A 52-unit assisted living recap that underwrote labor at 42 percent of revenue and ran 54

Take a $150k LP check into a recapitalization of a 52-unit assisted living community in a secondary market, sponsor with two comparable properties, real operating history, decent reporting, all the questions asked that usually matter. The pro forma: occupancy 78 to 92 over 24 months, rate growth 4 percent a year, labor at 42 percent of revenue holding flat, 6 percent preferred paid quarterly, refi in year three, five to seven year hold. Demand is rarely the problem in these deals. Occupancy hit 89 by month 20 and touched 92 briefly, the tailwind everybody in this room talks about showing up exactly as advertised. Labor did not hold at 42. It ran 54 within eighteen months, driven by two things. Caregiver turnover reached 22 percent a quarter at one point, and every gap got filled with contract staff billed at roughly 1.9 times the equivalent base wage plus travel. The state also adjusted minimum staffing expectations mid-hold, changing the required hours per resident day. Staffing rules are set state by state and can move without much notice, so anyone underwriting this kind of deal should ask what's pending in that specific state rather than assuming the schedule is fixed. A twelve point swing on a revenue base around $9.8 million is roughly $1.2 million a year, which is the whole preferred and then some. In a case like this, distributions might run five quarters and stop for nine, refi fails to clear coverage, sponsor calls capital, and an LP who doesn't fund gets diluted under a mechanic that was read but never modeled. The fix: underwrite labor as dollars per resident day and stress it 20 percent, instead of carrying it as a percentage of revenue where rate growth hides the damage. Require agency hours and agency dollars as their own line in monthly reporting, separate from payroll, because blended payroll conceals the burn until it's a year old. And model the dilution math on a capital call you don't fund at the moment you're signing, not the day the call arrives. The demographics are usually right in this asset class. The cost of the people delivering the care is where deals like this go wrong.