Fred Splient gave his ALF Project Steering Committee 2 months to develop a project plan for their area of responsibility in the project. Each member was told to include the tasks, predecessors and successors, resources needed, responsible person, and an estimated cost. He asked that these be presented to the steering team on August 31. All through July the ALF project team scrambled to identify the steps required to open the facility and to determine what it would cost. Each team member met with his or her departmental staff to get help in identifying what was needed. For example, the COO spoke with the Dietary Department head and asked that she develop a plan to meet all requirements to set up the facility to feed the residents. The COO then asked the Facilities Manager to develop an action plan to prepare the building and maintain it. The COO also met with the Rehab Services Medical Director and his clinical staff to identify the residents' probable medical needs based on the projected population, and to develop an action plan to prepare to meet the residents' health needs. The COO asked the therapy manager to prepare a plan to develop social activities for the residents. Everyone on the team called the Chief Financial Officer for help in determining the budgets for their action plans. The CFO also had to validate the estimates of cost and revenue from facility operations, and to project earnings and return on the investment. Like any good administrator, when the CFO realized he had no expertise in this area, he hired a consultant to help him determine the project costs and budget. Dr. Sara Sharf was chosen as the consultantshe had over 5 years' experience in developing business plans for assisted living facilities. Dr. Sharf recommended that Friendly Medical Center target the middle income geriatric population since there were many up-scale facilities in the area. Dr. Sharf and the market researchers determined what level of rent people in that population could and would pay. They then looked at what needed to be in the facility to meet the needs of their targeted population. After additional site visits of facilities and meetings with the selected construction contractor, they finalized the layout of units and common space areas that would be included in the design. The Construction Project Manager requested and received an action plan and cost estimate from the construction contractor. The contractor had estimated that construction cost would probably run about $70 per square foot with a standard deviation of $3.67. He could not be absolutely sure because of potential change orders. He emphasized that the estimates assumed that the project would be completed without further changes in its design concept. While the CFO was haggling with the construction contractor about

determining a more accurate cost estimate, he received a phone call from Dr. Zen Link, the Head of Geriatric Medicine at Friendly Medical Center. Dr. Link's secretary had seen men measuring the land behind the parking lot and she wanted to know what was going on; so did Dr. Link. Since Dr. Link was one of the hospital's best referrers, the CFO told him about the potential project. Dr. Link felt that his input was needed up front as he was the only person on staff who would know the health needs of the facility's residents and appropriate equipment needs and staffing models that should be set up. With Dr. Link's input, the CFO estimated the operating costs to run the facility and projected the occupancy rates needed to cover those costs. The Rehab Services Medical Director, who was a member of the original project team, was quite upset when he saw Dr. Link's budget for the medical equipment that was to be purchased for the facility. The Medical Director felt that Dr. Link wanted to purchase too much expensive equipment, which was not necessary to have on site. The hospital had the majority of the equipment that was necessary and there was no need to duplicate it, thus inflating that portion of the budget. The CFO did not want to get in the middle of their argument so he left Link's budget just as Link submitted it and hoped someone would raise the issue at the next Steering Team Meeting. The CFO was quite concerned about the lack of experience of the team in developing such a budget, and he felt that there was far more uncertainty in the budget than the estimates reflected. With the construction cost estimate and an outline of the services to be provided, the following projected capital expenditure was developed.

The CFO developed an income statement for the next 20 years. The first 3 years are shown below.

The CFO, Dr. Sharf, and the Project Steering Team were ready to combine their individual plans and costs into a composite plan and budget.

Question:

Once the overall budget is agreed upon, what will need to be changed in it for the project to commence?

Preliminary Project Budget Apartment Type Net Sq Ft Studio units 450 1 BR/bath units 600 Units 20 80 100 Units Total Sq Ft 9,000 48,000 57,000 Total Sq Ft 17,000 22,230 96,330 96,330 $70.00 Apartment Type Net Sq Ft Common space 0.3 Net to gross 1.3 Total gross sq ft Square feet Est cost per sq ft Construction Costs Building Contingency Land Program development & equipment costs Furniture A&E fees @ 5% Financing costs Capitalized interest Site improvements Phone & IS system Kitchen equipment Total Organizational costs: Legal and accounting Initial marketing Project consultant Follow-up market survey Total organizational costs Total $6,743,000 674,300 600,000 405,000 400,000(see below) 347,000 202,000 135,000 125,000 30,000 30,000 $ 9,991,300 25,000 250,000 $2,500/unit 80,000 20,000 375,000 $10,066,300 Studio Heavy Asst. 5 units $4,160/unit 20 units $5,460/unit Light Asst. 15 units $3,280/unit 60 units $3,780/unit 1 BR/bath Friendly Assisted Living Pro Forma Year 1 Year 2 Year 3 Service Revenues Studios One bedroom Additional person revenue Ancillary revenue Total service revenues Operating Expenses Salaries and wages Employee benefits $ 256,662 408,564 30,866 28,969 725,061 $ 414,012 1,398,197 72,291 67,656 1,952,155 $ 430,572 2,077,321 98,841 92,417 2,699,151 649,606 142,913 Year 2 55,910 50,000 692,734 152,401 Year 3 73,434 50,000 376,657 82,865 Year 1 69,571 76,177 217,516 48,000 29,002 899,788 (174,727) 78,086 976,515 975,640 107,966 1,076,535 1,622,616 Supplies Purchased services Utilities Insurance Other Total operating expenses Income (Loss) Before Other Expenses Other Expenses (Income) Depreciation and amortization Interest expense Interest income Total other expenses (income) Net Income (Loss) Internal Rate of Return Average Occupied Units 20 units 80 units 560,200 560,700 561,200 (1,226) 558,974 $(733,701) 10.1 11,321 572,021 $ 403,619 47,451 608,651 $1,013,965 12.3 19.0 52.6 19.0 75.0 19.6 46.0 31.9 71.6 94.0 Total Resident Days 20 units 80 units Total 4,488 7,146 11.634 6,935 19,191 26.126 6,935 27,380 34.315 21.8 37.8 38.8 Full-time Equivalents Cash Flow: Net income (loss) Minus: capital investment Add: depreciation and amortization Add: working capital change Net cash flow $ (733,701) $ 403,619 (10,079,000) (5,000) 560,200 560,700 130,656 82,500 $(10,121,845) $1,041,819 $1,013,965 (5,500) 561,200 18,638 $1,588,302