Nonprofit vs Profit Senior Housing Communities — Does it really matter? And if so how?
“What is the difference between profit and nonprofit organizations and does it matter?” This a frequently asked question when considering Senior Housing Communities. Some people think for-profits will take money out of the community to pay shareholders, to the detriment of residents. Or that non-profits will be kinder because of a charitable mission, to the benefit of residents.
It’s not that simple.
Nonprofits can and do go bankrupt when they can’t pay their bills
This topic came up last year when we sat in on a sales presentation by a nonprofit LifeCare Community. The sales pitch proudly proclaimed the community’s nonprofit status. This was shortly after discussing the community’s recent bankruptcy reorganization brought on by excessive construction debt. In other words, they didn’t sell or lease up fast enough. The occupancy rate was under 80%. several years after initial construction. A normal, financially “safe” occupancy rate is over 90%. The presenter claimed only the creditors suffered from the reorganization. . . not the residents. As a nonprofit retirement community, they didn’t have to pay shareholders. The speaker’s clear implication was that nonprofit residents automatically got more and were unaffected by the bankruptcy?
We didn’t believe it. Partly because we were aware of some bad outcomes for residents or resident families from the bankruptcy. There were service disruptions during the bankruptcy. Staff turnover was high. Quality ratings sank. There were excessively long delays in receiving refunds. Maintenance was deferred. And more. Residents did suffer.
If one inference was wrong, was the other? Do nonprofit residents really get more because there are no shareholders to pay?
We decided to explore this topic in more detail.
This question matters because the for-profit share of the senior housing market is increasing. And some of our favorite senior housing communities are either owned or managed by for-profit companies.
What does profit vs nonprofit status say about the community?
Do we really believe nonprofit retirement communities better protect residents? No.
We don’t. We think it is far more important to focus on what you get for your money at any particular senior housing community. Read the contracts. Compare prices. And here the contracts and prices are more similar than not. We are unconvinced that a nonprofit senior housing community has clear financial benefits for the resident. At least not by virtue of being nonprofit. Are some nonprofits better than average? Yes. But there are also some for-profits significantly better than the norm.
The mere label, “nonprofit” is not a magic talisman protecting the consumer from caveat emptor (buyer beware).
We see no significant difference in the real estate, programming features, or contractual commitments of nonprofit vs for-profit communities. It isn’t obvious that non-profit residents are getting more because shareholders are getting nothing (there are no share or stockholders in a nonprofit). The two types of entities compete in the same market. For-profits wouldn’t be winning the competitive battle for market share by delivering less to residents.
If anyone is getting less, it is government from non-profits due to tax exemptions for charities.
Which begs the question, “Where is all the money going if not to the differential benefit of residents?” That’s the next section.
Our answer is not self-obvious. We may be in the minority with this conclusion. It is a complex topic. Let’s peel back the onion.
What are the profit motives for each? Wait, nonprofits can have profit motives? Yes.
At the most basic level, nonprofits still have to produce positive cash flow. They need revenue to match or exceed expenses. Just like a for-profit community. Stephen Covey’s rule of thumb applies, “No margin? No mission.” If you don’t generate more revenue than expenses? Someone else will be pursuing your mission or charitable purpose.
And it turns out that just because the real estate owner is a nonprofit, doesn’t mean there aren’t plenty of opportunities for individuals or other businesses to profit from a nonprofit. This isn’t cynicism. It’s reality.
The iceberg below the nonprofit surface includes lots of for-profit motives
A nonprofit community typically has complex relationships with profit-seeking people and entities. For-profit motives are there, just hidden below the surface. The label, “nonprofit” simply doesn’t tell the whole story.
These contracts show up as expenses on the nonprofit senior housing community’s statement of financial activities (equivalent to a for-profit’s income statement) and statement of financial position (the equivalent of a for-profit’s balance statement).
So, the label “nonprofit” can also be misleading if you think that no one is making a profit off a nonprofit.
