Senior Living Bond Defaults: Do Bondholders Or Residents Have Priority Over Entrance Fees?

Published date13 January 2022
Subject MatterLitigation, Mediation & Arbitration, Real Estate and Construction, Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy, Trials & Appeals & Compensation, Landlord & Tenant - Leases
Law FirmArnold & Porter
AuthorMr Brian Lohan and Maja Zerjal Fink

Nearly eight percent of the $41 billion in outstanding senior living bonds were in default as of December 2021, with the sector accounting for almost one-quarter of defaulted debt in the muni market, not including bonds caught up in Puerto Rico's bankruptcy.1 As challenges to the senior housing sector persist, including staffing shortages, rising labor costs, occupancy volatility, skepticism of congregate living arrangements and other pandemic-related disruptions, we are likely to see more distressed-related activity in this sector, including defaults on municipal debt issued by such projects.

A bankruptcy or receivership of such a project has the potential to pit two very different groups of creditors against each other: (i) holders of municipal debt issued by the project and (ii) the project's residents. More specifically, a dispute may arise over which group is entitled to priority over the residents' "entrance fees," or the portion of such fees that is refundable to the resident upon termination of its occupancy.

Recently, in In re Atrium of Racine, Inc., the Wisconsin Court of Appeals (Court of Appeals) faced this very issue and determined that under principles of Wisconsin landlord/tenant law, entrance fees are security deposits with priority over the claims of the municipal bondholders.

By way of background, the Atrium is a 76-unit senior housing facility in Racine, Wisconsin. As is typical in these types of facilities, its residents were required to enter into a residency agreement and pay: (i) an entrance fee of approximately $40,000 to $238,000; (ii) in certain instances, a security deposit; and (iii) a monthly fee to live in the rented unit. Although there were different versions of residency agreements, each provided that a portion of the entrance fee would be reimbursed upon termination of a resident's occupancy.

Atrium issued bonds to finance the construction and operation of a separate assisted living facility. The bonds were secured by a first mortgage on Atrium's property, which was subject to "Permitted Liens."2 Permitted Liens was defined to include "Entrance Fees or similar funds deposited by or on behalf of [residents]."3 The Prospectus and Project Contract for the bonds defined Entrance Fees as "the fees, other than monthly service charges, paid by residents of a Facility to the [Obligor/Corporation] for the purpose of obtaining the right to reside in a Facility, including any refundable resident deposits described in any lease or...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT