7 Tips on Retirement Community Safeguards

Consumer concerns raised as some communities are squeezed by rising financial pressures and weak sales.

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Consumers living in or interested in a retirement community—particularly a newer facility—should carefully review the community's financial records and its ability to honor its service and refund commitments. Concerns have arisen in response to reports that the recession and the depressed real estate market have caused financial hardships for some institutions throughout the country. Maryland-based Erickson Retirement Communities, widely considered a pioneer and leader in the field, has been forced to seek additional investment support to shore up the finances of some of its 19 campuses, according to a story in the Wall Street Journal. According to the newspaper account, which an Erickson spokesman said was accurate, the company was forced to close an Ohio facility and warned that two other campuses might need to seek bankruptcy protection.

[See 6 Pillars of Solid Retirement Communities.]

More than 22,000 people live in Erickson's continuing care retirement communities (CCRCs), which provide a range of independent and assisted living facilities. Occupants furnish a substantial entry deposit to secure their apartment, pay monthly living expenses, and usually stay for the rest of their lives. There are other CCRC business models, including rental communities. Assurance of lifetime residency and care are the industry's hallmark service commitments.

When an Erickson resident dies or leaves a community, his or her entry deposit is returned (without interest). This has been a strong selling point for the company. Despite financial pressures, Erickson says it intends to honor all commitments to return entrance deposits.

Historically, people have funded their entrance fees by selling their existing residences. But the housing slowdown has sharply curtailed this source of new residents. Most communities now provide a range of discounts and other inducements to help people with these fees, but many are struggling to fill slots, particularly at recently opened complexes.

In a recent letter to residents, John C. Erickson, company founder and executive chairman, said that the operational side of Erickson's retirement communities remains strong but that the real estate side has come under growing pressure. "In order to get funding . . . we had to make commitments to the banks about how quickly we would welcome new residents," he said. "While we weren't blind to the possibility of economic downturns . . . we frankly didn't foresee the magnitude or duration of the economic crisis that hit us and all of America."

Ziegler Capital Markets is a major player in helping to fund retirement communities. It notes a "thaw" in what has been a frozen capital market but cites a "multiplicity of negative factors" that include "disrupted real estate values, high fixed interest rates, withdrawal of letter of credit banks from the sector, and excruciatingly low investment returns."

Earlier this year, the Senate Special Committee on Aging asked the Government Accountability Office to study CCRC finances and the suitability of regulatory oversight of the communities. Although written contracts between homes and residents provide financial protection, Democratic committee chair Herb Kohl of Wisconsin said at the time:

"Contracts also do not guarantee CCRCs will remain financially viable and continue to provide residents with housing and care for 20 to 25 years and often longer. CCRCs are particularly vulnerable during economic downturns, as stagnant real estate markets drive down occupancy levels in independent living units—CCRCs' primary source of profit. In effect, seniors choosing CCRCs today could be exchanging their assets and income for nothing more than a promise. At the very least, reliable information about a CCRC's financial condition and financial reserves should be available to seniors to help them choose a CCRC wisely."

Larry Minnix, president of the American Association of Homes and Services for the Aging, a Washington nonprofit, says "very few" CCRCs face the kind of financial problems that have affected Erickson. Most communities, he says, "are in good shape because they were not leveraged in that way," referring to the pressure on Erickson to shore up its finances by finding new investment capital. Still, Minnix said, the GAO inquiry is appropriate, and seniors and their families always should carefully investigate any retirement community they are considering. Here are some important points to consider, according to Minnix:

Refund policy. Some homes have a high percentage of refundable entrance fees, and others may have a sliding scale depending on the length of residency. "I would think through this transaction carefully," Minnix said. "Usually, the more you pay upfront [in entrance fees], the less your monthly payment" will be.

Business history. How long has the community's parent organization been in business? Many CCRCs are operated by religious and other nonprofit organizations and have been in existence for 50 or even 75 years. "Longevity matters," he says.

Accreditation. Some CCRCs pay to be evaluated by a private organization called the Commission on Accreditation of Rehabilitation Facilities. Not all communities seek this endorsement, but Minnix says a community that is accredited can claim to meet a number of industry standards.

[See A Dozen Retirement Community Bargains.]

Financial records. "I would ask them to look at the books," Minnix says. Most communities are nonprofits, and their finances should be transparent. Also, some may have funded their communities with bond sales and thus may have bond ratings that provide a sense of their financial strength.

Resident and employee metrics. Minnix says prospective CCRC residents should seek information on measures of current resident and staff satisfaction, including staff turnover. A satisfied and stable CCRC is a strong endorsement.

Benevolence policy. Minnix says most CCRCs have some charitable arm to help residents continue to stay in the community even if they run into financial difficulties. "I would ask them what happens if my personal portfolio tanked," he says. "The good ones [CCRCs] have a benevolence policy that will let you stay."

Healthcare arrangements. What is the community's proximity to medical care? Are there physicians and hospitals nearby? Does the CCRC have health professionals on the premises? Does it provide in-home health services, which are very important to people in independent living arrangements as they begin to encounter more health issues?

[See Make a Housing Plan for Your Later Years.]