CCRCs and Entrance Fee Deposits - Part I

Defining the Issue:

The recent filing for bankruptcy protection by The Clare (here) prompted some readers to question what effect will the bankruptcy have on the resident's entrance fee deposit. For those who live in a continuing care retirement community (CCRC) or whose parent(s) live in such a community, this is no small matter. Residents of continuing care projects may pay large entry fees, often starting at approximately $150,000 and go up to $1 million.

In the recent bankruptcy of Erickson Retirement Communities (comprising 19 communities which house about 19,000 older adults) the entrance fee deposits were returned to the residents as delineated in the life care contract (i.e. entrance agreement). However, there were other bankruptcies in this sector where residents lost their entrance fee deposits (here and here). It is important to note that this seems to be the exception and few CCRCs have closed or declared bankruptcy over the past 20 years.

In general, it is in the best interest of the purchaser of a bankrupt (or financially troubled) CCRC to keep the current residents content and bring new residents into the community (quickly). Assuring the return of the entrance fee is critical for success, but "best interest" is not the same as a legal obligation and the outcome of these cases vary widely. Regulation of CCRCs are inconsistent among the states.

What happens in Illinois?

In Illinois, the Life Care Communities Act (interesting to compare to the relevant statute in Florida) contains the regulatory rules applicable to CCRCs. Although the Act requires a newly constructed CCRC to set aside the entrance fee deposits in an escrow account (with staggered release during construction), once a resident's living unit is ready for move-in, all the remaining entrance fee can be disbursed to the community operator (dependent on long-term financing commitment). From that point on, the repayment of the entrance fee deposit is dependent upon re-leasing.

Since there is no federal statute to protect CCRC residents from a bankruptcy, they must rely on the Bankruptcy Court and, in general, if a CCRC files for bankruptcy the entrance fee deposits are usually considered to be unsecured claims (uh-oh).

Federal Response:

In the summer of 2010, the US Senate Special Committee on Aging convened a hearing on the subject, "CCRCs: Secure Retirement or Risky Investment" and their report  (Continuing Care Retirement Communities: Risks To Seniors) offers advice to state regulators as well as cautionary words to future residents.

The Committee requested a report (here) from the General Accounting Office (GAO) and although the GAO did not recommend legislative action, it did recommend that states take a more aggressive posture at requiring CCRC fiscal transparency. Interestingly, the GAO performance audit of the industry included Illinois in its sample of eight states. Additionally, the supplementary materials tendered by Professor Katherine Pearson, to the Committee (here) provides an interesting framework for conducting future discussions.

In Part II, I'll take a closer look at how well CCRC regulations in Illinois compare to the other states included in the GAO report.

Any questions?


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    Bruce Lederman has over 25 years experience in the senior care field as a direct care provider and thought leader. Bruce was CEO and president of his own firm that operated skilled nursing facilities in Illinois. He is a former nursing home administrator and has consulted to numerous elder care providers on planning for strategic growth as well as process improvement. Recently he served as board chair of CJE SeniorLife, a leading non-profit elder care provider in the Chicago area. Bruce is currently employed as chief strategy officer for a company providing skilled nursing services in communities throughout Illinois and Missouri.

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