Case Study · Massachusetts · Behavioral Health & SUD · Conventional
Behavioral Health Feasibility Study, Massachusetts — A Conventional Worked Case
This is how our independent feasibility study company and consultant team analyzed a new, ground-up residential behavioral health and substance-use-disorder (SUD) treatment facility underwritten to a conventional construction-to-permanent credit, from bed-level demand and the payer mix through the debt-service coverage a lender must document. It is a representative, anonymized worked example of the methodology — not a specific client deal — set in a Massachusetts submarket where the MassHealth Section 1115 waiver, not raw demand, decides how the beds are sized.
An 80-bed residential treatment campus in a Massachusetts submarket.
A sponsor came to our feasibility study company with a ground-up residential behavioral-health and SUD treatment project and a conventional bank that needed the projected cash flow independently tested before it would size a construction-to-permanent loan. The subject is an anonymized new-build campus of roughly 80 licensed beds, licensed at ASAM Levels 3.5 and 3.1 clinically managed and low-intensity residential care, on a suburban parcel in a Massachusetts submarket outside the Greater Boston inner core — a more affordable, balanced region rather than the state's oversupplied life-science and office geographies.14 The program is designed to serve a diversified payer base of in-network commercial, MassHealth Medicaid, Medicare, and private pay.
Because a treatment facility is a going-concern operating business rather than passive real estate, the lender's question is not “what is the land and building worth” but “can this specific facility fill, license, staff, and repay this specific loan.” The economics are hotel-like — licensed beds times census times revenue per patient day times authorized days — but reimbursement-controlled: the payer's utilization review, not the clinician, sets the days, and the facility is valued as a going concern of real estate plus FF&E plus goodwill plus licenses and accreditation.6 As an independent feasibility consultant, our scope was the bed-level demand, payer-mix, licensure-and-ramp, and debt-service analysis that supports that credit.
Representative and anonymized. Every figure below is illustrative of a typical engagement of this type; the facility, submarket, and parties are composited, not a real named borrower, address, or completed transaction.
Bed-level demand, not a dollar-market headline.
Behavioral-health demand is built from people, prevalence, and the treatment gap, translated into bed-days — never from the vendor dollar-market figures that diverge by up to 60x because they measure different things. The read starts with the catchment population and the share that needs residential care.
The treatment gap is real and enormous: 48.5 million people aged 12 and older reported a past-year SUD in 2023, and 41.1 million of those needing treatment went without it.2 That national fact must be held evenhandedly against a sector that overbuilt residential capacity on an oversold thesis, with overdose deaths falling about 26.9 percent in 2024 — the largest decline on record — even as the structural gap remains.3 So demand is not asserted from a crisis narrative; it is built from the primary market area (PMA). The subject's PMA is a drive-time catchment of roughly 600,000 residents. Applying past-year SUD prevalence near 16 to 17 percent of the population aged 12 and older, and then the conservative share that both seeks treatment and requires residential rather than outpatient care, yields a modeled annual residential admissions demand that comfortably exceeds the licensed residential SUD beds the PMA holds today.1
The bed count then turns on length of stay, which is payer-controlled and has compressed. Average authorized residential LOS has fallen from a historical 28-to-30-plus-day norm toward roughly 10 to 20 authorized days, and national claims data show a median residential LOS of 6 days and a detox LOS of 4.7 Compressed LOS collapses revenue per admission and forces higher admission volume to fill the same beds, so the study sizes beds on authorized bed-days, not on a legacy 30-day assumption. On a conservative treatment-seeking rate and a compressed authorized LOS, the PMA supports the subject's stabilized census of 64 average daily residents (80 beds at 80 percent) — roughly 23,360 patient-days a year — without relying on out-of-market draw.
| Demand driver | Basis | Supported figure |
|---|---|---|
| PMA population (drive-time catchment) | ~600,000 residents14 | Catchment base |
| Past-year SUD prevalence (12+) | ~16–17% of population (NSDUH basis)2 | ~100,000 affected |
| Treatment gap | ~85% of those needing treatment untreated nationally (41.1M of 48.5M, 2023)2 | Large unmet need |
| Residential / ASAM 3.5 share, seeking care | Conservative share of need requiring residential, on compressed authorized LOS7 | Modeled admissions > PMA beds |
| Supported stabilized census | 80 beds × 80% occupancy | 64 ADC / ~23,360 patient-days/yr |
Bed-need built from SAMHSA N-SUMHSS state profiles, NSDUH prevalence, and the PMA licensure roster rather than national averages or vendor dollar-market figures; see sources 1, 2, and 7. Figures are illustrative of the engagement type.
