Long Live the CCRC Entrance Fee Model

Is the entrance fee almost extinct? Every few years,especially since the recession began, the question has been raisedabout whether charging seniors hefty entrance fees to get intocontinuing care retirement communities (CCRCs) should be shelvedfor the strict rental model.

The question was again floated at a recent Urban Land Institutewebinar for the seniors housing industry. A panel debated whetherthe entrance fee, harder for seniors to raise today because of allthe underwater and valued-less mortgages, is keeping occupancyrates lower.

The resulting opinion? Though development has still been slow,its agreed that entrance fee-based CCRCs are still the bestmethod to create new mixed-setting properties for elderly care,with offerings such as assisted living, nursing and memorycare.

I dont think the entrance fee model isdead, said Aaron Conley, president of healthcare real estatedevelopment at Third Act Solutions, based in Greer, S.C. Ijust think people are getting more comfortable with the rentalmodel, as in the hot multifamily markets today.

There are typically three levels of entry to CCRCs. The toplevel, labeled a type-A community, includes the entrance fee, whichcan range from $50,000 to $500,000, depending on the luxury andcare level of the property. In many facilities, paying the entrancefee guarantees the senior that the monthly rent for any requiredhealthcare service, from in-home nursing to transfer to a memorycare center if that becomes necessary, will not change. If thesenior decides to move out, the entrance fee is typicallyrefundable on a sliding basis per length of stay. About 60 percentof all CCRCs charge an entrance fee.

A type-B community generally charges a lower entrance fee, andthe monthly rent is low but can change if more care is needed. Atype-C community has the lowest or even no entrance fee, and ispay-as-you-go service with higher monthly rent.

Conley said that seniors, as well as adult children who aretaking care of seniors, are being more cautious today about whereto put the accumulated life savings. Folks want to stay moreliquid, they want to keep some cash on handsome by choiceand some by necessity, he said.

Entrance fees at many types of properties, such as golf andcountry clubs, have dropped considerably due to the recession,Conley said. In many of the luxury CCRCs, the prospective tenantswere members of those clubs, and are now expecting the same type ofdiscount because of the economy, he said.

Diane Twohy Masson, a California-based seniors housingconsultant, said more properties would like to offer discounts, butcant because of their financing requirements. Ownersdont pay much more than a few million dollars to build andmarket the communities, most of the money comes from bonds issuedto investors, with some of the entrance fees going to pay off thedebt. This allows for attractive properties with lots of amenities,but not much wiggle room on unit charges.

Ive seen owners beg lenders to allow for areduction in the entrance fees, but if they are extended, as manycompanies did before the crash, they cant lower thefees, she said. Its the properties withoutmuch debt that are better able to respond to the seniorslower fortunes today.

Masson said she recommends that her clients keep entrance fees,as the costs can help pay for amenities which seniors want today.At two of my communities, they wanted to go all rental, theydidnt believe they could sell entrance fees anymore,she said. Its all about how much value you bring tothe customer, they still want a vibrant community. The average agemay be going up for moving into the property, but the average80-year-old today is more active, theyre not just sitting inrocking chairs, they want activities and entertainment.

More proof that entrance fees arent dead can be found inthe recent announcement by Brookdale Senior Living, which generatedabout $19.1 million in the third quarter from the entrance fees at147 unit closings. However, although this was a record entrance feeamount for the trust, Brookdale still reported a net loss of $12million for the quarter because of cuts to Medicare reimbursementsand changes to therapy services.

Conley said CCRCs are still attracting 7 percent of the market,and there is positive chatter that things will pick up in 2013.Regardless of the current arguments for and against entrance fees,in the next 10 to 20 years, whether to charge an entrance fee willlikely become a moot point.

When the baby boomers come, the sheer numbers are goingto create real demand and youll see much more movement anddevelopment, he said. Thats a few years away,and until then, developers and investors should pick and chooselocations carefully and decide, based on that, if the entrance feemodel will work best.