Searching for Security
How to tell whether a continuing-care community will be able to keep its financial promises
By KELLY GREENE, The Wall Street Journal
For years, the primary selling point of continuing-care retirement communities has been security: the knowledge that a person or couple could settle—and remain—in a development, whatever the changes to their health.
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Today, though, with parts of the continuing-care market in financial trouble, residents and would-be residents are grappling with a fundamental question: Can continuing-care developments keep their promise?
The picture currently isn’t pretty. As the economic downturn has made it tougher for potential new residents to sell their existing homes and move in, a number of individual communities and one of the country’s largest developers of such facilities, Erickson Retirement Communities, have sought bankruptcy protection.
Some projects have been abandoned mid-construction. Others are trimming staff, reducing the number of meals served or delaying the opening of assisted-living or skilled-nursing units.
Would-be residents, meanwhile, are discovering the difficulties in looking beyond the amenities that make many continuing-care developments so attractive at first glance—upscale housing, fine dining, fitness centers—and digging into a community’s finances.
“One should be careful, as with any investment, to know the fine print,” says Nan Rideout, age 65, a state-government retiree in Chapel Hill, N.C., who with her husband has been scrutinizing continuing-care communities and their finances up and down the East Coast.
For instance, “CCRCs will advertise that they will guarantee you life occupancy even if your financial circumstances change,” Ms. Rideout says. But “the fine print [says] they can go after your estate when you’re dead to recoup money they advanced on your behalf. How would that be calculated? How much interest are they going to charge your estate for that? Those details I’ve never seen spelled out.”
If you’re considering a move to one of these communities—and are trying to determine how the finances work and whether a development will remain solvent for as long as you might need it—here’s what to look for.
A good first stop is two industry groups that have developed dozens of questions to help with your research. At carf.org, the Web site for the group that accredits continuing-care communities, you can download the “Consumer Guide to Understanding Financial Performance and Reporting in Continuing Care Retirement Communities” by clicking on “Free Publications” and scrolling down to “Special reports.” The site also has a more general section titled, “How to select a continuing care retirement community,” which you can find by clicking “Consumer Services” and then “Choosing a provider.”
To get another free guide, “The Continuing Care Retirement Community: A Guidebook for Consumers,” go to aahsa.org, the Web site for the American Association of Homes and Services for the Aging, and click on “Consumers.” Scroll down to “Choosing Services,” and click on “The Continuing Care Retirement Community: A Guidebook for Consumers.”
Next, get a copy of the facility’s audited financial statements. If you get any resistance at all when you make this request, it should serve as a big red flag, says Susanne Matthiesen, managing director of aging services for Carf International, which oversees the Continuing Care Accreditation Commission.
Look for the facility’s “days of cash on hand,” which reflects how long it could operate with no additional revenue—a good indication of financial stability. The community should be able to provide the figure, but to calculate it yourself, add together these two lines from the report to get the numerator: “unrestricted current cash and investments” plus “unrestricted noncurrent cash and investments.” To get the denominator, find “operating expenses,” then subtract “depreciation” and “amortization,” then divide the result by 365. Finally, divide the numerator by the denominator.
The result is the number of days the facility could operate with the cash it has at its disposal. Accredited communities with one campus or development average 306 days of cash on hand; those with multiple sites average 281 days.
There are other numbers to consider, including the facility’s cash-to-debt ratio, which should be about 35%, says Jill Collins, chief operating officer of Pacific Retirement Services in Medford, Ore., which runs 11 continuing-care communities.
She encourages people considering a facility to ask for its ratio calculations, along with how it stacks up against other places. Those doing well are in the 75th percentile or higher nationally, she says.
Other things to watch out for, according to Ms. Collins, include facilities that rely heavily on investment income, donations or entry fees, which may be a signal that the facility can’t support itself with income from operations, she says.
Even if you aren’t comfortable reading financial statements, you should ask for them anyway. “Give them to your tax guy if you’re not very financially savvy,” Ms. Collins says. “They should be able to give you any financial information you’re looking for. I hate to get into what we’re paying for lettuce, but we have benchmarks.”
You can also ask for any bond covenants—and whether the facility is meeting them. Typically, banks require 300 days of cash on hand and a minimum of 25% cash to debt, Ms. Collins adds.
Also keep in mind that if the facility you’re considering is part of a group, it’s worth asking about the financial health of the group’s other communities and whether your investment could be used to prop them up, Ms. Collins says.
If a community’s marketing staff can’t answer your questions about the facility’s financial condition, ask to speak to the chief financial officer, executive director or chief executive officer, Ms. Matthiesen says. Another option: Most facilities have a residents’ finance committee, so you could ask to speak to members of that group to get the information you need.
The ways in which residents buy into continuing-care developments also can affect a community’s finances.
In the so-called life-care model, residents pay a large upfront deposit (usually at least a few hundred thousand dollars) plus a monthly fee that generally stays the same no matter how much care they need. Typically, residents forfeit their deposit after living at the community a certain number of years.
With such a model, it’s particularly important to ask for actuarial analysis that shows “how there’s enough money in the kitty if everyone needs care 20 years from now,” says John Endicott, a resident of a life-care facility in Pomona, Calif., who helped write the accreditation commission’s consumer guide.
With the increasingly common “Type B” model, residents pay a smaller upfront deposit, some of which may be refundable if they move out or die, and pay larger monthly fees if they need to use assisted-living or skilled nursing care. With that model, you’ll need to consider whether you could afford higher monthly fees and whether you hold—or should obtain—long-term-care insurance that could help cover them.
Another potentially thorny issue: How would you, or your heirs, get your deposit back? Many places make you wait until the unit is resold, and you may have to pay a monthly fee until that happens. Ms. Rideout worries that this requirement creates a “disincentive for the [community] to use all available efforts to resell a unit”—particularly if it’s also marketing new units at the same time.
In addition, find out what happens if you run out of money. Many continuing-care communities have created a benevolence fund specifically to help residents who find themselves in that situation. But the contract’s fine print sometimes gives the facility the right to recoup any unpaid fees from your estate.
Ms. Greene is a staff reporter in The Wall Street Journal’s New York bureau. She can be reached at
encore@wsj.com
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