CHICAGO — The Clare at Water Tower, an upscale high-rise senior-living community in downtown Chicago that has struggled to meet financial projections due to cost overruns, construction delays, and faltering occupancy rates, drew $554,000 from its debt-service reserves to cover its Nov. 15 debt-service payment.
The draw on reserves was needed to fully make the latest payment on the Clare’s $91.5 million of fixed-rate bonds that was part of its $229 million, mostly tax-exempt issue in 2005. The trustee tapped $405,812 from the reserve on the $74 million A series, $84,818 from the $14 million B series, and $64,982 from the reserve on the $7 million C series.
The $229 million deal — issued through the Illinois Finance Authority in 2005 with Ziegler Capital Markets Group serving as underwriter — also included $125 million of variable-rate bonds that several market participants said are held by the transaction’s letter-of-credit banks and $12.5 million of taxable bonds. The bonds are secured by a pledge of project revenues and a leasehold mortgage.
The draw on reserves comes as negotiations are ongoing among officials representing the facility, the bond trustee Bank of New York Mellon Trust Co., the letter-of-credit banks, and a group of unnamed institutional investors in an attempt to reach a bond restructuring agreement. A group of banks led by LaSalle National Bank and Sovereign Bank provided the letters of credit.
Though the parties have not yet reached a formal agreement, several sources said the group is close to one and that it could involve a forbearance agreement. The Clare has been escrowing entrance fees and therefore could offer some partial distribution of those revenues as incentive to reach an agreement.
Officials canceled an investor call that was scheduled for late August due to the “active negotiations” on a “consensual restructuring,” according to bondholder notices. A notice over the summer stated the goals of the parties as being to fill the facility, deliver on the promise to residents and depositors that they would live in a financially stable community, and maximize repayment of the bonds.
The project faced the “perfect storm,” said Edward Merrigan, director of research at Ziegler. The project suffered from cost overruns as construction costs rose due to foundation and other problems discovered as construction proceeded. Those problems led to a delay in the project’s opening date in late 2008 that coincided with the collapse of the housing market. The facility opened in phases but it was not until this past fall that the skilled nursing and assisted-living units were fully operational.
The economic collapse sapped the interest of some potential residents and negatively affected others, who had pre-sale contracts but needed to sell their existing properties in order to move. The market downtown and financial crisis that followed the September, 2008 collapse of Lehman Brothers exacerbated the facility’s struggles.
“Had they opened on time” in mid 2007, “they would have been fine,” Merrigan said, adding that the facility is filling up, though slowly, and with time could meet revenue projections to cover the debt.
New continuing-care facilities and those under construction have been hit especially hard by the real estate and financial crisis and a full recovery is not on the horizon, as property foreclosures are expected to increase, hurting the value of homes seniors may need to sell to cover their entrance and other fees for retirement housing.
The Clare billed itself as a first-of-its-kind senior-living community when it entered the market, as it was housed in a high rise in the upscale Gold Coast neighborhood off Chicago’s “Magnificent Mile.” Loyola University of Chicago, owner of the site, is leasing the space for 99 years to the Clare, a stand-alone credit sponsored by the highly regarded Franciscan Communities Inc.
The 54-story facility originally offered independent-living units with entrance fees — most of which is refunded when residents leave. The fees ranged from $491,000 to $1 million for independent units, while assisted-living units started at $53,000. Under the original plans, the Clare was to include 271 independent-living apartments, 54 assisted-living suites, and 32 private- and semi-private nursing rooms. The facility now offers a deferred entrance fee program and has updated its marketing efforts in a push to increase occupancy. Residents also pay monthly fees while living there.
When the IFA approved the deal in 2005, some eyebrows were raised over the use of a tax exemption to finance a facility for affluent seniors, though it is legal under the tax code. Representatives of the Franciscan order and Ziegler bankers defended the project as one that meets a demand among aging residents of the area who otherwise might have to leave their neighborhood for continuing care and said the prices are based on the primary real estate market.
