The Ranch Stillwater OK (Oklahoma) is a cautionary tale for consumers considering buying into a retirement community still in development. Or under construction. You don’t want to join a zombie community. Get it wrong? It can feel like one of those scary campfire tales. Don’t be the object lesson. As retirees, we’re attracted to the energy and comfort of brand spanking new. But we only have one lifetime of savings. So financial safety matters too. Is there a way to have both? New, untested, but with less financial risk? Yes.
With over 55 beautiful acres of land? It was to be Stillwater’s first and only Continuing Care Retirement Community (CCRC). The Ranch Stillwater OK promised cottages and one or two-bedroom apartments for independent living. Nearly 100 charter members made initial deposits. Presales had starry-eyed buyers signed up to purchase before construction began in 2016. The estimated construction cost was $82 million. Construction started in June 2016 with a targeted completion of January 2018. It’s not unusual for big projects to take 18-24 months in construction.
We mentioned The Ranch in a prior article on tax reform and other trends impacting senior housing. Tax Reform and Senior Housing — Aging With Freedom It’s worth a follow-up.
But in 2018 rather than opening as scheduled, the development went into foreclosure. Lenders refused to advance more money. Construction halted. The general contractor was owed more than $15 million for construction progress to-date. Everyone ended up in court.
One year later, in 2019, Cedar City, Utah-based Safari Hospitality purchased the partially complete project, for $19.5 million. What went wrong? And what can future retirement community buyers learn from this nightmare?
The Cautionary Tale
The Ranch Stillwater OK is a cautionary tale. This senior community in-development failed while still under construction.
The original developer secured construction financing based upon projected financials. The loan was in the form of selling bonds rather than a traditional bank loan. The bondholders agreed to finance construction. But the lender relied on the projected revenues in the developer’s financials. Those projections included assumptions about required resident down-payments or buy-ins. The buy-in is an up front payment by residents at the time of a unit sale.
A Continuing Care Retirement Communities (CCRC), like The Ranch Stillwater OK, requires a buy-in. Or down-payment. But also a monthly service fee. Alternatively, there are rental senior communities. But a rental community’s fee structure is different than a buy-in community’s. A rental community only has a monthly fee. (The respective resident contracts are also different.)
When The Ranch Stillwater OK changed the required buy-in? It reduced the money available for the developer’s initial loan repayments.
Projections ≠ Reality
It appears the developer made a unilateral decision to lower the required buy-in. Perhaps, to be more competitive in the local market or speed sales. For whatever reason, the developer got the initial market assumptions wrong. And the projections bondholders relied on were no longer true. Projections no longer equaled reality. If they ever did.
But that unilateral change made the original promises to repay impossible to meet. These projections were part of the promise to the lenders. Even though no payment was yet due or missed? The bondholders looked at the revised numbers. And knew what was coming. They concluded the developer would not have the cash flow promised to service the bonds.
And the bondholders stopped providing more cash. The lenders treated the new pricing as an anticipatory breach of contract or default. If the default is inevitable, the lender doesn’t have to wait to seek legal relief. Waiting would only dig the hole deeper. And reduce everyone’s ability to mitigate or reduce damages.
An anticipatory breach of contract is an action that shows one party’s intention to fail to fulfill its contractual obligations to another party. An anticipatory breach ends the counterparty’s responsibility to perform its duties.Investopedia
When You Find Yourself In a Hole?
A project in construction does not get all the money day-one. The loan grows as the project progresses. Incremental progress payments approximately match the percentage of project completion. With the anticipatory default? The bondholders stopped progress payments. They limited their loss with the classic prescription. When you find yourself in a hole? Stop digging. Likewise, the developer stopped paying the construction contractors. Everyone waited for the courts to sort it out.
The Ranch Stillwater OK Version 2.0
A new developer bought the partially built project. The roughly $20M sale price presumably went first to cover the bondholders and the contractors.
Mutual Amendment vs. Unilateral Dictate
The original developer’s mistake? Not renegotiating with the bondholders. That would have been a mutual decision. An amendment to a complex financing contract like this usually requires mutual agreement. One side can’t just change the deal. Unilateral dictates aren’t enough.
Shiny ≠ Safe
What’s the takeaway? A brand-new facility in development may be in the perfect location. The prospect of a new construction community is exciting. Shiny. (A favorite adjective for Firefly fans.) The glossy marketing compelling. But like a campfire horror story? There’s a cautionary tale for prospective residents.
Market Tested Track Record?
