WASHINGTON - Investors who bought $55.5 million of bonds to help construct the Glebe, an upscale continuing-care retirement community near Roanoke, Va., face major uncertainties with their investments after the facility defaulted on a $15 million bond payment in July because its revenues came in lower than anticipated.
Adding to the uncertainty is a looming Virginia Supreme Court decision could add hundreds of thousands of back taxes to the facility's tab.
Representatives of the Glebe are currently holding talks with the bondholders and bond trustee, U.S. Bank NA in Richmond, to obtain time to try to improve the facility's financial operations, Kevin W. Quinn, finance director of Virginia Baptist Homes Inc., the nonprofit corporation that owns the facility, said in a recent material event notice on the payment default that was filed with nationally recognized repositories.
But those efforts could be hampered by the current financial crisis.
Quinn declined to comment and referred calls to Randall Robinson, the president of Virginia Baptists Homes.
"We escrowed $7.5 million but we were not able to escrow the entire $15 million," Robinson said about the default of the principal payment on term bonds that matured in July.
The Glebe has not missed interest payments yet, but the next one is due Jan. 1, 2009, according to Robinson.
"We assume that the trustee will make that payment, as the trustee did on July 1, 2008," he said.
The Glebe's financing plan for the bonds relies on pricey entrance fees - more than $300,000 in some cases - and other revenues to pay debt service, Robinson said. But the facility is only 68% occupied and needs to be 94% full to meet its debt service payments, he said.
Robinson was reluctant to comment on the specifics of the discussion between the parties trying to remedy the situation.
"There are just lots of moving parts to that and we continue to have those ongoing negotiations with the trustee," he said. "Really, the next steps are that we have to perform at a certain level, and we continue to give them financial reports to keep them fully informed. We just want to give the Glebe more time so they can fill up and continue to improve financially."
Robinson said VBH is hiring a new marketing management company to entice buyers to the facility. He would not identify any company because he said they are still negotiating.
"We want to promote a strong marketing presence," Robinson said. "Obviously, it is a revenue problem and the revenue problem is caused by not having the Glebe full."
Dean Pope, a partner with Hunton & Williams LLP in Richmond that served as bond counsel for $55.5 million of bonds that the Roanoke Industrial Development Authority, now the Economic Development Authority, issued in December 2003. Pope would not return calls for comment.
The Glebe is an entrance-fee continuing care retirement community, or CCRC, which typically are financed with tax-exempt bonds and owned by nonprofit organizations or companies. Virginia Baptist Homes has three other CCRCs in the state, all of which are in good financial shape, according to Robinson. The bonds for the Glebe, like other CCRCs, are secured by the facility's large entrance fees, monthly fees, and other revenue.
The VBH's efforts to improve the occupancy of the Glebe come as a Standard & Poor's report released Thursday said shakier times are ahead for the nonprofit senior-living sector. The report said that because of the housing downturn, seniors are delaying moving in to senior-living organizations. As a result, CCRC balance sheet ratios and debt service coverage levels will probably begin to retreat in response to market volatility and the economic downturn, the rating agency said.
The Glebe's financial situation is further complicated in that the Virginia State Corporation Commission, a state agency that granted Virginia Baptist Homes a license to operate a health care facility at the Glebe, has ordered it not to take entrance fee payments from new residents until its financial situation stabilizes to protect the residents' investments. Robinson said any new residents will eventually have to pay the fees.
But The Glebe's rocky finances are not only dependent upon an increase in residents.
It faces the possibility of having to pay a backlog of tax payments totaling as much as $500,000, as well as more than $220 million of future annual tax payments, in the wake of a court ruling on a lawsuit Botetourt County filed against the facility and Virginia Baptist Homes, soon after it opened in 2005.
The county's Board of Supervisors said that Virginia Baptist Homes' religious and benevolent tax exemption, granted by the state legislature, does not apply to the Glebe because it does not provide subsidies to any of its residents.
Virginia Baptist Homes has maintained that its exemption it has held for more than 30 years applies to all of its properties, including new ones such as the Glebe, which Robinson said will offer reduced rates for some residents in the future after a benefit foundation is grown with donations.
Circuit Court Judge Michael Irvine sided with the county last year, ruling that the religious and benevolent exemption granted to Virginia Baptist Homes by the General Assembly does not simultaneously apply to all its properties.
"The lower court found that you not only have to be tax-exempt by statute, but you have to be tax-exempt by practice," said Don Assaid, chairman of the Botetourt County Board of Supervisors. He said that the county believes that by forming under the VBH, the Glebe is evading taxes.
"The county wanted to see an immediate impact on benevolence," Robinson said. "We're a faith-based organization. They felt like they had to say we weren't religious enough. We have a legislative exemption from the legislature of the commonwealth of Virginia that says Virginia Baptists Homes, and property owned by VBH, when used for benevolent religious purposes, which we feel like [is] our whole mission ... don't have to pay property taxes."
VBH appealed the decision to the Virginia Supreme Court, where a decision is expected to be handed down by the end of the month.
"We're standing by waiting .... We're just relying on the court to render their opinion," Robinson said.
The Glebe is not the only party interested in the court's decision.
"I think everybody is paying attention to this," said Sandee Levin, president of the Virginia Association of Nonprofit Homes for the Aging, which represents and advocates for 43 CCRCs in the state. "We don't usually have an issue like this come up, so we're concerned and we're concerned about the residents, of course."
However, Levin said that the situation at the Glebe is unique and that most other CCRCs have worked out tax-exempt issues in the state.
Other CCRCs have defaulted on bonds in the past because of the same problem of insufficient revenue collections because of lower-than-expected occupancy. Two properties owned by nonprofits in default were sold by real estate broker CLW Health Care Services Group, based in Florida - Carlton Cove in Huntsville, Ala., the sale of which closed May 30, and Marsh's Edge in St. Simons Island, Ga., which closed June 27.
Carlton Cove was financed with $77 million of debt sold in 2001 by the Huntsville Special Care Facilities Financing Authority, and Marsh's Edge was financed with $99.9 million of debt sold in 2004 by the nonprofit Coastal Community Retirement Corp.
