My guess is that most of you have never heard of Mission Ridge, let alone just how close it came to being the epicenter of an event that could have fundamentally changed aging services. Four years ago, the small continuing care retirement community in Billings, Mont., underwent a tax-exempt bond audit by the Internal Revenue Service. Following the audit, the IRS determined that entrance fees collected by Mission Ridge were really replacement proceeds from a tax-exempt bond used to finance its construction – and therefore were yield restricted.
What does that mean exactly? I decided to ask Mary Muñoz, the managing director for senior living finance at Ziegler Investment Banking. Mary offered the following analogy: “Say you’re the CEO of a nonprofit with a dedicated, segregated pot of cash saved for a future project. Investment rates are high, borrowing rates are low, and you decide to invest the cash at 6 percent, then turn around and borrow at 4 percent for your project. If you did that, your nonprofit would be prohibited from keeping the 2 percent in earnings because the cash is treated like bond proceeds, which legally may not earn a return above the yield.”
Bottom line: The IRS interpretation in the Mission Ridge case threatened the viability of all CCRCs financed with tax-exempt bonds.
In early February – after no less than nine separate attempts to prove its case – the IRS finally ruled in favor of Mission Ridge. I talked to the CEO, Kent Burgess, last week. While relieved, he expressed concern for what the future might hold for the entire field of continuing care retirement communities. The Mission Ridge case is one of a handful where the IRS is questioning the tax status of nonprofit providers of senior living and care. Now I don’t know about you, but this is the kind of thing that keeps me up nights. This case reminds us that how we care for older adults today might not be how we care for them tomorrow. As we contemplate the future of aging services, we must remain ever vigilant.