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  • 10-K (Feb 25, 2010)
  • 10-K (Apr 30, 2009)

 
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8-K

 
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Sunrise Senior Living 10-K 2009
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Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-K
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2008
 
 
SUNRISE SENIOR LIVING, INC.
(Exact name of registrant as specified in its charter)
 
     
Delaware
  54-1746596
     
(State or other jurisdiction
incorporation or organization)
  (I.R.S. Employer
Identification No.)
     
7902 Westpark Drive
McLean, VA
  22102
     
(Address of principal
executive offices)
  (Zip Code)
 
Registrant’s telephone number, including area code: (703) 273-7500
 
Securities registered pursuant to Section 12(b) of the Act:
 
     
Title of Each Class
  Name of Each Exchange on Which Registered
     
Common stock, $.01 par value per share
  New York Stock Exchange
 
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
             
Large accelerated filer þ
  Accelerated filer o   Non-accelerated filer o
(Do not check if a smaller reporting company)
  Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
 
The aggregate market value of the Registrant’s Common Stock held by non-affiliates based upon the closing price of $22.48 per share on the New York Stock Exchange on June 30, 2008 was $1,016.6 million. Solely for the purposes of this calculation, all directors and executive officers of the registrant are considered to be affiliates.
 
The number of shares of Registrant’s Common Stock outstanding was 50,863,040 at February 20, 2009.
 
 
Portions of our 2009 annual meeting proxy statement are incorporated by reference into Part III of this report.
 


 

 
                         
            Page
 
                       
          Item 1     Business     4  
          Item 1A.     Risk Factors     21  
          Item 1B.     Unresolved Staff Comments     37  
          Item 2.     Properties     37  
          Item 3.     Legal Proceedings     37  
          Item 4.     Submission of Matters to a Vote of Security Holders     41  
                   
  PART II                      
          Item 5.     Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     43  
          Item 6.     Selected Financial Data     44  
          Item 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operations     45  
          Item 7A.     Quantitative and Qualitative Disclosures About Market Risk     78  
          Item 8.     Financial Statements and Supplementary Data     79  
          Item 9.     Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     144  
          Item 9A.     Controls and Procedures     144  
          Item 9B.     Other Information     147  
                   
  PART III                      
          Item 10.     Directors, Executive Officers and Corporate Governance     148  
          Item 11.     Executive Compensation     148  
          Item 12.     Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     148  
          Item 13.     Certain Relationships and Related Transactions and Director Independence     148  
          Item 14.     Principal Accountant Fees and Services     148  
                   
  PART IV                      
          Item 15.     Exhibits and Financial Statement Schedules     149  
                    150  
 EX-10.17
 EX-10.18
 EX-10.19
 EX-10.45
 EX-21
 EX-23.1
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2


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This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. Although we believe the expectations reflected in such forward-looking statements are based on reasonable assumptions, there can be no assurance that our expectations will be realized. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to:
 
  •      changes in our anticipated cash flow and liquidity;
  •      our ability to maintain adequate liquidity to operate our business and execute our restructuring;
  •      our ability to raise funds from capital sources;
  •      our ability to comply with the terms of our Bank Credit Facility and the amendments to it or to obtain any necessary further extension of the waivers for compliance with the financial covenants;
  •      our ability to obtain waivers, cure or reach agreements with respect to defaults under our loan, joint venture and construction agreements;
  •      our ability to negotiate a comprehensive restructuring of our obligations in respect of our Germany communities, our Fountains portfolio and certain of our other ventures;
  •      business conditions and market factors that could affect the value of our properties;
  •      the outcome of the U.S. Securities and Exchange Commission’s (“SEC”) investigation;
  •      the outcomes of pending putative class action and shareholders’ derivative litigation;
  •      the outcome of the Trinity investigation by the Office of the Inspector General of the Department of Health and Human Services (“OIG”) and qui tam lawsuit relating to Trinity in which we are a defendant;
  •      the outcome of the IRS audit of our tax returns for the tax years ended December 31, 2005, 2006 and 2007;
  •      the ability of our Greystone subsidiary to continue to provide development services in the absence of liquid bond financing markets;
  •      the risk of loss of our seed capital investments with our Greystone subsidiary if we fail to fund further seed capital requirements;
  •      our ability to continue to recognize income from refinancings and sales of communities by ventures;
  •      risk of changes in our critical accounting estimates;
  •      risk of further write-downs or impairments of our assets;
  •      risk of future obligations to fund guarantees and other support arrangements to some of our ventures, lenders to the ventures or third party owners;
  •      risk of declining occupancies in existing communities or slower than expected leasing of new communities;
  •      risk resulting from any international expansion;
  •      development and construction risks;
  •      risks associated with past or any future acquisitions;
  •      our ability to achieve anticipated savings from our cost reduction program;
  •      our ability to comply with government regulations;
  •      risk of new legislation or regulatory developments;
  •      competition and our response to pricing and promotional activities of our competitors;
  •      changes in interest rates;
  •      unanticipated expenses;
  •      the downturns in general economic conditions including, but not limited to, financial market performance, consumer credit availability, interest rates, inflation, energy prices, unemployment and consumer sentiment about the economy in general;
  •      risks associated with the ownership and operation of assisted living and independent living communities; and
  •      other risk factors contained in this Form 10-K.
 
