The point, she says, is that a high percentage of private-pay patients will not stabilize net operating income at assisted living or skilled nursing facilities. Because all patients inevitably become Medicaid recipients, these properties face an inordinate amount of risk since that program is coming up against financial strain due to a shirking labor force.The more a property relies on Medicaid, the more variability in cash flows, explains Gorman. The variable service component share of monthly fee income depends on the type of facility, with the share rising along the care spectrum from 5% to 10% for independent living, all the way up to 75% for skilled nursing/Alzheimer facilities. At the same time, NOI growth decreases along the same spectrum. CCRCs have the highest year-over-year NOI growth--26% between 2005 and 2006--followed by independent living at 18% and then assisted living at 8%, according to the 2006 State of Senior Housing Survey administered by the American Seniors Housing Association.

"The risks of intense care facilities can be attributed to the complexities of Medicaid reimbursement, labor shortages in nursing aides and healthcare support staff, and the amount of customization and maintenance required at intense care facilities," says Gorman. However, the level of risk varies by state. Areas with high elderly populations have high Medicaid reimbursement rates--Arizona, for instance, has a rate of 65.77%, while New York has the national minimum of 50%.

Demographics, too, may work against traditional seniors housing product, says Gorman. The need for qualified aides and healthcare support--typically entry-level positions--is so great that the demand exceeds supply, according to the Bureau of Labor Statistics. "As a result, ALF and SNF in some states need to increase wages to retain staff or employ expensive temporary nursing agencies to fill gaps," she states.

Also, the level of build-out for a facility--amenities, safety features and the like--can cost a chunk of change, as do the higher liability insurance and labor costs of the asset, particularly in skilled nursing and Alzheimer care centers. "Though the maze of entitlements, state-level need demonstration, and Medicaid complexities do create high barriers to entry at the intense care-level of the market, the impact to pricing power and returns does not outweigh the escalating, volatile costs of operating assisted living, skilled nursing and Alzheimer's care facilities," says Gorman.

These risks are playing themselves out in the capital markets, with cap rates for age-restricted apartments the lowest at 7.1%, and skilled nursing facilities the highest, at 12.1%, in 2007. As a result, Gorman suggests that investors diversify their portfolios when it comes to senior housing investment. "Investors today will recognize that the demographics that make senior housing a slam dunk will favor new aging-in-place product types to the traditional nursing home facilities of the past," she says.