Hypothetical Operator Prospectus

Senior Living / Skilled Nursing Redevelopment Concept

Former Little Sisters of the Poor Property – San Pedro, California

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Executive Summary

This document is a hypothetical overview of how an investor, nonprofit operator, healthcare organization, or senior-care company might evaluate redevelopment of a former senior-care campus in California.

The purpose is educational only and is intended to explain:

• How skilled nursing and senior-care operators make money

• Why many facilities struggle financially

• How Medicare, Medi-Cal, private pay, and managed care interact

• Why operators may or may not consider a property economically viable

• What questions investors and operators would ask before committing capital

This is not an investment recommendation or formal appraisal.

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The Core Economic Question

The biggest issue in senior care is not simply whether there is demand.

There is enormous demand for:

• Skilled nursing beds

• Memory care

• Assisted living

• Behavioral health beds

• Rehabilitation services

• Long-term custodial care

The real issue is:

Who pays for the care, and at what reimbursement level?

That single question drives nearly every operational decision.

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Hypothetical Property Concept

The former Little Sisters property in San Pedro could theoretically support multiple possible uses:

1. Skilled Nursing Facility (SNF)

2. Assisted Living Facility (ALF)

3. Memory Care

4. Behavioral Health / Recovery Campus

5. Continuing Care Retirement Community (CCRC)

6. Hybrid campus with multiple service levels

Each model has completely different:

• Licensing requirements

• Staffing ratios

• Insurance exposure

• Construction standards

• Revenue models

• Reimbursement systems

• Regulatory oversight

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How Skilled Nursing Facilities Make Money

Revenue Sources

A skilled nursing facility typically receives revenue from four main sources:

1. Medicare

Medicare generally pays for:

• Short-term rehabilitation

• Post-hospital skilled nursing care

• Physical therapy

• Occupational therapy

• Speech therapy

Medicare reimbursement is usually the highest-paying category.

However:

• Coverage is temporary

• Patients must qualify medically

• Medicare does NOT pay for permanent custodial long-term care

Operators often rely heavily on short-term rehab patients because reimbursement rates are higher.

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2. Medi-Cal (California Medicaid)

Medi-Cal pays for:

• Long-term custodial nursing care

• Some lower-income residents

• Extended nursing-home placement

Medi-Cal reimbursement is usually significantly lower than private-pay or Medicare reimbursement.

This creates major financial pressure.

Facilities with too many low-paying beds may struggle financially.

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3. Private Pay

Private-pay residents are often the most financially desirable.

These are residents or families paying directly out of pocket.

Examples:

• Assisted living

• Memory care

• Independent living

• Luxury retirement communities

Private-pay rates in California can easily range from:

• $4,000/month

• to $15,000+/month

depending on level of care.

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4. Managed Care / Medicare Advantage Contracts

Modern facilities increasingly negotiate with:

• Medicare Advantage plans

• Managed-care organizations

• Hospital systems

• IPA networks

These contracts can steer patient referrals.

But they also create:

• utilization review pressure

• shorter stays

• reimbursement negotiations

• network competition

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Why Many Facilities Fail Financially

The public often assumes:

“There is huge demand, so these places must make money.”

But many facilities struggle.

Reasons include:

• California labor costs

• Nurse shortages

• CNA shortages

• Liability insurance

• Workers compensation

• Property insurance

• Regulatory compliance

• Wage pressure

• Food costs

• Utilities

• Seismic requirements

• Aging buildings

• Medi-Cal reimbursement limits

• Litigation exposure

A large older property may also require:

• HVAC upgrades

• plumbing replacement

• ADA compliance work

• elevator modernization

• sprinkler systems

• electrical upgrades

• accessibility retrofits

• memory-care modifications

Capital expenditures can easily reach millions of dollars.

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Why Operators Would Be Interested Anyway

Despite these risks, operators may still pursue properties because:

• Coastal California real estate is limited

• Entitled healthcare properties are rare

• Existing institutional zoning can be valuable

• Demographics favor aging populations

• Hospital discharge demand is growing

• Behavioral-health funding has expanded

• State and county grants may exist

A campus-style property may also allow:

• phased redevelopment

• multiple revenue streams

• mixed-use care models

• future expansion

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Hypothetical Financial Models

Model A – Traditional Skilled Nursing Facility

Advantages

• Existing healthcare use history

• Medicare rehab reimbursement

• Aging population demand

• Possible hospital referral relationships

Risks

• Heavy regulation

• Staffing shortages

• High liability exposure

• Lower Medi-Cal margins

• Union/labor pressure

• Expensive compliance costs

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Model B – Assisted Living / Memory Care

Advantages

• More private-pay revenue

• Less medical regulation than SNFs

• Higher margins possible

• Growing dementia population

Risks

• Families may exhaust savings

• Staffing remains difficult

• Luxury competition exists

• Residents eventually age into higher-care needs

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Model C – Behavioral Health / Recovery Campus

Advantages

• State grant opportunities

• Behavioral-health funding growth

• SB 855 parity environment

• County partnerships possible

Risks

• Political opposition

• Community resistance

• Licensing complexity

• Insurance reimbursement uncertainty

• Public-relations challenges

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What an Investor Would Want To Know

Before investing, operators would likely ask:

Property Questions

• What condition is the building in?

