Ritzy Chicago senior home bows to frugal market
Clare at Water Tower folds on its financing
09/28/2011 10:00 PM
The financial shortfalls of a luxurious senior living development in Chicago may indicate that the industry’s tried-and-true, pay-as-you-go model is here to stay.
Last week, the Franciscan Sisters of Chicago, a Roman Catholic charitable institution that provides funding and management services for senior living communities across the country, announced that in early September it had defaulted on bonds issued to finance the Clare at Water Tower, a high-end retirement community located in the city’s affluent Gold Coast neighborhood.
The stop payment was ordered on a $229 million loan — the largest default on a municipal bond this year, according to a report by Bloomberg News.
Opened in 2008 after a year-long construction stall, the 53-story Clare at 55 E. Pearson St. was marketed as a “new standard” for senior living, offering prosperous buyers an alternative to traditional retirement and assisted living homes.
Unlike most senior residences, many of which offer monthly and yearly rental rates on top of extra care fees, developments like the Clare, referred to as “continuing care retirement communities,” require entrance fees that are returned at a percentage once the unit is re-purchased, in addition to monthly charges.
With attractive amenities such as multiple dining venues, three chapels and a fitness and aquatic center, prices at the Clare range from around $550,000 for a one-bedroom unit to $1.2 million for a 1,700-square-foot, three-bedroom unit. The development also includes an onsite care provider which offers services for memory support, skilled nursing and rehabilitation.
Jennifer Thompson, a spokeswoman for the Franciscan Sisters, said that the financing problems at the development were inseparable from the industry’s overarching woes.
“The current state of the economy and the real estate market in the past several years … have created occupancy and revenue challenges for the Clare,” she said.
Only one-third of the development’s 248 units are presently occupied, Thompson said.
According to a disclosure statement issued to the Illinois Finance Authority on Sept. 20, the Franciscan Sisters said that it would attempt to renegotiate the terms of its financing agreement for the Clare with the various parties involved in the bond, which include the Bank of New York Mellon Trust Company and lender Bank of America. The order avoided a similar default when it renegotiated with investors last summer.
Thompson said that discussions over the new agreement were just beginning, and did not allude to what form that restructuring may take. “Certainly all options are being considered,” she said.
While the floor seems to have fallen out from under the Clare, the overall market for senior living real estate is still kicking. Closings for long-term care mergers and acquisitions have risen from 27 to 43 publicly announced transactions per quarter since mid-2010, and average annual prices in assisted living homes have recently returned to pre-2008 levels at just under $140,000 per unit, according to data from SeniorCare Investor.
Ryan Saul is the managing director of Senior Living Investment Brokerage, a Glen Ellyn-based company that specializes in selling long-term care and senior housing facilities. Though not involved in sales at the Clare, the firm has represented the Franciscan Sisters in deals for five other rental developments in the Midwest.
Back in 2008, Saul said, the entrance fee model touted by homes such as the Clare was not seen as overly ambitious.
“It was a good program,” he said. “It gave residents a feeling of ownership, like they were buying into their unit.”
But as with other Continuing Care Retirement Communities built around the same time, the project was a victim of bad timing.
“They were faced with their development right at the time that the entire real estate market crashed,” he said.
Senior living homes that started marketing units since then have come up short, Saul said, because most potential buyers can’t unload their primary residences to foot the entrance bill. Those facilities that took in sales before the slump, he added, are now surviving on the short-term.
Given the dearth of available buyers, he said investors will probably steer clear of up-front payment developments like the Clare for the foreseeable future.
“[There] won’t be lending or bond-financing for these types of opportunities at this point anyways,” said Saul. “There’s nobody that even has it on their business plan.”
In the case of the Clare, Saul said that if the order intended to avoid an outright asset sale, it would have to restructure its debt to reflect the realities of the new market.
“I don’t think they have any intention of walking away from this project,” he said.