By Jack Cumming
Not long ago, SLF’s Steve Moran challenged people to come up with “stupid” things in senior living. Of course, he didn’t mean that people are stupid. He meant that there are things that are common practices that don’t make sense.
In this article, we focus on two common practices that inhibit sales. We should quickly add that not all providers follow these practices. Those who don’t should take pride in their wisdom. Others, though, may find opportunity in change.
Priority for Vacant Units
A major selling point for my wife and me when we were considering moving to senior living was the assertion that existing residents had first claim for the larger more attractive apartments. The idea was that you could move into a placeholder unit to get the benefit of that priority. The sooner you moved in the higher your priority. That was compelling.
We were so eager for the benefits of congregate living, that we decided that we would even accept a studio apartment if that were all there was. Our thinking was that we would then rent a larger apartment in town and use the on-campus studio as an office. We both intended to remain productive and socially active. That was fifteen years ago.
Shortly after there was an available studio, but it wasn’t offered to us. When we asked why we were told that marketing didn’t think the studio was suitable for a couple. Within weeks, though, we were offered a two-bedroom unit as a placeholder while we waited for a more suitable unit. We wanted two sinks in the master bath (nice for marital harmony), and enough space so we weren’t all over each other trying to share that one room for an office.
It took another year, and we finally moved to what was not our first choice but what was better than that small two-bedroom apartment with its limited working space. Shortly after, a new Executive Director arrived, and we learned that the marketing policy had changed to give first priority to nonresidents over residents. Residents could only claim a vacant unit after it had been on the market for 90 days.
We assumed that the new Executive Director had changed the policy. We’ve since learned that the favoring of nonresidents was not new, but that marketing had cleverly talked around the policy to encourage us to move in early. Marketing had it right. The Corporate Policy makes no sense.
The Right Thing Is the Smart Thing
First, giving priority to residents is simply the right thing to do. They’re your customers. They are loyal to you, and you owe them some loyalty in return. Second, giving priority to residents spurs sales by giving an incentive for those who are just window shopping to decide to move in sooner. Third, happy residents, whose changing needs are accommodated, will encourage a positive word-of-mouth reputation, which takes on new importance in a social media era.
In short, having a two-tiered waiting list for insiders and outsiders just makes sense, and the logic is flawed that imagines that giving priority to prospects will promote sales and move-ins. Those prospects, who might have moved in while waiting for their first choice, will soon learn that waiting works. Moreover, the romance of senior living may fade while they wait.
The second flawed practice is more compelling than the first. But, we’ll start at the beginning to set the stage. A fundamental premise of senior living is that as people age it’s appropriate for them to downsize into smaller living quarters. That downward trend toward a simpler life with fewer possessions doesn’t end with move-in.
Typically, newer arrivals, particularly couples, if they can afford it, want larger apartments as an intermediate stage in that process. When a spouse dies, the surviving spouse is often ready to move to a smaller unit within the senior living complex both to leave behind painful memories of loss and to further move along the simplification continuum.
In that context, consider the following contractual provision concerning such “transfers,” which is excerpted from a contract form commonly found among “charitable” nonprofit providers.
“The Entrance Fee that you paid for your previous apartment will be applied to the Entrance Fee for your new apartment. If the Entrance Fee that you paid for your previous apartment is less than the then-current Entrance Fee for the new apartment, you will pay the difference at the time of transfer. If the Entrance Fee that you paid for your previous apartment is more than the then-current Entrance Fee for the new apartment, the provider will pay the difference to you.”
This seems to confuse many people, so we’ll try to simplify it. The apartment you, as a resident, leave when you move was worth much less when you moved in than what it has now appreciated to. You have to pay the full current price for the new apartment, but the provider requires that you also pay the provider for the appreciation in value of the old unit. You wouldn’t accept that for a home you own, and it seems unfair with a home you pay for but the provider owns.
If this is confusing, we’ll use some hypothetical numbers to illustrate. The nature of numbers is that the more you work with them the clearer they become. If you care about this and want to understand, you may want to write the numbers down in columns to see if that helps.
Consider the situation in the outside housing market of homeowners. Let’s say you own a large home for which you paid, say, $200,000 many years ago, and you want to downsize to a new home that costs $300,000 today. You check with a realtor and learn that the home you are leaving is now worth $500,000. When you sell your old home, you have the full $500,000 to use for the new home.
That’s not the way this common senior living transfer works. Continuing with our example, your new, smaller home has an entrance fee of $300,000. You paid an entrance fee of $200,000 many years ago for the larger unit. The entrance fee for that unit is now $500,000. You can make the move, but you have to give the difference of $100,000 to the provider instead of having any benefit from the increase in value of the unit you are leaving. That can strike residents as unfair.
Moreover, the risk stays with you, the resident. You may be asking, “What risk?” When you buy a home with a mortgage, you know that your down payment is at risk. You know that if a bank forecloses, the homeowner loses the full down payment. That’s called “equity risk.”
That’s the same risk that entrance fee investors have in nonprofit senior living. Nonprofits use resident entrance fees to secure the provider’s debt. The residents carry the “equity risk.” Residents are at the bottom of the financial hierarchy if the enterprise flounders.
Residents are in the financial position of equity providers but without the equity prerogatives of ownership. Nonprofit debt financing places the residents at risk for their entrance fees. In ordinary practice, the providers of the equity risk capital reap the gains from the debt leveraging. This practice in senior living reverses that to favor enterprise interests.
What of Derek?
Consider the situation of Derek (name changed to protect the parties). Derek lived for twenty years in a comfortable one-bedroom far from the dining room and public areas. It was a time of considerable inflation (our nation’s stated economic policy calls for a government fostered inflation rate of 2% a year). A studio near the dining room was vacant, and he asked if he could move there. That’s when Derek learned of the contractual transfer pricing. To downsize to the less valuable apartment he would have to make up an entrance fee shortfall of $90,000. Derek bought a motorized chair instead.
If Derek had moved, the larger apartment could have more readily attracted a move-in than did the studio. Soon, Derek was moved involuntarily to assisted living, so the provider reaped the entrance fee appreciation on both apartments anyway. Moreover, encouraging natural downsizing among residents not only better meets their needs, but can also help marketing as well.
For marketing, it can be hard to persuade a prospect to give up a comfortable living situation to live out the rest of their days in a single room. Derek was willing to make that move, which would have freed up the more desirable one-bedroom unit. Thus, enforcing the contractual provision impedes sales.
Hearts and Minds
It’s possible that a well-intended contract drafter, thinking only of a client-provider’s best interests, put together this common transfer language. A lawyer works for a client, so it may be understandable that a lawyer gives the client an advantage with little regard for fairness, what’s best for the consumer, or for how such a provision if followed in practice, can affect sales.
No one will object if a contract drafted to favor the provider, and which the consumer has to accept without change, is administered more fairly in the consumer’s interest. Of all industries, senior living needs to act above reproach in its commitment to those who trust their lives to its care.