Operating Reserve

Operating Reserve

This page provides an overview of the statutory operating reserve requirements applicable to continuing care providers and Continuing Care Retirement Communities (CCRCs) in North Carolina. Operating reserve requirements are established under Part 11 of Article 64A of Chapter 58 of the North Carolina General Statutes and are intended to help ensure that providers maintain sufficient financial resources to meet ongoing obligations and protect residents.

Statutory requirements govern in all cases.

What is an Operating Reserve?

An operating reserve is a minimum level of financial resources that a continuing care provider is required to maintain after a CCRC opens. The operating reserve is intended to support the provider’s ability to meet operating obligations and maintain continuity of services for residents.

When the Operating Reserve Requirement Applies

After the opening of a continuing care retirement community, a provider must maintain an operating reserve based on projected operating costs for the upcoming 12-month period, as reflected in the most recent Disclosure Statement filed with the Department.

Operating reserve requirements apply on an ongoing basis and are subject to periodic recalculation and certification.

Required Operating Reserve Amounts

Initial Requirement

Unless otherwise permitted by statute, a provider must maintain an operating reserve equal to 50% of total operating costs projected for the 12-month period following the most recent Disclosure Statement.

Reduced Requirements Based on Occupancy

Once a CCRC achieves a 12-month daily average independent living unit occupancy rate of 90% or higher, the required operating reserve is reduced according to the following statutory schedule, unless otherwise instructed by the Commissioner:

Additional Reduced Requirement for Certain Providers

A provider may qualify for a further reduced operating reserve equal to 12.5% of total operating costs if:

• The provider has achieved a 12-month daily average independent living occupancy rate of 93% or higher, and
• The provider has no long-term debt or a debt service coverage ratio greater than 2.00, based on its most recent fiscal year-end financial statements.

This reduced requirement applies unless otherwise instructed by the Commissioner.

Commissioner Authority and Hazardous Conditions

If the Commissioner determines that a provider is in a hazardous condition, the Commissioner may:

• Increase the required operating reserve (up to 50% of total operating costs), and/or
• Require the provider to place the operating reserve on deposit with the Commissioner.

If such action is taken, the provider must notify all residents in writing within 10 business days.

If the operating reserve is placed on deposit with the Commissioner, the provider must also deliver a power of attorney authorizing the sale or transfer of qualifying assets to pay provider liabilities related to the CCRC.

How the Operating Reserve is Calculated

Basis for Calculation

Operating reserve calculations are based on:

• The provider’s five-year prospective financial statements, and
• The CCRC’s 12-month daily average independent living unit occupancy rate.

Providers must calculate and, if necessary, adjust the required operating reserve at least semiannually, including at the time of annual certification.

What Costs Are Included

Total operating costs generally include:

• Operating expenses
• Debt service (principal and interest)
• Taxes and insurance

Depreciation, amortization, and extraordinary items are excluded, subject to statutory conditions and Commissioner approval.

Extraordinary Items

A provider must apply in writing to exclude extraordinary items from operating costs and provide supporting documentation. The Commissioner reviews such requests in accordance with statutory review timelines.

Special Situations

The Commissioner may allow:

• A reduced operating reserve for providers that have permanently discontinued entering into continuing care contracts or operate communities with mixed contract populations, if consistent with resident protections.
• Exclusion of independent living units added through a qualifying expansion for up to 18 months after the units become available for occupancy.
• A different operating reserve calculation if it does not diminish resident protections.

Qualifying Assets

Operating reserves must be funded with qualifying assets, which may include:

• Cash and cash equivalents
• Investment-grade securities
• Publicly traded stocks, mutual funds, and exchange-traded funds
• Other assets approved by the Commissioner on a case-by-case basis

Qualifying assets must generally be:

• Unencumbered, and
• Valued at current fair market value for purposes of calculating the operating reserve.

Alternative Funding Methods

In lieu of funding the operating reserve with qualifying assets, a provider may fund all or a portion of the operating reserve using:

• A surety bond, or
• A clean, irrevocable, unconditional letter of credit,

provided all statutory requirements are met and the form and terms are approved by the Commissioner.

Operating Reserve Forms and Templates

A provider that elects to fund all or a portion of its operating reserve using a surety bond or letter of credit must use a form that is acceptable to the Commissioner and complies with G.S. § 58-64A-260.

The following Department forms are provided for this purpose:

• CCRC-20 Operating Reserve Surety Bond
• CCRC-21 Operating Reserve Letter of Credit

Important Notice

Providers are responsible for ensuring that all required terms, notices, and conditions are satisfied. Submission of a surety bond or letter of credit does not constitute approval unless and until accepted by the Commissioner.

Use of these forms does not limit the Commissioner’s authority to require additional security, reject a proposed instrument, or take action under G.S. § 58-64A-245, § 58-64A-260, or § 58-64A-285.

Release of Operating Reserve Funds

Operating reserve funds may be released only with prior approval of the Commissioner.

A provider requesting a release must:

• Submit a written request at least 10 business days before the proposed release date,
• Explain why the release is necessary, and
• Submit a repayment schedule, if applicable.

The Commissioner may deny a request if the release is not in the best interest of residents. Providers must notify residents in writing at the same time a release request is submitted.

Certification and Reporting

At the time a provider files its annual audited financial statements, the provider must also file a certification acceptable to the Commissioner that reports:

• The 12-month daily average independent living occupancy rate,
• The required operating reserve amount, and
• The qualifying assets or other security used to satisfy the requirement.

Operating reserve certification must be submitted using Form CCRC-02.

Questions

Operating reserve requirements are statutory and apply independently of other financial requirements, including disclosure, reporting, and hazardous condition provisions.

Questions regarding operating reserve requirements may be submitted through the Department’s general CCRC inquiry contact, but providers are responsible for ensuring compliance with all applicable statutory requirements.

This page is provided for informational purposes only and does not create legal rights or obligations. Statutory requirements govern in all cases.