When Restructuring Financially Distressed CCRCs, Go With Creativity—Not Bankruptcy

Multiple headlines in the not-too-distant past have trumpeted the struggles of some non-profit continuing care retirement communities (CCRCs) that are attributable—at least in part—to their financing structures, and there are bound to be more coming down the pike, those in the market say.

But while bankruptcy has traditionally been the main option for these distressed communities, as evidenced by the epic default and eventual bankruptcy sale of Chicago’s Clare at Water Tower, the traditional workout needs to make way for more outside-the-box solutions.

That, or stay away from bankruptcy in the first place, said David Reis, CEO of Senior Care Development LLC, during a Distressed Healthcare Assets webcast hosted in July by law firm McDermott Will & Emery LLP.

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“We’re trying to solve issues before bankruptcy to keep the value there longer,” says Reis, whose Chicago Senior Care company purchased the Clare out of bankruptcy in 2011. “I have a feeling with the amount of activity in the next year or two, people will get more creative and not just reach for the bankruptcy tag. They’ll go to the marketplace and try to solve the problems to keep the community.”

Bankruptcy typically leads to a purchase at 70% to 80% of the community’s value, whereas distressed properties that don’t go into bankruptcy should still be able to get about 90% of the fair market value, Reis says.

But preventing bankruptcy can be less clear-cut than a simple solution. Depending on how long the community has been in business, the timing of the distress can cause hurdles that are difficult to overcome.

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“CCRC projects are difficult to restructure,” says Nathan Coco, partner with McDermott Will & Emery. “This is particularly true where a project becomes distressed during the fill-up phase. Entrance fees are the lifeblood, so if units are selling, it likely doesn’t need a workout. If they’re not selling, a workout may not make a bit of difference. Covenant relief might buy time… but bankruptcy may be the only hope.”

Bankruptcy, however, should be avoided at all costs, he says. It is expensive and can be extremely difficult to find lenders to work with in a property that is distressed.

Additionally, the residents must be considered, as well as the headline risk that a bankruptcy presents.

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“In almost all cases, the residents’ contracts are assumed and assigned to a buyer,” Coco says. “This can lead to displaced resident and headline risk. One thing we are likely to see is more creativity in terms of how resident contracts are handled.”

What that creativity may entail is still an unknown, but greater flexibility on the part of banks might be one change to look for. A line of credit option, for example, may be more likely to happen today than in recent memory.

“Over time, we’re seeing banks being willing at least to consider that, or make modest adjustments to debt,” says David Fields, director of RBC Capital Markets. “There’s a lot of pressure for banks to look for resolution now with some seeing more willingness to compromise.”

Written by Elizabeth Ecker

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