If Senior Care Development LLC’s $86 million bid on a bankrupt Chicago continuing care retirement community goes through, holders of $229 million of debt for the distressed property will recoup just pennies on the dollar, according to The Bond Buyer, a “catastrophically bad recovery rate” that’s tied to its current business model.
A hearing is set for Tuesday before U.S. Bankruptcy Court Judge Susan Pierson Sonderby, in the Northern District of Illinois in Chicago, during which The Clare at Water Tower will ask the court to approve the bidding terms on an asset sale as part of its restructuring plan.
The stalking horse bid includes the assumption of $57 million of debt for residential deposits and $29.5 million in cash, of which $2 million would go to cover deferred lease payments to the building’s owner, Loyola University of Chicago. Another $12 million would pay off debtor-in-possession financing provided by Redwood Capital Investments LLC, which allowed the facility to continue operating after its November bankruptcy filing.
That leaves $15 million to be distributed to bondholders. “It is a catastrophically bad recovery rate,” said an attorney following the case who asked not to be identified. “The hope is that the auction will bid the assets up… The Clare appears to be a very large and very public disaster.”
The Clare’s sponsor organization, the Franciscan Sisters of Chicago Service Corp., will be accepting bids until April 10. If any exceed Senior Care Development’s bid, then an auction would be held on April 12, with assets being sold to the highest and best offer, says The Bond Buyer.
Part of the Clare’s financial struggles are tied to its refund structure and the fact that multiple sources are competing for any incoming dollars, says David Reis, CEO of Senior Care Development.
“The Clare did something very unique; it’s very rare,” he told SHN. “What they say to residents is that you’ll get your refund when any unit sells. Now, that sounds good, but it only works if the entire community is full and sold out.”
If all (or most) of a community’s units are sold, and then one becomes available, it’s more likely that another resident will soon move into the open unit[s], and the departing resident’s estate will get a refund very quickly. But the downside to this system, says Reis, is when a building doesn’t fill up quickly and there are a lot of vacant units that aren’t generating any income.
“Now you’re in a world of hurt because now you have bondholders who still want to be paid their interest current, you still have all this unsold inventory, and all those demands of the people who are already there,” he says. “If everything works perfectly, this system works. But it’s a terrible plan if sales are slow and you never fill up your community.”
Were Senior Care Development’s $86 million bid to succeed, Reis says his plan would be to tie refunds back to individual sales of peoples’ apartments, and give existing residents an option to get a refund within, “at a worst-case scenario,” five years of leaving the community.
“We [would] put a cap on how long [the refund] could be outstanding. It’s probably not optimal, and if this were a brand-new community, the refund wouldn’t be outstanding that long,” says Reis. “But here, the key for the Clare is to try to solve its problems in a way that is fair for all.”
In a bankrupt community, trying to craft a fair plan is difficult, says Reis, but if his company wins the bid, “none of the residents will lose a dollar.” New, incoming residents, however, would be offered a different kind of arrangement that’s more in keeping with traditional community contracts.
Read the full The Bond Buyer article to find out more about the Clare’s previous bond restructuring plans and complications that arose after prior attempts to sell the luxury CCRC.
Written by Alyssa Gerace