Real Estate Valuation of Senior Living Facilities

Commercial real estate appraisers have tough jobs. Beyond having to possess expertise in the details of property valuation, they must also have a keen understanding of the industry in which they work. The valuation of specialized health care communities—such as senior residences—presents a particularly difficult task to an appraiser. Few types of commercial property introduce a situation where the business is inextricably linked to the real estate upon which it operates. Whether the property in question is an independent living (AL), assisted living (AL),  or a skilled nursing (SN) community, legal and practical considerations are required to separate the accounting of real estate and business personal property (BPP).

The foremost concern is that real estate is a depreciable asset while BPP consists of both tangible and intangible components, the latter being non-depreciable. The proper accounting of real estate and BPP is also necessary for real estate lending and property tax valuation.

Further complicating matters is thatmost senior residences are sold as complete businesses—including land, buildings, staff, and equipment—while the residents remain in place. When a property is sold with a business, it is necessary to evaluate real estate, tangible BPP and intangible BPP both individually and in relation to each other to arrive at a fair market value for the transaction.

In Seniors Housing & Care Journal, appraisers William Beazley III, Steven Sparks, and Michael Bates provide a quantitative analysis using available market data to determine allocations of the real estate components of IL, AL, and SN communities. The authors efficiently present two common approaches to valuation in order to create a reasonable range of values. The income approach uses an estimate of the net operating income (NOI) divided by the market capitalization rate to determine the value of the property. Both the NOI estimate and market capitalization rate may be constructed from readily available market data. This is a common technique for commercial property appraisal. However, when a senior residence is being analyzed, the reported income represents the output of the entire business, not simply the value of the building and surrounding land.

The cost approach is also examined. This method estimates the property value by totaling the land value and the cost of reproducing or replacing the building, adjusted for depreciation. While several factors may affect the validity of the cost approach, its main advantage is that it is not influenced by the BPP. Using national averages, Beazley et al. subtracted the results of a cost approach analysis from the results of an income approach, thereby separating the fundamental real estate value from the BPP for IL, AL and SN communities. Thanks to their work, appraisers now have access to sound quantitative estimates of real estate allocation ratios. Of course, these estimates based upon national averages must be adjusted according to a variety of local conditions that may significantly change valuation outcomes. While quantitative methods are steadily gaining popularity among appraisers, accurate valuations will continue to depend upon the skills and knowledge of the individual appraiser.


Beazley W, Sparks S and Bates M. (2011). Valuation of real estate within senior living facilities. Seniors Housing & Care Journal (19)1: 23-33.

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