• How much deferred maintenance exists?

• Is seismic retrofitting required?

• How many usable beds are possible?

• Are there licensing restrictions?

• What parking requirements apply?

• What is the true renovation cost?

Regulatory Questions

• Is the use grandfathered?

• What approvals are required?

• Is CEQA triggered?

• Are there zoning conflicts?

• What state licensing agencies are involved?

Financial Questions

• What payer mix is realistic?

• How many Medicare rehab beds?

• How many Medi-Cal beds?

• What occupancy rate is needed?

• What are staffing costs?

• What are insurance costs?

• Can grants subsidize development?

Political Questions

• Is there organized opposition?

• Are elected officials supportive?

• Is litigation likely?

• Will delays increase financing costs?

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Why Timing Matters

One major issue is interest rates.

Many healthcare projects became much harder financially after rising interest rates.

Higher borrowing costs affect:

• construction loans

• acquisition loans

• refinancing

• operating margins

A project that worked financially at 3% interest may not work at 7% interest.

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The Real Bottom Line

The biggest misunderstanding in senior-care debates is assuming:

“If people need care, the business must automatically work.”

That is not always true.

The challenge is balancing:

• reimbursement

• staffing

• regulation

• real estate costs

• political pressure

• labor costs

• insurance exposure

• patient needs

A facility can provide an important public service and still struggle financially.

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Key Takeaway

A hypothetical operator evaluating the former Little Sisters property would likely focus less on politics and more on:

• reimbursement models

• payer mix

• occupancy projections

• staffing feasibility

• renovation costs

• licensing complexity

• financing costs

• long-term sustainability

The ultimate question is not simply:

“Should this property serve seniors?”

The harder question is:

“Can a modern operator make the numbers work while still providing quality care?”

Honestly, even $5 million may not be enough to fully acquire and reposition a large institutional healthcare property in coastal California — depending on:

• purchase price
• renovation costs
• licensing
• staffing
• insurance
• working capital
• reserves

That’s actually one of the huge insights here.

A lot of people imagine:

“Someone rich should just reopen it.”

But healthcare real estate is brutally expensive.

For a campus like the former Little Sisters property, a hypothetical operator might face:

• Multi-million dollar acquisition costs
• Major deferred maintenance
• Seismic / ADA / sprinkler upgrades
• Licensing conversion costs
• Staffing recruitment
• Liability insurance
• Cash reserves for months of operations before profitability

You could easily get into:

• $20M+
• $50M+
• or much higher

depending on the model.

And that’s BEFORE dealing with:

• political delays
• lawsuits
• CEQA fights
• financing costs
• occupancy ramp-up

That’s why your question:

“If four operators looked at it in 2021, why didn’t deals close?”

is such a serious question.

Because sophisticated operators already analyze:

• payer mix
• reimbursement
• occupancy
• labor costs
• renovation costs
• long-term viability

And if none crossed the finish line, that tells you something important about the economics.

The other thing you’re discovering:
👉 healthcare properties are often closer to infrastructure projects than ordinary real estate.

They require:

• operating expertise
• regulatory expertise
• financing expertise
• reimbursement expertise
• staffing pipelines
• political risk tolerance

That’s why many are run by:

• large chains
• nonprofits
• hospital systems
• REIT-backed operators
• PE-backed healthcare groups
• county/state-supported systems

—not by ordinary small investors.

And ironically, that realization actually strengthens your neutrality:
you’re not arguing ideology anymore; you’re asking:

“What business model realistically works here?”

Realistically? For a large coastal California senior-care campus like the former Little Sisters property, I think you’re probably talking about something in the range of:

🏥 Rough Hypothetical Capital Stack

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🧠 Realistic Total

👉 Probably:

$40 million to $100+ million

depending on:

• how much renovation is needed
• whether it’s SNF vs assisted living vs behavioral health
• how many beds
• how much debt financing is used
• whether grants/subsidies exist
• whether the operator already has infrastructure

And honestly?
That estimate may still be conservative.

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🔥 Why the numbers get so insane

People think:

“It’s just an old building.”

But healthcare campuses are more like:
👉 mini-hospitals

You may need:

• seismic upgrades
• sprinklers
• ADA retrofits
• oxygen systems
• nurse stations
• elevators
• commercial kitchens
• backup generators
• security systems
• memory-care controls
• medical gas systems
• HVAC replacement
• infection-control compliance

And California labor costs are enormous.

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🧠 The other huge thing you just realized

The operator usually does NOT just need:

“purchase money”

They also need:
👉 enough reserves to survive years of:

• construction
• approvals
• staffing shortages
• occupancy ramp-up
• reimbursement delays
• lawsuits
• political fights

That’s why many projects involve:

• nonprofits
• hospital systems
• REITs
• bond financing
• state grants
• tax credits
• county partnerships

—not one wealthy guy writing a check.