newjerseynewsroom.com

BY GERALD J. ROBINSON

NEWJERSEYNEWSROOM.COM

If you're thinking about a retirement community for your parents — or yourself — take a deep breath. Making a prudent choice depends on a lot more than finding a beautiful amenity package and getting friends' recommendations.

Continuing-care retirement communities, referred to as "CCRCs," have grown in popularity in recent years, particularly among more affluent, upper-middle class individuals who can afford the stiff up-front entrance payments many of them require. These CCRCs now house approximately 750,000 seniors, with the number expected to rise with the retirement of the baby-boomers.

The popularity of these retirement communities is understandable. They provide security and comfort with attractive physical surroundings, extensive activity schedules, nutritious meals and health clubs. Often they also provide on-site medical and long-term care.

But in exchange for the promise of lifetime care they generally require a large investment. CCRCs that aren't rentals generally require six-figure up-front payments for an entrance ticket. The retirement community contract may or may not provide that part or all of the payment will be refunded when the resident dies or moves out, an important feature to consider where there is concern for heirs' inheritances. The average entrance fee is reported to be around $250,000 and for higher end communities can exceed $500,000. Residents also pay hefty monthly fees, rising in amount as the level of services contracted for increases.

These retirement communities generally are regulated by state agencies, but such regulation is no guarantee of financial soundness. Because the up-front investment is so large, prudent buyers have to be concerned with whether the retirement community can meet its obligations over their life expectancies. These obligations include being able to make the entire or partial refund of the entrance fee bargained for and being able to meet the agreed level of services without raising the monthly fees more than the inflation rate.

The recent economic downturn has put financial pressure on many retirement communities, especially those that rely on the receipt of entrance fees to fund their continuing operations. Because of the slow residential real estate market, many candidates for buying into a retirement communities are unable to do so because they cannot sell their existing homes, the main source of payment for the entrance fees.

The reduction in the flow of entrance fees, in turn, may make it difficult or impossible for the retirement community to promptly repay the refundable portion of the entrance fee or may require either unexpected increases in monthly service fees or reduction of staff and services provided. While bankruptcies of retirement communities appear to be rare, they have occurred.

There may be another catch about refund of entrance fees. In some cases residents, or their heirs, can't get the fee refunded until a new resident buys the unit vacated. In a slow real estate market, the wait could be long.

What this means is that a prudent choice of a retirement community requires an evaluation of its financial soundness.

How is this done?

The place to start is with the free "Consumer Guide to Understanding Financial Performance and Reporting in CCRCs," available at CARF International's website, www.carf.org. Among the helpful contents in this publication are a short "Financial Primer" and a list of cogent "Questions to Ask."

Another good source of guidance is "Today's Continuing Care Retirement Community (CCRC)," provided by the American Seniors Housing Association, available free at www.aahsa.org. This guide discusses important economic factors affecting the soundness of retirement communities and provides a useful introduction to the use of "financial ratios" for evaluating a retirement community's financial strength.

After the general orientation provided by these guidebooks, it's necessary to get down to a study of the financial status of the specific retirement community. The most important step is to ask for and study its audited financial statements for the past three years. The balance sheets should show the assets and liabilities of the organization and the profit and loss statement should show whether operations are in the black.

You should focus especially on the amount of cash on hand in relation to monthly cash requirements and the amount of debt in relation to current assets. Be leery of communities that rely heavily on donations or entrance fees to support current operations. If you don't know how to evaluate the financial statements, get a qualified accountant to help you.

Then there's the contract to be signed. The contract will spell out the services and living accommodations to be provided and financial and other responsibilities of both parties, as well as a variety of other provisions concerning occupancy. It should be carefully reviewed and explained to you by your lawyer.

The lure of a secure and luxurious setting for "aging in place" may tempt some to rush to the dotted line. Financial prudence suggests, make haste slowly.

Gerald J. Robinson, Esq., formerly tax counsel to the New York City law firm of Carb, Luria, Cook & Kufeld, is a member of the New York and Maryland bars. He received his B.A. degree from Cornell University, an LL.B. from the University of Maryland and an LL.M. in Taxation from New York University. Prior to entering private practice he served in the Office of Chief Counsel, Internal Revenue Service. He is the author of the treatise, Federal Income Taxation of Real Estate, now in its sixth edition, and wrote the monthly newsletter, Real Estate Tax Ideas, both published by Warren, Gorham & Lamont. He is also a frequent lecturer and contributor to various professional journals.