In last week’s post, “What Makes a Life Plan Community Great?,” I mentioned the importance of financial viability. While CCRCs want some level of assurance that a new resident’s finances are adequate to cover the costs associated with living in the community, prospective residents should also take time to check out the finances of the community to be sure it will have the operational cash on hand to be able to follow through with their contractual obligations to you and other residents to provide housing, amenities, and in the future, care services.

But how can you tell if a CCRC is financially viable? Here are some important questions to ask at each of the communities you are considering:

What is the occupancy ratio in independent living? A high occupancy ratio (90 percent or more) shows a strong demand for the community and contributes to a stronger balance sheet. But do not just look at current occupancy levels; also, ask about the direction occupancy has been trending over the past several years.

What are your bond ratings? Not every retirement community will have this, but some CCRCs that used public debt to finance their initial development or renovations may have had their bonds rated by a rating agency. A rating of BBB- or higher indicates financial strength.

Are financial covenants being met? Communities that use debt financing will be held to strict financial covenants by their lender(s). Ask if the CCRC if there have been any recent violations of bond covenants, if applicable. Some violations may be rather minor but others can point to bigger issues.

Is there positive cash flow from operations? Cash flow generated by operations results from a combination of residents’ monthly fees and non-refundable entry fees. While negative cash flow may be acceptable for short periods of time, it should not be a trend. Operational income must be sufficient to cover the CCRC’s annual operating expenses. A qualified accountant can help you analyze the audited financial statements.

Is there a future service obligation? CCRCs have to determine whether expected future costs for housing and healthcare will be met by future revenues. If the expected long-term cost of services exceeds expected revenues, it is referred to as a future service obligation (FSO), which should show up on the balance sheet as a long-term liability.

Has a detailed actuarial analysis been performed? A professional actuary can analyze factors not covered in the FSO calculation–things like long-term debt, capital expenditures, and planned expansions. The report should indicate that future obligations to current residents are covered, new resident fees are sufficient, and long-term positive cash flows are projected.

Do current assets exceed current debts? Current assets and debts are those that are expected to be realized or paid, respectively, within the next 12 months. The ratio of current assets to current debts is referred to as the current ratio and is an indication of whether an organization is in a position to repay its liabilities with its assets.

Is the provider financially regulated by the state? Not every state regulates CCRCs’ finances, but in some states, there may be specific financial conditions that communities are required to meet each year like certain cash reserves and possibly financial ratio requirements. State regulation does not ensure a community’s financial viability but it does add another means of oversight and consumer protection.

A complex equation

Acceptable responses to most of these questions are a good indicator that the community you are considering has strong financials, but bear in mind that there can be good reasons for any one of these indicators to appear less than favorable at a particular point in time–perhaps the community just financed the construction of a new building, for example, so debt is a higher than it might normally be.

Also, CCRCs that are less than eight years old should be judged differently than established communities. These start-ups may have negative equity as a result of the higher levels of debt required for development, but even a new community should have a comprehensive strategic and marketing plan and be on track to meet early occupancy goals. If management underestimates the amount of time they will need to fill the units, CCRCs are more likely to run out of money.

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