Bankruptcy at an Illinois retirement community has financial impact on residents and families too
Robert McCoppin, Chicago Tribune – November 15, 2023
At age 88, World War II veteran Robert Kroll moved to Friendship Village of Schaumburg, Illinois, a retirement community where he would be taken care of until death, and so his children would get their inheritance after he died.
He paid an entrance fee of $124,000, plus about $2,400 a month, to guarantee that he would always get housing and medical care even if he ran out of money, with the understanding that his family would get 90% of his remaining entrance fee after expenses upon his passing.
Kroll died in 2019, but his family still hasn’t gotten their money back. In June, Friendship Village, citing problems caused by the COVID pandemic, filed for Chapter 11 bankruptcy, in which officials say operations will continue as usual, but with some debts unpaid. A company has bid $115 million to buy the facility, but the bankruptcy proposal includes only $2 million to pay back families of former residents — about 10% of what is owed.
“Our family has been waiting for four years with no resolution,” Kroll’s daughter, Michelle Barnes, told the Tribune. “I wanted to share our story to help inform the public and put pressure on our politicians to change the laws in Illinois that will protect seniors from this type of deception in the future.”
Her dispute is over Friendship Village’s policy of only paying back entry fees upon the resale of a resident’s unit. The facility — the largest not-for-profit retirement community in Illinois, with 815 units — didn’t resell Kroll’s one-bedroom unit, so hadn’t paid his family back.
Now that Friendship Village has entered bankruptcy, families of former residents are unlikely to ever receive full repayment, which Barnes and other families see as a betrayal of what they were promised.
Friendship Village officials say the contracts were clear about the arrangement, which had worked well for decades since the retirement community opened in 1977.
“We never expected this to happen,” CEO Mike Flynn said.
Friendship Village provides a full continuum of care from independent living to assisted living and skilled nursing residences. It has a three out of five star overall rating from Medicare.gov, and residents and others the Tribune interviewed spoke highly of the staff and facilities there.
But in 2020, COVID was particularly deadly for older victims, and prompted Illinois Gov. J.B. Pritzker to close general access to nursing facilities. That prevented Friendship Village from showing its units to new customers, and prevented the sale of what normally was a turnover of some 100 units a year. Some expenses increased while demand for nursing homes dropped.
The owner of Friendship Village, Evangelical Retirement Homes of Greater Chicago, estimated allowed claims by bondholders total almost $132 million, for current residents $78 million, and for former residents $20 million. But the bond debt is secured, meaning its repayment is backed by the collateral of the property itself.
The facility has more than 200 creditors, including dozens of residents and family members, many owed hundreds of thousands of dollars.
Because Friendship Village is deemed a not-for-profit business, it does not pay property taxes. It did pay $23 million in employee compensation in 2022, including $406,000 to its prior CEO, Stephen Yencheck. Bankruptcy attorney Bruce Dopke reported he’s been paid $350,000 for legal services, and would be paid for any additional costs. Before bankruptcy, the company had a prospective buyer, but the deal fell through.
The amount available to repay debtors depends on the amount offered by a buyer in auction. The highest bid was recently reported at $115 million by Encore Healthcare Services of New York.
“It would have been nice if somebody stepped up and honored the entrance fee refund,” Flynn said. “That didn’t happen, but at least they’re getting something.”
Besides former residents like Kroll, current residents are also worried about their investment.
Ed and Toby Gordon, age 88 and 87, respectively, moved into Friendship Village in January, in part to be close to their daughter, Michelle Miller, and because they knew they would need more care. They paid more than $300,000 as an entrance fee, Miller said. Under the bankruptcy proposal, residents who die or leave would be repaid over about 16 years.
Miller is upset that her parents did not know about the facility’s dire financial situation.
“My parents should have known how bad those numbers were,” she said, “because they could have been renters instead.”
Residents are concerned that they won’t get the continuing care they expected and won’t get the refunds they were guaranteed. “A lot of people are just scared and don’t know what’s going to happen to them,” she said.
Friendship Village issued a statement reassuring residents that they will be taken care of.
Within the new ownership contract, the statement read, “there are provisions to take care of the current residents who entered the community under an entrance fee agreement for the rest of their lives, regardless of the level of care needed. There is also a benevolent fund that has been doubled by the new owner for those who run out of money through no fault of their own.”
In response to complaints even before the bankruptcy, state Rep. Michelle Mussman, a Democrat whose northwest suburban district includes Friendship Village, introduced a bill that would require repayment of entrance fees in order of those who leave, rather than upon resale of each individual’s unit.
But after getting pushback from the industry, Mussman is taking a step back and talking to stakeholders. Chronological repayment may not be as fair to residents who paid for more desirable units that sell faster, and may impair the ability to care for residents still living there, Mussman said.
“It’s not perfect,” she said. “We’ve not been able to find the right combination that would work.”
Angela Schnepf, president and CEO of LeadingAge Illinois, which represents the senior care industry, said entrance fees are like an insurance policy. The community takes on the risk of caring for residents even if they run out of money, while residents carry the risk of not getting their fee back until their units sell.
She said some residents see the queue system as paying other residents when their own unit sells.
“If their neighbor gets their refund sooner just because they put their unit up for sale sooner, they find this very unfair,” Schnepf said.
If retirement communities were forced to pay back before selling units, she said, it might put them at financial risk.
But under the current arrangement, current and former residents are at risk because of the bankruptcy. A creditors’ committee continues to investigate the management of funds in the case.
The next court hearing to consider the bankruptcy terms is set for Nov. 22 in federal court in Chicago. The proposed repayment plan is subject to a vote by creditors and is scheduled to be ruled on Jan. 17 by U.S. Judge Timothy Barnes.
More broadly, the problems facing Friendship Village also face Life Plan or Continuing Care Retirement Communities in general.
Several such not-for-proft communities nationwide have fallen into financial distress recently and been acquired by for-profit companies, said Dan Hermann, president and CEO of Ziegler, which has provided financing to senior living businesses, including Friendship Village.
The for-profit companies can offer efficiencies by providing their own ancillary services such as pharmacy and tech work, and tighter staffing.
An underlying problem, Hermann said, is that Illinois for years has had low reimbursement rates for Medicaid residents, which make up a significant portion of some retirement communities like Friendship Village.