Herbert J. Sims & Co., Inc. - Chelsea at First Community Village

Chelsea at First Community Village

repositioning a 40-year old campus

the challenge

First Community Village (“FCV”) is a 40-year-old continuing care retirement center located on a 31-acre campus in Upper Arlington, Ohio, an affluent suburb of Columbus. FCV was the first CCRC in Central Ohio and currently consists of 90 independent living units, 88 assisted living units and a 175-bed nursing center. FCV encountered many of the same problems that aging campuses face all over the country: an aging physical plant whose independent living units were no longer competitive in the market and whose health care units and wellness and other programs needed more space for increased services. In addition to its physical problems, FCV had to demolish buildings while maintaining services to existing residents. FCV also faced financial challenges: (1) lack of liquidity from a decline in census due to aging existing physical plant as well as planned “attrition” in preparation of redevelopment project; (2) escalation in construction costs due to market conditions; (3) managing existing operations in conjunction with managing a large-scale construction project.

the solution

In response to its position, FCV planned an extensive redevelopment of its 31-acre campus that will reposition itself as an upscale continuing care retirement community. The completed redeveloped facilities, to be known as The Chelsea at First Community Village, will include a total of 38 manor homes, 54 independent living units, 86 congregate living units, 38 assisted living units, 36 assisted living dementia units and 175 nursing facility units. The redevelopment will be completed in two phases to accommodate the demolition, renovation and construction of certain facilities and to facilitate the transfer of existing residents. Phase I consists of all of the project described above except 32 manor homes, which will be completed as Phase II.

the implementation

The Chelsea at First Community Village

In order to execute this complex repositioning plan with many facets, FCV hired Herbert J. Sims & Co. in the fall of 2003. Working with the other members of FCV’s team, Sims led the effort to develop a custom tailored finance plan. As its first step, Sims worked with another local firm to underwrite a $5.3 million seed capital taxfree bond anticipation note in October, 2003. Over the next approximately 18 months, Sims guided the FCV team though a series of challenges involving escalating construction costs and a rising interest rate environment, particularly the increase in the spread between taxable and tax-exempt short-term rates. The circumstances dictated a change in the contractor as well as a revised financing structure, but the diligence, creativity and cooperation of the finance team yielded a financeable project for FCV. On March 30, 2005, Sims closed an $85+ million financing for FCV to fund the campus redevelopment project as well as to refinance two outstanding series of debt. The financing consisted of $58.7 million of letter of credit enhanced variable rate bonds which was used to fund the construction of Phase I and to refinance the existing debt. The balance of Phase I construction as well as Phase II construction will be financed with a $23 million construction loan which is expected to be repaid from entrance fees. The construction loan was structured such that the proceeds will be drawn upon as the last tranche of the financing to minimize the capitalized interest requirements. The letter of credit and construction loan was provided by a syndicate of banks, led by Sovereign Bank, and including National Cooperative Bank, KBC Bank and HSH Nordbank. To address the liquidity issue, the banks’ commitment included $3 million which could be used for unanticipated project costs or operating deficits from existing operations. To satisfy the bank’s equity requirement, Sims raised a net of $1.5 million of subordinated bonds, which was combined with $1.5 million of proceeds generated from FCV’s sale of four adjacent parcels of land which could only be used for single-family development. Finally, the Borrower was able to secure $900,000 of tax incremental financing (“TIF”) proceeds from the City of Upper Arlington.

Sims also secured a five-year interest rate swap on the variable rate bonds that provided FCV with the option to terminate the swap at no penalty at the end of the third or fourth year. This option provides flexibility in the event FCV decides to refinance in advance of the initial term of the letter of credit without the potential financial burden of terminating the swap prior to its maturity in the event the swap is “out of the money.”

the result

The President of FCV, Jack Sandman observed, “While the strength of First Community Village’s market made this project attractive to lenders, great creativity in bringing the financing together was required. As the successor and ultimate underwriter, Sims brought the necessary inventiveness, persistence and diplomacy needed to complete this financing.”

At the Sims Late Winter Conference, Ed Kelly, CEO of New Life, illustrated how the natural life cycle of CCRCs through an aging physical plant, now competition and changing program and service trends, worsen the facility’s financial performance and market appeal. Chris Keysor of Larson Allen also noted at the Conference that incremental change is a CCRC’s biggest enemy.

Fortunately, First Community Village recognized its position and acted boldly.