What Could Happen if Your Active Adult Community Went Bankrupt?

Category: Active adult communities

Note: Don’t miss the related articles in this series: “When Good Communities Go Bad“, and “When Bad Things Happen to Good Communities – Fairfield Harbor

December 9, 2011 — Perhaps the biggest concern of someone making a retirement decision is, what happens if my new community goes bankrupt? Just last week that became a real-life concern for residents of The Village of Penn State, a well known Continuing Care Retirement Community (CCRC) community located in State College, PA. The Village is one of a growing number of university-affiliated communities; in fact it is frequently consulted by other universities who are considering their own retirement communities. According to published reports, the Village has apparently been struggling with its debt load for years. The Village offers living options of apartments, cottages and nursing services.

Levitt & Sons, a very large developer of 55+ communities nationwide, declared bankruptcy in November, 2007. That situation actually worked out pretty well for most of the affected properties, as they were purchased by new owners who had deeper pockets and could complete and market them.

Good News for The Village
The good news is at The Village at Penn State Retirement Community has signed an Asset Purchase Agreement with Liberty Lutheran Housing Development Corporation (LLHD), part of the Liberty Lutheran Services organization. It could become the new owner of VPS after a “Dutch Auction” bidding process is completed.

Luanne Fisher, CEO of Liberty Lutheran Housing immediately announced that “We don’t anticipate, certainly initially, to make changes”. They will be assessing the situation at The Village, looking at potential renovations or additional facilities. They plan to continue offering residents access to Penn State classes, cultural and sports programs. The name will remain unchanged.

So What Does This Mean to You
The first consideration is that this must be very traumatic for both the residents and employees of The Village at Penn State. Waking up to find your community or employer is in bankruptcy has to be traumatic. Even though the transition to new owner might be effected by February, changes and uncertainty will probably be in the air for some time to come.

Fortunately, many states have strong consumer protections that apply to CCRCs. We are not familiar with those in Pennsylvania, but we can say that Florida has a robust set of laws protecting consumers. Other states might be less so. Although The Village at Penn State is a CCRC, some of the concerns that apply here apply to buyers in other types of 55+ active communities, even condominium projects with no age restrictions. Here are some of the key ones:

Resident contracts will they be affected. For example, a resident probably paid a considerable entry fee. The contract specifies what percentage of that fee is reimbursable upon death or moving, and residents certainly don’t want that affected. Also, what happens if the resident depletes their own assets before death, can they stay or will they be forced into a Medicaid paid nursing home?

Financial reserves. By law CCRCs usually have to have some kind of reserves set aside to fund departing residents’ agreements, as well as for other needs. Will the bankruptcy affect these reserves? This does NOT appear to be the case here, but what would happen if a company had illegally used those reserves?

Services. Day to day there is a lot that a new owner could do to save money. The quality of food could go down. Maintenance could be reduced or deferred. Social programs and amenities could be curtailed or eliminated. Most of these items are probably not covered by contract.

Fees. In a CCRC the contract probably stipulates how much fees can go up per year. That is probably not the case for an active adult community owned or managed by a developer.

Intangibles. What happens if the transition is so unpleasant that a lot of residents decide to leave? The answer is probably not pretty, as the new owner struggles to maintain services with drastically lower revenues.

Facilities and property. Lets say that a 55+ community is still owned by the developer. They have promised to build a new clubhouse, or develop a new residential section. Those might not happen. Similarly, a golf course could conceivably be sold off to a third party or new manager put in place. Assets could be sold.

Active adult communities. A very real scenario for active adult communities today is the situation where a partially built development goes bankrupt. That might not be good news for the initial buyers (although in the case of the Levitt & Sons bankruptcy, it was). Similarly, an older development could go bankrupt because it has too many foreclosures and non-dues paying members. If the entire Home Owners Association went bankrupt, the uncertainty that would result could be very traumatic.

