Pros, cons: Continuing care retirement community

Senior couple.

Most people want to age in place. But for those who don’t, one option to consider is a continuing care retirement community or CCRC.

CCRCs offer a variety of living options — from independent living to assisted living to nursing care — all within one community. And on paper, there’s plenty to like about CCRCs, which allow aging Americans the chance to stay in one place but move from one type of residence to another as their health care needs change.

To be sure, there’s a cost for this sort of convenience. Entrance fees for CCRCs, of which there are some 2,000 nationwide, can run anywhere from $100,000 to $1 million, and monthly fees can range from $3,000 to $5,000, if not more.

At the moment, some 600,000 people live in a CCRC, but experts say many residents and prospective residents overlook the financial risks they take on when signing a contract to move into a CCRC. “Few CCRC residents understand the financial risks they took on when they signed the contract,” James Sullivan, a certified public accountant with Core Capital Solutions in Naperville, Ill., Wrote in a recent article about the subject. Read: What CPA planners need to know about continuing care retirement communities.

If fact, worst case, you could lose your entire investment should the CCRC go bankrupt. 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.

But what questions should you ask, and, equally important, what are the right answers to those questions? Here’s what Sullivan 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? Had to say.

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What can you tell me to help me feel confident about your long-term financial viability?

The prospective resident is looking for real answers here, not just general responses or avoidance. Answers such as this are what you’re looking for: “Financial stability is of utmost importance to us. We have been in operation for 20 years and have never had financial difficulties. We have maintained an occupancy ratio in excess of 90% for the past three years. We have extremely low staff and resident turnover, etc., Etc. Our management team has 50 years of experience and manages more than 40 CCRCs across the United States, etc., Etc.”.

Ultimately the provider should want to sell the prospect on their strong financial position, not avoid the topic. 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.

(In his article, Sullivan noted that several CCRCs have in recent months filed for bankruptcy protection.).

What is your current occupancy ratio, and how does that compare with where you have been historically? CCRCs should be able to show reasonably high occupancy rates over the past two years. Rating agencies have historically looked for 90% or higher across all levels, that is independent, assisted living and skilled care. However, occupancy levels have dropped industrywide as a result of the great recession, so even some of the stronger providers may just now be climbing back to this level.

What has been your average rate of turnover in independent living over the past few years? A turnover rate of 20% or more increases the chance of units sitting vacant for an extended period of time, which strains cash flow.

Does the community appear to be well-kept with up-to-date facilities? If not, it could indicate not only a lack of resources, but it could also hurt demand.

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Can you provide me with your most recent audited financial statements? Clearly the answer should be yes. Consider consulting with a qualified tax professional who is well-versed in senior living to analyze ratios covering the areas of liquidity, debt and profitability. The key is to look for balance among these ratios. A low ratio in one area should be offset by higher ratios in another. For instance, if a community just expanded they may have unusually high debt. That in and of itself is not necessarily bad if they have strong operating revenue to adequately service the debt or high levels of cash. Poor ratios across the board could be a cause for concern. It would be great if communities offered up these ratios as part of their marketing plan, but I haven’t seen any go that far.

Is the most recent auditor’s report “unqualified” or does it list “accounting exceptions?” Accounting exceptions may indicate that the provider could potentially struggle to remain as a going concern.

Has an independent, certified actuary with experience in the CCRC industry performed a detailed actuarial analysis on your community within the past two years? If so, does it indicate that you will remain solvent and be able to fulfill your contractual obligations to current and future residents? Actuarial studies are not as applicable in the case of rental or fee-for-service providers, whereby residents pay for care as needed.

Do you have rated debt and, if so, what is the rating? 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.

If any portion of the entry fee is refundable — either if I decide to move out or at death — what are the stipulations for receiving the refund? Does my unit have to be re-occupied first? Is there a maximum time limit upon which I’ll receive the refund regardless? Do I (or my heirs) continue to pay the monthly fees until it is re-occupied? Keep in mind that while such stipulations usually aren’t viewed favorably from a resident’s financial perspective, they actually contribute positively to the financial stability of the provider, which ultimately benefits the resident.

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Is the care consistent from one living arrangement to the next? “When you enter a CCRC you are assuming that the facility provides not only a nice independent living area but is equally as good at providing assisted living and skilled nursing,” says Sullivan. But these represent very different services.

“You may enter a facility well known for its independent living area and its excellent food but find out later that the attached skilled nursing facility is not particularly good,” says Sullivan. “In that case, you made a wrong choice.”.

So, Sullivan suggests that you investigate carefully all levels of service from independent living to skilled nursing before making a decision. “Even then you may find that by the time you need skilled nursing the facility has deteriorated considerably in its level of service provided to residents who need 24/7 care,” Sullivan says.

Other resources: The Financial Advisory Council of the Commission on Accreditation of Rehabilitation Facilities (CARF) and Continuing Care Accreditation Commission (CCAC) produce two publications about the financial performance of CCRCs. The publications are Financial Ratios and Trend Analysis of CARF-CCAC Accredited Organizations, which can be purchased in the CARF online bookstore, and the Consumer Guide to Understanding Financial Performance & Reporting in Continuing Care Retirement Communities, which can be downloaded here. CARF-CCAC claims to be the nation’s only accreditation organization for CCRCs. The organization says it implements standards for quality and evaluates financial health.

Robert Powell is editor of Retirement Weekly, contributes regularly to USA WEEKEND, USA TODAY, The Wall Street Journal and MarketWatch and teaches at Boston University.

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