The Covenant at South Hills, Inc. has filed for protection under Chapter 11 of the U.S. Bankruptcy Code.
The Mt. Lebanon senior living facility, which is sponsored by B’nai B’rith, made the decision to seek bankruptcy protection when it became apparent it could not reach what its board of directors believed was a reasonable arrangement with two investment firms that have purchased a large percentage of the bonds that have financed the development of the facility.
The Covenant, which opened in 2002, has been unable to make its debt service payments. Despite various attempts over time to restructure the bonds or find a suitable buyer for the facility, the Covenant had been unable to find a viable solution to its financial problems.
In November, the trustee for the bondholders, and one of the bondholders, initiated foreclosure proceedings. Following the filing of those lawsuits, the trustee, along with some of the bondholders, sought the appointment of a receiver in Orphans’ Court to take over the Covenant and sell it.
Just one day before the Jan. 9 hearing to appoint a receiver would have occurred, the Covenant filed for bankruptcy protection.
“We moved it into Bankruptcy Court because we could not reach a settlement with the bondholders that, in our judgment, would protect the residents,” said Allan Jacobs, president of the Covenant.
“From the [Covenant’s] board’s perspective, the concern has and always will be protection for the residents,” said David Lampl, attorney for the Covenant. “There was a perception that in Orphan’s Court, they may not have been as protected as they should be.”
Lampl said the facility would remain open while the bankruptcy proceedings are pending.
Possible resolutions to the Covenant’s financial problems include selling the facility, or restructuring the current debt, with B’nai B’rith keeping an interest in the facility.
“We are certainly open to a buyer,” said Jacobs, “but we want it to be a qualified buyer.”
Negotiations with potential buyer Sunwest Management, Inc. fell through last spring following strong protests by the Covenant’s Residents’ Council, which was concerned by Sunwest’s alleged record of mismanagement and elder abuse violations.
The Covenant has headed toward a fiscal crisis from its outset, as erroneous “initial projections” during the property’s development phase caused the facility to be short of the funds necessary to satisfy its debt, according to Jacobs.
He said that the Covenant retained one of the “largest builders of senior housing” to prepare those financial projections, which were then reviewed by a CPA consulting firm.
“They made two erroneous assumptions,” said Jacobs. “First, they thought the real estate taxes would be minimal, when in fact, even after litigation with the tax authority, the taxes were off by a considerable sum.” Jacobs said the initial real estate tax projection was about $100,000, when the actual taxes turned out to be closer to $900,000.
They also underestimated the number of staff required to properly operate the facility, according to Jacobs. “The staffing level was way under the Department of Insurance requirements.”
Another contributing factor to the facility’s deficit was occupancy.
The facility didn’t fill up as quickly as the Covenant anticipated, Jacobs said, attributing the shortfall in part to the timing of the facility’s opening, soon after 9/11.
“We also had some construction overruns,” he added.
The Covenant still has too many vacancies in its independent living wing, with only about 92 of the 126 units occupied. With the future of the Covenant so uncertain, marketing the units is even more difficult.
Covenant has always maintained a high quality of care for its residents, according to Jacobs. “Our intent never was to short the bondholders, but our primary responsibility — as well as to the bondholders — was to the residents.”
The residents, whose investments into the facility range from about $90,000 to $319,000, have hired their own attorney to insure their interests are protected, and to keep them informed, throughout this process. They will also seek a place on the Covenant’s board of directors, which currently lacks any members from the South Hills community.
“The Resident’s Council will try to negotiate with the board to have representation from the Residents’ Council on the board of directors and to require that a person from the South Hills community other than a resident also be on the board,” said Maury Deul, president of the Covenant’s Resident’s Council.
After several years of not knowing what the future will bring for their home, the residents are eager for a resolution, Deul added. “The residents continue to be concerned with the actions that seem to be going nowhere.”
(Toby Tabachnick can be reached at email@example.com.)