CHICAGO — A federal bankruptcy court judge on Tuesday approved Senior Care Development LLC’s $40 million bid to purchase two Chicago area bond-financed continuing care retirement communities although the size of a final payout for bondholders remains unclear.

The two facilities are Monarch Landing in Naperville and Sedgebrook in Lincolnshire. In 2007, the Illinois Finance Authority issued $137 million of bonds, including $98 million of fixed-rate and $39 million of variable-rate bonds, on behalf of Sedgebrook Inc. Most remains outstanding, according to market participants.

The authority that year also sold $178.7 million of debt — $128.7 million of fixed-rate bonds and $50 million of floating-rate bonds — on behalf of Monarch Landing Inc. About $133 million remains outstanding.

Both facilities defaulted on debt service payments more than a year ago.

While the two facilities were among 19 CCRs operated by Erickson Retirement Communities, the assets of the various subsidiaries and not-for-profit entities established as part of their development were not part of Erickson’s bankruptcy filing last year. They also were not among the Erickson assets acquired by Redwood Capital Investments LLC for $365 million.

That meant the fate of their municipal debt became the focus of a new round of negotiations with potential buyers, including Redwood. The negotiations apparently failed although no details have been released due to confidentiality agreements signed by the various parties.

The facilities then filed their own bankruptcy petitions June 15, leading to a formal auction process. Bids were due in early September in anticipation of an auction late week. The two bidders that participated were Senior Care and Erickson Living Holdings LLC with Senior Care offering a final bid of $40 million compared to Erickson’s final offer of $31.5 million. Senior Care’s initial offer of $20 million had served as the stalking horse bid.

“The debtors believe, in their best business judgment, that the $40 million final bid accurately reflects the fair market value of the debtors’ assets,” read a court filing seeking approval for the sale agreement.

The final bid allocated $30 million to the Sedgebrook campus and $10 million to the Monarch campus.

The sale proceeds will go into a pool of funds along with money that remains in reserves and escrow accounts for distribution to bondholders after various legal fees, expenses, and other liabilities are paid. “The trustee cannot predict the amount which will be distributed with respect to the bonds, or when such a distribution will take place,” a trustee notice posted last Friday read.

A June notice reported a balance of $32.6 million in the Monarch debt service reserve and $4.1 million in a supplemental account. Sedgebrook held at least $15 million in various reserves as of April 30, according to a financial filing.

“I was expecting a higher number based on the real estate, but this was a real live auction and that tells you how bad times are,” said Edward Merrigan, director of research at B.C. Ziegler & Co.

Merrigan said the sale price could have been hurt by the buyer’s assumption of liabilities tied to entrance fee refunds. In past sales, prices were not steeply discounted to take into account the future liability of entrance fee refunds paid out when residents leave continuing care facilities.

Senior Care Development will also acquire the entities established to fund land improvements at the sites of the two facilities, under the sale agreement approved orally by Judge Stacey G. Jernigan at a Tuesday hearing in the Northern District of Texas Bankruptcy Court in Dallas. A written order and other documents are expected to be filed by the end of the week.

Those entities are Naperville Campus LLC, which issued $14.5 million of special tax district bonds, and Lincolnshire Campus LLC, which issued $14.3 million of special tax district bonds, to fund land costs.

The Erickson financing structure is complex and unique in the continuing care retirement community sector. While Erickson is a for-profit developer and manager and it provides capital for initial development costs, it develops its CCRCs through its for-profit subsidiaries that own the land. A nonprofit organization then leases the site from the subsidiary.

The parent of most of the nonprofits is National Senior Campuses Inc. — also a not-for-profit organization. The nonprofits then contract with Erickson for management services. While Erickson is not the direct obligor of the debt, many of the borrowers rely on Erickson funds to help meet operating costs.

Wells Fargo Bank NA serves as trustee on the Monarch bonds and US Bank serves as trustee on the Sedgebrook bonds. Mintz Levin Cohn Ferris Glovsky & Popeo PC represents the bond trustees.  The Monarch and Sedgebrook bonds were secured by their borrower’s pledge of revenues, receipts, a leasehold mortgage, security agreement, assignment of leases and rents.

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