A thin licensed-bed set at the subject's level of care.
The competitive denominator is licensed residential beds at the subject's ASAM level, not every program with the word “treatment” in its name. The PMA holds a handful of relevant providers, several of them frequently waitlisted, and one of them not a clinical facility at all.
| Provider | Type / level of care | Beds | Payer posture | Read |
|---|---|---|---|---|
| Provider A | Hospital detox & inpatient psych (ASAM 3.7/4.0) | ~30 | In-network commercial + Medicaid | Acute; a feeder, not a direct residential comp |
| Provider B | Residential SUD (ASAM 3.5) | ~40 | Medicaid + commercial | Nearest direct competitor; often waitlisted |
| Provider C | Private-pay residential | ~24 | Private / out-of-network | Different payer niche, self-pay led |
| Provider D | PHP / IOP outpatient | n/a | Commercial + Medicaid | Step-down partner, not a bed competitor |
| Provider E | Recovery residence / sober living | ~50 | Private-pay rent (unlicensed) | Housing, not clinical treatment |
| Provider F | Hospital psychiatric unit | ~20 | All payers | Acute psych; limited SUD residential |
Competitive set surveyed for the engagement and reconciled to the SAMHSA N-SUMHSS facility census and the state licensure roster; anonymized. Announced and licensed beds were scanned, not only the standing set. See source 1.
Netting out the acute hospital units, the outpatient step-down, and the unlicensed recovery residence, the PMA holds on the order of 64 licensed residential SUD beds at the subject's level of care — Provider B's ~40 and Provider C's ~24 — and Provider C serves a private-pay niche rather than the commercial-and-Medicaid demand the subject targets. A rigorous study does not stop at that standing set: it reconciles the survey to the SAMHSA facility census and the state licensure roster so the capture forecast is not quietly overstated by beds the trailing data cannot yet see, and it credits no demand to the collapsed out-of-network residential model that produced the sector's 2014–2019 boom.1 Here the read is a genuinely undersupplied level of care: modeled residential bed-day demand exceeds the standing licensed beds, and the subject fills that gap rather than splitting a saturated market.
Massachusetts: a waiver state, a CON state, and a high-cost state.
Three Massachusetts-specific realities decide whether an 80-bed residential facility pencils: the MassHealth Section 1115 waiver that makes the beds Medicaid-billable, the Determination of Need regime most competitors state wrong, and an operating-cost base that must be rebuilt from local inputs.
The decisive fact is the waiver. Since Medicaid's 1965 enactment, federal law bars federal Medicaid payment for adults aged 21 to 64 who are patients in an institution for mental diseases (IMD) — a facility of more than 16 beds primarily treating mental disease — under Section 1905(i) of the Social Security Act, which is why so many residential facilities are built at exactly 16 beds.4 An 80-bed facility only clears that trap where the state holds a Section 1115 SUD waiver that lets it draw federal Medicaid funds for short-term IMD residential stays, subject to conditions including an ASAM-aligned care continuum and a roughly 30-day statewide-average length of stay. Massachusetts operates under such a MassHealth demonstration, so the subject can bill Medicaid for adult residential treatment; in a non-waiver state the identical 80-bed build would be structurally uninvestable for adult residential Medicaid, eliminating the largest payer by volume.5 This gate drives facility sizing and market selection more than demand does, and confirming current waiver status on the KFF tracker is a gating step of the study, not a footnote.
