before 1970.
2. Postage stamp property with no ability to expand
3. Lack of space for rehab and storage
4. Limited or no road visibility
5. Three-bed and Four-bed rooms
6. No Certificate of Need process or Medicaid Moratorium controlling new construction
7. Previous attempts to sell failed
8. History of poor surveys. Watch List
9. Unfavorable Workers’ Compensation History
10. Located in Sparsely Populated Rural Market