New Year, New Repayment Law for CCRCs

Continuing care retirement communities (CCRCs) in California are preparing for a new law that will impact the way they repay contracts. The new law requires CCRCs to repay entrance fees if a unit is vacated by the resident in a certain amount of time, or else risk accruing interest.

The law has the potential to place new financial burdens on CCRCs that are unable to resell a unit previously occupied by a resident.

Similar bills affecting CCRCs have been considered elsewhere in the country, though few states have put forth new regulations, according to Steve Maag, director of residential communities at non-profit provider association LeadingAge.

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At the time when the measure was first being considered in California, several senior living groups vocalized their opposition to such regulations.

“We’re a little disappointed,” Maag told SHN of the new regulations. “We had hoped to get some amendments to make it a little more flexible. It remains to be seen how much of an impact it will actually have. As with any artificial restraints, sometimes, there are consequences not foreseen. We’re in a wait-and-see attitude.”

The bill mandates that if a repayable contract is not fully paid after 180 days a resident vacates a unit, 4% interest applies to the balance until the lump sum is paid. After 240 days, 6% interest applies to the unpaid balance.

“ASHA’s members were very concerned that changes proposed relative to repayment penalties in this state legislation would present significant challenges to operating CCRCs in California and potentially discourage new investment in entrance fee CCRCs, “ David Schless, president of the American Senior Housing Association (ASHA), told Senior Housing News.”This legislation, which ultimately passed and goes into effect in early 2017, imposes interest penalties of 4%-6% on any unpaid entrance fee balance (rates well above most investment yields in today’s market) in as soon as four months after vacancy of the unit regardless of whether or not the unit was resold or occupied.”

Proponents of the law argue that the regulations speed up the process for families waiting on repayment from refundable CCRC contracts. The CCRC industry in the state became more supportive of the law once the final legislation lengthened the repayment time period. The California Continuing Care Residents Association (CALCRA), a group that represents thousands of CCRC residents in the state, sponsored the final version of the legislation, SB 939, which was introduced by California State Senator Bill Monning (D-CA-17).

“The delay in repayment has created many hardships on former residents looking to move or on family members needing to settle an estate during difficult times,” Margaret Grifiin, president of CALCRA, said in a statement when the bill was signed into law in July. “CALCRA was proud to sponsor SB 939, which will bring much-needed stability and predictability to CCRC lump-sum repayments.”

Structural Changes in Store?

Currently, CCRCs that offer lump-sum repayments for entrance fees are not obligated to repay the sum until the unit is sold—and there is no timeline for resale. In addition to accruing interest over time for lump-sum repayments, the bill also requires CCRC providers to state their average and longest time it has taken to resell a unit. The bill mandates providers make a ”good-faith effort to reoccupy or resell the unit.”

Not all CCRCs offer refundable entrance fees, and refundable options have typically been higher than non-refundable fees and have been contingent upon resale of the unit.

“As ASHA stated in letters to the state legislature opposing the bill, the existing CCRC financial models that utilize entrance fee repayment structures are designed to be contingent on the re-occupancy or resale of the unit—mechanisms that ensure the financial integrity of the community and also required by many lenders and bond holders,” Schless said. “This legislation will force operators to change these terms.”

The law may not even impact too many senior living providers in the state, which has sustained demand for senior living. The need for the new regulations may have been more prevalent during the recession, when the housing crisis dampened occupancy rates and made it harder for CCRCs to refill vacant units. Furthermore, the number of days before interest accrues allows providers to plan ahead when units do become vacant for one reason or another.

“I don’t think this will impact a ton of providers,” Maag said. “A lot of them will be able to meet the criteria. It likely won’t start to have any financial impact for a few years, and the providers are going to be able to adjust their finances so they have some kind of level of prediction to take into account. The caveat is if we have, like in 2008, some market correction. Then it would have a significantly high impact.”

Across the country, a vast majority of CCRCs—or life plan communities—offer repayable contracts, and that is unlikely to change, Maag contended.

As far as how wide the impact will be, only “time will tell,” Schless predicted.

“It is clear that it will result in added costs to the bottom line, and so operators and developers will be re-evalutating their pricing structure and product offerings going forward,” he said.

Written by Amy Baxter

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