The bankruptcy proceeding of Erickson Retirement Communities has understandably upset the 23,000 residents of the company's 19 communities and their families. People who live with Erickson at Charlestown, Oak Crest, Riderwood and other places have a substantial investment in the communities in the form of their apartments. When residents die or move out of a community, Erickson has always paid back the "entrance fees" for the apartments, which can run up to $600,000. Residents want to know if the bankruptcy will affect Erickson's ability to do that.
Having reviewed lots of documents and talked to bankruptcy specialists, I believe that Erickson residents will be insulated from the financial trauma at the parent company. Peter Chapman, publisher of Erickson Retirement Bankruptcy News and a longtime bankruptcy watcher, goes further.
"From a customer's perspective, bankruptcy should be a non-event," Chapman told me. "The company's goal is that the bankruptcy doesn't impact the individuals that they are providing service to. They're telling the bankruptcy court: 'If we disrupt our customer base, we're out of business.' I don't think anybody's going to object to that."
What he's saying is that it's in nobody's interest - not Erickson, not Erickson's creditors, not the guy who's buying Erickson, not the nonprofit corporations that own Erickson's communities - to abuse residents. It's in everybody's interest to ensure that Erickson as a business continues as normally as possible.
In response to many queries, I'll go over again how Erickson's entrance fees work. They're not as solid as owning title to a house or condo. Erickson residents have no legal property interest in their apartments. Instead, they sign a contract that says the nonprofit community will repay the money after 1) they move out and 2) a new resident pays an entrance fee. There is a clause that allows the nonprofit community to pay back a discounted entrance fee if it can't sell the apartment for the same amount.
Some residents believe Erickson keeps their entrance fees in a bank until they move out. Not so. The 2007 IRS filing for Oak Crest, for example, shows total residents' deposits of $236 million but less than $3 million held for residents, including pending refunds.
That said, however, no Erickson resident has ever failed to get back his/her full entrance fee, to my knowledge. And, as Chapman says, it's in Erickson's interest to try hard to ensure residents continue to get full refunds. It's a key part of the company's marketing schtick.
The residency agreements are signed with the nonprofit Erickson communities, not Erickson corporate. The communities are legally separate from Erickson corporate and are not part of the bankruptcy proceeding.
Prospective Erickson buyer Jim Davis has committed to buy Erickson corporate's assets for $100 million, assume $500 million in debt and put $50 million new cash into the company, new court filings show. That should help the company's liquidity. So will the debtor financing it gets as part of the bankruptcy process.
One of the first things Erickson did in bankruptcy court was to request the judge's permission to put prospective residents' deposits in escrow.
I can't guarantee that no present or prospective Erickson residents will be hurt by the bankruptcy. But it looks like the company understands that it's in its best interests to try to see that they're not.