Continuing Care Retirement Communities (CCRC) Benefits and Risks

I. What is a CCRC?

A. Also called “life care communities”, CCRCs promise a single campus in which an individual can enter to independent living while having eventual access to assisted living and nursing home on site, if needed. New residents usually enter independent living apartments, townhouses or villas and can access a community center offering a dining room, recreation facilities, and group activities along with basic services like banks, physicians and dentists. Most CCRC residents probably are age 70 and up (although some residents may be in their 60s).

B. CCRCs market themselves as providing a worry free lifestyle, opportunities to meet friends and participate in activities, and ability to age in place, but not all CCRCs deliver on these promises. A good lawyer will help clients distinguish between marketing puffery and legally binding duties so that the client fully understands what the CCRC really promises to provide and the true cost.

II. How does a CCRC operate?

A. CCRCs typically are sponsored by a private developer like Erickson, or a religious group like the Society of Friends (Quakers). CCRC development and marketing is regulated by the NJ Department of Community Affairs.

B. Typically, a developer will establish a separate corporation for each CCRC so that only the particular CCRC on the contract has legal obligations even though marketing materials may emphasize a sponsor’s many communities and years of experience in the CCRC business. Therefore, in performing due diligence, evaluate the CCRC as an independent entity.

C. CCRC marketing materials stress lifestyle and aging in place but the contracts paint a different picture.

D. CCRCs charge a monthly maintenance fee to cover common costs such as grounds maintenance, staff, outside and common area maintenance, taxes, and utilities. Obviously, the fee will increase if costs increase, it is set too low initially, or it is subsidized temporarily.

E. CCRCs usually call for a substantial buy-in of at least $75,000 to a few hundred thousand dollars. Depending on the size of the entry-fee up to 90% of the entry-fee may be refundable on termination, but a particular resident’s actual refund can be far less than the maximum of 90%.

F. A typical CCRC may provide that the smaller of 90% of the original entry-fee or the remaining uncharged entry-fee will be refunded. So long as a resident never enters the nursing or assisted living facility, the refund will remain at 90% but the refund will be reduced if the resident requires long term care.

G. When an individual enters the CCRC assisted living facility or nursing home, he usually continues to pay only the monthly maintenance fee applicable to his unit but his entry-fee account is charged the excess of the full health facility cost over the monthly maintenance fee payments. For example, if John pays a 90% refundable fee of $200,000 for a CCRC one bedroom apartment that carries a $1,000 per month maintenance fee and then John enters the nursing facility, which charges $9,000 per month, John still pays the CCRC only $1,000 each month, but his $180,000 refundable deposit account is charged $8,000 each month that John is in the nursing facility. If John is in the nursing facility temporarily so that he also keeps his apartment, the full $9,000 per month may be charged against the refundable deposit.

H. Some CCRCs also offer an option of a somewhat smaller entry-fee that isn’t refundable at all or in which the refund percentage declines dramatically each year until there is no refund after several years of residence. While the savings can be attractive, the loss can be dramatic if the client decides to move out of the CCRC rather than stay there for life. With the no refund/short refund plan, the resident must bear a major financial hit if he leaves early (perhaps because the resident isn’t happy or can’t afford rising maintenance fees) and the CCRC realizes a windfall if the resident dies within a few years of entering the CCRC. On the other hand, the smaller entry-fee plan can provide a substantial windfall to the resident if he enters the CCRC nursing or assisted living facility and the CCRC ends up subsidizing his stay after the full entry-fee is exhausted.

III. What is the lawyer’s role?

A. When clients consult us about entering a CCRC, they usually are very enthusiastic about the wonderful opportunity that the CCRC presents. As with so much of legal practice, our primary rule is to curb the client’s enthusiasm and make sure the client understands what he is getting into.

B. Due diligence falls into three categories, legal, financial, and social.

IV. What is legal due diligence?

A. The lawyer must review all the marketing materials and contract and make sure the client understands the general terms and financial arrangement. The CCRC contract or entrance agreement usually differs dramatically from the marketing materials (particularly when the CCRC is in the planned or just beginning construction phase).

B. Explain that the monthly maintenance fee can rise over time, and it almost certainly will rise dramatically if the sponsor temporarily is subsidizing the fee for marketing reasons.

C. Similarly, explain that 90% is the maximum refund but the actual refund will be considerably less or even nothing if the client spends substantial time in the CCRC nursing or assisted living facility.

D. Explain the timing limitations on payment of the refundable entrance fee. Clients usually think that the CCRC will refund the 90% (or other refundable share) of the entrance fee when the resident dies or moves out. However, the contract probably says that no refund will be given until the CCRC re-lets the unit. This is not an issue in a fully built-out CCRC that is highly desirable, but can lead to major wait in a CCRC with new units still being constructed or that is less desirable than competing housing in the area. For CCRCs with many vacancies, the effect can be that the refund obligation is illusory.

E. Finally, it is crucial that the client understand that because residents are general creditors, CCRCs may not refund entrance fees unless finances are sufficient to satisfy obligations to secured creditors like banks and bondholders. Thus, the need for financial due diligence.

V. What is financial due diligence?

A. If the CCRC isn’t fully built out yet, then the common facilities and remaining units promised by the developer may never be built if the CCRC isn’t on a sound financial footing. Similarly, there may not be sufficient funds to properly maintain the CCRC and provide the promised amenities.

B. If the developer is subsidizing maintenance fees initially, the true long-term maintenance fee may be much higher than the initial “teaser” maintenance fee. This can make it too expensive for the client to remain at the CCRC once the subsidy ends.

C. If the projected number of units isn’t built, then each resident will bear a greater than anticipated share of the common costs, which is likely to result in higher maintenance charges than anticipated.

D. In extreme cases, a CCRC may be unable to meet its financial commitments and can go bankrupt as happened out West when CCRCs first started.

VI. What is social due diligence?

A. Because it tends to be very costly to leave a CCRC, clients should plan to stay for life. Therefore, it is important that the client have a strong likelihood of making friend and enjoying the activities.

B. Counsel clients to quiz existing residents on what life at the CCRC is really like rather than just relying on marketing materials and staff claims.

C. Meanwhile the lawyer should inquire as to management’s experience and track record.

VII. What about Medicaid?

A. In the many CCRC nursing and assisted living facilities that do not accept Medicaid, a resident must pay privately once his refundable entrance fee is fully exhausted. While CCRC marketing materials often imply that a CCRC will keep residents whose entrance fees are exhausted, CCRC contracts with which I’m familiar provide that such subsidies are purely voluntary. Thus, a CCRC can discharge a resident to family or an offsite facility that accepts Medicaid once the refundable deposit is exhausted. Obviously, this would defeat the aging in place concept.

B. DRA 2005 revised 42 U.S.C. 1396r(c)(5) to permit CCRCs to require a CCRC resident to spend all amounts declared in the admission application on care before applying for Medicaid. Thus, any Medicaid planning gifts should be made before a client completes a CCRC application.

C. DRA also added a new 42 U.S.C. 1396p(g), which provides that CCRC refundable entrance fees are Medicaid countable resources. As a result, a CCRC resident cannot qualify for Medicaid until the refundable entrance fee is fully applied against CCRC nursing or assisted living facility charges.

VIII. Conclusion

A. The lawyer has a crucial role to play when a client is considering entering a CCRC.

B. The lawyer must ensure separate marketing talk from legal obligations and ensure that the client understands that the contract governs the relationship between resident and CCRC and the contract can differ significantly from the glossy sales brochure.