CCRCs: Navigating rough financial waters

The best advice for continuing care retirement community (CCRC) owners and operators? Hold a mirror up to your own site and ask, “Why does anybody come here?” says Larry Bradshaw, CEO of National Lutheran Communities & Services, Rockville, Md. And while you're making the wish list of new amenities and renovations, be sure to add up the math. The biggest risk for CCRCs in challenging financial times is letting the investments and expenses get ahead of the money management happening at the unit level, Bradshaw said during a presentation at October’s LeadingAge annual meeting.

Bradshaw’s own site, a 300-bed non-profit skilled nursing facility (SNF) with big dreams of becoming a CCRC, had gotten in a bit over its own head by 2009. Although the organization had zero debt, it was losing $4 million a year from its endowment thanks to the plummeting U.S. recession. Time for a financial overhaul, the organization decided.

5 red flags

If you want to keep your continuing care retirement community in the black, avoid these red-flag practices, notes James Emerson, a retirement housing and services consultant based in Orlando, Fla.

  • Using entrance fees to create large cash-on-hand instead of paying down on original debt per unit.
  • Promising refunds of more than 90 percent of entrance fees without realizing the weight of that risk.
  • Using entrance fees allotted for refunds to keep loans afloat.
  • Basing business decisions of feasibility projections above 93 percent without adjusting staff and operating costs to match.
  • Failing to transition the marketing team into a sales team.

By 2014, Bradshaw’s organization had moved from a massive loss ratio to an operating margin of 2.5 percent by re-evaluating operating costs against intake revenue. It also expanded the site in phases, waiting for intake to catch up before moving on to the next phase.

Weighing future expansions against current operating costs can be tricky business, notes Steven Van Camp, senior vice president and CFO at National Church Residences, Columbus, Ohio. When his organization tried to expand with new housing models beyond its existing SNF, nearly 10 banks eventually got involved. After a brush with bankruptcy, Van Camp’s organization now has reorganized, streamlined its loans and has gone from a two-star rating to a five-star rating under the CMS Nursing Home Compare system. "Residents' word of mouth is more powerful than any marketing message you can get out there," Van Camp says.

Struggling CCRCs can successfully avoid bankruptcy if the banks can work together on a loan strategy, but it’s definitely not easy, said Cynthia Dunn, president and CEO of Judson Services, Cleveland. “Banks are great to work with, but they're not always creative with solutions when financial hardships arise. They don't think outside the box; they're IN the box.” Now that Judson has survived its recent financial challenges, its leaders keep a vigilant eye on sales structures and unit prices, constantly reassessing to keep units selling, Dunn said.

“We’re always asking, ‘What can we do to market and sell our units? Do some of the unsold units need to be repriced? Should we waive the second occupant fee?' We didn't want to start a project that depended on phase two to succeed. We didn't want to say, 'Once we're full, we'll build that pool and add the other amenities we promised.' "

The most dangerous pitfall is adding new spaces, amenities and services that the organization can’t really afford, says Jim Emerson, a retirement housing and services consultant based in Orlando, Fla. "Service creep is the biggest problem at CCRCs. We can do anything as long as we can pay for it. Increase revenue or reduce the expenses. It's that simple."

Emerson suggests, for every initiative/expansion decision, always ask:

  • What is the job purpose of this expense?
  • How long should the project take?
  • How much does it cost, and what are the benchmarks?
  • How will you pay for it?
  • How will you monitor it?

And in all cases, pay special attention to sales messaging and transforming current marketing staff over to sales initiatives, Emerson says. "We can tell our story all we want, but we need to sell units,” Emerson says. “It may take changes in people, not because they're bad people, but because they can't sell."

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