By Jack Cumming
Tales of Sam Veltheim, Resident Director
Author’s Note: This is Part 6 in a fictional account of how one CCRC might have evolved with a different cultural focus. The series is unashamedly written from a resident’s perspective.
The story so far: We last left the residents of Resteasy Village, led by Executive Director Sam Veltheim, himself a resident, contemplating the development of a 320-acre property given to them by the city’s beloved Coach Koch.
Enthusiasm for the new unified town plaza concept grew among the residents as they discussed it and looked at the architectural renderings. They had provided input from the earliest conceptualization and were impressed with the mixed classicism provided by renowned collegiate architect, Gregorios Triandis. Most residents felt they had ownership, so they were among the most enthusiastic supporters of the project.
Financing Challenges
Sam Veltheim was working closely with a partner, Latisha Simpson, from Adler Hirsch, a leading New York investment banking firm, to bring the ambitious project to fruition. Market studies had shown that the growth of the city, and the aging population in the surrounding municipalities, brought with it high demand for quality communal services, both for a growing senior population and for all ages.
The biggest challenge was how best to finance the project. This is where Latisha’s financial expertise was of the greatest value. Resteasy Village was organized as a tax-exempt, not-for-profit home for the aged under IRS guidelines. The conventional approach for expansion of such communities was to encumber resident entrance fees to guarantee the added debt.
Sam and Latisha thought this was unwise for two reasons. First, it would burden the CCRC to the point at which it became risky for residents. Second, diverting entrance fees to expansion broke faith with the contracting residents. Entrance fees are advance payment for lifetime commitments, not investment capital to be risked by the enterprise.
Protecting Residents’ Good Faith
Resteasy Village existed to provide haven for aging persons. Undermining that purpose was not acceptable to the board, once the directors fully understood the hazards of the conventional approach. Latisha Simpson’s creative general financing experience was of immense help.
The board’s inclination was to continue as a tax-exempt organization, so Latisha explored with them the creative possibility of adapting the Surplus Note capability used to capitalize mutual insurance companies to support adequate capitalization for Resteasy Village. The board’s financial goal was to maintain a positive net asset position at least equal to 10% of liabilities.
When Latisha first mentioned Surplus Notes to Sam Veltheim, he looked into the instrument, where he learned that “in the United States, a contingent surplus note is a bond-like instrument issued by an insurance company. These securities are subordinated obligations and fall at the very bottom of the operating insurance company’s capital structure.”
Insurance companies are allowed by statutory accounting to treat the proceeds from these notes as part of their net worth above the line. Latisha thought that it might be possible for Resteasy Village to use a similar financial device to meet its capital adequacy objectives while retaining tax exemption or at least the customer focus of a mutual corporation.
Back To Basics
In practice, however, the Surplus Notes proposal seemed a bit too creative for the board to be fully comfortable with. This all emerged in a full-day board workshop meeting at which the development and its financing were the core items on the agenda.
Latisha opened the meeting with a presentation of alternatives. There was an obvious conflict between the Board’s capital adequacy objective and retention of tax-exempt status. The financial advisor on the Board made an impassioned plea that capital adequacy be given primacy, especially for an organization that had the security and welfare of vulnerable older people in its care.
Capital Adequacy vs. Tax Exemption
Latisha presented the financial and other impacts that would ensue if Resteasy were to convert to for-profit status. For openers, the city would welcome the change because of the tax revenues it would receive. Surprisingly, the property taxes that would fall to the enterprise were not as great as many had feared.
Moreover, Sam thought that there were economies associated with the development that could offset the taxes that the city would receive. In addition, converting to a taxpaying enterprise would facilitate the inclusion of the commercial entertainment and shopping center within the project.
The discussion lasted the rest of the morning and into the afternoon, but by the end of the day, the board was much more comfortable with considering a financing approach that would involve a for-profit enterprise. They decided, though, to retain the not-for-profit enterprise for certain functions, including many of the common care functions. Because they formed, with Coach Koch’s acquiescence, a new for-profit entity to complement the nonprofit, the conversion challenges were greatly reduced. They no longer needed attorney general approval to take the planned steps.
Funding The Dream
Adler Hirsch, the investment bankers, recommended a private placement with sophisticated accredited investors known to have an interest in mixed-use commercial and senior housing development. Sam Veltheim wanted residents to have a priority opportunity to invest in the venture that houses them. Latisha Simpson suggested that priority be given to those residents who qualified as sophisticated investors.
For the most part, a person qualifies as a sophisticated or accredited investor with either a preset net worth or sufficient earnings. Since confining the opportunity to qualified investors would spare Resteasy Village the cost of disclosure and prospectus requirements, Sam agreed to the restriction. Moreover, it seemed likely that the bulk of the residents who would want to make such an investment would qualify.
The results were surprising. It turned out that there was more resident wealth than Sam had ever imagined. The equity-ownership offering, when it was made, was 60% subscribed by qualified residents, with only another 40% to be made up by outside interests. It was decided to finance the project with 75% debt and 25% equity.
Getting It Done
With the money in hand, construction began, and the project quickly took shape over the next 15 months. There were complexities attributable to the project’s foundational and below-grade aspects. Excavation was accomplished in stages. One stage’s below-ground infrastructure was built. Then, soil from the next stage was used to cover it. That then provided a foundation for planting. Once construction was underway, shrewd use of contractor incentives, devised by Latisha Simpson, brought the project forward to completion on time and with high quality.
Resteasy Village, the name now adopted for the entire mixed-use project, soon took on a new connotation as a place for relaxation more than as a haven for those seeking peace of mind while aging. As had been envisioned, Resteasy provided a unifying center for the city, which the city had previously lacked. It became the local gathering place, which gave families a safe place to come together while offering invigorating opportunities for the older residents in the CCRC.
It wasn’t long before the city decided to lease a structure at Resteasy Village as a municipal center and city hall. The merits of early planning with imagination and competence gave new life to all, bringing together all ages in a way conducive to interaction and natural harmony.
Stay Tuned. There’s more.
Disclaimer: In this story, and in other related tales of Resteasy Village, all names, characters, and incidents are fictitious. No identification with actual persons (living or deceased), places, buildings, businesses, or circumstances should be inferred.