Massachusetts is also a Certificate of Need state — the regime is called Determination of Need (DoN), administered by the Department of Public Health under M.G.L. c. 111 §25C and 105 CMR 100.000 — a fact competitors routinely get wrong. DoN gates substantial capital expenditures, new facilities, and added hospital or long-term-care beds, and it imposes a distinctive Community Health Initiative contribution generally equal to at least 5 percent of the approved project's capital expenditure.13 For 2026 the inflation-adjusted hospital Substantial Capital Expenditure threshold is $27,668,903.99, effective October 1, 2025 through September 30, 2026. The subject, at a $26.0 million project cost, is a licensed residential program sized to sit just under that threshold and to be a Bureau of Substance Addiction Services licensure matter rather than a full DoN facility; the feasibility study runs the DoN screen explicitly and reserves the 5 percent Community Health Initiative as a contingency should DoN apply.13
Finally, Massachusetts is a high-cost operating environment. The Commonwealth carries among the highest electricity rates in the continental United States and an expensive clinical labor market, so national expense assumptions understate the cost base and are rebuilt from local inputs — the single largest of which, direct-care labor, is also the binding operational constraint on filling licensed beds.14 On the revenue side, the same discipline applies: the out-of-network commercial billing model that once carried the sector has structurally collapsed under utilization review, the No Surprises Act, and in-network conversion, with behavioral-health claim denial rates rising to 11.8 percent in 2024, so the model is built on collected, not billed, revenue by payer, and public tailwinds such as opioid-settlement funding ($57.7 billion cumulatively by December 2025) are segregated as non-recurring rather than underwritten as reimbursement.812
Why the campus fits the catchment.
Catchment size, payer composition, referral geography, and clinical-workforce availability all point the same direction, and the site converts that demand into filled, staffed beds.
The drive-time PMA of roughly 600,000 residents carries the payer composition a diversified residential program needs: a working commercial-insured base for in-network contracts, a substantial MassHealth-eligible population that the Section 1115 waiver makes billable, and a referral network of hospital detox units, emergency departments, drug courts, and outpatient providers that feed residential admissions. Trailing facility counts understate the unmet need because the largest share of people needing treatment never enter it, a distortion the study corrects for rather than extrapolates.2
The site does the rest. The subject occupies a suburban parcel of about four acres with the zoning and setbacks a residential clinical campus requires, close enough to the referral spine of hospitals and courts to shorten the admission path but residential enough to support a therapeutic setting. One siting nuance is specific to this asset class and is analyzed explicitly: persons in recovery are protected as persons with disabilities under the Fair Housing Act and the ADA, but the FHA protects dwellings, so a primarily clinical treatment facility may not be a protected dwelling in the way a sober-living residence is — a distinction that materially changes the siting and permitting analysis.9 The binding operational input, though, is clinical labor: in a high-cost Massachusetts market, the model credits the subject with an 80 percent stabilized census only after confirming the nursing, technician, and licensed-clinician pipeline can staff the beds at the wage assumptions the pro forma carries.
The conventional construction-to-permanent structure.
Total project cost lands at $26.0 million. No rule requires a study for a conventional loan; the bank requires one because a de-novo, special-purpose operating business is precisely the risk the in-place financials cannot resolve, and coverage — not leverage — sizes the permanent loan.
| Cost component | Amount |
|---|---|
| Land (~4-acre suburban parcel) | $2.20M |
| Site work & utilities | $1.80M |
| Building shell & core (~55,000 sf residential/clinical) | $13.50M |
| FF&E (clinical + residential) | $2.60M |
| Licensing, permitting & DoN / CHI contingency | $0.70M |
| Soft costs, design & contingency | $2.40M |
| Working capital & operating reserve (de-novo ramp) | $2.80M |
| Total project cost | $26.00M |
| Item | Figure |
|---|---|
| Conventional construction-to-perm loan (65% loan-to-cost) | $16.90M |
| Sponsor equity injection (35%) | $9.10M |
| Term / amortization | Perm 25-year amortization (interest-only through ramp) |
| Illustrative rate | ~8.5% |
| Annual debt service (stabilized, amortizing) | ≈ $1.63M |
Conventional and agency lenders size a loan to the most restrictive of loan-to-value, debt-service coverage, and debt yield; on a de-novo asset coverage binds first. Bank construction coverage convention runs ~1.20–1.40x, cost-based, with a takeout test. See source 15.
