CHICAGO — A bankruptcy court judge in Chicago will be asked next week to approve a $53.5 million cash offer to purchase the assets of the Clare at Water Tower continuing-care community in a deal that provides holders of the facility’s $229 million of debt with a recovery rate of at least 20 cents on the dollar, sources said.

Harrison, N.Y.-based Senior Care Development LLC, in partnership with Fundamental Advisors LLP and Life Care Companies LLC, won the bidding at an auction Thursday to purchase the assets of the upscale facility in downtown Chicago from its sponsors, the Franciscan Sisters of Chicago Service Corp.

Though investors still face a steep loss, it’s significantly less of a haircut than initially expected based on the preferred bid — known as the stalking horse bid — negotiated last month by the Clare’s operators and Senior Care.

Senior Care’s initial offer would honor refunds of residents’ expensive deposits and provide $29.5 million in cash. That figure included $2 million earmarked to cover deferred rental payments owed to the building’s owner, Loyola University of Chicago, and $12 million to repay debtor-in-possession financing. It left about $15 million for distribution to bondholders.

Two other qualified bids were received by the April 10 deadline, leading to the auction Thursday.

The high bid for $32 million in cash came from the Tulsa-based Senior Star Living, which operates nine senior living facilities, with funding coming from Health Care REIT.

The third bid for $31.05 million came from Pearson Street Partners, sponsored by the Prime Group with funding from Canyon, sources said.

“The bidding was vigorous and representatives of the variable-rate and fixed-rate bondholders were pleased with the results, which exceeded expectations,” one attorney who attended the auction said.

Senior Star eventually dropped out of the bidding Thursday, with competing offers between the remaining two driving the bid up to a net of $53.5 million, which more than doubled the amount likely available for distribution to bondholders.

The winning bid also still honors all deposit obligations. An attorney involved in the case projected that the recovery rate would top 20 cents on the dollar, far better than the less than 10 cents on the dollar under the initial stalking-horse bid.

The ultimate recovery rate is still not clear, as a long list of debts must be settled. U.S. Bankruptcy Court Judge Susan Pierson Sonderby in the Northern District of Illinois in Chicago on April 24 is expected to approve the sale results, putting The Clare on the path to exit bankruptcy.

Senior Care, led by chief executive officer David Reis, is a distressed buyer of CCRCs. Fundamental Advisors is an investment firm established in 2007 with an eye towards distressed and stressed municipal assets financed with revenue-backed debt in the senior care, affordable housing, student housing, and infrastructure sectors.

The team takes over a facility with a balance sheet now cleared of the debt that eventually drove the former operators into bankruptcy. “It was a well-executed sale,” said Laurence Gottlieb, CEO of Fundamental Advisors. The firm has a “pipeline of stressed, distressed, or otherwise challenged assets and businesses” it follows for investment opportunities.

The team also acquired in 2010 the former Erickson Retirement Communities’ CCRCs in suburban Chicago, Monarch Landing and Sedgebrook. Bondholders received roughly 20 cents on the dollar in those transactions also, market participants said.

The Franciscan Sisters said in a statement that the sale provided the best solution for residents. “The Clare will now have no debt on its balance sheet, ensuring a stable future for the community and its residents,” it read. The transaction is also still subject to regulatory approval.

Attorneys for The Clare announced at a court hearing last month that they had reached agreement with Loyola, the owner of the 53-story building that houses the facility, on lease revisions that ease restrictions governing who can operate the facility and other terms.

The Clare also plans to restructure its deposit refund structure, under which departing residents are refunded their entrance deposits when a sufficient number of new deposits to cover the liability are received. The facility will shift to a model that reflects the industry standard, allowing for a refund when an individual’s unit is filled.

Almost out of cash to keep operating, the CCRC filed for Chapter 11 in November. Since it opened in December 2008, The Clare has struggled to fill its units. At the close of last year, only 34% were occupied.

It defaulted on an installment payment due Sept. 1 to cure a shortage in its debt service fund on its fixed-rate bonds, triggering a default under its loan agreements. The CCRC also did not pay letter-of-credit fees or reimburse the bank for an interest draw on its floating-rate securities.

The Clare issued $229 million of debt through the Illinois Finance Authority in 2005, with Ziegler Capital Markets Group as underwriter. The issue included $91.5 million of fixed-rate bonds in A, B and C series, $125 million of variable-rate tax-exempts, and $12.5 million of variable-rate taxable bonds.

Bondholders took a haircut in 2010 under a restructuring plan that eased near-term pressures, but it wasn’t enough to stave off the eventual bankruptcy. The operators also last year sought a forbearance from bondholders to avoid bankruptcy.

The Franciscan Sisters blamed the CCRC’s struggles on the 2008 housing crisis that drove down home values. It left seniors planning to move into the facility unable to sell their homes at a price needed to cover the expensive entrance fees.

Bank of America, which had provided a letter of credit on the floating-rate bonds, now holds that debt, while the fixed-rate bonds are held by a handful of institutional investors.

Bank of New York Mellon Trust Co. is the trustee.

The 2005 bonds were secured by a pledge of project revenues, leasehold mortgage, and a security agreement.

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