Prospective residents often overlook the financial risks they take on when moving into a continuing care retirement community (CCRC), USA Today suggests, adding that prospects need to ask hard questions about the community’s financial viability before making the transition.
Entrance fees for CCRCs, of which there are some 2,000 nationwide, can run anywhere from $100,000 to more than $1 million, and monthly fees can top $5,000.
The costs associated with CCRCs, particularly their entrance fees, often require residents to sell their home to afford moving in. Because of this, CCRCs are highly dependent on the strength of the local housing economy, and when it tanks, so can a CCRC, USA Today writes.
Earlier this year, two CCRCs in Indiana and New York both announced within days of each other that they were filing Chapter 11 bankruptcy protection, citing pressures brought on by the economic recession. Neither case to date has resulted in loss of resident entrance fees.
“You could lose your entire investment should the CCRC go bankrupt,” USA Today writes. “And that’s why financial planners and others say you should ask hard questions about the financial status of whatever CCRC you’re considering before signing any contract and moving into a facility of this sort.”
To come up with examples of such questions, USA Today enlisted the help of James Sullivan, a certified public accountant with Core Capital Solutions in Naperville, Ill., and Brad Breeding, a certified financial planner, president of LifeSite Logics in Raleigh, N.C., and author of “What’s the Deal with Retirement Communities?”
They suggest prospective resident should ask, among other questions: Does the community appear to be well-kept with up-to-date facilities? What has been your average rate of turnover in independent living over the past few years? Do you have rated debt and, if so, what is the rating?
With regard to whether the community is updated and well-kept, if the answer is no, it could indicate a lack of resources and hurt demand.
The second question addresses a bigger-picture issue: A turnover rate of 20% or more increases the chance of units sitting vacant for an extended period of time, which strains cash flow.
And finally, about 25% of CCRCs have rated debt. All others either do not have debt or, more likely, are unrated. For comparison, very few have a rating higher than investment grade BBB, the article states.
“Ultimately the provider should want to sell the prospect on their strong financial position, not avoid the topic,” Sullivan and Breeding say. “This can be a strong initial indicator. Personally, I think sales teams should beg people to ask them about their finances. Unless, of course, they don’t want them to.”
Two nonprofit CCRCs recently sat down with SHN to explain how their high credit ratings have boosted their success.
Royal Oaks, a single-site CCRC owned and operated by People of Faith, Inc., has an A Fitch rating. ACTS Retirement-Life Communities, the largest not-for-profit owner, operator and developer of CCRCs, is rated A- by Fitch and BBB+ by Standard & Poor’s.
Both boast solid financial profiles, high occupancy ratings and the ability to gain easier access to capital and debt when they need it.
To read the full USA Today story, click here.
Written by Emily Study