David,
Thank you for the thoughtful follow-up questions in your private email. I think you have put your finger on one of the most important distinctions residents need to understand when they look at the financial strength of a CCRC.
There are really two different but related questions. One is whether the provider has adequately priced and reserved for the lifetime service obligations it has undertaken in its resident contracts. That is the actuarial question: resident longevity, health care utilization, contract type, refundable entrance fee obligations, monthly fee assumptions, investment assumptions, and the expected cost of providing future services. That is the world AV Powell was addressing, and it is properly the work of actuaries.
The second question is whether the organization is adequately planning for the long-term stewardship of its physical plant. That is not “actuarial” in the same sense, but it is still a disciplined long-range financial exercise. It belongs partly to facilities management, partly to real estate asset management, partly to marketing strategy, and partly to board-level capital planning.
A well-run organization should know, in considerable detail, what it owns, how old it is, what condition it is in, how long it is expected to last, what it will cost to repair or replace, and how those costs will be funded. That includes roofs, elevators, HVAC systems, boilers, chillers, pavement, windows, kitchens, common areas, life-safety systems, resident-unit turnover costs, furnishings, IT infrastructure, and the many less glamorous systems that keep a campus functioning.
This is common practice outside the CCRC field. Professional real estate managers, including those trained through IREM, are expected to think in terms of property management plans, capital budgets, preventive maintenance, useful life, replacement cycles, and the preservation of property value. Condominium and homeowner associations use “reserve studies” for the same reason. A reserve study typically inventories major components, estimates their useful life and remaining useful life, estimates current replacement cost, and develops a funding plan. That model is not identical to a CCRC, but it is highly relevant because both involve shared facilities whose cost must be spread fairly over time.
The hospitality industry offers another useful comparison. A hotel may replace carpet, furniture, fixtures, and finishes before they are physically worn out because the facility must remain attractive in the market. A Quaker meetinghouse, by contrast, may intentionally preserve a carpet or bench for generations because continuity and simplicity are part of the institution’s character. Neither approach is automatically right or wrong. The important point is that the organization should have a conscious standard, not merely a habit of deferring expenditures until something fails.
For a CCRC, that distinction matters greatly. Residents are not simply buying this year’s meals, maintenance, and programming. They are relying on the provider to steward a community over decades. If the campus is allowed to decline, the damage is not merely cosmetic. Deferred capital spending can weaken marketing, reduce occupancy, increase emergency repair costs, impair morale, and eventually place pressure on monthly fees or entrance fees. In the worst cases, physical plant neglect can become part of a downward financial spiral.
As to accounting presentation, I would be cautious about assuming that the audited financial statements alone will answer the question. Nonprofit financial statements may show net assets without donor restrictions, net assets with donor restrictions, debt, depreciation, liquidity, and sometimes board-designated funds. A board may designate unrestricted net assets for capital replacement, debt service, operating reserves, benevolent care, or other purposes. But a board designation is not the same thing as an externally restricted fund; it can usually be changed by board action. So residents should ask not only “what appears on the balance sheet?” but also “what policy governs these reserves, how was the target calculated, and under what circumstances may the money be used for something else?”
In practical terms, I would want to see several things:
- First, a current facilities condition assessment or reserve study, prepared or reviewed by qualified people, that inventories major components and estimates remaining useful life and replacement cost.
- Second, a rolling capital plan, perhaps 10 years for management purposes and 20 to 30 years for major infrastructure visibility.
- Third, a clear distinction between routine maintenance, major repair and replacement, strategic repositioning, and expansion. Painting a hallway, replacing a chiller, renovating dining venues to remain competitive, and adding a new wing are not the same kind of expenditure.
- Fourth, a funding policy approved by the board. The question should not be merely whether cash exists today, but whether annual pricing and capital budgeting are systematically feeding the future cost of renewal.
- Fifth, transparency. Residents do not need every engineering detail, but a finance committee should be able to see the logic: what is included, what is excluded, what assumptions are being used, and whether management is keeping up or falling behind.
I would also distinguish “depreciation” from “funding.” Depreciation is an accounting allocation of past capital cost. It is not a reserve fund. A community can show depreciation expense every year and still fail to set aside adequate cash for future replacement. Conversely, a community may be spending substantially on renewal but not make that clear unless capital expenditures, debt, and cash reserves are examined together.
On your question about insolvency, I would hesitate to assign a frequency without data. My impression is that under-reserving for physical plant renewal is often not the sole cause of serious financial distress, but it can be an important contributing factor. The more common pattern is interaction among several weaknesses: declining occupancy, too much debt, unrealistic pricing, refund obligations, weak operating margins, management mistakes, and deferred capital spending. Physical plant underinvestment can both result from financial weakness and make the weakness worse by reducing market appeal.
So my answer is: yes, the “building replacement, repairs, maintenance, and capital improvement” side deserves disciplined long-range analysis. It may not be actuarial in the resident-longevity sense, but it should be just as systematic. A CCRC that relies only on annual budgeting and ordinary depreciation schedules is not really answering the stewardship question.
If I were on a Residents Association Finance Committee, I would not begin by accusing management of under-reserving. I would begin by asking for the framework:
- Does the provider maintain a current facilities condition assessment or reserve study?
- What major components are included?
- What period does the capital plan cover?
- How are useful life and replacement cost estimated?
- How are routine maintenance, capital replacement, repositioning, and expansion separated?
- What funds are board-designated for capital renewal?
- What policy governs those funds?
- How does planned capital spending compare with depreciation over time?
- How does the capital plan affect projected days cash on hand, debt service coverage, occupancy, and monthly fee increases?
Those are fair questions. They are not hostile questions. They go to the heart of whether the organization is stewarding the community for present and future residents.
Richmond Shreve
NaCCRA Board Member & VP
Forum Moderator