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Greystone Hosts Business Office Managers for Conference

Business office managers representing 13 of Greystone’s management clients gathered in Irving last month for Greystone’s Business Office Conference. During this two-day event, attendees discussed health care, procurement, cost reports, Medicare, resident contracts, transitioning through the continuum, entrance fee refunds, financial analysis and more.

See photos in the gallery below.

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Construction Begins at East Ridge at Cutler Bay

New aerials photos show the beginning of repositioning at East Ridge at Cutler Bay, SantaFe Senior Living’s continuing care retirement community in Cutler Bay, Florida. In Phase I, East Ridge will add 90 news assisted living units, 31 new memory support units and 74 skilled nursing beds. These new units and beds will replace the existing assisted living skilled nursing areas. Greystone is serving as development consultant.

See aerial photos of East Ridge in the gallery below.

Learn more about East Ridge at Cutler Bay.

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Photos: See Inside The Terraces at San Joaquin Gardens

New photos show redevelopment of The Terraces at San Joaquin Gardens, an American Baptist Homes of the West-sponsored continuing care retirement community in Fresno, California. The Terraces is in the midst of a $120 million redevelopment project. Greystone is serving as development consultant.

See photos of The Terraces at San Joaquin Gardens in the gallery below.

Learn more about The Terraces.

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Refundable Entrance Fees: Changes in Accounting

When Greystone first began working with non-profit senior living providers more than 30 years ago, non-refundable entrance fee programs were the norm for continuing care retirement communities (CCRCs). In the mid-1980s, Greystone helped pioneer the refundable entrance fee structure wherein residents or their estates were refunded the majority of their entrance fees upon re-occupancy of their apartment home after resident contract termination.

As refundable entrance fee structures became more prevalent, the Financial Accounting Standards Board (FASB) developed guidance to allow the refundable portion of entrance fees to be amortized into revenue over the estimated lifetime of the associated facility — typically a period of 40 years. As the refundable portion of entrance fees was not eligible for repayment until re-occupancy and receipt of a new entrance fee, the refundable portion was similar to paid-in equity. Amortizing the refundable portion to revenue, and ultimately net assets, enabled that pseudo paid-in equity to be reflected in net assets.

In July 2012, the FASB issued ASU No. 2012-01 to alter the approach for accounting for refundable entrance fees. No longer can refundable entrance fees be amortized into revenue and net assets unless a CCRC’s policy is to limit the proceeds of a refund to the amount received for re-occupancy. For CCRCs using resident contracts which do not limit refund amounts to the proceeds received, the choice is to either: A) modify resident contracts to limit refunds to proceeds received, or B) stop amortizing refundable entrance fees and reverse previous amortization.

Implementation of ASU 2012-01 is required for CCRCs with fiscal years beginning December 15, 2013 and later. While some CCRCs will choose to adopt ASU 2012-01 early, many are just beginning to do so with audits for the fiscal year ending December 31, 2013.

Greystone manages nearly 20 CCRCs nationwide. Most of these communities chose not to adopt ASU 2012-12 early in order to further contemplate whether or not to adjust resident contracts or to stop accruing refundable entrance fee revenue and reverse previously recognized revenue. Revising resident contracts to limit potential refunds to re-occupancy receipts received is inconsistent with existing contracts and would presumably lead to considerable resident resistance if amendments to existing contracts are suggested. Further, even if an amendment is made for accounting purposes, it is inconsistent with most sponsors’ intent to make refunds consistent with representations made at move-in. Finally, if contracts are adjusted to allow revenue amortization while limiting refund amounts, market appeal and future contract type flexibility would be negatively impacted. As such, most communities have been adopting the new accounting approach to no longer amortize refundable entrance fees into revenue.

In Brief

The choice:

  • Adjust resident contracts to limit refunds to resale proceeds, meaning less than a full refund could occur and refunds without resale would not be allowed. In today’s challenging and evolving environment which often demands flexibility, this could result in a competitive disadvantage.
  • Discontinue amortization of the refundable portion of entrance fees and reverse previous amortized revenue.

Impact of implementing ASU No. 2012-01:

  • Reverse prior year revenue amortized as a cumulative effect of a change in accounting principle as of the beginning of the reporting year. This results in reduced balance sheet net assets and increased net liabilities.
  • Reduction of GAAP net income in the current and future years
  • No changes to cash flow
  • No changes to the business model
  • No change to actuarial balance
  • Higher likelihood of a future service obligation. Unamortized deferred revenue from refundable entrance fees is no longer available as an offset in the calculation of future service obligations.

Consequences:

  • Generally no impact on cash profitability and liquidity ratios. This includes debt service coverage ratios, cash-to-debt ratios and days cash on hand.
  • Potential negative impact to capitalization ratios which could necessitate amending any financing covenants that test capitalization
  • Weaker income statements and balance sheets presented in resident disclosure statements potentially leading to concern from current residents, prospective residents and their advisors. Cash flow projections, cash reserve levels and financial covenant compliance can be useful tools to help overcome any of these concerns.
  • Weaker income statements and balance sheets for regulatory filings
  • Further reduction of net income and net assets, which, for startups, are already negative considering startup losses, high interest expense at opening and high depreciation levels at opening.

Benefits

  • Simpler accounting
  • Flexibility to modify and evolve resident contract types without concern over the accounting impact to previously amortized revenue

Greystone’s experience to date:

  • Most operating communities are adopting ASU No. 2012-01 to not amortize refundable entrance fees rather than changing their resident contract refund terms
  • New startup communities are planning to not amortize refundable entrance fees and consequently maintain resident contract flexibility
  • Future service obligations without including future deferred revenue from refundable entrance fees are ranging from $0 to more than $50 million. If including future deferred revenue from refundable entrance fees, none of those communities would have a future service obligation.
  • Minimal impact to date on prospective residents, regulatory agencies and lenders. However, many communities are still in the process of issuing their first statements without amortized refundable entrance fee revenue.

The information here is only a brief explanation of important changes going into effect. If you have any further questions, please contact us online or call us at 972-402-3700.