Once they are ready to move out of their homes, some people look to a Continuing Care Retirement Community (CCRC) for housing. CCRCs offer a very attractive transition – from independent living with your own apartment and cooking facilities, to assisted living with some support for daily activities to full nursing care. You can just move from one part of the facility to the other and — depending on they type of contract — all without increasing your monthly charges. Your children and grand-children can come and visit but are not burdened by having to look after you.
This has been a growing business. As of 2017, there were over 1,950 CCRCs in the U.S. according to the Ziegler National CCRC Listing & Profile. Over 300 were registered in California alone. Most are for-profit enterprises although some are run as non-profit organizations.
As of 2017, there were over 1,950 CCRCs in the U.S.
CCRCs can provide an unparalleled social environment for seniors in their final years – especially if you are a man in a CCRC with a 4:1 gender balance in your favor (as is not uncommon, at least in California.) In some cases, the stimulation of constant social interaction and cultural events provides a high that gives another several years of life. This is not to be discounted!
CCRCs provide an unparalled social environment for seniors.
One of my good friends in La Jolla is considering just such CCRCs and requested my opinion on the financial investment. She asked me to review four sets of contracts, three in Southern California and one in Central Florida.
Every CCRC’s contract was different but I found some common elements to all the contracts I reviewed. They all shared one common problem — the CCRCs combined two different products into one bundle and you need to buy both at the same time. But if you don’t like one, you are sunk. Let me explain.
Typically the CCRC requires that you pay a sizeable “entrance fee”, where some portion is returned to your estate after your passing and some is turned over to the CCRC. The non-refundable portion is amortized over a short period – in one case, just 15 months – but typically under three years. It effectively becomes your premium for a long-term care (LTC) insurance policy. On the contract that I reviewed, it was 30 percent of a $1 million (or more) upfront fee, i.e. $300 thousand or more.
However if you were to purchase a LTC policy at the age of 75, according to Genworth’s online calculator, the annual premium would be just $13,300 (for coverage of $150 per day for four years). Furthermore you would pay it each year rather than upfront. It would take more than 20 years of such a policy before you would breakeven on the coverage. Furthermore, the investment in not transferable. If you decide that you want to move to another CCRC, that $300 thousand (and the implied LTC insurance policy) would be lost.
The problem is that the entrance fee is thought be many CCRC residents to be similar to a long-term care contract. However the CCRC contracts are not written as insurance contracts — and they have none of the standard consumer protection provisions of an insurance contract. Furthermore they are not regulated by the state regulatory agencies as insurance contracts.
Entrance fees to CCRCs appear to many to be LTC contracts — but they are not regulated as such.
At the same time, CCRC residents have no protection against arbitrary increases in your monthly fees – or the loss of services. Some states, including California, require that the governing board for the CCRC include patient representatives but at least in California, those representatives have only an advisory role. They have no power to vote on decisions made by the CCRC. If you would like to have breakfast offered (in addition to dinner) and the CCRC management doesn’t wish to provide it, you should make sure there’s a Starbucks nearby.
Residents have no voting authority on the boards of CCRCs.
However that is not the end of the financial risks. The repayment of the refundable portion of your investment may depend on several factors, such as whether your apartment can be rented to a new entrant at the same rate as you were paying, or whether you ran out of money to pay monthly fees and the difference was taken out of the investment, or whether the CCRC is still financially solvent and had not declared bankruptcy. It hasn’t happened often but there are several CCRCs that have gone bankrupt.
While the CCRCs in California are expected to set aside reserves for the repayment of the refundable investments, the residents of the Vi in La Jolla found that even a court case could not force the CCRC to do so. In spite of all your good planning, your estate may find itself suing the CCRC as an unsecured creditor – and hoping for the best. At the same time, there is no requirement for your funds to be invested at market rates. Your estate has made a zero-interest rate loan to the CCRC with an uncertain repayment date. In California, you can find the audited financial statements of the companies owning CCRCs on the website of the Department of Social Services which can be accessed here.
The CCRCs are not required to set aside separate reserves to repay residents (or their estates) when the resident leaves the CCRC.
The complexities do not end there. The CCRCs that are run as non-profit entities appear to have relatively simple ownership and control structures. They are considered as charitable organizations, known as 501(c )3, and in at least one case, had access to tax-exempt municipal bond financing through the State of Massachusetts. The bond issue for Newbridge on the Charles was rated only BB+ by Fitch (i.e. below investment grade) but its bond offering provided over 270 pages of extensive discussion of the CCRCs operations, forecasts and risks.
However even with a non-profit owning the facility, management is likely to be with a for-profit management company. In the case of the one non-profit CCRC, the CEO was receiving compensation in excess of $600,000 per year. Nevertheless the legal ownership and control structures were transparent. In addition, the tax-exempt municipal bonds issued through the California Statewide Communities Development Corporation provide extensive publicly available information on their business operations and investment risks. You can find the information here. In addition, the official disclosure statements on bond issues for non-profits (what you call a prospectus in the corporate world) can be found here.
Such clarity of ownership and control and operations is not so easily found for the for-profit CCRCs. The legal structures of the for-profit entities are highly complicated and rival those of a real-estate investment trust (REIT). In one case, the CCRC facilities were owned by one limited partnership but the management was provided by another limited partnership. The parent company for both had no legal responsibility for the CCRC (not even for the reimbursable investment funds that flowed to the parent.) Ownership holdings of the partnership was not publicly available information.
For-profit CCRCs may have legal structures intended to protect the investors — not the residents.
Why does all this matter? If you have a dispute that you cannot resolve with the management of the CCRC, you may need to consider suing the company. Where the CCRC has separated management from the physical property, it will be hard to sue the part of the operation that holds the largest assets. Indeed many lawyers recommend the creation of special purpose entities (SPEs) simply for the purpose of protecting the company’s assets from any lawsuits related to negligence in the treatment of patients.
Note also that most CCRC contracts include provisions for mandatory arbitration of any disputes. No matter what the issue, it will have to be settled in a closed arbitration hearing where class action lawsuits have been prohibited and the transcript and final decisions are sealed from the public record. The contracts on CCRCs typically preclude class action lawsuits by insisting on arbitration.
In the case of a dispute with the management or owners of a CCRC, you are not likely to be able to have your day in court.
In summary, my view was that CCRCs are expensive solutions that require a large non-refundable investment up-front but provide only vague promises on the type and quality of care to be provided over your lifetime. But it’s a very attractive lifestyle.
Just be sure to read the fine print — and ask your lawyer for a second opinion.