The New Reality of Senior Communities

New Missouri community reflects investor demand for safer financing, affluent residents.


Late next year, a new $190 million retirement community will begin opening living units west of St. Louis in Kirkwood, Mo. Called Aberdeen Heights, it will include 243 independent living and 30 assisted living apartments, 15 memory support (Alzheimer's) units, and 38 nursing beds. Aberdeen Heights will be at or near the top of the line in what are called continuing care retirement communities (CCRCs). It also represents one of the few new CCRCs to attract investors in recent times, as the industry slowly recovers from the major economic blows of a recession plus housing and credit market crises. For prospective CCRC residents, and their families, Aberdeen Heights provides a guide to what the CCRC business may look like in the future.

[See Best Affordable Places to Retire.] The public image of retirement communities is dominated by warm photos of vibrantly healthy older people, usually couples, enjoying wonderful lifestyles among compatible neighbors in attractive complexes. All maintenance and drudgery are done by CCRC staffers, meals are provided, and a raft of cultural, recreational, and learning activities are offered. Should residents become ill or frail, the CCRC provides a range of increasingly intensive medical care and support.

While many communities do, indeed, get high marks from residents, the industry's public image belies a complex and challenging business that has been severely tested. A leading provider of CCRCs, Erickson Retirement Communities, filed for bankruptcy last year and has been taken over by another company. The Aberdeen Heights deal illustrates the complex structure of the industry, including investor insistence on a more conservative CCRC business model with reserve funds and aggressive residential occupancy targets.

Many communities are struggling with vacancy rates that threaten their viability, and have responded with discounts and other inducements to lure new occupants. Funding for new CCRC residential memberships traditionally comes from the proceeds of a person's sale of his or her primary residence. The steep drop in home values and sales has made it much harder for people to afford the communities. This has reduced demand in existing complexes and made it harder for new communities to get started.

CCRCs offer three basic packages. Type A communities, of which Aberdeen Heights is one, offer lifetime care for an initial membership fee plus monthly service fees. Type B offers a modified package that generally includes lower payments but limited coverage for assisted living and nursing services; after minimums are reached, residents must pay for additional service. Type C is a fee for service model that may include a membership fee or monthly rentals; beyond basic services spelled out in a contract, residents must pay for what they receive.

CCRCs tend to be affiliated with non-profit owners, often with religious affiliations. But if you're thinking of non-profits as charities and social service agencies, think again. The non-profit status of most CCRCs qualifies them as tax-exempt entities, and thus lowers their funding expenses and tax bills. But they tend to be run -- in exchange for fees and other payments -- by for-profit companies who are very much focused on the bottom line. The network of companies created for the Aberdeen Heights CCRC is very complex. This structure helps limit owners' liability for any Aberdeen Heights losses. It also has created business units that are providing a range of services to the new community, in exchange for many millions of dollars in payments.

[See Best Places to Retire.]

As explained in financing documents, Aberdeen Heights is part of Ashfield Active Living and Wellness Communities, Inc. , a Missouri non-profit that borrowed $178.8 million through a series of seven bond issues sold to investors with different maturities and interest rates. Ashfield, in turn, is controlled by Presbyterian Manors of Mid-America Inc., a not-for-profit Kansas company that was begun more than 60 years ago by the Presbyterians in Kansas and now manages 17 senior living communities in Kansas and Missouri. The $190 million-plus in project funds includes $14.8 million in entrance fees from initial residents. The project itself will cost about $125 million and financing and other expenses will total more than $68 million.

The community will actually be overseen and managed by units of Greystone Communities in Irving, Tx., which specializes in building and managing senior-living communities. Founded in 1982, it became part of Sunrise Senior Living, a Virginia-based publicly traded company that has been forced to significantly downsize its operations to survive the steep industry downturn. Last year, as one of its restructuring moves, Sunrise sold Greystone back to its employees, and Greystone now is run as a private, employee-owned company.

Greystone units -- Greystone Management Services Co. and Greystone Development Co. -- will oversee Aberdeen Heights' operations and management, and also provide consulting services. Another unit was set up by Greystone to provide nearly $9 million of pre-finance money to the project, and includes other Greystone units as limited partners along with The Ziegler Companies, underwriters of the bond issues. Ziegler is a Chicago-based investment banking and services firm that specializes in the healthcare, senior living, church, and school sectors. It says the Aberdeen financing, announced last month, was the first CCRC new-community financing of the year, and the largest such deal since late 2007.

All these entities are very much in business to make a profit, and will be benefiting from substantial fees and other payments. Based on pro-forma financial statements, for example, the providers of the pre-finance money will be repaid these funds out of the bond proceeds and also will receive another $6.8 million for their work on the deal. Greystone is also entitled to another $8.5 million in fees, excluding its charges for managing and operating the community once it has opened. Fees for underwriting services and efforts to sell the bonds are about $3 million.

According to financial projections, it will take Aberdeen Heights several years to ramp up and approach break-even. For the year ending June 30, 2015, it projects a loss of $1.4 million and will have amassed cumulative losses of more than $25 million by that time. Projected expenses for 2015 are $24.5 million, including $696,000 in administrative costs and $728,000 in management fees. Repaying the borrowed money is far and away the biggest community expense, approaching half of its annual costs in many years. By the time the last bond issue is retired in 2045, Aberdeen Heights must generate enough revenue to repay the $178.8 million in principal on the bonds plus more than $250 million in interest payments -- more than $12.2 million a year, on average, to repay principal and interest.

To even get to the point of selling the bonds, however, Aberdeen Heights' owners had to overcome a lot of market jitters about CCRC financing. The project required years of planning and the development of very solid financial projections. Nearly 85 percent of the project's independent living units were reserved before the bonds were sold, with buyers needing to put down 10 percent deposits. Buyers also had to prove their financial ability to continue making monthly service payments. I'll provide details in my next Best Life column about the consumer costs and related terms of living in Aberdeen Heights.

[See Senior Communities Cope With Hard Times.]