When researching a life plan community, also known as a continuing care retirement community (CCRC), it is natural to focus on residence floorplans, amenities, lifestyle, and healthcare services. But there is another consideration that may be just as important: Is the organization financially equipped to fulfill its commitments to residents over the long term?
Moving to a life plan community is a considerable financial commitment, often involving a substantial entrance fee and ongoing monthly payments. In return, residents expect the organization to maintain its facilities, provide promised services, and make appropriate levels of care available if a person’s needs change. Because these obligations may extend for decades, evaluating the provider’s financial viability should be an essential part of the decision process.
Doing your due diligence on a community’s financial viability can help ensure your senior living decision will be fiscally sound for the long haul. The following eight questions can help prospective residents and their loved ones evaluate a community’s financial health.
1. What do the community’s recent financial statements reveal?
Request the community’s most recent audited financial statements and, if available, those from the previous two or three years. These documents provide insight into its financial position, operating performance, assets, and liabilities.
Look for fiscally sustainable operations and a balance sheet that supports ongoing obligations. Is revenue keeping pace with expenses? Are liabilities growing significantly? If so, why? Has the organization’s financial position deteriorated over time?
If the community belongs to a larger senior living organization, clarify which legal entity is responsible for your residency agreement. The financial strength of a parent organization does not necessarily ensure the financial health of an individual community.
And because senior living financial statements can be complex, consider having an experienced CPA or other financial professional review them. The challenge can be finding someone who is well-versed in the financial operations of CCRCs, which can be quite different from a typical operating company
>> Related: How Do I Know If a CCRC Is Financially Viable?
2. What is the community’s occupancy rate, and how has it changed over time?
Occupancy is an important indicator of a senior living community’s ability to generate ongoing revenue, now and into the future. When entrance fees and monthly service fees fall short because of sustained vacancies, it can create shortfalls in what is needed to cover expenses.
Ask what percentage of independent living residences are occupied and how that figure has changed over the past three to five years. Find out whether the community is meeting its occupancy projections, whether its waitlist is growing, and how quickly it typically fills vacant residences. And pay attention to the trend: Some communities that experienced occupancy challenges may have made significant strides to turn things around, including things such as a new management team, community improvements, a comprehensive strategic plan, and more.
For newer communities, determine whether they are meeting occupancy targets. And for more established communities, ask management to explain any persistent occupancy declines and their strategy for attracting new residents.
It’s important to consider occupancy alongside other financial measures, however; strong demand alone does not guarantee long-term financial stability.
>> Related: The Intersection of CCRC Finances & Occupancy Results
3. Does the community generate sufficient cash from operations?
Cash flow from regular operating activities helps show whether a community generates enough money to cover its day-to-day expenses.
Ask whether operating cash flow has been positive in recent years. With the high inflationary environment we’ve recently experienced in the U.S., it may not be surprising to find some cash flow deficits in recent years. If this is the case, it’s important to learn more about the root of any shortfall. For instance, find out whether the cause was temporary (such as a major construction project) or reflects a persistent imbalance between revenue and expenses.
One key is to distinguish operating cash flow from money raised through borrowing or asset sales. Although these sources can provide legitimate funding, they do not necessarily demonstrate that the underlying business model is sustainable in the long term.
Recurring operating deficits may force an organization to draw down reserves, borrow more, or increase resident fees. Ask how management monitors cash flow performance and addresses any shortfalls.
>> Resource: Guide to Evaluating the Financial Viability of a CCRC
4. How much debt does the organization carry?
Given their large capital requirements, borrowing is common among life plan communities, which may use loans or bonds to finance construction, renovations, and other infrastructure improvements. Debt is therefore not inherently bad, but the key question is whether the debt is manageable.
Ask about outstanding loans and bonds, upcoming repayments, and whether the organization is meeting its financial obligations to lenders. One useful measure is the community’s debt service coverage ratio, which assesses whether available cash flow is sufficient to cover required principal and interest payments.
Heavy debt payments can limit the funds available for staffing, maintenance, and other operating needs, therefore understanding the debt burden helps you assess the organization’s financial situation.
If the community has publicly rated bonds from organizations such as Fitch or S&P, request its current credit rating and ask about recent changes. A downgrade or covenant violation warrants further investigation, though neither automatically indicates financial distress.
