Friday, July 11, 2014
Thomas R. Califano, Jeremy R. Johnson & Jason Karaffa, published an article entitled, Initial Entrance Deposits in Troubled CCRCS. Provided below is the introduction to the article:
Continuing care retirement communities (CCRCs), which provide seniors with the ability to remain within the same community for the remainder of their years and the peace of mind that comes along with such stability, have become increasingly popular over the past few decades. Under one popular business model, prior to moving into a CCRC, a senior typically pays a sizable initial entrance deposit (an IED).
The IEDs, in turn, provide the cash flow necessary to operate the CCRC and to pay down the significant debt used to fund the construction of the CCRC. The resident retains a right to receive a refund of the IED when the resident dies and/or their unit is resold. Because payment of an IED is often linked to the sale of a senior’s home, the success of a CCRC depends greatly on the housing market. Stress in the housing market has slowed the pace of “absorption” at many CCRCs resulting in defaults and bankruptcy filings which have placed residents’ interests in jeopardy. Resident’s interests in IEDs are at risk because the project’s contingent obligation to refund the IEDs is subordinate in fact to the secured debt which funded the project’s construction. The treatment of IEDs and residency agreements after a CCRC is in danger of defaulting on its secured loans has become a hot-button issue which creates great concern among regulators, current and potential residents of a bankrupt CCRC and may impact the post-bankruptcy success of the CCRC.
Special thanks to Brian Cohan (Attorney at Law, Law Offices of Brian J. Cohan, P.C.) for bringing this article to my attention.