With an unbuilt or even a new facility? There’s no track record of sales and occupancy to give comfort that the pricing is market-tested. If the price is wrong? Problems follow. A half-empty facility will be no fun for you or the developer. You can’t know yet. Is it a zombie community? Sucking everyone’s blood and money? With a new development? We don’t yet know if the local demand is there to support a successful community. It’s a riskier bet to be the first one to sign on the dotted line.
Lots of things can happen between proposal and occupancy years later. The Ranch Stillwater OK was in pre-sales for more than four years, even before construction. Construction of a large project often takes 18-24 months. If everything goes right. And even then, opening to move-ins doesn’t mean full occupancy overnight.
The 90% Occupancy Rule
It’s hard to make the financial numbers of a senior community work long-term with less than 90% occupancy. With an established community? There are fewer guesses and less risk. The higher the occupancy the better. To some extent? Senior living communities are like a pyramid scheme. Communities depend upon a constant flow of new residents. Cash flow is everything.
A Waiting List Is a Good Sign
A long waiting list for an existing community? Promises future cash flow. A waiting list is one of the best financial protections for a prospective CCRC resident. Especially if it’s a buy-in style contract. Rental communities are safer for residents when there’s more uncertainty.
Revivified as a Rental Community — Legacy Village of Stillwater
The Ranch Stillwater OK failed as a buy-in CCRC. The new developer revivified the zombie project. And renamed it. The new name? Legacy Village of Stillwater. Unlike the originally envisioned The Ranch? Legacy Village is a rental community and not a buy-in contract. It is operated by Western States Lodging & Management.
Buyers’ deposits from The Ranch got refunded. Holding deposits in escrow until completion is some protection. Some of the original buyers elected to lease in the renamed Legacy Village rental project.
Just in Time for COVID
Legacy Village of Stillwater (formerly The Ranch) is now open. More than seven years into the tale. Open just in time for all the COVID challenges. As of mid-January 2021, Legacy Village had 16 cumulative COVID cases, but no deaths. But the community itself is finally alive. https://oklahoma.gov/content/dam/ok/en/covid19/documents/weekly-epi-report/2021.01.15%20Weekly%20Epi%20Report.pdf
We’ll see if it survives the COVID challenge. The whole industry is stressed by COVID.
You might ask, “But isn’t a well-known corporate brand some financial protection?” Yes. But not much. The big names in senior living can play one or more roles in an individual project. The roles range from full-owner to developer, to post-construction operational manager. There’s often a local non-profit in the role of the local owner. But the contracts are written such that each project is fire-walled. Local failure can’t take down the brand. If a project comes up a loser? It typically gets sold off to limit both corporate financial losses and brand damage.
We know one prominent brand that claims that none of its projects have ever gone bankrupt. Technically true. But misleading. Projects developed by it did go bankrupt. Just not under its watch. They got sold before the ultimate failure.
Experience Does Matter
The big senior living brand has the discretion to cut its losses! They fear putting good money in after bad and multiplying the loss. But there are also instances where the big brand doubles down and transmutes dross into gold.
Experience limits the frequency and scale of market mistakes. But doesn’t eliminate mistakes. So an experienced brand name is some minor protection, but far short of a guarantee. When a project goes down in financial flames? The brand can hide behind the firewall!
Our lesson for senior living consumers? With a proposed or brand-new development?
- Rentals are less risky than buy-in developments. If developers guessed wrong and the demand isn’t there? The cost of a mistake to the consumer is much lower with a rental. Yes, it’s still a hassle if you have to move again. But you as a resident are less financially entangled in a rental.
- The cost of a mistake in a buy-in community is much higher. And can involve long legal entanglements and financial delays. Depending upon the terms of your contract? You might not get any, much less all your down-payment back.
- Money held in escrow is safer.
- But if you have to wait for the developer to resell your unit when new units are still unsold? You will wait for a long-time. And for senior living residents? Time is money is even more true than usual.
- Don’t depend too much on the involvement of a big brand name in the project. If the project sinks? The brand name often abandons ship!
More and More Rental
We note that the market share of senior living rental communities is increasing. Buy-in communities are still being built, but rental communities are increasingly the trend. The cautionary tale of The Ranch Stillwater OK nightmare? A useful reminder to be aware of the risks around brand new developments. The successor Legacy Villages is on-trend as a rental community rather than a buy-in. Many communities, both existing and new, also now offer the option of buy-in or rental. Try before you buy isn’t a bad idea.