The equity injection sits at 35 percent, well above what a stabilized, well-documented asset would carry, and that is deliberate: a de-novo, special-purpose treatment facility is both a construction risk and a start-up, and the working-capital reserve inside the cost budget must carry the facility across the licensure-and-accreditation gap before it can bill at full capacity.10 A facility generally cannot bill commercial payers without Joint Commission or CARF accreditation, and it generally cannot be surveyed for accreditation until it has operated — the 6-to-18-month gap between opening and full billing capability that is the classic de-novo cash-flow trap in this sector, and the reason the $2.80 million reserve is sized to 12 to 18 months. At $16.9 million the permanent loan is 65 percent of cost, but the binding constraint at stabilization is coverage: on a 25-year amortization at an illustrative 8.5 percent, annual debt service is about $1.63 million — the number the projected coverage has to clear. The study exists to support exactly that, tested against an independent read of collected revenue rather than the sponsor's own projection.15
Feasible and bankable, on coverage the credit can document.
The stabilized model builds net revenue from collected per-diems across a diversified payer mix, nets a labor-heavy operating expense rebuilt from Massachusetts inputs, and carries the coverage to a 1.40x stabilized DSCR on a graded census ramp.
| Line | Basis | Amount |
|---|---|---|
| In-network commercial | 7,008 patient-days × ~$1,000 collected/day6 | ≈ $7.01M |
| MassHealth (Medicaid, §1115) | 11,213 patient-days × ~$410 collected/day5 | ≈ $4.60M |
| Medicare / Medicare Advantage | 1,168 patient-days × ~$525 collected/day | ≈ $0.61M |
| Private pay / self-pay | 3,971 patient-days × ~$650 collected/day | ≈ $2.58M |
| Total net patient revenue | 23,360 patient-days (64 ADC); ~$634 blended collected/day | ≈ $14.80M |
| Operating expenses | Clinical labor, patient-acquisition, dietary, utilities, insurance, R&M, G&A, management fee, tax | ≈ ($12.51M) |
| Net operating income (NOI) | Net revenue less operating expense | ≈ $2.29M |
Per-diems are collected, not billed — commercial residential is often quoted at $800–$1,500+ billed, but the model carries collected in-network rates, with Medicaid materially lower and state-set. Direct-care salaries, wages and benefits are the largest expense at roughly half of net revenue. See sources 5, 6, and 8.
| Year | Stage | NOI | Debt-service basis | DSCR |
|---|---|---|---|---|
| Year 1 | Census ramp (interest-only bridge) | ~$1.45M | Interest-only ~$1.44M | 1.01 |
| Year 2 | Building (accredited, in-network) | ~$1.96M | Full amortizing ~$1.63M | 1.20 |
| Year 3 | Stabilized (80% census) | ~$2.29M | Full amortizing ~$1.63M | 1.40 |
DSCR computed as NOI divided by the period debt-service obligation. Year 1 is intentionally at the ~1.00 ramp floor, covered by the interest-only bridge; permanent amortizing coverage is measured once census stabilizes. See source 15 for the conventional coverage convention.
