How three nonprofits thrived during the downturn

A $60 million expansion at Laclede Groves included the addition of 80 new independent living apartments. A $60 million expansion at Laclede Groves included the addition of 80 new independent living apartments.

From enhanced marketing efforts to rethinking the product mix to reinvestment, organizations take different paths to growth.

By Jane Adler

In July, the Amsterdam at Harborside filed for bankruptcy — the latest example of an upscale continuing care retirement community (CCRC) that crumbled under the pressures of a punishing recession. 

Saddled with $220 million in debt, the non-profit community located in Port Washington, N.Y., opened in 2010 at a time when new CCRCs were slow to fill because of the depressed housing market. 

CCRCs charge an upfront entrance fee and monthly fees, and provide a range of housing options depending on seniors’ individual needs. Because of the downturn, many seniors couldn’t move to CCRCs because they were unable to sell their homes and use the proceeds to pay CCRC entrance fees.

At Harborside, entrance fees ranged from approximately $600,000 to $1.4 million. Weak sales and lower than expected entrance fees affected operations. As a result, Harborside couldn’t pay back its debt and was forced into bankruptcy. 

The scenario harkened back to the widely reported bankruptcy of the Clare, a 54-story luxury high-rise CCRC in Chicago developed by the Fransican Sisters of Chicago Service Corp., a non-profit organization. Unlike for-profit developers, nonprofits are often affiliated with religious organizations and are mission driven.

The $272 million Clare opened in 2008 at the start of the downturn and sales were slower than anticipated. The Clare filed for bankruptcy in 2011 and was sold the next year for $53.5 million to Senior Care Development, which kept the building open. Harborside also stayed open after making an agreement with bondholders to restructure its debt.

Healthy nonprofits abound

Although these high-profile bankruptcies are pointed lessons in bad timing, it’s notable that a number of non-profit communities have thrived during the downturn. In fact, some organizations have used the recession as an opportunity to position themselves to win the next round of competition for new residents. 

“The majority of non-profit operators are healthy,” notes Dan Hermann, senior managing director and head of investment banking for Chicago-based Ziegler. “They figured out how to survive and thrive during the recession.”

In the last three years, roughly 80 percent of non-profit operators have had their bond rating confirmed by rating agencies, according to Hermann. Another 10 percent were upgraded; 10 percent were downgraded. 

Survival strategies in the wake of the recession have varied. Some single-site communities entered into affiliations with larger systems, while nimble operators introduced creative solutions and best practices. 

What follows are three examples of how successful non-profit organizations managed to grow during the downturn by sharpening marketing strategies, broadening product offerings and reinvesting in existing properties.

Bold marketing shift

Lutheran Senior Services owns and operates 20 communities in Missouri and Illinois, including nine CCRCs, nine affordable housing projects, a stand-alone assisted living facility and a stand-alone nursing facility. 

“During the recession, the St. Louis-based organization decided to focus on its existing portfolio rather than new ground-up developments,” recalls Paul Ogier, chief financial officer at Lutheran Senior Services. “Each of the nine CCRCs had a major project under way during the downturn. We used the time to improve ourselves. It was not the time to take on new commitments.”

The nursing centers at seven of the CCRC campuses were completely revamped. Short-stay rehab units were upgraded and more private rooms were added. Lutheran Senior Services plans to revamp care centers at two other campuses. 

The biggest expansion project took place at the group’s oldest property, Laclede Groves in Webster Groves, a community just outside of St. Louis with 300 independent living units as well as a care center. The community was fully occupied, but the buildings on average were 20 years old and out of date. 

A $60 million expansion included the addition of 80 new independent living apartments. Property amenities and common areas were upgraded. The community had one dining venue that was replaced with three new dining areas for residents. The nursing center was completely renovated. 

Completed last April, the project’s new apartments were reserved five months before opening, and now the community has a waiting list. What’s the secret to its success? 

In 2008, Lutheran Senior Services began a process to completely rebuild its marketing department, an overhaul that took six years. “Nonprofits have taken a lackadaisical approach to marketing,” says Ogier. “We came up with a plan.”

