Most people are familiar with the Greek myth of Icarus, who, enthralled with flying, ventured too close to the sun. It’s a homily that helps to explain the fate of many companies, including two in long-term care.
I’m speaking specifically of Erickson Retirement Communities and Sunrise Senior Living Inc., one-time giants of the industry that have hit financial straits. (To wit: McKnight’s has profiled company owners John Erickson and Paul Klaassen.)
These companies remind me of the modern-day character of Icarus. His story goes something like this: Icarus was the son of Daedalus. To escape imprisonment in Crete, Daedalus created two pairs of wings out of wax and feathers for himself and his son.
Before they left, Daedalus warned his son not to fly too close to the sun. But excited by the experience of flying, Icarus did, and the sun melted the wax. No longer able to fly, Icarus fell into the sea.
What brought this myth to mind was a piece in The Washington Post on Sunday about Erickson, which has generated interest and accolades with its large-scale senior-living communities and its trademark 100% refundable deposits.
But it also engaged in some questionable behavior. Over the years, according to the newspaper, it profited from an arrangement in which the for-profit company (ERC) structured its communities as nonprofit organizations. The nonprofits helped ERC thrive, giving ERC multimillion-dollar management contracts. Some later bought their campuses from ERC for millions, the newspaper reported.
The close relationship between the for-profit management company and nonprofit communities was not exactly ethical, the Internal Revenue Service found. The nonprofits were in business, not for charitable purposes, but to serve the private interests of ERC and its owners. The IRS didn’t take action and the company continued to reap major profits from its nonprofit communities, the article contends. (By last fall, it managed 20 communities with 23,000 residents.)
Then the real estate bubble burst. Seniors no longer could sell their homes and move into Erickson communities. It was forced to file for bankruptcy. Redwood Capital Investments LLC, which is buying the company, has a close connection with owner John Erickson, according to the story. Redwood, which had lent John Erickson money in the past, has promised him a five-year consulting contract worth $1 million a year.
Here’s a response to The Washington Post story from Erickson spokesman Mel Tansill:
“The last year has been challenging for Erickson Retirement Communities. The well-being of residents has been— and will always be—our first priority. Erickson will soon emerge from the Chapter 11 proceeding it voluntarily filed last October. When it does, the company will be in a solid position under new ownership to bring the Erickson lifestyle to as many people as possible in the future. We look forward to doing so.”
It appears this was a case of a company that flew a little too high and got burned.
Sunrise and the sun
Sunrise Senior Living, it seems, did something similar. The company over decades grew into the largest assisted living chain in the United States. Meanwhile, it gained a strong reputation for its unique approach to Alzheimer’s. But its heady days came to a halt in 2006 when allegations surfaced that it engaged in illegal accounting practices, insider trading and other improper behavior.
Since then, it has fallen hard, with earnings restatements, an SEC investigation, and the firings of several corporate executives. It is still struggling to recover from staggering earnings losses and is undergoing a corporate restructuring.
These tales of excess are not unusual and by no means limited to long-term care. It’s just too bad companies continue to make the same mistakes. I guess they’re not reading the Greek myths.
