By Jack Cumming
“I’ve been reminded of the multiple constituencies that a nonprofit organization can energize and harness and leverage and convene together . . . And a for-profit organization does not have that.” – Kathleen S. Anderson, President & CEO, Goodwin House
“The challenge is . . . that we, as nonprofits, need to focus our attention on those areas where the for-profits aren’t going to gravitate . . . those unfulfilled needs.” – Louis J. Woolf, President & CEO, Hebrew Seniorlife
“For me, the bottom line is, Jesus spent his life on this earth serving other people. So if it was good enough for Him, it’s bound to be good enough for us.” – Ron Jennette, President & CEO of Methodist Retirement Communities
These perspectives, beliefs, and convictions are from a 2017 LeadingAge initiative asking a group of senior living leaders to do some soul searching around the nonprofit advantage. Since then we’ve had a pandemic, but the question still hangs in the air. What is the nonprofit advantage? Is there a nonprofit advantage? It’s a question that has long lingered in my mind.
One branch of the senior living industry serves the indigent and depends on philanthropy and government grants for funding. Another branch provides services to the affluent, often in Continuing Care Retirement Communities (CCRCs aka Life Plan Communities). A favorable tax ruling in 1972 has allowed enterprises to cater to both socioeconomic groups – indigent and affluent – while remaining fully tax-exempt. That has brought nonprofits into direct competition with for-profit enterprises. The for-profits are proving resilient. These senior living leaders all agree that the nonprofit share of the market is declining.
The For-Profit Advantage
There are clear advantages to the for-profit corporate form:
- For-profits have access to equity capital; nonprofits do not.
- For-profits are owned by their equity investors; nonprofit ownership is abstract.
- For-profits pay taxes, which is socially responsible; nonprofits are tax exempt.
- For-profits can give residents ownership; nonprofits cannot.
Like nonprofits, for-profits can serve the public good. There is even strong evidence that such a servant mentality leads to greater growth and profitability. A cursory look suggests that some senior living nonprofits spend more to avoid taxes than it would cost to pay them in the first place. Is it time to reconsider the primacy many industry leaders now give to their nonprofit status?
When my career began in earnest, I was proud to work for a large mutual life insurance company. Mutual companies are owned by their customers, policyholders in the case of mutual life insurance companies. That all changed with the interest rate disruption of the early 1980s. You may remember that era. Today interest rates are minimal. But then mortgage rates rose to 20% and there was no end in sight. It was a devastating crisis for life insurers.
Like senior living contracts, life insurance contracts are often for the lifetimes of their customers. In the 1980s, the insurers needed equity capital to be able to weather volatile interest rates. Some companies had the needed balance sheet strength, but others were at risk. Prudential, Metropolitan, Equitable – the three largest mutual life insurers – all converted along with many smaller entities. Equitable was then bought by AXA.
Those conversions have been very successful. The industry came through the time of trial and is thriving today. Cynics argue that a key reason for mutual insurers’ becoming stock companies is that their executives see a chance to get richer. While it’s true that stock options can be a compensation tool that is not available for mutual companies, I can’t imagine executives who are already well paid being that duplicitous.
Nonprofit Senior Living
Nonprofit senior living enterprises do not face a pressing crisis as did the mutual life insurers in the interest rate upheaval of the 1980s. An infusion of equity capital can nevertheless be beneficial.
Access to capital can:
- Strengthen the balance sheet to lower debt costs
- Provide funding to make the enterprise more attractive to a public skeptical of senior living
- Allow those residents who want ownership to have a stake in their homes
- Pay for the physical upgrading and refurbishment of dated facilities
- Cover the cost to upgrade technology to leapfrog senior living into the digital forefront for the 21st century.
This fifth purpose needs emphasis. The lack of state-of-the-art technology has become a major marketing handicap. Those who do move-in may be less technically astute, so a self-fulfilling cycle may assert itself. A common belief is, “Our residents aren’t ready for technology.” The alternative is, “Our lost sales are those who rely on technology.” Turning technology from a weakness to a strength can be game-changing.
The Mechanics of Conversion
Law firms, investment bankers, and other corporate and financial counselors can advise on the conversion process. The process is not complicated. For instance, in California, the NEO Law Group, a San Francisco-based firm serving nonprofit and tax-exempt organizations, outlines three steps:
- The State Attorney General’s approval is needed (Corp. Code § 5813.5(b));
- All “charitable” assets must be transferred to another charity; and
- Usually, an independent valuation appraisal must show that the transaction is fair and reasonable.
The conversion can then be accomplished by amending the Articles of Incorporation and, most likely, the bylaws. Whether the receiving entity for the “charitable” transfer can be a continuing affiliated nonprofit is an intriguing legal question. Specialized legal counsel is essential for any conversion.
Rethinking the concept of a nonprofit advantage to a service concept that can give any enterprise credibility can open the door toward growth, toward serving more Americans, toward making congregate living more attractive and less institutional, and toward unbridling the spirit of innovation and better living. The executives interviewed for the 2017 LeadingAge program were exemplary in their public-spiritedness. They would act no differently as for-profit corporate leaders. Our industry’s common purpose is to better meet the needs of aging Americans.
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