One of the trends in all of senior living operations is the increasing number of conversions from nonprofit to for-profit operations, sometimes made by means of a formal “sale of assets.” The trend includes Continuing Care Retirement Communities (CCRCs) and Life Plan Communities.
I am going to highlight here some of what I hear from CCRC and Life Plan Community residents. For example, there are two proposed transactions going on near me, one involving a sale of assets by a nonprofit CCRC in Pennsylvania, and another described as either a new partnership or an asset sale of a nonprofit CCRC to a for-profit company in New Jersey.
First, let’s discuss the most likely reasons for a transition from nonprofit to for-profit identity. In my experience, there is a fundamental tension in such transactions. On the one hand, the most likely reason is that the nonprofit operator is experiencing serious financial challenges. Plus, sometimes the identity of the original operator as a nonprofit has changed over time, making it harder to recruit new residents who identify with the charitable mission. Further, it can be hard to find good personnel, especially for the executive suite, and sometimes the current management is just plain “worn out.” But serious financial challenges are probably at the top of the list of reasons for making a big change, and “financial problems” feed into the tension I have witnessed.
I teach Nonprofit Organizations Law as a law school course, and one of the first topics we address in class is the meaning of “profit.” We examine the reality that without a healthy “margin” created by income exceeding operating expenses, the nonprofit operation may become unsustainable. What is called “profit margin” for for-profit operations is a measurement that still needs to be healthy for the charitable enterprise.
My concern, whenever I see a nonprofit “senior living” operation making some form of transition to “for profit,” is the reality that the absence of a healthy margin for the nonprofit will not magically disappear simply by reorganizing as a for-profit. During the public review that is typical under state law for any conversion of a nonprofit, any promises or predictions made by the buyer, will probably involve the buyer’s assessment of the value of the assets it is taking over. Residents can be affected by the buyer’s plans for how to make the new operational “profitable” over time. This can be a sensitive point in the sale review process. Residents are sometimes warned that the “best deal” could be lost by raising too many objections to the sale terms.
So let’s address key CCRC resident concerns:
Probably the most common questions I hear from residents at CCRCs facing a change of ownership include:
- “Should I leave now, before the character of my community changes?”
- “What is the likelihood of reductions in services or increases in fees or both?”
I always encourage residents to speak to their local attorney or financial advisor. Most lawyers will probably offer a typical lawyer answer, “Well, it depends….”
Therefore, let’s talk next about points of review for this type of transaction. Often that starts with the resident’s original contract:
- What does your current residential contract say about your rights when terminating a contract? Are you contractually entitled to a refund of all or any portion of your entrance fee? Does your “state’s law” place any additional requirements on how much and when any refund must be paid? What is the history of refund payments in your area?
- Typically, any new operator cannot unilaterally change that contract for existing residents. (Note: I am assuming the transaction is not taking place in bankruptcy court; a bankruptcy reorganization changes the nature of negotiations on several levels.)
- That means the new operation, at a minimum cannot simply charge “new” entrance fees. On the other hand, monthly service fees may increase, and that is because the contract permitted them to increase before the transition to for-profit status. Might the increases be larger under for-profit management? Yes, and an argument may be made that the need for unpopular increases to cover expenses or repairs or improvements is part of what pushed the nonprofit operator out of the business. But, I can also imagine an argument being made that the purpose of price increases should not be to permit non-resident investors to receive stock dividends. Usually there will be a sort of honeymoon period (admittedly an odd analogy) before changes in monthly service fees take place.
- The prospect of increases in fees or reductions in services are appropriate topics for residents to address upfront, and sometimes state actors can support the residents in their search for answers or modifications to a plan.
- Generally speaking, a nonprofit organization’s conversion to a “for profit” operation will trigger significant oversight by the State’s Attorney General, as well as reviews by any regulatory bodies involved in specific operations. For example, in Pennsylvania, in addition to the Attorney General’s involvement, reviews are required for the “new” operator to be licensed by the Department of Health (regarding skilled care) and to receive a new Certificate of Authority from the Pennsylvania Department of Insurance (to operate as a CCRC). Residents are often given a window (sometimes very tight) to submit their concerns, questions, and objections to the state actors. The right lawyer or financial advisor can help here.
- In some states, including Pennsylvania, the seller may also be required to seek approval of the entire transaction by a local Court. That means the possibility of a full public hearing. Again an opportunity for affected parties, including residents to speak.
In other words, there are points where concerns of the public and of residents can and should be addressed, on the record. For example, I wonder whether the AG might consider securing a role for residents on the governing boards after transition, as a first-line recognition of the importance of resident voices being heard on an ongoing basis about their own communities?
Typically, during this sales negotiations process, the buyer’s agents, including any “management” unit, will be holding regular meetings with residents, and that can present opportunities for the residents to know them and to have a first look at whether the community’s character will continue to match the resident’s values and goals, including future care.
Finally, the reason for the Attorney General, as “parens patriea,” to have a role in conversions such as this, is to protect the nonprofit’s assets as a charitable resource.
Residents here are all older adults and they can have a lot to say about how and why the character of the nonprofit CCRC they chose as their “forever home,” was important to their plan as they age and important to protect as a public resource. In my experience, the most significant advantage of a CCRC is a strong, active, involved resident community. Residents are not only stakeholders in the operations, but also the lifeblood of volunteer work, who keep the atmosphere dynamic.
This is a fairly long blog post, although the questions that might be asked could create a much longer list. But residents should be advised it is better to ask in advance, get any new promises in writing, and to consult with their own lawyers or financial advisors.
Readers should feel free to email me if you have additional thoughts to add. I suspect this “educational topic” will be recurring.
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