The Groves Defaults on $88 Million in Bonds, Benchmark Makes Bid

The Groves in Lincoln, Inc., the not-for-profit owner and operator of a 168-unit independent living community in Lincoln, Mass., filed for Chapter 11 bankruptcy protection on Monday after defaulting on $88.4 million of tax-exempt bonds.

Masonic Health System (MHS) of Massachusetts, Inc. and New England Deaconess Association – Abundant Life Communities, Inc. (DALC) are the two sponsoring members of the Groves corporation with 80% and 20% membership interests, respectively.

As of the filing, The Groves in Lincoln owes approximately $88.43 million in outstanding tax-exempt bonds issued by the Massachusetts Development Finance Agency, which it used to finance the construction of the community in 2009.

In addition to the outstanding bond principal, the corporation owes accrued but unpaid interest in the amount of about $1.82 million plus $32,000 in fees and expenses.

In November 2009, the company obtained $117.2 million in tax exempt bonds when it had reservation deposits on 103 of its 168 independent living units. This represented a potential occupancy level of 75% in the event that all of these reservations converted to occupied units, according to court documents.

Once construction was complete, The Groves experienced a high level of entry fee deposit cancellations. From November 2009 through July 2010, there were 30 cancellations but only 16 new reservation deposits.

The individuals cancelling their deposits primarily cited personal financial issues, according to court documents. At the time of the March 11 filing, the community was only 56% occupied.

Although there is a stalking horse bidder in place, the debtors and about 70% of the bondholders have agreed to permit counteroffers in the form of either a purchase of assets under Section 363 of the Bankruptcy Code (a “363 sale”) or a proposal to restructure outstanding debt under a Chapter 11 plan.

The Groves is in favor of selling the assets to BSL Lincoln LLC, an affiliate of Benchmark Assisted Living LLC, who is offering a stalking horse bid of $30 million in cash.

The agreement also provides for an additional payment of up to $5 million in cash hinging on whether the stalking horse bidder is able to obtain approvals to build an assisted living and memory care facility on The Groves’ campus in addition to the existing facility.

If the proposed sale goes through on the terms of the stalking horse bid, bondholders are looking at about a 51% recovery, according to the debtors.

The community is suffering the same fate as many senior living projects built during the real estate downturn. One of the largest was the Clare, a continuing care retirement community based in Chicago that defaulted on $229 million of municipal debt in 2012.

The Clare was eventually purchased by its stalking horse bidder Senior Care Development in April 2012 for $53 million as part of a Chicago Senior Care joint venture.

While The Groves corporation will be accepting other bids, David Reis, CEO of Senior Care Development, thinks Benchmark’s offer will be successful.

“We looked at the property and feel that Benchmark’s stalking horse bid is quite competitive and doubt there will be anyone outbidding them,” said Reis in an email to SHN.

Because of the voluntary nature of the bankruptcy filing along with several other key factors, the situation will likely result in an increased recovery for bondholders, according to George Mesires of Ungaretti and Harris LLP, on-trend with other recent cases where consensual filings are yielding higher returns.

“Although it is difficult to predict whether ultimately the assets will be sold or whether the bonds will be restructured, one thing is clear: the dual track structure will accommodate buyers and sponsors to develop a creative solution hopefully resulting in a higher return to existing bondholders,” Mesires says.

The Groves in Lincoln, Inc. had not responded to SHN’s request for comment as of press time.

Written by John Yedinak and Alyssa Gerace