Highly Compensated Staff
Salespeople and administrators are well-paid, and often by an organization that manages but doesn’t own the community’s real estate. The devil truly is in the details. Both for-profits and nonprofits must pay the going rate for talent. Complex organizations, of both stripes, tend to have well-compensated executives, professionals, and sales staff.
Contracts with For-Profits “Off-Balance Sheet”
Off-balance sheet deals with for-profit entities obscure the details of who’s benefiting. For-profit shareholder dividends are not the only way to extract cash from a senior housing community to the detriment of residents. Developer fees and management fees accomplish the same extraction. Do not blindly accept that nonprofit means no conflicting motives or conflicts of interests.
Because of the complex web of contracts around nonprofits, we’re not convinced that nonprofit means more resources go to the direct benefit of residents. We’re reluctant to buy into any great advantage for nonprofit senior housing communities because while many communities are nonprofit, there is typically a complex web of management agreements and developer contracts with for-profit entities.
Follow the Money: The Difference between Profit and Nonprofit Organizations
Do nonprofit community residents benefit from nonprofit tax exemption?
So far the score is at best even with no clear benefits for residents from a senior housing community’s nonprofit status.
Remember, nonprofit is not a financial objective, it is a tax status. All nonprofit recognition does is relieve the entity from the obligation to pay corporate income tax and often local property tax. The exemption is in recognition of a charitable mission. Governments get less money. Do residents get more benefits? More protection?
A cash flow positive nonprofit enjoys clear savings by avoiding income tax payments that a similarly situated for-profit senior housing community would pay. Many municipalities similarly exempt or protect nonprofits from property taxes. But not all.
Linkage and Leakage
But there’s no necessary linkage that requires tax savings end up in lower prices, savings, more benefits, or greater reserves to secure promises to residents. They could just as easily flow out of the nonprofit to management or developers who look more like the financially interested shareholders of big, bad for-profits than the residents who are supposed to be the beneficial mission of a nonprofit.
Looking at the label nonprofit isn’t enough. Regardless of the senior housing community’s tax status, we have to examine the details of an individual community’s financial statements. There’s simply no shortcut to Deep Throat’s famous prescription, “Follow the money.” Financial security isn’t in the label, it’s in the financial performance and management practices of the senior housing community, regardless of for-profit or nonprofit tax status.
Nonprofits may; however, offer nonfinancial or intangible benefits.
Religious Affiliation and Mission: The Difference between Profit and Nonprofit Organizations
We concluded the devil was in the details when it comes to financial benefits from a senior housing community’s tax status, for-profit vs nonprofit. There’s no financial protection for residents in a label. That doesn’t mean nonprofit is necessarily meaningless.
But what happens as a resident when I outlive my money? Won’t a for-profit dump me on street? Or won’t a charitable nonprofit be kinder, gentler, and be more likely to let me stay? Again, in reality almost no difference.
The resident contracts are typically very similar. Almost all senior housing contracts, regardless of profit or nonprofit status, allow a community to evict someone unable to pay ongoing monthly fees. If it’s a straight lease or rental agreement, you gotta pay the rent. Rental communities are part of the do-it-yourself (DIY) retirement puzzle. It’s up to you to manage the risk of running out of money.
For buy-in communities, it’s a little fuzzier.
Buy-In Communities Buy Some Built-in Protections
Many senior living or housing communities feature contracts that require a “buy-in”. These have some built-in protections, regardless of the tax status of the community. Buy-in contracts are more common in Life Plan Communities (LPCs) also called Continuing Care Retirement Communities (CCRCs) or a variety of trade names like LifeCare. (The Department of Acronyms is working overtime in this industry.) Evictions are a rare event for buy-in communities, by either profits or nonprofits. These are the communities selling the worry-free promise of security, regardless of your future needs. The security of a buy-in contract can be promised by either a for-profit or a nonprofit community.
- First, both financially underwrite or qualify resident admission based upon ability to pay. They’re both good at running the actuarial numbers. Regulators and financers often require them to run the numbers to reduce risk of failure.
