Tuesday, May 27, 2014
Continuing Care Retirement Communities (CCRCs) utilize a variety of payment arrangements to attract potential residents. One option popular prior to the 2008 recession was a "100% refundable entrance fee" model, where the new resident was promised return of his or her upfront entrance fee upon "termination," subject to certain conditions, usually including re-occupancy of the unit in question by a new resident. During good financial times, this refund option benefited both parties. The company could rely on a quick "resale" of the unit, either for the same or a higher entrance fee. Thus the company often took the position it was able to "use" the original resident's entrance fee immediately, subject to any state regulations for mandatory reserves or other repayment guarantees or restrictions.
But who bears the risk of a downturn in the senior living market, especially the dramatic downturn that accompanied the 2008-2010 recession?
In Stewart v. Henry Ford Village, Inc., the issue was whether a departing resident must accept the company's offer of a lower refund, tied to what any new resident would pay as an entrance fee to reside in that unit. The difference was hefty, as the resident had paid $137k in 1998 when she moved in, but when she left the community in 2010, comparable units were reportedly going for $89k.
In a rare court decision analyzing a refundable fee, the Court of Appeals for Michigan ruled that the parties' contract language controlled, and in this contract the contract did not provide for a lower refund amount. Further, the company's obligation to comply with the contract terms was subject to an implied obligation of good faith (a Contract Law concept my students would, I hope, recognize!) to promptly market and "resell" the unit, thus suggesting a CCRC would not be in good faith for delaying a unit's resale as a negotiation tool. Here is the heart of the court's analysis:
"Given the totality of the circumstances, the status of the parties, and the rights and obligations as set forth in the Agreement, the Disclosure Statement, and the [state's Living Care Disclosure Act] we find no support for the conclusion that plaintiff should or is obliged to bear the risks of a declining real estate market. To the contrary, those risks would seem properly to fall to defendant. By way of example, when a lessee properly complies with his or her lease in vacating a rental property, the lessee bears no responsibility for the fact that the landlord may need to lower the rent to attract a subsequent tenant. Rather, it is the landlord alone who must bear the consequences of the existing market risks. Additionally, plaintiff notes that if the unit was subsequently reoccupied with a higher entrance deposit, defendant would not furnish additional monies to plaintiff. Defendant has not suggested otherwise.... It strikes us as incongruous, as unsupported contractually, and as of questionable good faith (without adequate disclosure), that plaintiff be held to bear the risks of a declining real estate market without the ability to reap the rewards of a booming one."
In the "unpublished" (and therefore nonprecedential) opinion, the Michigan appellate court remanded for an evidentiary hearing. The ruling demonstrates the importance of the contract language, state regulations, and, I suspect, the likelihood that future refundable fee CCRC contracts will provide clearly that refunds will be tied in whole or in part to "resale" amounts, at least for any so-called 100% refundable fee agreements.
It should also be noted that refundability of admission fees is potentially a separate issue from actuarially sound practices for CCRCs in the handling of such fees. Along that line, I note that one of the residents who pioneered concerns about financial soundness in CCRCs, Charles Prine of Pittsburgh, passed away recently. Mr. Prine's articulate advocacy included testimony before the Senate Special Committee on Aging. Chuck will be missed.