By Jack Cumming
With a New Year comes New Beginnings. 2021 promises new hope, new opportunities, and new joy. This series starts the year by rethinking what senior living might be.
This is Part 1 of a 3-Part Series exploring some of the fundamental thought premises of senior living. In this first part, we question the primacy given to the distinction between tax-exempt organizations and those that are taxpaying.
It’s time to rethink whether nonprofit status is best for senior housing. It may be past time. But let us begin.
The Nonprofit Myth
The most obvious advantage of tax exemption may prove to be its weak point. That advantage is the avoidance of taxes. To qualify for tax exemption senior housing enterprises don’t even need to be charitable, in the usual sense of dependence on donors, nor do they have to avoid profits. Profitability and tax exemption? That sounds irresistible.
To gain that tax avoidance, not-for-profits have to give up access to the equity markets. They lose the potential market advantage of giving residents an ownership stake (though there are seldom-used workarounds), and they become less accountable, which some may see as an advantage though it can also lure an organization into complacency and rigidity.
For a long time, it was thought that nonprofit status was a marketing plus, and anecdotal information suggests that it was. That advantage is eroding, however, as a more sophisticated, more highly educated consumer is redefining the marketplace. Today’s consumer is resistant to traditional nonprofit financing models like entry fees. Entry fees have been used to provide the risk capital to secure the debt on which most nonprofit senior housing providers are dependent. Resident investors in entry fees might expect to have a say in the business they finance, but that has not been the case. And growing numbers of prospects are rejecting that disconnect.
Paying for Government Services
Not surprisingly, municipalities, too, prefer taxpaying organizations over nonprofits. As a political reality, nonprofits still wear a halo of goodness right up there with houses of worship. Still, it’s not surprising that nonprofit senior housing sometimes encounters NIMBY (not in my backyard) resistance that for-profits don’t. Some nonprofits agree to pay PILOT (payments in lieu of taxes) fees. But that is not everywhere, and it can seem like a bit of a dodge around the obligation of most citizens to pay their fair share of the costs of government.
Still, it’s marketing that drives the success or reversals of any business, and senior living is no exception. Customer value is the reason businesses thrive. Why would anyone sell their house to extract the equity value built over many years, only to turn around and invest those proceeds in a contract to allow a nonprofit to own their new home with themselves as tenants or mere residential licensees?
The Charitable Myth
Senior living communities can gain tax exemption because they are classified as nonprofit entities under Internal Revenue Code Section 501(c)(3). That “charitable” status applies even for luxury Continuing Care Retirement Communities (CCRCs, called Life Plan Communities by some) because of IRS Revenue Ruling 72-124. This is an administrative ruling, which was issued during the Nixon Administration in 1972. It could be revoked administratively as well. That’s a tenuous authority on which to build an industry to serve affluent customers who have to demonstrate wealth to be admitted to residence.
Of course, many of the same tax-exempt businesses that serve the affluent also have an affordable housing outreach and even provide charitable services beyond just housing. Those activities may, in fact, be donor-supported and may accord with traditional concepts of what constitutes a charity worthy of some kind of government support in the form of tax abatement. This discussion, though, centers on tax-exemption for luxury housing of the affluent.
How Can This Be?
You may wonder how an industry targeting the affluent came to have such a tax benefice. Of course, many but not all senior living operators also have an affiliated affordable housing outreach, but the luxury housing part of their business is also tax-exempt. The story is that a Hanson Bridgett partner persuaded the National Office of the IRS to issue the special exemption arguing that old age, in and of itself, is distressing and deserving of charitable status. Hanson Bridgett is a law firm that, for more than 50 years, has furnished legal services and business advice to residential communities, long-term care providers, and specialized enterprises that serve senior citizens.
Washington, DC-based LeadingAge only allows “nonprofit” senior living organizations to be members. LeadingAge is itself a 501(c)(3) tax-exempt charitable organization though its mission is to advocate for its members alongside its continuing education and other activities. It also requires its state affiliates to be similarly focused on tax-exempt operations. One state affiliate was expelled for having too many taxpaying members. LeadingAge continues to defend tax-exemption as central to its purpose.
Breaking the Mold
It’s clear from the above that a decision by a currently tax-exempt senior living enterprise to convert to taxpaying status would be a departure from the nonprofit culture in which the industry has historically been rooted. It would not change the service mission of the industry, which has long been dedicated to providing safe haven for those who fear vulnerability due to old age.
The core distinction determining whether organizations meet that purpose proactively and effectively is not tax status but mindset. Thus, we can conclude that the key differentiator affecting the senior living industry is not whether an organization has applied for, and received, Revenue Ruling 72-124 tax exemption, but rather what aims it serves, who it serves, and how it serves. That what, who, and how will be the subject of Part 2 of this 3-part series.