We clearly need an expansion of the healthcare wing of the Kendal Center. I have not heard anyone express opposition to that goal.

But we are in the midst of a discussion about what that expansion should look like, how it should be funded, and what the impacts of its construction might be. The tradeoffs involved are the subject of this blog post.

One of the potential funding mechanisms for the expansion project is the creation of new independent living (IL) units, the ongoing revenue from which would help fund the project. But that concept comes with a tradeoff: a significant increase in Kendal’s IL population.

Size of resident population. Our current resident population (as of April 2022, the last official filing with the state) is 408 people, including those in personal care and skilled nursing. About 330 of those are in independent living. That is roughly as high as our IL population has ever been.

Does it matter if our population grows? Separate meetings are planned for the discussion of “what the end size of our campus should be” (as Seth put it during the September 28 presentation of the expansion plan). That’s an important discussion to have, and it is critical to have it before a funding decision is made that locks in more growth. I hope these discussions can be scheduled soon.

For me, our current resident population is where the line should be drawn. I believe Kendal is already suffering the consequences of having a slightly larger-than-ideal population. The main symptom of size is suspicion of and disdain for some groups of residents by other groups.

Have you ever heard hushed complaints like these?

  • “Those Quakers. They seem to think they own the place.”
  • “Those people in the duplexes. They seem to live in a separate world from the rest of us.”
  • “Those KRA people. They seem to give their friends all the best committee spots.” 

Us-versus-them comments like these are the signs of the strains that can only be expected to grow as our population increases. They represent the tendency of a community the size of ours to break up into sub-groups, as fewer and fewer of us know the majority of the other residents.

There has been a good bit of research on this subject, and I summarized some of it in a previous blog post. (https://kendaljourney.com/2022/08/06/whats-the-optimal-size-of-a-retirement-community/)

How did we get to be this big? For the last 20 years or more, major improvements at Kendal-Crosslands has always been funded by adding residents. Now, it is happening again. We had previously been told that Kendal would never be allowed to grow beyond its previous maximum size, but that is exactly what is being proposed.

I think it is time to take a close look at the effects of increasing our resident population (and not only on our sense of community, but also on the capacity of our auditorium, dining, and other facilities).

You may hear that the only way to fund the expansion of the healthcare wing is to get revenue from more residents. That’s not really the case. There are several options. In the rest of this blog post, I will lay out the arguments being made for this “funding by adding residents” approach, and what the alternatives are.

How the cost rose to $55 million. Before I get to the funding issues, I need to present a few details about the current plan, some of which are only now becoming clear to me.

I was privileged to be picked as part of the “Expanded Resident Financial Communications Committee”, a group of 22 residents from all four campuses that CFO Ed Plasha convened to discuss major construction plans. The most recent meeting was on October 4, when the primary topic was the expansion of the healthcare wing of the Kendal Center. (There was also a short discussion of Crosslands construction plans.) In addition to the resident committee members, CEO Lisa Marsilio and Seth Beaver (in charge of capital projects) attended the meeting, which was run by Ed Plasha.

Although no decision has been made about the expansion, there is currently only one option on the table, and the financing of that plan was the major topic of the October 4 meeting. (The basics of the proposed layout are presented in a previous blog post, and much more detail is available in the September 28 presentation led by Sarah Matas that can be viewed here.

One of the important things the committee learned at the October 4 meeting was the sequence of events that led to the plan in its present form, and why its cost (currently estimated at about $55 million) is so much higher than had previously been thought. The planning process, which extended over the past few years, involved the administration; the relevant healthcare, property, and financial committees; our architectural firm; and one of our contractors (in an advisory role).

Ed Plasha reviewed the sequence of events and the discussions of funding options. Here is my summary of what he said.

  1. The plan that initially took shape involved an expansion on both of the current floors of the health wing. The healthcare space and facilities under that two-floor plan would have been roughly the same as the space and facilities that we see in the new one-floor layout, but split across the two floors. A preliminary estimate of the cost was $28 million. At this point, the KCC board agreed that it was appropriate to fund the majority of the cost from “the balance sheet” (i.e. KCC’s reserves, which are well over $100 million), along with $5 million from a donor fund established for this purpose.
  2. The architects produced a “schematic design” (still on two floors), which provided a much more detailed basis for a cost estimate. Benchmark, the contractor we are using for new construction, used it to estimate a more precise cost: $31 million. That was higher than anticipated, but still manageable.
  3. The schematic design was then put out for bids. It was a bad time for construction bidding. The combination of supply-chain problems and uncertainty about the economic recovery coming out of Covid caused contractors to be very cautious in their estimates. The bids came back at around $37 million.
  4. With costs looking so much higher than anticipated, it was time to take another look at the plans. Ed was convinced that a new source of funding would be needed, beyond the reserves, the $5 million fund, and borrowing. This was the genesis of the plan we are now looking at, with “all-on-one-floor” healthcare expansion plus some independent-living (IL) apartments below. On the one hand, revenue from the new apartments would help with the funding of the expansion; but on the other, the construction costs would be much higher: the current estimate is $55 million.  Ed emphasized that the plan came about as a way to resolve the financial need, and not because it was decided that single-floor healthcare was essential. (It is clear, though, that healthcare on a single floor has important advantages.) Ed went through the financial calculations with the committee.

