Nonrefundable And Refundable Plans Each Have Their Merits
The number of occasions in which CCRC insolvency has caused residents to lose their refundable entrance fee deposits has been very rare, but is the entrance-fee pricing model the best alternative for CCRCs—and for residents?
As it has evolved, the entrance-fee CCRC model allows seniors to use their home equity to move into an environment that offers independence and a full range of services and amenities at a stable monthly cost. It’s the only model that provides that lifestyle and support without prohibitively high levels of monthly fees or rents—which is why rental communities typically offer fewer services and amenities.
Given its predominance in the industry, especially on the not-for-profit side, the entrance-fee model has clearly done a good job—although recent economic times have uncovered some of the downside, according to Mark Streicher, Principal at Sawgrass Partners, LLC in Glenview, Illinois.
Originally, the concept of life-care communities supported by faith-based or charitable endowments was for residents (often widows with no heirs) to give up all their assets, whatever the amount, and the organization agreed to provide care for the rest of their lives. That pricing model didn’t work out so well economically. Once people moved into the retirement community environment—with some independence, regular meals, housekeeping services, socialization, a better level of care, etc.—they were revitalized, lived longer, and many organizations lost their shirts with no additional revenue beyond their endowments and usual fundraising efforts.
The nonrefundable, fully amortizable entrance-fee plan was the next step. Residents paid an entrance fee where the refund declined to zero over four or five years, along with monthly service fees based on the type of contract selected and the level, if any, of health-care benefits. Then, as home values dramatically appreciated in the late 1970s and early 1980s—and people (and their heirs) didn’t want to lose all their home equity—the industry migrated to refundable entrance fees ranging anywhere from 25% to 100% refundable, although many CCRCs built during the last five or 10 years have offered 90% refundable contracts. Back when interest rates were high (and higher than today), some providers used their pool of entrance-fee revenues to pay down more debt. It was a win-win for everyone, so the amortizable, or declining-balance, entrance-fee plan became less prominent in recent years.
So over the last 25 years, CCRC pricing has largely evolved into the refundable entrance-fee model. Older communities may continue to offer nonrefundable entrance-fee plans until they do an expansion, particularly a substantive expansion, or if they’re suffering occupancy problems, according to Paul Steinhoff, Vice Chairman and CEO of Greystone Communities, Inc. in Irving, Texas. Then the refundable entrance fees come into play to help overcome market resistance. And if a community becomes stressed for any reason, the board has the option of reducing the refund for new residents.
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