Linda and her friend, Mary, walked through the apartment at the retirement village. It was the perfect space for a single adult who didn’t want to deal with the responsibility of home ownership.
“There are a number of different units available, with a wide variety of amenities,” the real estate agent said. “Because this is a continuing care retirement community, our residents essentially purchase a unit and then are permitted to age in place. When their health needs change or they require more care, they are provided with an enhanced level of assistance. Generally, our residents begin with independent living, then move on to assisted living and possibly, nursing homes. We also have medical staff on site should emergency care be required.”
We have a dining room for those who can no longer cook for themselves or prefer not to. We also provide housekeeping and laundry services. In addition, we offer an on-site workout facility as well as off-campus activities, such as field trips to museums or plays. And of course, access to healthcare is provided.”
“Wow, what does all of this cost?” Mary asked.
“There is an initial fee for the unit and then a monthly maintenance fee. Other fees are outlined in the contract.” “What happens to the unit when someone dies?” Linda asked. “Do they simply lose their investment?”
The real estate agent smiled. “That’s the beauty of a CCRC. When a resident dies, the community guarantees that it will refund the cost of the unit to their heirs at 90 percent of its value.” The agent handed Linda a brochure. “I suggest you read this carefully. It outlines what the costs are and what’s included in that cost.”
“Wait a minute,” Mary interjected. “What happens if the community runs into financial problems? Are the residents left high and dry? Do they lose their housing?”
The real estate agent smiled confidently. “That hasn’t happened, yet. But as you know, the only certainties in life are death and taxes.”
Generally, a continuing care retirement community (CCRC) offers a long-term contract to provide housing, amenities and services, and nursing care in one location. There are a number of contract variations available, each offering a package of services for a set price. For example, a Type A or Extensive Agreement may include long-term housing, specified services and amenities, and health-related services. A Type B or Modified Agreement may include housing, limited services and amenities, and a limited amount of nursing care. Additional healthcare services may be provided at a discounted rate. A Type C or fee-for-service agreement provides housing, and services and amenities for a predetermined fee. Healthcare services may also be provided for a fee. Long-term rental housing, with access to services and amenities, and healthcare for a fee, may also be available.
However, the fees for entry into CCRCs are steep and typically require initial one-time payments ranging from $100,000 up to more than $1 million. For that reason, it is important to carefully review the housing contract provided by the retirement community, as well as investigate the CCRC itself. In California, most CCRCs are licensed and are required to file annual financial reports with the state Attorney General. Those reports are available online. In addition, state law protects the rights of those who participate in CCRCs and provides a means for filing complaints against such facilities. There is also an international accrediting body for CCRCs: CARF International.
When reviewing the financial health of a CCRC, it’s important to ask several questions, including:
- What is the occupancy rate? Usually, an occupancy rate of 90 percent or more is an indication that the CCRC is successfully managed. In addition, a high occupancy rate may have an impact on the timing of a guaranteed refund, especially if the refund is contingent on the sale of the unit.
- Has the monthly fee remained relatively stable or has it been subject to steep, unexplained increases? As a general rule, it is reasonable to expect monthly maintenance fees to increase up to 3.5 percent a year. More substantial increases may be an indication of poor financial management or a low occupancy rate.
- Has the CCRC issued bonds to fund expansions or capital improvements? If so, check out their bond rating. Ratings below BBB may indicate a questionable financial status.
- Is the CCRC profitable? Generally, a CCRC should bring in more money than it spends. When reviewing a financial statement or annual report, calculate what percentage of cash operating revenue goes toward cash operating expenses. A number below 100 percent indicates the community is generating enough cash to cover expenses.
- Is the CCRC well- maintained? Again, experts recommend turning to the financial statement. If capital spending is equal to at least 50 percent of depreciation, chances are the CCRC is well-maintained. However, a visit to the facility should be made to confirm that.
- Does the CCRC retain sufficient reserves? An actuary’s report will verify that a community has the reserves, income and cash flow necessary to meet its contractual obligations.
As with any large investment, it is important to have a CCRC contract reviewed by an estate planning attorney. They are familiar with statutory requirements, explanations of service, and necessary provisions to protect the buyer.