Ed acknowledged that new IL apartments meant an increase in the campus resident population. He anticipates the number might be 25-30 new residents, or about a 10% increase in IL residents. He recognized this as a “tradeoff”: the need to balance the requirement for more funding against the previously stated goal of not increasing Kendal’s population or unit count.

On a related but non-financial topic, Ed also discussed the proximity of the healthcare expansion to existing cottages. There is the possibility that a resident would be asked to move so that the cottage nearest the new wing could be removed. The resident of that cottage has been approached and seems willing, we were told. Two of the duplex cottages that currently look out on the mound where sunflowers were grown during the pandemic would now see the healthcare expansion instead. It may be possible to adjust the plans to address this issue.

The tradeoffs. Now, we come to the hard part. As I see it, there are four main issues in play: an expansion on one floor vs. two, Kendal’s reserves, resident fees, and the size of Kendal’s resident population.

I have already mentioned the population issue. Let’s take each of the others in turn.

One floor vs. two. It seems clear that an all-on-one-floor approach is preferable, all else being equal. If I understood correctly, Ed estimates that the cost of the one-floor approach (with no apartments below) would be about $3 million above the cost of the original two-floor approach. It’s unclear what would be below the expanded wing in that scenario. (Parking? recreational space? storage? something else?) Looking at item 3 above (where the two-floor cost was given as $37 million), the extra $3 million would put the total cost at about $40 million (a cost increase of less than 10%). Questions: Is $3 million the correct amount? Is the extra cost justified by the benefits?

Kendal’s reserves. KCC is rightly proud of its financial reserves. As of the end of last year, we had enough money available to operate for about 900 days with no income—no new resident down payments, no fees from existing residents, with all expenses continuing at their current levels. That’s pretty astonishing.

According to figures Ed provided, the average operator of multiple retirement communities had just 341 days of reserves. Ed thinks we are in the upper 5% on this criterion (and I think that might even be understating the case). We certainly have strong reserves, built up over the last few decades. Ed is willing to put $25 million of that money toward the healthcare expansion. Question: Might it be appropriate to use somewhat more of that money in this situation?

Resident fees. This is obviously a sensitive issue, and Ed favors a plan that has “no significant impact” on resident fees. If resident fees were to be used to help finance the healthcare wing expansion, the most likely use would be to pay interest on bonds or loans. If the interest rate were 3%, and fees were used to finance $5 million of the cost, the typical fee increase would be about half a percent (by my calculation). Question: Is my calculation right? Would that increase be acceptable?

These three factors, plus the possibility of a population increase, constitute a difficult balancing act. No doubt each reader will prefer a different set of choices, but somehow we will need to come up with a solution that the community is willing to live with.

My own personal preferences. I admit to having strong opinions, and (for what it’s worth) I will share them now.

One floor vs. two: it’s clear that having all of healthcare on one floor is valuable. I certainly like the concept. If it really adds only $3 million to the cost of a two-floor solution (for a total cost of around $40 million, with no apartments underneath) then I am all for it.

But, for me, it is important that it adds just $3 million (less than 10%) to the cost of a “no apartment” solution. If it added, say, $10 million to the cost, I would want to know much more about the pros and cons of one floor vs. two, and I would like to see some serious brainstorming about alternatives.

Kendal’s reserves: I cannot see why it is important to limit the use of the reserve funds to $25 million. If we used $30 million from the reserves for this project, Kendal would still have greater reserves than 75% of CCRCs (“LifePlan communities”), according to Ed’s numbers. What are these funds “reserved” for? I submit they are for exceptional, once-in-a-generation needs, and the healthcare expansion is one of those.

Resident fees: Personally, I would not object to a fraction of a percent increase in fees to help fund this project. I suspect most residents would agree that this is reasonable.

The size of Kendal’s IL population: You already know where I stand: I think we should not grow any larger than we are now. I think we urgently need to hold open discussions on Kendal’s population, before we make another funding decision that depends on growth. Those discussions have been announced but not scheduled. Let’s get them started.

By my calculations (and these would need to be confirmed by someone with more expertise), we could fund a $40 million expansion (no new IL units) with a combination of $30 million from reserves, $5 million from the existing donor fund, and $5 million from a half-percent fee increase. No resident population increase would be needed.

It is possible that a fundraising effort, like the one for the Wellness Center, would reduce or eliminate the need for a fee increase.

I look forward to other opinions on this topic. Please use the comment facility, below, to join the conversation.

For an update on this topic, with additional financial information and on the potential for expanding on two floors instead of one, see https://kendaljourney.com/2022/11/04/the-healthcare-wing-expansion-an-update/