In last week’s post, “What Makes a Life Plan Community Great?,” I discussed why financial viability matters. Communities want assurance that new residents can cover fees, but prospective residents should also review the community’s finances to confirm it will have the resources to honor its commitments—maintaining housing, amenities, and, when needed, care services.
So how can you tell if a continuing care retirement community (CCRC) is financially sound? Below are key questions to ask when evaluating each community on your list:
What is the occupancy ratio in independent living? A high occupancy ratio—typically 90 percent or more—signals steady demand and supports a healthier balance sheet. Don’t only check current levels; ask how occupancy has trended over the past several years to see whether demand is stable, rising, or falling.
What are your bond ratings? Not all communities will have bond ratings, but those that financed development or renovations with public debt may have been rated by an agency. A rating of BBB- or higher generally indicates relative financial strength.
Are financial covenants being met? Communities that use debt financing are bound by covenants set by lenders. Ask whether the CCRC has had any recent covenant violations. Some breaches can be minor, but others may point to deeper financial stress.
Is there positive cash flow from operations? Operational cash flow comes from resident fees and entry payments. While occasional short-term deficits can occur, a persistent negative trend is a red flag. Operating income should cover annual expenses; an accountant experienced with CCRCs can help you interpret audited financial statements.
Is there a future service obligation? CCRCs must assess whether anticipated revenues will cover future housing and healthcare costs. If projected long-term service costs exceed expected revenues, the community will report a future service obligation (FSO) as a long-term liability on its balance sheet.
Has a detailed actuarial analysis been performed? An independent actuary examines items beyond the FSO calculation—such as long-term debt, capital expenditures, and planned expansions. A thorough actuarial report will show whether obligations to current residents are covered, entry fees for new residents are adequate, and long-term cash flow looks sustainable.
Do current assets exceed current debts? Current assets and current liabilities are those expected to be realized or paid within 12 months. The current ratio—current assets divided by current liabilities—indicates whether the organization can meet near-term obligations with available assets.
Is the provider financially regulated by the state? Some states impose financial oversight on CCRCs, requiring cash reserves or specific financial ratio targets. State regulation doesn’t guarantee financial health, but it does provide an additional layer of oversight and consumer protection in regulated states.
A complex equation
Favorable answers to most of these questions suggest a community is in solid financial shape, but individual metrics should be interpreted in context. For example, a community that recently financed a new building may temporarily show higher debt levels. Start-up communities under eight years old also require a different assessment: development costs and early operating losses can produce negative equity, but a viable new community should have a clear strategic and marketing plan and reasonable occupancy projections. If management underestimates how long it will take to reach target occupancy, the community risks running short of funds.
If you want to explore CCRCs in your area, visit our free online community search tool to compare options and gather financial and operational information before you decide.