By Jack Cumming
Joe Romano was troubled. He loved the idea of living with others aging, as he was. His wife had died recently, and Joe was lonely in the big, rambling house in which they had raised their seven children, four boys and three girls.
Joe Considers His Options
Joe lived in Wellesley, and many of their friends had moved to North Hill when they “were ready for that.” Some went voluntarily while others were pressured by their children to move. Joe had been thinking of North Hill but putting it off. He had yet to visit the community or to contact its marketing facilitators.
Then he stumbled across a troubling story in a major national media outlet. A CCRC enterprise that Joe would have thought was solid had gone through a financial reorganization. It was what’s called a “prepackaged bankruptcy.” The residents’ contracts were voided, and they were given 30 days to accept new contracts with fewer safeguards.
Oddly, in the bankruptcy, “refundable” entrance fees were favored over entrance fees that were merely prepayment for future services. One would have thought that an industry dedicated to alleviating “the unique forms of ‘distress’ to which the aged, as a class, are highly susceptible” would have favored care for the continuing residents over cash refunds.
Joe thought about what that would mean for him if he had been a resident. He would not have been able to afford a “refundable” contract. Moreover, the residents as a group had not even retained counsel. They had hoped that the regulators would look out for them. Joe felt stymied, and as a modern man, he turned to AI, actually Google’s Gemini, for guidance.
The Big Question
Joe Romano asked AI, “Are nonprofit CCRCs financially safe for residents?” The answer was quick and firm: “Nonprofit Continuing Care Retirement Communities (CCRCs) offer greater financial safety nets than for-profit options, but they still carry general industry risks.” Joe wanted to believe that, but a neighbor, Sam Atkins, who had researched CCRCs before deciding to stay put, shared his own contrary findings. As a business historian, Sam Atkins was schooled in research.
What Joe’s Neighbor Found
A sales counselor at a CCRC told Sam the same thing as AI told Joe. The response didn’t make sense. How, Sam wondered, could an entity with a negative balance sheet be more secure than a for-profit with a strong balance sheet? He set out to better understand the premise that “nonprofit CCRCs offer greater financial safety nets than for-profit options.”
First, Sam had learned that some for-profits, e.g., ERA Living and Continuing Life, LLC, protect entrance fees with a first deed of trust, providing residents a financial claim on the CCRC assets if it faltered. Then, he found out that many, perhaps most, not-for-profit CCRCs treat entrance fees as at-risk equity funding.
Sam was puzzled. How could CCRCs that put entrance fees at equity risk offer greater safety than others with finances buffered by outside equity investors? It made no sense. Sam shared these findings with Joe.
Contract Consideration or At-Risk Equity Funding?
Sam then asked Joe what his understanding was of the entrance fee. Joe said that he’d been told that entrance fees were prepayment for the possibility of future care so that his recurrent fees wouldn’t change if he later needed “enhanced living” or skilled nursing. He added that that was what was in the residence agreement.
Entrance fees were contract consideration to offset reduced recurring fees over the residents’ lifetimes. As part of his retirement planning, Sam realized that such an entrance fee is the same as a single premium life annuity. He was puzzled that they didn’t seem to be regulated the same.
Sam called the Massachusetts Executive Office of Aging & Independence, and they weren’t able to help him. Sam shared his discovery with Joe and explained that financial fragility and dissimulation were why he decided to stay put.
The Awakening
As it turned out, Joe had some financial background. Early in his career, he had sold life insurance and qualified for many of the credentials that give insurance agents credibility. Sam’s insights impacted him, and he sought out objective data. What he found was Form 990 filed with the IRS. It showed that his first choice had an impaired balance sheet.
Joe then asked the marketing people about the impairment, and they referred him to the Director of Finance, who acted like a “negative net asset” position was common and who then spoke of “days cash on hand” and “bond covenants.” Joe had an uncomfortable feeling about the finances and the financial prudence at the community. He did, however, like what he saw of the living arrangements and the residential life.
That visit, with its deflection of his core concerns, led Joe to take a different course from that taken by his neighbor, Sam. Joe decided that community living would be better than staying put. His confidence in North Hill shaken by that balance sheet, he was temporarily intrigued by Fox Hill Village, a resident-run cooperative. But, as he dug deeper, he found that its finances also lacked the solidity that he felt he needed.
The Search
Joe pursued a long search, in which he discovered that many, many not-for-profit CCRCs tried to rationalize a negative net asset position, i.e., an impaired balance sheet. He was repeatedly told that while an impaired balance sheet can seem distressing, negative net assets are common for CCRCs and cooperative senior living models.
CPAs, who he had always thought to be trustworthy professionals, told him that the appearance of impairment is driven by the unique accounting standards governing the industry. Joe found that deceptive. If accounting has any meaning at all, he decided, then an impaired balance sheet is impaired and should be avoided. He liked the not-for-profit idea in the abstract, but if it put his latter years at risk, he decided it was best to avoid it.
Eventually, after much thought, more research, and the realization that GAAP balance sheet impairment was widely tolerated by the Massachusetts regulators, Joe decided on Brookhaven at Lexington. It turned out to be his happy place. The balance sheet wasn’t strong, but it was positive; revenues covered expenses, and Joe had found those measures of sound financial management of CCRCs to be rare in Massachusetts.
Note: Characters are the product of the author’s imagination, and any resemblance to actual persons is entirely coincidental. Financial and contract regulation varies widely from state to state.