The stabilized 1.40x coverage is the figure the lender documents, and it clears the conventional ~1.20 to 1.25x floor with real headroom.15 The ramp is census-driven and gated by accreditation, which is why it is deliberately graded. In Year 1 the facility is licensed and admitting but not yet accredited, so it leans on MassHealth and private pay while the interest-only bridge covers a ramp-year NOI near $1.45 million at roughly 1.01x. By Year 2, Joint Commission or CARF accreditation is in hand and in-network commercial contracts begin to convert, census builds toward 70 percent, and the project already covers fully amortizing debt service at 1.20x. Year 3 reaches an 80 percent stabilized census and 1.40x. Modeling mature-facility census in Year 1, a 28-to-30-day stay while payers authorize 10 to 20, or historical out-of-network collections, are the most common ways these pro formas fail review; each is stressed out of this model.7
On the equity side, the $9.10 million injection earns levered free cash flow that builds from roughly breakeven in the interest-only ramp year — where the working-capital reserve, not distributions, carries the facility — to about $0.5 million once stabilized and net of a capital reserve, and higher thereafter as commercial rate escalators, payer-mix seasoning, and operating leverage grow NOI toward roughly $3.3 million by Year 10. The exit is valued on a going-concern basis, not a leased-fee cap rate: a treatment facility is an owner-operated business, and behavioral-health assets trade on EBITDA multiples — accredited residential at roughly 5x to 8x business-only, standalone SUD near a 9.5x mean, and co-occurring near 11.4x.11 Capitalizing a Year-10 stabilized NOI near $3.3 million on a going-concern basis that bundles the operating business with the owned Massachusetts real estate — an overall rate near 9 percent, which cross-checks to roughly 11x facility EBITDA — implies a gross value near $36.5 million and roughly $21 million of net equity after selling costs and the outstanding loan balance. Blended with the interim distributions, the illustrative levered equity IRR is about 15 percent over a 10-year hold, a return the exit multiple swings and that the study flags as a sensitivity rather than a promise.11
Verdict: financially feasible and bankable. On independently derived bed demand, collected (not billed) revenue, waiver-enabled Medicaid, a stabilized 1.40x DSCR, and a ~15% levered equity IRR, the projections support the conventional construction-to-permanent credit.
Independent bed demand, payer mix, the regulatory gates, and DSCR stress.
The engagement was scoped the way a credit committee reads it. As an independent feasibility consultant, our role is to test the sponsor's projection against the market, not to restate it — the value of the deliverable is precisely that it carries no stake in the outcome. We derived bed demand from PMA population, SUD prevalence, the treatment gap, and the licensed-bed set, then sized the beds on compressed authorized bed-days rather than a legacy 30-day stay. We modeled revenue on collected per-diems by payer, not billed charges, and confirmed the Section 1115 waiver status that makes the 80-bed count Medicaid-billable before crediting a dollar of MassHealth revenue.
The coverage analysis was then stress-tested against the variables a treatment facility is most exposed to — census ramp, authorized length of stay, payer mix, and denial rates — to confirm the credit still holds when commercial conversion is slower or MassHealth is a larger share than modeled. Two scope boundaries are worth stating plainly: as the feasibility study company we reference, but do not perform, the Phase I environmental site assessment, the going-concern appraisal, and the Determination of Need legal filing, each a separate professional's engagement running in parallel.13 That combination — independent bed demand, collected-revenue payer modeling, the IMD and waiver gate, a reserved licensure-and-accreditation ramp, and a stressed DSCR — is what lets the lender rely on the file.
Representative engagement
This is an anonymized, illustrative worked example of our methodology, built on market data current to 2026; figures are representative of a typical engagement of this type and do not depict a specific client, site, or completed transaction.
Underwriting a Massachusetts behavioral health or SUD treatment facility? Start with the feasibility study.
Feasibility Study Company prepares independent behavioral health and SUD treatment feasibility studies for conventional, specialty-healthcare, SBA, and USDA capital, built to the coverage standard your lender must document. A methodology briefing walks through the bed demand, payer mix, the Section 1115 waiver and Determination of Need posture, and the DSCR analysis behind a case like this one, calibrated to your submarket and level of care.
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The deal figures are illustrative of the engagement type; the market data that grounds each dimension is real and sourced, drawn from our standing Massachusetts, Behavioral Health & SUD, and Conventional & Institutional analyses and the primary authorities they cite. Metrics are labeled by basis and payer and must not be compared across incompatible bases; billed charges, allowed amounts, and collected revenue are distinct.
- SAMHSA, 2023 National Substance Use and Mental Health Services Survey (N-SUMHSS), Publication No. PEP24-07-027 (December 2024): the definitive federal facility census (20,681 eligible facilities), used with state licensure rosters to build PMA bed-supply and payer-mix counts rather than national averages.
- SAMHSA, National Survey on Drug Use and Health (NSDUH), 2023 and 2024, with NACo summary: SUD prevalence and the treatment gap (48.5 million people aged 12+ with past-year SUD; 41.1 million of those needing treatment untreated in 2023).