- Second, buy-in contracts often feature a “return of capital” feature. If you can’t make the monthly payment, they take it out of the return of capital, from your initial buy-in, promised to your heirs. Buy-ins often exceed $500,000. Given the time value of money, this is a lot of collateral or security. (Note, most return of capital contracts only return some portion of the original buy-in and not any earnings on the buy-in (contributed capital or equity) in the interim. E.g., 90% return of capital but not interest on the money.)
- Third, most senior communities maximize income from available public programs like Medicare, Medicaid, and VA benefits (among others). If you spend down assets? If you run out of money? Medicaid is the backstop. Both for you and the community.
- Fourth, if you’re selling security, it’s tough to get new residents if you’re throwing existing residents out on the street. It looks bad. Regardless of the community’s tax status.
Evictions are rare for buy-in communities, and normally due to a hard to manage health challenge or behavioral issue as much as financial capacity. Behavior changes and psychiatric challenges are a real problem, often associated with progressive dementia. In these cases, it’s a transfer to a facility better able to provide necessary care, at Medicaid’s expense. And it is often justified as protecting remaining residents or staff from the risk of physical harm. The transfer may not be to as nice of a building, but a broke and difficult resident is not dumped out on the street.
Nonfinancial or Intangible Benefits of Nonprofits
There are also nonfinancial benefits that can matter very much to individual residents.
It may matter to you for instance whether there is a religious affiliation. A dedicated Catholic may prefer a religiously inspired nonprofit that offers engagement with the Church for spiritual support. Several of the strong nonprofit networks have religious foundations. Religious lines include: Quaker, Catholic, Presbyterian, Bethany (Congregationalist), Baptist, Methodist, Jewish, Masons, and more. And there are other nonprofits with a service mission that are not faith-inspired or religiously affiliated.
Several of our favorite communities are owned or managed by mission-driven organizations like the Quaker-affiliated Kendal organization and Chicago’s The Admiral at the Lake. The Admiral at the Lake — The New Wave. But we also see great for-profit communities like Balfour Senior Livings’ The Balfour at Riverfront Park in Denver.
A religiously-inspired or mission-inspired benefit does not necessarily go to financial strength unless the parent church or organization is willing to stand financially behind the individual communities. Larger, multi-community systems tend to have more financially secure individual communities than single-site organizations. This is true for both nonprofits and for-profits. Experience normally pays. But not always.
Parents Don’t Always Bail-out a Troubled Child
In most circumstances, individual senior housing communities are organized as separate legal entities in which the managing parent or affiliate is not required to invest more in a failing community. The owner of the real estate is not always the same business entity as the operator. The parent may do so voluntarily to avoid the marketing black-eye of a failure, but we’ve also seen well-known systems practice window-dressing by selling off their losers. They can continue to say, we’ve never had a bankruptcy, not because they’ve never had a troubled community, but because it didn’t fail on their watch. They dumped it before the bad news hit the headlines.
A financially strong parent is no guarantee that the local affiliate will be bailed-out. The experience of management may reduce the risk of failure. And parent companies can and do sometimes bail out troubled children. But they also sometimes bail and sellout or dump a miss into bankruptcy.
For-profit vs Nonprofit Conclusion — Financial Results not the Label
Nonprofit status does not mean more money benefitting residents
In this multi-part discussion, we’ve explored whether nonprofit senior housing communities such as CCRCs yield any clear financial benefit for residents over for-profit competitors. Our conclusion? No.
Because this is a common point of market differentiation and because it’s a common question by prospective residents, we intend to continue to explore the actual performance differences between nonprofits and for-profits and see if we can document any clear advantage in financial security or value for the residents, in one or the other.
The answer is in the individual financial performance of a community and not in the label. Well-managed communities with high occupancy rates and strong reserves are a better guarantee than nonprofit status. Read the financial statements. Don’t count too heavily on the label or the parent organization. Don’t assume nonprofits are pure or without profit motives below the waterline.
We welcome your thoughts on the question. Does this square with your experience? Are there questions we should explore that we didn’t discuss? Let us know. Love a discussion on an important topic.