>> Related: CCRC Bond Ratings Explained
5. Does the community have adequate liquid reserves?
An organization can own valuable property and still struggle to pay its bills if it lacks readily available cash. Liquidity measures its ability to meet financial obligations as they come due.
Ask the community how much unrestricted cash and investments the organization maintains and how many days of operating expenses those funds could cover. This measure, known as days cash on hand, is commonly used to evaluate a senior living organization’s financial cushion.
Clarify whether liquid reserves are restricted to specific purposes or are available for general operating needs. Also ask how the organization prepares for unanticipated expenses such as unexpected major repairs or sudden increases in labor costs. Adequate liquidity can help a community weather such temporary financial pressures without immediately resorting to additional borrowing or other disruptive measures.
6. Has the organization evaluated the potential cost of its long-term care obligations?
Life plan communities must consider the potential cost of serving residents over many years. Depending on the type of residency contract(s) offered, the organization may assume some financial risk associated with residents’ future healthcare needs.
To address this risk, ask whether the community conducts actuarial studies or other long-range financial analyses. These assessments may consider residents’ longevity, future care requirements and costs, fee revenue, investment returns, and operating expenses.
For communities offering Type A (life care) or Type B contracts with built-in or discounted healthcare costs, these actuarial projections are particularly important. If future care costs exceed projections or available resources, the organization could face financial pressure.
Learn how management identifies potential shortfalls early and updates projections as assumptions change. Although no analysis can guarantee future stability, they can reveal risks that conventional financial statements may not capture.
>> Related: An Actuarial Perspective on CCRC Financial Viability
7. How will the community fund future maintenance and capital improvements?
Buildings and infrastructure require ongoing investment. Roofs, elevators, heating and cooling systems, and healthcare facilities all need maintenance, repairs, and eventual replacement.
Ask whether the organization has a multiyear capital improvement plan and how it will fund major projects. Will it use reserves, operating revenue, or additional borrowing? Could the projects affect resident fees in the future?
As with any building, deferred maintenance can lead to larger expenses later for a CCRC, while major renovations may increase debt and operating costs. Neither necessarily indicates financial weakness, but management should be able to explain how planned spending fits into its long-term financial strategy.
>> Related: Finding Your Happy Place: Tips for Choosing a CCRC Residential Unit
8. What unbiased financial benchmarks and/or oversight are available?
Independent benchmarks and regulatory information can help put a life plan community’s financial results into context. For instance, ask whether the community is accredited by CARF International. Its standards address CCRCs’/life plan communities’ financial planning and management, although accreditation does not guarantee future financial stability. Furthermore, a lack of CARF accreditation does not necessarily mean a community’s financial outlook is poor. Many financially sound life plan communities choose not to pursue accreditation because of the time and cost requirements.
For communities that are CARF-accredited, the organization’s financial ratios and trend analysis resources can help prospective residents compare a community’s performance against industry benchmarks like liquidity, operating performance, and debt-related ratios. Comparisons should account for differences in community size and contract structure, however.
Also ask whether any state agencies regulate the community and what, if any, financial disclosures are required. (Note that senior living oversight varies considerably by state.)
Finally, pay attention to how clearly management answers financial questions and whether it provides supporting documentation. Transparency and forthrightness are key to helping prospective residents conduct meaningful due diligence.
>> Related: Long-Term Care Ombudsman Programs Support LTC Residents
Looking beyond appearances to assess a CCRC’s long-term financial health
In addition to convenient services and attractive amenities, one of the top reasons people choose to move to a life plan community is for peace of mind. This is why prospective residents should determine whether the community they are considering has the financial resources and management practices needed to honor its commitments over time.
No single measure can guarantee long-term financial viability, however. Instead, consider the community’s overall financial picture … factors like operating performance, occupancy rates, cash flow, debt, liquidity, long-term care obligations, and capital planning.
Ultimately, your goal is not to become an expert financial analyst. It is to ask salient questions, understand the answers, and seek professional guidance when needed. Sometimes the best indicator may simply be the community’s transparency and willingness to answer your questions in a satisfactory manner. And importantly, evaluating a life plan community’s financial health before signing a residency agreement can help you make a more confident, informed decision about an organization you plan to rely on for many years to come!
