LeadingAge North Carolina Releases White Paper on CCRC Financial Reserves

Members | August 09, 2012

A new white paper from LeadingAge North Carolina looks at the state’s financial reserve requirements for CCRCs in light of the recent economic downturn.

LeadingAge North Carolina released a 5-page white paper this summer that outlines financial reserve requirements for Continuing Care Retirement Communities (CCRCs).

North Carolina CCRC Reserve Requirements addresses issues relating directly to North Carolina’s regulatory environment. But the topics it discusses also apply to many CCRCs in other states, says Steve Maag, director of residential communities at LeadingAge.

CCRC Regulations in NC

The regulation of CCRCs in North Carolina began in the mid-1980s when state lawmakers passed legislation aimed at protecting CCRC consumers without inhibiting the development and operation of CCRCs within the state.

North Carolina requires that a provider maintain an operating reserve equal to 50% of its total operating costs over a 12-month period. If a community maintains an occupancy level in excess of 90%, a provider must maintain a 25% operating reserve.

“This legislation – and the resulting disclosure and reserve requirements – explain in large part why North Carolina has been such a successful state in terms of CCRC development and operations and relatively more problem-free than many other states,” says the paper. 

CCRC Health: Good Despite Economic Downturn

Most CCRCs remain fundamentally strong and financially sound despite the economic downturn of 2008, according to the LeadingAge North Carolina paper. One reason for this is that many CCRCs responded to the crisis by more tightly managing the expense side of their operations.

In spite of this diligence, however, factors outside the control of CCRCs continue to affect their economic health and occupancy levels. Two key factors include:

  • Resident deaths: According to the paper, a CCRC with a census of 300 residents will experience a 1% drop in occupancy after only 3 resident deaths. Death-related drops in occupancy do not adequately reflect the financial health of the community. But they are still challenging to CCRCs that must base their reserve levels on occupancy numbers. 
  • Homeowner psychology: Many homeowners responded to the depressed housing market by delaying their move to a CCRC. They were waiting for the market to rebound in the hopes that such a rebound would restore housing prices to their previously inflated levels. Most homeowners now recognize that home prices are not likely to return to pre-slump levels. As a result, they are beginning to put their homes on the market and plan their moves to a CCRC.

Key Indicators: It’s Not Just About Occupancy

Occupancy levels are not the only indicator of a CCRC’s financial health, says the report. CCRCs can also measure themselves against a number of key indicators that assess their liquidity, profitability, capital investment and debt/risk ratios. These indicators include: 

  • Net Operating Margin.
  • Operating Ratio.
  • Days Cash on Hand.
  • Debt Service Coverage Ratio.
  • Unrestricted Cash to Debt.
  • Average Age of Facility.