What Should You Do?
As always, due diligence is job #1. If you are considering entering a CCRC or Home Owners Association, have an attorney or financial consultant review the contract. Generally these facilities will not negotiate on their contract language, but at least you have the right to know what is in the boilerplate before you sign. Your expert should review the financials before you buy into any community. You must know what the reserves and cash situation is. Ask questions, talk to residents, do Internet searches looking for problems.

If you find yourself in a community that either goes into bankruptcy or looks like it might, get organized. Most communities will have some residents with the kind of corporate or legal experience who can lead the response. Professional help is almost always a good idea to protect your interests.

Comments? What would you add or subtract about the kinds of problems that can occur in bankruptcy, as well as what your response might be?

For Further Reference:
Announcement from The Village at Penn State
When Good Communities Go Bad
When Bad Things Happen to Good Communities – Fairfield Harbor
The links below on HOA bankruptcy were provided to us by Joe West, President of the Community Associations Network:
http://www.floridacondohoalawblog.com/2009/09/articles/qa/qa-condominium-and-homeowners-association-bankruptcy/
http://real-estate.lawyers.com/homeowners-association-law/When-HOAs-are-Bankrupt-or-in-Foreclosure.html
http://www.ehow.com/about_6585165_happens-homeowners-association-goes-bankrupt_.html
http://www.heraldtribune.com/article/20081103/breaking/811030252
http://www.poliakoffoncondohoaliving.com/2011/04/can-a-condo-or-hoa-file-bankruptcy-a-primer/

Posted by John Brady on December 9th, 2011

4 Comments »

  1. This is an important discussion. Thanks for getting it out there. Here are some questions I am left with:

    – One of the reasons someone would choose a CCRC is because of a family history of dementia or other lingering health issues. What happens to those for whom dementia or other health issues have begun if their CCRC goes bankrupt? Especially if there are no trusted family members to help sort through the legal issues and other complications and decisions?

    – Where would one search to find the consumer protection laws in force in a given state for CCRC residents? Is there any website where states are rated as to how well these protections are enforced? Are there any federal laws governing CCRCs managed by multi-state organizations?

    – How does this feel to residents of the Village at Penn State? It would be most interesting if residents and prospective residents would give their reactions.

    – What were the important lifestyle options that drew residents to The Village and to LLHD campuses? How well do those lifestyles mesh? (The Village literature seemed heavy on football, alcohol, and ice cream. I am unfamiliar with what Lutheran communities promote.)

    – You say, “The Village has apparently been struggling with its debt load for years.” Was that information available to prospective residents? How easily can prospective residents of CCRC’s access a true reading of the CCRC’s financial status? Or can the true status be easily hidden, like the mortgage crisis financial information behind the current financial meltdown. Places like Morningstar were still recommending investment in Washington Mutual shortly before it collapsed. If their analysts could not detect a bank about to collapse, how can anyone get a clear look into a CCRC’s financial status?

    Editor’s Note: Anne originally brought this story to our attention. Thanks for that, and for the great questions!

    by Anne — December 10, 2011

  2. In a home resale situation, one has to make / list a disclosure form, at least here in CA. of any negative associated with the house, crime rate in the area etc…Would the Village of had to disclose to any new buyer during the contract stage of its debt load situation? As Anne brings up, it is quite challenging to a prospective buyer, to obtain the information on their own. Was “The Village” as the seller, legally required to advise / disclose to prospective buyers their financials and possible financial concerns?

    by Bill from CA. — December 10, 2011

  3. Whether they were required to or not becomes less important..given they did not. If they were required the person handling the closing for the buyers should have assured the got that information. Again..the milk has Ben spilled….and placing blame although important….is less a priority than knowing how those effected will be affected and what they must do now to maintain their home and peace of mind.

    by Charlie — December 10, 2011

  4. Far too often, people file for bankruptcy unaware of what may happen and how bankruptcy will affect their debts and assets. Don’t fall into that trap.

    by michigan bankruptcy — December 15, 2011

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