Charities boosted profits of Erickson retirement communities

By David S. Hilzenrath
Sunday, April 4, 2010

Like many titans of business, retirement community developer John Erickson acquired the trappings of success. In headier days, he collected a company-owned penthouse in a tower overlooking Baltimore's Inner Harbor, a corporate jet, a $4.2 million riverfront home near Annapolis -- also owned by the company -- and a home on the water in Palm Beach Gardens, Fla.

Then there was his yacht, the Andrea Cay, described by its builder as a mini cruise ship.

Unlike most executives, however, Erickson derived his success in significant part from nonprofit, tax-exempt companies.

His story shows how organizations certified as charities by the Internal Revenue Service -- in effect subsidized by the public -- can be used for private advantage.

Today, Baltimore-based Erickson Retirement Communities (ERC) is in bankruptcy court. Laid-off workers face unemployment and financial ruin. The company has been auctioned, subject to court approval. Lenders who put up hundreds of millions of dollars to finance the business have been fighting over the proceeds, which won't be enough to repay them all.

Before his debt-fueled expansion ran headlong into a collapsing real estate market, Erickson became known as a visionary for his big retirement campuses, where people could move from independent living to assisted living and then to nursing facilities. Communities were marketed with the Erickson name, and some displayed his portrait. One featured his statue.

Erickson began by converting a suburban Baltimore seminary in the early 1980s. By the time of the company's bankruptcy filing last fall, ERC managed 20 communities with 23,000 residents, including Greenspring, Ashby Ponds and Riderwood in the Washington area.

Its business model has been a marriage of charity and capitalism.

Although it is a for-profit enterprise, privately owned by Erickson and his family, ERC structured communities as nonprofit organizations.

The nonprofits turned around and awarded contracts worth millions of dollars to ERC to manage the communities. They also leased the real estate from ERC, giving it another revenue stream. Eventually, some bought their campuses from ERC.

For ERC, the transactions could be highly profitable. A company history boasts that Oak Crest, a community in Parkville, Md., was sold in 1999 at a "$140 million net gain."

The buyer was one of the nonprofits.

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