Senior Living Bond Defaults: Do Bondholders or Residents Have Priority Over Entrance Fees?
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. 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.
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Arnold & Porter Kaye Scholer LLP by Brian J. Lohan and Maja Zerjal Fink. Published January 12, 2022.