When sales opened for the new independent living apartments at Laclede Groves, entrance fees were about $300,000 with a monthly fee of about $2,600. Older units were much less expensive, with an average entrance fee of about $150,000 and a monthly fee of $2,000.

The marketing staff encountered the same objections heard by other CCRCs across the country. Seniors liked the property and wanted to move, but they were afraid they couldn’t sell their houses. “In 2008, it was an obstacle,” says Ogier. 

The first step in the new marketing push was to hire a team of move-in counselors. They help seniors work through the process of selling their homes, including the often daunting task of disposing of a surplus of accumulated possessions. Five move-in counselors are currently assigned to cover the organization’s nine CCRCs.

In 2008, Lutheran Senior Services also introduced a new program to boost sales. The idea came about following a series of focus groups with potential residents who were concerned about selling their homes. One senior even offered to give his home to the organization just to get rid of it. “That showed us what a big problem it was,” says Ogier.

Although seniors would have liked the community to buy their homes outright, Lutheran Senior Services created a program to use the senior’s home to fund a gift annuity to the community. 

Here’s how it works: If the senior doesn’t have the house sold at the time of move-in, the senior deeds the house to the community in exchange for a monthly annuity. The value of the home is determined by an independent appraiser and annuity payments are provided by Lutheran Senior Services based on the value of the house.

The senior receives monthly annuity payments as long as he or she lives. Most seniors in the program opt not to pay an entrance fee, but as a result they also don’t receive a refund when they leave the community. 

“We make sure they understand the benefits and also what they are giving up,” says Ogier. He adds that, in his experience, the biggest fear of seniors is that they’ll outlive their money and not whether they’ll leave something to their children. “They like the idea that the money will last as long as they will.”

Annuities range from about $500 to $2,000 a month depending on the value of the home. The average value of a home in the program is $160,000.

In August, the organization closed on the 200th home in the annuity program. Of those, 190 homes have been resold. The inventory of homes is generally 10 to 20 properties. “We own the homes for as short a time as possible,” says Ogier. In 2008, the average holding period for a home was seven months, and now it’s about five months. “The housing market is much better now,” he says. 

The program is available at all nine CCRCs. Five employees, called directors of stewardship, administer the program and work with seniors. 

Although the housing market has improved, interest in the program hasn’t subsided. About 20 percent of new residents still select the annuity option. 

The annuity doesn’t work in all cases, especially for seniors who want to leave a legacy to their children, Ogier says. But it does work for elderly people who own a house that could be tough to sell. 

Overall, sales have rebounded. And though it’s hard to say how much of the improvement is due to the annuity, Ogier notes that the entire marketing push has increased occupancies. In 2010, the average occupancy rate system-wide was about 88 percent. By 2012, the average occupancy rate had risen to 94 percent.

However, Ogier acknowledges the program won’t work unless a sponsor has enough liquidity to offer a contract without an entrance fee. “We have been fortunate to be able to do that,” he says.

Think outside the box

Presbyterian Senior Living changed its strategy during the downturn to focus on affordable housing. The non-profit organization owns and operates 29 communities in Pennsylvania, Maryland and Delaware, including CCRCs and affordable apartment buildings for seniors. 

The group had a long history of providing services to seniors with limited incomes, but in the 1970s it had started to build communities and provide services to seniors with middle and upper incomes. 

In 2008, Presbyterian Senior Living decided to circle back to its roots and concentrate again on affordable housing. The goal was to provide a continuum of services for seniors across the spectrum of income levels.

“We can provide services for seniors whether they have means or not,” says Stephen Proctor, chief executive at Presbyterian Senior Living based in Dillsburg, Pa. “It’s pretty neat to be able to do that.”

Affordable housing is also a less risky proposition than the development of a new CCRC with its huge upfront costs and debt obligations, says Proctor. CCRCs are typically large projects with a variety of housing options and a wide range of amenities. “Middle- and low-income projects are low hanging fruit.”

The group currently has 870 affordable apartment units in its portfolio. Two new projects are under way in the Pittsburg area and another project is under construction in York, Pa. The affordable buildings are financed with low-income housing tax credits. The group also develops market-rate buildings.

