2. Session 7B - Legal Issues Update Monday, March 14, 2016 12:30 – 2:00 pm PEAK Leadership Summit Washington, DC

3. Presenters Pam Kaufmann San Francisco, CA Kimber Latsha Mechanicsburg, PA Martha Sweterlitsch Columbus, OH

4. THE STATE OF THE REPAYABLE ENTRANCE FEE Genesis of repayable entrance fee – – Introduced in mid-to-late-1980s outside CA – Introduced in early-to-mid-1990s in CA (first needed exemption from refund reserve)

5. Benefits Gives residents choice: – smaller entrance fee paid on a declining balance basis; – larger entrance fee repayable upon termination or death; and – in some CCRCs, multiple tiers of repayable entrance fee (50, 75, 90, 100%) Allows residents’ children to inherit a large percentage of entrance fee

6. Benefits Mimics equity interest in some respects without triggering burdens of real estate ownership Gives providers a cash infusion that helps to fund new construction, renovation, reserves, etc. – Facilitates issuance of shorter term bonds at lower interest rates, to be paid off with entrance fee revenues

7. Disadvantages Higher initial fee than amortized model No interest paid to resident (generally) – Imputed interest rules under IRC 7872 -- no longer an issue Repayments generally delayed until reletting of apartment – Required in CA – Contract feature elsewhere?

8. Impact of Recession Slower sales – Exacerbated by reletting requirements Continuation of monthly fee until unit is relet – Largely a for-profit phenomenon – Triggered a rash of litigation and threatened litigation – Often resolved through reduction or elimination of monthly fee pending reletting Financial hit to provider if it must repay larger repayable entrance fee with proceeds from smaller amortized entrance fee

9. Impact of Recession Change in financial assumptions behind fee calculation – Repayment “premium” has historically been based on predicted investment yield during resident’s actuarial life expectancy – Need to revisit present value calculation if money market yield is 1% or less. – Essential to reset assumptions going forward Decline in consumer confidence in fee model Bad press

10. Advent of State Bills California – 2015 Monning bill (Monning I) (SB 475) (VETOED) – partial repayment (10/20%) in 120 days, tiered interest after 180 and 240 days, disclosure of average and maximum reletting periods, good faith reletting efforts, DSS grievance process, and voluntary early payment – 2016 Monning bill (Monning II) (SB 939) (pending) – same as above without DSS grievance process – 2016 Burke bill (AB 2661) –reletting period disclosure, voluntary early repayment, pooling

11. Advent of State Bills Connecticut – Public Act 15-115: Took effect Oct.1, 2015 Limits repayment period to 3 years (among other changes) New Jersey – SB 182: bill would limit repayment period to 12 months Other states

12. National Continuing Care Residents Movement Goals: – Introduce repayment bills like Monning bill – Beef up resident rights laws, including increased financial disclosure Being monitored by a taskforce including LeadingAge, ASHA, Argentum, providers, and consultants

13. Alternative Models “First in, first out”- repayment in order of termination Pool to fund repayments Refundable entrance fee with refund reserves – no reletting requirement Equity CCRC (condo, coop) Amortized entrance fee – Trend toward shorter amortization period? Limiting repayable fee option to best apartments Offering designated repayable-fee-only apartments Reducing repayable percentage (e.g., to 50% or 75%)

14. Fiduciary Duties of Directors in the Face of Financial Reverses “Good faith” immunity and volunteer immunity statutes do not protect directors who make bad decisions – or no decisions at all Bankruptcy may clear the debts of the organization but it may not absolve the directors

15. Sears Methodist Retirement Systems Bankruptcy Properties all sold Charitable funds that could be identified were protected and subject to Cy Pres action No release of claims by the State of Texas or the Texas AG on behalf of the charity Bankruptcy judge “invited’ the AG to make claims against the Directors and Officers