- CDC/NCHS provisional drug-overdose death data (May 14, 2025): overdose deaths fell an estimated 26.9 percent in 2024, the largest decline on record, cutting against a perpetual-crisis demand narrative even as the structural gap remains.
- Social Security Act §1905(i); Congressional Research Service IF10222; Congressional Budget Office (April 2023): the Medicaid IMD exclusion and the 16-bed threshold barring federal Medicaid payment for adults 21–64 in an institution for mental diseases.
- KFF Medicaid Section 1115 waiver tracker; MassHealth Section 1115 demonstration: Section 1115 SUD/IMD waivers (introduced 2015, updated 2017) let waiver states draw federal Medicaid for short-term IMD residential SUD stays subject to conditions including a ~30-day statewide-average length of stay and ASAM-aligned care; current status must be confirmed on the KFF tracker, since counts shift. Massachusetts Medicaid residential per-diems are state-set and materially below commercial.
- Behavioral Health Business / ADSC (2024): commercial residential per-diem reference range (~$800–$1,500+) and PHP (~$400–$900); figures are billed or allowed reference points, not collected revenue, and payer bases differ by a factor of 5 to 10.
- Peterson-KFF Health System Tracker (2023 MarketScan): median hospital rehabilitation/residential length of stay of 6 days and detox length of stay of 4 days; authorized residential LOS has compressed from a 28-to-30-plus-day norm toward roughly 10 to 20 authorized days.
- Arise Billing Solutions (2024), citing industry data: behavioral-health claim-denial rates rose from 10.2 to 11.8 percent in 2024 (Medicare Advantage 15.7 percent; commercial 13.9 percent), a driver of the structural collapse of the out-of-network commercial billing model alongside the No Surprises Act (effective January 1, 2022).
- DOJ/HUD Joint Statement on Group Homes; City of Edmonds v. Oxford House: Fair Housing Act and ADA protection for persons in recovery, with the FHA protecting dwellings — so a primarily clinical treatment facility may not be a protected dwelling, changing the siting analysis versus a sober-living residence.
- Scope Research; Behavioral Health Business Broker (2026); Vallexa Advisors: the de-novo licensure-and-accreditation cash-flow trap (a 6-to-18-month gap between opening and full billing capability, requiring 12 to 18 months of reserved working capital) and the accreditation EBITDA premium at sale.
- Edgemont Partners (Fall 2025) and PitchBook: behavioral-health EBITDA multiples (accredited residential ~5x–8x business-only; standalone SUD near a 9.5x mean; co-occurring near 11.4x); the facility is valued as a going concern of real estate plus FF&E plus goodwill plus licenses, not a leased-fee cap rate.
- Opioid Settlement Tracker / GrantFinder Funding Report (December 16, 2025) and KFF Health News: cumulative opioid-settlement funding of $57.7 billion; settlement and SAMHSA grant funds are public-funding tailwinds, not recurring reimbursement, and are segregated from the pro forma and stressed to zero at renewal.
- Massachusetts Department of Public Health, Determination of Need Program; M.G.L. c. 111 §25C and 105 CMR 100.000; DPH DoN bulletin, “Expenditure Minimums for Applying for a DoN 2025-26” (memo dated November 18, 2025; hospital Substantial Capital Expenditure threshold $27,668,903.99, effective October 1, 2025 through September 30, 2026); 105 CMR 100.210 (Community Health Initiative contribution generally at least 5 percent of approved project cost).
- U.S. Census Bureau, Vintage 2024 and Vintage 2025 Population Estimates (Massachusetts 7,136,171 as of July 1, 2024; approximately 7.15 million by mid-2025, with net international migration falling from about 78,000 to roughly 40,000 and continued domestic out-migration), used to build the PMA catchment; Massachusetts carries among the highest electricity rates in the continental United States, elevating operating expense above national assumptions.
- CBRE, Q4 2025 Multifamily Underwriting Survey and lender coverage conventions; conventional and agency lenders size a loan to the most restrictive of loan-to-value, debt-service coverage, and debt yield, with bank construction coverage conventions of roughly 1.20x to 1.40x on a cost basis and a takeout test; in a higher-rate environment coverage binds before leverage.