After seeing that Senior Care Development, LLC had placed a stalking-horse bid on the bankrupt Clare at Water Tower, in Chicago’s Gold Coast, Senior Housing News tracked down its chief executive officer David Reis for an exclusive interview. Reis has extensive experience in senior living development, and specializes in ground-up development of large-scale continuing care retirement communities (CCRCs) and acquiring troubled ones and turning them around.
Although Reis couldn’t share too much additional information about his company’s dealings with the Clare and its sponsor, the Franciscan Sisters of Chicago Service Corp., due to confidentiality agreements, he did tell us his plans to change the luxury high-rise’s entrance fee refund structure if his bid is accepted; what makes him so favorable toward the CCRC model of senior living; and why the current model of nonprofit financing will “go the way of the dodo bird.”
Senior Housing News: What made you interested in the Clare, and if your bid is successful, will you continue to have a relationship with the Clare’s sponsors [the Franciscan Sisters]?
David Reis: Since our purchase of Monarch Landing and Sedgebrook [two senior living communities originally developed by Erickson Living, which Senior Care Development purchased after Erickson’s bankruptcy filing], we’ve done a lot more research into the Chicago marketplace, and we really feel that the Clare is highly unique. It’s one of only a few high-rise CCRCs in the entire country, and it really has a spectacular location—a block away from Michigan Avenue, in what we consider a very vibrant section of downtown, that we feel has a lot of appeal for seniors.
Our bid does not contain any future relationship with the Franciscan Sisters. We are planning on bringing in [operator] Life Care Services as our management company. We’ve done business with them for more than 20 years, and they manage all of our facilities.
SHN: Do you feel that other urban cities can sustain a CCRC such as the Clare?
DR: One hundred percent, yes. The problem is the cost of land, and the cost of building infrastructure is really cost-prohibitive.
If you went to New York City and wanted to duplicate a high-rise CCRC there, and you costed out the land, construction, etc., you would find that the cost you would have to charge a resident is way far in excess of what their competing options are. Therefore, when you finish that analysis, you’d say, ‘Wait a second, I can’t afford to sell these for a price these prospects can afford to pay.’
That’s why you don’t see more CCRCs in cities. Between the arts, and access to great hospitals that are in the city, all the vibrant parts, what I consider the fabric of a city life—it’s really great for the residents to have access to. But because of that cost analysis, I can only think of one other CCRC in a city in Washington State. I don’t really know of any other city that supports a large CCRC, and in a way, that’s what makes the Clare a very attractive asset to purchase.
SHN: Your company ended up buying two former Erickson Living properties in the Chicago area after Erickson’s bankruptcy filing. What opportunity does your company see in the distressed market?
DR: [Senior Care Development] bought them out of bankruptcy for cash, and they’re highly stable communities—debt-free. What we find is that the communities that we organize appropriately do extremely well. Really, if there are 1,900 CCRCs around the country, and less than 3% of them find themselves in any financial distress– It really is less than any other type of real estate sector, like condos. As a real estate group, a less-than 3% default rate is extremely low.
Senior Care Development specializes in either building large-scale CCRCs from the ground up, or buying distressed communities. [Sometimes] we buy them through bankruptcy court; some projects we’re looking to team up with the nonprofit who owns them and keep them in place, help them reorganize their finances through or out of bankruptcy court.
We’re probably tracking a couple dozen communities in various stages of covenant violations or distress of some sort. I would say that almost all of them are nonprofits.
SHN: What might nonprofit status have to do with bankruptcy filings by CCRC sponsors?
DR: If you look at the history of CCRCs in the U.S., maybe 80% of them are nonprofits. A very high percentage of the nonprofit market traditionally had a refund plan that stated that when a resident left a community, they or their estate would get back whatever percentage they had paid—typically a 90% refund plan—when their unit resold. Saying you only get repaid when your unit resells shifts risk to residents.
Most people who move into CCRCs really have no issues and have good lives and are in a community that’s financially viable. People have to start looking at the finances of the sponsors, irrespective of if they’re for-profit or nonprofit. Looking across the U.S., the vast majority of CCRCs that are having financial stress, are all owned by nonprofits.
Nonprofits can use nontaxable status to go raise 100% of their financing in the bond market. Traditionally, many organizations hardly put a dime of their own money into the project, and many hadn’t been in the business, had no experience, and offered no skin in the game.
The model of a nonprofit getting 100% financing is going the way of the dodo bird. That’s history. Because no one else in this business gets to put no cash in the game, and doesn’t have to have any experience to go out there and operate. Moving forward, a lot of people who buy tax-exempt bonds, who would buy these– they’re gonna find that they’re not gonna want to buy these types of bonds from nonprofit, inexperienced sponsors.
SHN: How does aging in place affect senior living communities’ business models?
DR: Everyone would like to have seniors moving at a younger age. That’s the Holy Grail that one searches for. I can tell you in 25 years of doing this, for brand-new senior living communities that have just opened their doors, typically the average age of a resident moving in is 78. For a stable community, that age is about 81.
Interestingly enough, those numbers haven’t changed in the last decade as far as I know. When you look at these move-in rates, these numbers are uncannily accurate. That said, average life expectancy of a move-in into a stable community is somewhere between seven and 10 years.
I’m a big believer in the full continuum of care, having independent living, assisted living, and skilled nursing al on one campus. I’m really a believer that elderly people don’t want to leave their house and have to worry about moving more than once.
Say for example a couple moves into an independent living community, and then maybe one of them needs skilled nursing. I don’t think it’s right to disrupt that and have a double move. They’re better off going to a community that has all the levels of care at that community. I’ve shied away from assisted or independent living communities.
SHN: Out of the assisted living, memory care, and CCRC sectors, which do you think will see the most success, and why?
DR: I’m a fan of CCRCs because if you build a typical 250-unit independent living CCRC, your turnover, on a community that’s already aged in place and is stable– by the time it’s been open a decade or so, it’s only turning over maybe 8% of its community a year. For a stable community with 250 units, that’s only about 20 units a year that need to be sold; it’s less than two a month, and that’s very doable.
For assisted living communities, though—if you have a 90-unit assisted living community, it’s a third the size of a CCRC, but about 40% of its units are turning over each year, for about 36 units—50% more than a CCRC. That’s three units a month, for a building that’s a third the size of a CCRC.
On top of that, assisted living communities really have no barriers to entry for building. Anyone with a four-acre site can build an assisted living community, and the licensing is no big deal. It’s not like with a CCRC, which needs a certificate of need with the nursing home, and has more barriers to entry.
CCRCs won’t necessarily be the highest growth, but they will be the most stable. The barriers are so high that by definition, that keeps growth down. As a developer/investor, I like that.
I’ve never been a fan of assisted living because there are no barriers to entry, and there’s huge turnover, and that’s been born out in the statistics right now of occupancy, where most CCRCs across the country that are well-managed are running at 91, 92% occupancy or better, while assisted living is running about 86%.
The CCRC model offers the most bang for the buck. It’s a stable platform, it’s highly successful, and it will continue to be a success.