Is Your CCRC Financially Stable?
Whether you are a prospective resident of a Continuing Care Retirement Community (CCRC) or already a resident of one, the financial stability of the community should be well examined. After all, moving to a CCRC is a major financial and lifestyle commitment and it is important to know that the community will be there when you need it most.
The economic downturn has brought this issue to the forefront as evidenced by the recent Chapter 11 filing of a major CCRC developer out of Maryland, Erickson Retirement Communities. According to “The Bond Buyer” Erickson is the developer of 19 CCRC’s throughout the U.S. and at the time of filing had over $500 million of outstanding debt on various properties. Despite discussions and negotiations with its creditors Erickson was unable to reach an out-of-court agreement. http://www.bondbuyer.com/issues/118_203/Erickson-Retirement-Bankruptcy-1002845-1.html.
Like any other business you might give your money to it is important to do the appropriate research. Of course, there is ultimately no way to guarantee that your CCRC will always remain financially stable but there are a number of things you can look for that will likely increase the odds that it will.
Before getting to a few helpful hints there are some things you should understand about CCRC finances in general. First, the accounting for CCRC’s is rather unique from that of most business. Many of the communities accept a large entrance fee up- front, although only a portion of it will be considered income in the first year while, the remainder will be considered deferred income.
Second, there are various types of contracts among communities and the accounting will be handled differently depending on the type of contract. (I will address these contracts in a future post.)
Finally, many communities offer refund options, which further confuses the process. These differences in contract types and refund options also makes it very difficult to do an “apples-to-apples” comparison of the finances among different communities.
Despite the type of contracts and refund options your community offers there are a few common things to look for as a starting point:
1. Does your state have minimum reserve requirement? In the state of North Carolina all Continuing Care Retirement Communities are regulated by the department of insurance, which has strict minimum reserve requirements that each community has to meet.
2. Is the continuing care retirement community a “mature community” or a start-up? A mature community is typically considered to have been in existence for 8 years or longer. A start-up community may be managed very well but it does not have a track record and will usually face financial challenges that many mature communities are not contending with. Also, although the actual community you are considering may be newly developed there is a chance it may be owned by a parent company that has been in business for decades.
3. Is the CCRC accredited? The Commission on Accreditation of Rehabilitation Facilities/Continuing Care Accreditation Commission (CARF/CCAC) represents the only accrediting body just for CCRC’s. The retirement communities have to apply for accreditation so if a community is not accredited it does not necessarily mean that it isn’t in good financial standing. Additionally, the finances of the community are only one aspect of the accreditation process. Nonetheless, the commuities that have acheived accreditation have met the financial requirements of CARF/CCAC, which are rather rigid.
4. Has the community or its bonds been rated by one of the major rating agencies such as S&P or Fitch? If the community has issued bonds for start-up or for planned additions the rating agencies will rate the bonds and the bond is an indication of the financial stability of the community. The CCRC itself may also request to be rated. An investment grade rating will be considered favorable, although start-up communities will likely not recieve an investment grade rating.
5. Are the management team and board of directors proficient with varying backgrounds and strong business experience? Ultimately these two groups will be making the major decisions that affect your retirement community so experience and background are important.
6. Is there a history of high occupancy rates? Be sure to find out what the rate of occupancy has been over the past 18 months or so. Has it been consistent or growing? Have there been major changes in occupancy rates? If so, why? Occupancy rates are a major factor in the financial stability of CCRC’s.
7. Is the community able to generate cash flow from profitable operations, without the benefit of new advance fees or does the community rely on advance entrance fees as part of operating cash flow? Also, is there a heavy dependence on ongoing fundraising support or philanthropic contributions to subsidize operations and debt service? The ability to generate cash flow from operations sufficient to cover debt service will add another layer of financial security for the CCRC.
There are many other factors to consider that fall outside of the level of detail that I want to get into in this post, including financial ratios and actuarial projections. There is also an additional set of issues to address for start-up communities. My opinion is that is almost impossible to cover every base when it comes to determining the financial soundness of a CCRC. There are many, many moving parts. But if you know several pf the key items to look for you can go a long way in doing your due diligence.
Several of the above items, among many others, are discussed in the Fitch Ratings publication: “Rating Guidelines For Non-Profit Continuing Care Retirement Communities,” which can be found at www.fitchratings.com. If you would like to discuss CCRC finances in more detail feel free to contact our office at 877-699-2272 or if local you may call 919-773-2386. Also feel free to contact us via email at info@carolinacontinuingcare.com.
Brad C. Breeding, President
Carolina Continuing Care Planning, LLC.