The affordable buildings fea-ture amenities not typically offered in affordable projects, such as underground parking. A certain percentage of the fees paid to Presbyterian Senior Living, as developer, are reinvested in the properties. “The projects are a cut above other buildings,” says Proctor. 

Affordable buildings are operated like their upscale CCRC counterparts. The approach is to provide residents in affordable seniors housing with the kind of customer service found at CCRCs. “We don’t look at this as public housing or low-income housing,” says Proctor. “We see residents as another customer base who still want what all seniors want: security, safety, a nice place to live, and the supportive services needed to age in place.”

Six years ago, Presbyterian Senior Living embarked on the redevelopment of a 100-year-old property in Lancaster, Pa. Originally a home for indigent women, the 32-unit facility functioned as an assisted care home. The group that owned the facility was struggling, so it affiliated with Presbyterian Senior Living and plans were made to build a new campus about three miles away adjacent to a local church.

The new 13-acre community was named the Long Community at Highland and was built in phases. The campus currently includes a 32-unit assisted living building, a 61-unit affordable apartment building for independent seniors and a market-rate building with 108 units for independent seniors. Plans are now under way to renovate the original 100-year-old building, which will offer 50 affordable apartments for seniors.

There’s much demand for affordable seniors housing, says Proctor. He notes that Lancaster County, with a population of 500,000, has 17 CCRCs and is a competitive seniors housing market.

The Long Community at Highland was filled within three to four months. “It’s a great location,” says Proctor. 

When at work in his Dillsburg office, Proctor can view three of the group’s buildings located just outside his window. Two buildings feature affordable units and the other offers market-rate units for a total of 160 apartments on the site. The buildings remind Proctor what kind of housing seniors want. “For every occupied apartment, we have someone waiting to get in,” he says.

Reinvest to compete

Westminster Communities of Florida typically reinvests $35 million to $40 million a year in its properties. The Orlando-based non-profit owns and operates 19 communities in Florida, a mix of CCRCs and affordable apartments serving 6,000 residents. “When the bottom fell out of the economy, we sat tight for a couple months,” says Roger Stevens, CEO at Westminster Communities.

Taking the long view, Stevens realized the downturn might be a good opportunity to upgrade the non-profit’s communities and get ahead of the competition. “Nobody else was doing anything,” he says. “So we took advantage of the recession to redevelop our campuses.”

The group identified land near existing communities that could be acquired for expansion. Since property prices were depressed during the downturn, it was an opportunity to buy land at reasonable prices. 

In one case, a single-family home developer had started a new subdivision with 33 lots just across from the entrance to Westminster Oaks, a CCRC in Tallahassee owned by Westminster. The subdivision development went bankrupt and Westminster bought the property, building 33 single-family homes on the site to become part of the CCRC. “We sold the homes as fast as we could build them,” says Stevens.

In 2009, the organization expanded Westminster Palms, a CCRC in downtown St. Petersburg, with the purchase of a nearby 14-story high-rise. Designed as a condominium, the building was never completed because the developer went bankrupt. Westminster paid $9 million for the building and spent $6 million to renovate the property, creating 99 independent living apartments. 

Sales at Westminster Palms have been strong, according to Stevens. “We told our board it would take seven years to fill.” But the only remaining units for sale are the small ones that could not be combined to create the large units sought by many seniors.

Other expansions of communities undertaken immediately after the recession include the addition of a new building at Westminster Shores and in St. Petersburg, and the construction of 48 new villas at Westminster Woods on Julington Creek in Jacksonville. 

“We are low-risk developers,” says Stevens. For example, the organization will not build a $150 million project, but will focus instead on where it can add 30 to 50 units that can be sold, explains Stevens. “We wouldn’t risk everything on a high-profile project.”

Overall, the occupancy rate across Westminster’s portfolio is now approximately 90 percent. Some properties have occupancies as high as 97 percent, and the properties with occupancies as low as 85 percent are filling quickly.

“As occupancy has come back, we are positioned with a better product for residents,” says Stevens. “We were strong going into the recession, and now we are stronger. We spent a lot of money on our communities and it has paid off handsomely.”