sims finances 33 year old rental ccrc

background

Burcham Hills is a rental CCRC, located in East Lansing, Michigan. The community was originally developed in 1974 as a non profit, entrance fee community, with Independent Living studios and one bedroom apartments and a skilled nursing center. After incurring financial difficulties, ARC Management (“ARCM”) was brought in to manage the community, with ARC subsequently buying Burcham Hills in 1978 and recommending conversion to a rental retirement community. Shortly thereafter, ARC converted one wing of the third story to assisted living (known at Burcham Hills as “Independent Plus”), which is believed to be one of the first assisted living units of its kind in the country. In 1989, ARC sold Burcham Hills to the current non-profit owner, retaining a management relationship with the community which remains today. Today, Burcham Hills consist of 74 Independent Living apartments, 77 Independent Living Plus units, 34 Memory Care units and 133 skilled nursing beds.

challenges

Burcham Hills is a 33 year old community, with only 44 skilled nursing beds added to the community since its original construction in 1974. Considered state of the art when built, the building presents a number of marketing challenges, which ARCM has overcome with a deft feel for the local market place and efficient management of Burcham Hills’ health center. Studio apartments make up 78% of the Independent Living and 74% of the Independent Plus unit inventory, with the largest studio accommodations at 604 square feet.

ARCM has built the health center into the facility of choice in the East Lansing market place. The superb reputation for care has enabled ARCM to substantially increase the amount of therapy services provided by Burcham Hills, though the current health center does not provide adequate space for this growing and important level of service and care. In addition, due to the growth of therapy services provided, the limited resident common spaces in the health center have become cramped, requiring more space in order to provide appropriately comfortable living spaces for Burcham Hills’ health center residents. To meet the growing spatial needs in its health center, Burcham Hills planned a 9,000 square foot health center expansion, which will provide an enhanced therapy services wing on the first floor and increased social and commons areas on the second and third floors of the new wing. Determining the appropriate building renovations to remedy its health center challenges was the easy part. The key for Burcham Hills was finding the best way to afford the needed changes, which are estimated to cost $6 million. Since its acquisition in 1989, Burcham Hills has not only paid debt service on its senior bonds but has also paid out most of its excess cash balances on an annual basis to repay subordinate debt. As a result, though Burcham Hills’ cash flow was healthy, its cash balances were modest, creating a unique financing challenge.

solution

The answer was Herbert J. Sims & Co., Inc. (“Sims”) and its industry leading distribution network. Working with Burcham Hills, Sims designed a plan of finance including both taxable and tax-exempt non-rated fixed rate bonds, while eliminating all of Burcham Hills’ remaining subordinate debt by refinancing the outstanding balances into the new bond issue. Sims extended the final maturity of Burcham Hills’ bonds from 2019 to 2037, creating additional debt service capacity for Burcham Hills, enabling it to absorb the debt associated with the health center expansion. Extending the final maturity of the bonds not only allowed Burcham Hills to absorb the new debt but also lower its overall debt service burden substantially, creating cash flow savings which will serve to substantially improve cash balances over the life of the bond issue.

results

In order to maximize the economic impact of the refinancing and expansion financing for Burcham Hills, Sims marketed the new non-rated bonds to both its retail and institutional investors. As a result, Sims was able to produce a very low, fixed rate cost of capital for Burcham Hills, with tax-exempt bond yields ranging from 5.25 – 5.32% and maturities ranging from 2026 – 2037. Sims was able to fund an additional $6 million of capital needs and still reduce Burcham Hills’ debt service by approximately $235,000 annually. With the savings generated from the refinancing and the expansion of the health center, Burcham Hills is poised to further its position as the retirement center of choice in East Lansing.