Brochures compare sticker prices. The right comparison discounts the refund to the date the unit is resold, and the operator sees it differently.
Compare the two plans in present value: the non-refundable fee minus any refund in the first months, against the refundable fee minus the discounted refund paid after the unit is resold. On an illustrative community charging $400,000 non-refundable or $650,000 at 90 per cent refundable, an eight-year stay costs the resident $400,000 on the first plan and $230,847 on the second at a 4 per cent discount rate. The refundable plan is cheaper unless the extra $250,000 could earn more than 10.5 per cent a year.
Worked in full in Senior Living and Healthcare Real Estate by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Continuing care retirement communities, or life plan communities, charge an entrance fee on arrival and a monthly fee after it. The entrance fee comes in two broad shapes. A traditional fee declines to nothing over the first few years; a refundable fee is larger, and most of it comes back to the resident or the estate when the contract ends, often only once the unit is reoccupied. Brochures compare the sticker prices. The right comparison discounts the refund, and it looks different from the resident's side and the operator's.
| Input | Value |
|---|---|
| Non-refundable plan: entrance fee | $400,000 |
| Refund: 4% retained at once, then 2% a month | nil after 48 months |
| Refundable plan: entrance fee | $650,000 |
| Refund share | 90%, $585,000 |
| Expected stay | 8 years |
| Wait for the unit to be resold before the refund is paid | 0.5 years |
| Resident's discount rate | 4% |
| Operator's cost of capital | 7% |
Monthly fees are assumed equal under both plans so that they drop out. In practice the refundable plan sometimes carries a slightly different monthly fee; add the difference as an annuity if it does.
Non-refundable cost = fee − refund ÷ (1 + r)stay, with refund = fee × MAX(0, 1 − 4% − 2% × months)
Refundable cost = fee − 90% × fee ÷ (1 + r)stay + resale wait
Eight years is past the 48 months, so the non-refundable plan costs its full $400,000. The refundable plan's $585,000 arrives after 8.5 years; at 4 per cent it is worth $419,153 today, so the plan costs $650,000 − $419,153 = $230,847. In Excel: =650000-585000/(1+4%)^8.5.
The refundable plan saves $169,153 in present value. Undiscounted it costs only $65,000, which is the figure sales materials tend to imply and which overstates the saving by ignoring the eight and a half years the $585,000 is out of the family's hands.
| Stay, years | Non-refundable refund | Non-refundable cost | Refundable cost | Refundable saves |
|---|---|---|---|---|
| 1 | 288,000 | 123,077 | 98,423 | 24,654 |
| 2 | 192,000 | 222,485 | 119,638 | 102,847 |
| 4 | 0 | 400,000 | 159,650 | 240,350 |
| 6 | 0 | 400,000 | 196,644 | 203,356 |
| 8 | 0 | 400,000 | 230,847 | 169,153 |
| 10 | 0 | 400,000 | 262,470 | 137,530 |
| 12 | 0 | 400,000 | 291,706 | 108,294 |
The advantage peaks around year 4, when the non-refundable refund runs out, and shrinks after it as the refundable plan's refund recedes into the future. If the resale wait is two years rather than six months, the eight-year cost of the refundable plan rises to $254,795: the refund's contingency on resale is the term to read most carefully.
Discount the same contract at the operator's 7 per cent and the refundable plan is worth $650,000 − $585,000 ÷ 1.078.5 = $320,850 to it, against $400,000 for the non-refundable plan. To be indifferent on a stand-alone basis, the operator would need a refundable price of $810,347. The two parties value the same refund differently because they discount it at different rates, and that gap is what the plan trades on.
Operators accept the refundable plan because the refund is usually paid from the next resident's entrance fee. The liability rolls forward like a deposit base for as long as units resell. That makes the refund pool an occupancy risk: when demand weakens, refunds wait, residents' estates complain, and the balance sheet shows a liability that only new admissions can retire. The same occupancy arithmetic drives the revenue line, as in how to calculate RevPOR in senior living.
Comparing $400,000 with the $65,000 the refundable plan "really costs" after the refund. That ignores time. Discounted, the true cost at eight years is $230,847 at 4 per cent, and above a 10.5 per cent opportunity cost the non-refundable plan wins. For an investor, the matching mistake is treating refundable fees as cash earned: $585,000 of each $650,000 is owed back. How the lease and the operating structure change who bears that risk is set out in RIDEA vs triple-net lease.
Discount the refund to the date it will actually be paid, including the resale wait, and compare the two costs at your own rate: $230,847 against $400,000 here, with a 10.5 per cent break-even. Senior Living and Healthcare Real Estate is built around what an operating asset is actually worth, and the free workbooks for the book carry the occupancy, payor mix and valuation models behind it.
For most stays, in present value terms, if the resident has the capital. In the illustrative case a 90 per cent refundable $650,000 fee costs $230,847 at 4 per cent over eight years, against $400,000 for the non-refundable plan. It loses only if the extra $250,000 could earn more than 10.5 per cent a year.
A traditional contract keeps a small share at once and the rest amortises monthly. With 4 per cent retained and 2 per cent a month, a $400,000 fee refunds $288,000 after one year, $192,000 after two and nothing after 48 months.
Many contracts pay the refundable share only after the unit is reoccupied by a new resident, so the estate waits. On the illustrative refundable plan, a resale wait of two years instead of six months raises the present cost of an eight-year stay from $230,847 to $254,795.
This article is one calculation from Senior Living and Healthcare Real Estate. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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