How to check a continuing care retirement community's finances

Key takeaways:

• Every continuing care retirement community, or CCRC, should be willing to provide at least three years of audited financial statements, and you should review them before signing a contract.
• Occupancy is one of the clearest indicators of a community's financial health.
• Your entrance fee is not insured like a bank deposit, so due diligence before you commit is essential.

A continuing care retirement community, or CCRC, is a type of retirement community where a continuum of care needs — from independent living, assisted living and skilled nursing care — can all be met within the same community.

Entrance fees for the communities, which offer buy-in or rental options, range from $80,000 to $1 million. Monthly fees commonly range from roughly $2,500 to well over $5,000, depending on location, unit size and contract type. If the community runs into financial trouble after you move in, you could face rising fees, reduced services or, in a worst case, the loss of a large portion of your investment.

"Choosing a continuing care retirement community can be one of the biggest financial decisions an older adult makes, particularly if there’s a significant entrance fee," said Jennifer Szakaly, founder and CEO of Caregiving Corner in Charlotte, North Carolina. "I encourage families to consider more than whether they like the living space, dining room menu and amenities. They need to understand the organization before they enter into a long-term financial relationship."

Here's how to check.

Related content:

• What is a continuing care retirement community?
• What is the cost of a continuing care retirement community?

Every community should be willing to provide at least three years of audited financial statements. Audited means the financials have been reviewed by an independent accounting firm, not just prepared internally. If a community will not share its audited financials, or if it only provides internally prepared statements, treat that as a serious red flag.

You do not need to be an accountant to get useful information from these documents, but it helps to know what to focus on.

Is the community bringing in more money than it spends on day-to-day operations? A community that consistently runs operating deficits is drawing down its reserves or taking on debt to cover the gap. One bad year is not necessarily a crisis, but a pattern of operating losses over multiple years is a warning sign.

Most communities carry some debt, often from construction or expansion projects. What matters is whether the debt is manageable relative to the community's revenue and assets. Look at whether debt has been growing steadily without a corresponding increase in revenue. If the community is heavily leveraged and its income is flat or declining, that is a concern.

A well-run community maintains cash reserves to cover unexpected expenses, economic downturns or periods of lower-than-expected occupancy. If the community's reserves have been shrinking year over year, ask why. Reserves that are too thin leave the community vulnerable to any disruption.

What happens if a CCRC runs into financial difficulties when you live there? If it closes, do you get your entry fee or any other fees back?

"This is one of the most important questions to ask before you sign a contract because the answer can depend on your contract, the financial structure of the community and the laws in your state," said Szakaly.

"Don't assume that because an entrance fee is described as 'refundable,' that your money is guaranteed under every possible circumstance," she said. "Ask exactly when and how your entrance fee is refundable, what happens if you leave the community, what happens after your death and what happens if the organization experiences serious financial problems."

Have an attorney review the contract before you sign, especially when a large entrance fee is involved, Szakaly added. "Ask your attorney specifically, If this organization fails, where do I stand?"

Entrance fees generally are not protected by federal deposit insurance, although some states require escrow protections or other safeguards before funds are released to the community.

Occupancy is one of the clearest indicators of a CCRC's financial health. A community's revenue depends on having residents paying entrance fees and monthly charges. When units sit empty, revenue drops but the fixed costs of operating the community do not.

Ask the community what its current occupancy rate is and how it has trended over the past several years. A consistently high occupancy rate suggests strong demand and stable revenue. A declining occupancy rate may signal problems with the community's reputation, pricing, condition or local market.

Also ask about the occupancy rate at each level of care. A community may have strong occupancy in independent living but low occupancy in its assisted living or skilled nursing units, or vice versa. Imbalances can create financial strain, particularly if the community-built capacity for a level of care that is underutilized.

The Commission on Accreditation of Rehabilitation Facilities, or CARF, offers voluntary accreditation for communities that meet its standards for financial stability, governance and resident services. Not every good CCRC is accredited, and accreditation is not a guarantee of financial health. But the accreditation process requires the community to demonstrate sound financial management, maintain adequate reserves and submit to regular reviews.

If a community is accredited, that is a positive signal. If it is not, it does not necessarily mean the community is poorly run, but you should ask why it has not pursued accreditation and whether it meets comparable standards on its own.

CCRC oversight varies significantly by state. Some states have fairly robust oversight, including:

• Financial disclosure requirements
• Reserve requirements
• Actuarial studies
• Entrance-fee escrow rules

Others have minimal regulation. Before committing to a community, find out what your state requires. If the state mandates financial disclosures, request copies. If the state requires escrow or entrance fees, confirm that the community is in compliance. If your state has weak CCRC regulation, you will need to rely more heavily on your own due diligence and the advice of a financial professional.

Who owns and operates the community matters. Continuing care communities can be run by nonprofit organizations, religious groups, university-affiliated foundations or for-profit companies. Each structure has different incentives and different financial dynamics.

Nonprofit continuing care communities reinvest surplus revenue into the community. For-profit CCRCs seek to generate returns for owners or shareholders, while nonprofit communities generally reinvest excess revenue in operations, facilities and services.

Neither model is inherently better or worse, but understanding the ownership structure helps you evaluate the community's priorities and financial incentives.

Ask who sits on the board of directors, whether residents have any representation in governance and how major financial decisions are made. A community with transparent governance and resident input is generally more accountable than one where decisions are made entirely behind closed doors.

If you are considering a continuing care community with an entrance fee that represents a significant portion of your net worth, hiring a financial professional to review the community's statements is a reasonable expense. An accountant or financial adviser with experience in senior living or CCRC finances can identify issues that a layperson might miss, such as unusual accounting practices, understated liabilities or unsustainable growth assumptions.

An elder law attorney can also review the contract itself to make sure the terms are fair and that your rights are protected in the event of a financial disruption, such as a sale, restructuring or bankruptcy.

No single factor should disqualify a community on its own, but the following are worth paying close attention to:

• The community will not share audited financial statements. Transparency is a minimum standard, said Szakaly. "Any financially healthy organization should be comfortable explaining its finances, its fee structure and what protections, if any, residents have," she said. "The organization should want you to feel 100 percent comfortable."
• Occupancy has been declining for multiple years. Falling demand usually means falling revenue.
• The community has changed ownership recently. New ownership is not inherently bad, but it can mean new priorities, new fee structures or changes to the contract terms.
• Entrance fee refund obligations are growing faster than assets. This can signal a liquidity problem.
• The community is offering steep discounts or incentives to attract new residents. Aggressive discounting may indicate difficulty filling units.
• Maintenance and common areas appear neglected. Physical deterioration can be a visible symptom of financial stress.
• Staff turnover is high. Frequent turnover in leadership or caregiving staff can reflect instability.

More on this topic:

• Estate planning for seniors: How to leave your home to your heirs through wills, trusts and deeds
• Is a 55-plus community right for you?
• How to age in place as a senior
• How does assisted living work?