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Shaky Finances of Continuing Care Retirement Communities

If you or your parents are considering moving to a CCRC, or already live in one, you'll want to keep an eye on its solvency

By Lani Luciano | February 9, 2012

A Continuing Care Retirement Community, or CCRC, can be a wonderful place to live. By combining independent apartments or cottages onto a campus with assisted living units and a nursing home, a continuing care community offers peace of mind. Residents expect that after paying the facility’s entrance fee, they’ll be able to age-in-place as their caregiving needs change. But the financial health of some of these communities raises cause for concern.
 
Eight continuing care retirement communities have declared bankruptcy in recent years and an additional two dozen or so are teetering, says attorney John Durso, a senior partner with the Healthcare Practice group at Ungaretti and Harris, a Chicago law firm involved in several of the bankruptcy cases. CCRCs have experienced financial troubles before, notably in the 1970s and 1980s, when the industry attracted some dishonest firms.
 
If you or your parents are considering a move to a continuing care retirement community — or already live in one — you need to understand what could happen if the CCRC runs into financial trouble.
 
No resident has ever been evicted due to a CCRC bankruptcy, notes Durso, and only one meltdown caused residents to lose part of their entrance fees. So far, all the bankrupt properties have been sold or reorganized, with residents mostly unaffected in any significant way. “Short-changing residents is the last thing a CCRC wants to do,” Durso says, “because once word gets out, you can’t get anyone new to buy in.”
 
Still, the turmoil at stressed properties has created anxiety for residents and has often led to service cutbacks, ranging from limited menus to fewer shuttle buses for shopping. In some cases, staff vacancies have gone unfilled and residents’ monthly fees have gone up.
 
For decades, the continuing care retirement community business model worked perfectly well. The facilities’ owners used the upfront fees from new residents to underwrite the growing needs of their older residents. But the prolonged slump in housing values and the gyrating stock market have disrupted the equation lately.
 
“If seniors can’t sell their homes and their investment portfolios are down, they can’t come up with the cash for a CCRC,” Durso says. As a result, occupancy rates at some continuing care communities have become too low to sustain promised services and fully pay creditors, much less to refund entrance fees when a resident dies or moves out.
 
The most vulnerable properties today are stand-alone projects conceived by well-meaning but inexperienced non-profits and launched just as the real estate bust began. A prime example is the Clare, an upscale Chicago high-rise sponsored by a Catholic religious order, the Franciscan Sisters, that opened in 2006. Barely a third of its 248 independent living units were occupied when it declared bankruptcy last fall.
 
Steve Maag, who oversees continuing care retirement communities for LeadingAge (the senior housing industry association) says the vast majority of CCRCs are in fine financial shape. But he admits there are several on his private “watch list” that should be seeking help, but aren’t. “The longer they wait to solve their problems,” Maag says, “the harder it’s going to be.”
 
There is no federal oversight of CCRCs, other than anti-discrimination laws. Some 38 states regulate them in various ways, mainly protecting residents’ rights, not stepping in if there are solvency issues. Fewer than 20 percent of the communities are accredited by the Commission on Accreditation of Rehabilitation Facilities, which evaluates, but does not guarantee, a community’s financial health.
         
What it all means is that you’re pretty much on your own when judging the finances of a continuing care retirement community. Here’s what experts recommend you do:
 
Ask the management and residents about the facility’s financial health. You may or may not get a straight answer from CCRC staffers. But residents can tell you whether they’ve noticed a cutback in services or staff recently. They may be even more clued-in than that. “CCRCs are full of educated people,” Durso says, “some of them are even accounting professionals. Odds are, they’ll know if something’s up.”
 
Examine the facility’s financial statements. Most CCRCs will provide an audited statement of their finances. If you can’t get one, that’s a red flag. Look for phrases, usually in the footnotes, like “waiver of default” or “forbearance agreement,” which signal that a community is negotiating with its creditors. You might also want to download a “Consumer Guide to Understanding Financial Performance and Reporting at CCRCs” from the website of the Commission on Accrediation of Rehabilitation Facilities.
Get help from an expert. If reading financial statements is beyond you, “bring them to a CPA or financial planner,” says Cheryl Sherrard, director of financial planning at Rinehart Wealth Management in Charlotte, N.C. Short of deliberate fraud, a distressed balance sheet will be obvious to a trained eye. The cost for the review should be well under $1,000; the service might be free if you already work with a financial adviser.
 
Sherrard, who advises many CCRC residents, has one caveat. “A whole industry of so-called senior housing advisors has sprung up,” she says. “Some of these folks have little or no financial training.” To avoid exploitation, Sherrard suggests you use an accountant you trust or use a fee-only financial planner. You can look for a fee-only financial planner at the website of the National Association of Personal Financial Advisors, which is the trade group for these advisers.
 
Avoid a continuing care community with a big, refundable, upfront fee. That’s because, if the CCRC enters bankruptcy, you may not be able to get back your “refundable” fee.
 
Some continuing care retirement communities charge in other ways, without hefty, refundable, upfront fees. They might operate on a purely rental basis, where residents’ access to higher levels of medical care is subject to availability. In those cases, upfront fees will be minimal. Other CCRCs only offer contracts with non-refundable, albeit lower, entrance fees.
 
If you can’t avoid a large refundable fee, you may be able to bargain it down, putting less of your cash at risk. Even many healthy CCRCs are eager to fill units right now.
 
Wait a while, but not too long. Experts predict that once the housing market recovers, pent-up demand for continuing care communities will start filling up the facilities again, improving their bottom lines considerably. Keep in mind, however, that residents must be healthy when admitted into communities with pre-paid contracts that guarantee higher levels of medical care at the same rate as independent living, or at a discount from the full price. So if your health, or your parents’ health, worsens while waiting for a continuing care community’s financial health to improve, you or they may be out of luck.