16. Consequences Texas AG sued the officers and Executive Committee members alleging: – Breach of Fiduciary duty – Negligence – Statutory violations of UPMIFA – Prayer for Relief At least $1.4 million to compensate for failure to safeguard charitable assets Attorney fees Court costs and other equitable or legal relief Texas AG filed Cy Pres Petition asking court to distribute $1.6 million in charitable funds identified and protected by the bankruptcy court to other charities

17. Duties of directors Duty of Care – Alleged that organization took on too much debt and expanded to rapidly – No minutes reflecting oversight of charitable funds – General failure of financial oversight Duty of Loyalty

18. Duties of directors Duty to Maintain Accounts – Comingled restricted gifts with general operating funds – No proper fund management system in place – Insufficient records of expenditures of project funds Duty of compliance – Accepted restricted gifts but did not spend as donor intended – No way to track the actual use of the funds – Alleged failure to provide enough charity care to qualify property for property tax exemption!

19. Lessons Learned Clearly an extreme case -- but look at systems, policies, procedures, financial stress indicators and reports to the board. Don’t fall prey to the idea that the “market” will rescue you if you can hold out long enough or build in the “right place” Consider hiring outside advisors who are paid on a fee basis to give independent advice Use written signed gift agreements that describe restrictions and keep track of them

20. Structural and Legal Considerations for Strategic Relationships

21. Contractual Relationships with No Change in Management, Control or Ownership A.Preferred Provider Agreements B.Managed Care Agreements C.Risk Sharing Arrangements

22. Management Services Agreements Comprehensive Management Arrangement Limited Scope Management Arrangements

23. Provider “A” Provider “B” Joint Venture Entity Possible Other Providers 23 Joint Ventures Joint Venture Agreement

24. Parent/Controlling Company (Existing or New Entity) Controlled Provider “A”Controlled Provider “B” To Be Controlled Provider “C” 24 Typical “Change of Control” Affiliation

25. Provider “A” Merging Entity Provider “B” Surviving Entity 25 Merger Transaction Liabilities Assets Rights, Duties, Obligations, etc. Agreement for Merger

26. Provider “A” Provider “B” 26 Sale Transaction Purchases Assets

27. Transaction Documentation Confidentiality Agreement MOU/LOI Due Diligence Definitive Agreement

28. Structuring Considerations Governance Resolving the Issue of Control (Articles of Incorporation & Bylaws) Board Composition/Reserved Powers Management & Staffing Resident Agreements Tax-Exemption (Federal, State & Local) Licensing & Reimbursement Real Estate/Environmental Lease and Management Relationships Between Affiliates Human Resources (Management & Employees) – Benefit Plans (Church Plan Status) – CBAs – Severance Packages – Employment Agreements

29. Identifying and Documenting Financial Commitments Up-Front Cash Commitment Future Cash Commitment Assumption of Liabilities & Debt Contingencies Future Capital Commitment/Investment Valuation

30. Compliance Requirements Governmental Approvals – OAG & Orphan’s Court (Restricted Assets/Charitable Purpose) – Regulatory Agencies (Licensing & MA/Medicare Reimbursements) – CHOW Requirements – Fraud and Abuse – Pending Litigation – Antitrust Bond Covenants & Lender Approvals Sponsor Approvals Representations/Warranties & Indemnification

31. Legal Issues (cont.) Resolve Any Potential “Deal Breaker” Issues Early On Definitive Agreement On All Critical Issues – Control – Specific Commitments Timelines and Commitment to the Timeline Resolving Contingencies Commitment to the Deal Avoid “Unwind” Provisions

32. Contact Information Pamela S. Kaufmann Hanson Bridgett LLP San Francisco, CA (415) 995-5043 Direct pkaufmann@hansonbridgett.com Martha Sweterlitsch Benesch, Friedlander, Coplan & Aronoff, LLP Columbus, OH 614-223-9367 msweterlitsch@beneschlaw.com

33. Contact Information Kimber L. Latsha, Esq. Latsha Davis & McKenna, P.C. Mechanicsburg, PA 717-620-2424 klatsha@ldylaw.com Cory Kallheim LeadingAge Washington, DC 202-558-5691 ckallheim@leadingage.org