We assume no obligation to update or supplement forward-looking statements that become untrue because of subsequent events. Unless the context suggests otherwise, references herein to “Sunrise,” the “Company,” “we,” “us” and “our” mean Sunrise Senior Living, Inc. and our consolidated subsidiaries.


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PART I
 
 
 
We are a Delaware corporation and a provider of senior living services in the United States, Canada, the United Kingdom and Germany. Founded in 1981, we began with a simple but innovative vision — to create an alternative senior living option that would emphasize quality of life and quality of care. We offer a full range of personalized senior living services, including independent living, assisted living, care for individuals with Alzheimer’s and other forms of memory loss, nursing and rehabilitative care. We also develop senior living communities for ourselves, for ventures in which we retain an ownership interest and for third parties.
 
At December 31, 2008, we operated 435 communities, including 391 communities in the United States, 15 communities in Canada, 20 communities in the United Kingdom and nine communities in Germany (including two communities that were closed in January 2009), with a total resident capacity of approximately 54,340. Of the 435 communities that we operated at December 31, 2008, 47 were wholly owned, 15 were under operating leases, 10 were consolidated as a variable interest entity, 203 were owned in unconsolidated ventures and 160 were owned by third parties. In addition, at December 31, 2008, we provided pre-opening management and professional services to 26 communities under construction, of which 19 communities are in the United States and seven communities are in the United Kingdom, with a combined capacity for approximately 2,700 residents. During 2008, we opened 19 new communities, with a combined resident capacity of approximately 2,600 residents, which were developed by us.
 
The stock markets and credit markets in the United States and the world have been experiencing significant volatility, dislocations and liquidity disruptions. As a result the market prices of many stocks, including ours, have declined substantially and minimal amounts of debt financings have been available.
 
Significant 2008 and 2009 Developments
 
 
Historically, we have generated: (1) income from development and pre-opening fees from the development of new Sunrise communities, (2) gains on the sales of real estate and (3) proceeds and income from the recapitalization of ventures. The current state of the credit markets makes it unlikely that we will have significant income or gains from such activities for the foreseeable future. Accordingly, our focus for 2009 will be on: (1) working to implement the comprehensive restructuring plan discussed below, (2) operating high-quality assisted living and memory care communities in North America and the United Kingdom, (3) improving the operating efficiency of our operations, (4) improving the effectiveness and efficiency of our community operating costs and (5) improving the effectiveness and efficiency of our administrative functions. We do not intend to begin construction on any new projects in the United States in 2009, and we have only two construction starts projected for the United Kingdom in 2009. We do not contemplate funding new seed capital projects related to our Greystone subsidiary at least until, the bond financing markets improve. We will reconsider future development when market conditions stabilize and the cost of capital for development projects is in line with projected returns.
 
At December 31, 2008, we had total debt of $636.1 million. The components of the debt were as follows (in thousands):
 
         
Bank Credit Facility
  $ 95,000  
Mortgage debt on wholly-owned properties
    246,948  
Land loans
    37,407  
Debt of variable interest entity in New Jersey
    23,905  
German communities debt
    185,901  
Other
    46,970  
         
Total
  $ 636,131  
         


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The debt of the New Jersey variable interest entity and $34.4 million of land loans are guaranteed by us. Also, we have guaranteed €50 million ($70.0 million) of the Germany venture debt to the extent that the sale price of the four Germany communities securing the debt is less than a stipulated release price for each community.
 
We had $29.5 million and $138.2 million of unrestricted cash and cash equivalents at December 31, 2008 and December 31, 2007, respectively. Our results of operations for 2008 show a significant net loss of $439.2 million and a loss from operations of $389.4 million, both including significant non-cash charges for:
 
  •   Impairment of goodwill of $121.8 million;
 
  •   Write-off of abandoned development projects of $95.8 million;
 
  •   Extraordinary loss due to consolidation of our German venture of $22.1 million;
 
  •   Impairment of owned communities and undeveloped land of $36.5 million; and
 
  •   Depreciation and amortization of $51.3 million.
 
Our net cash used in operating activities of $123.9 million reflects operating losses and an increase in net operating assets and liabilities of $93.8 million which used significant cash. Most of this increase in net operating assets and liabilities reflected a significant reduction in accounts payable and accrued liabilities. Our net cash used in investing activities of $172.5 million was offset by net cash provided by financing activities of $187.7 million.
 
The waivers granted pursuant to the Tenth Amendment to our Bank Credit Facility (the “Bank Credit Facility”) will expire on March 30, 2009 unless further extended. We currently cannot borrow additional funds under the Bank Credit Facility and have significant debt maturing in 2009 and 2010. We expect that our cash balances and expected cash flow are sufficient to enable us to meet our obligations only through March 31, 2009. Because of these factors and our current financial position, we are seeking to preserve cash, reduce our financial obligations and reach negotiated settlements with various creditors to preserve our liquidity. We have also stopped funding certain projects and other obligations, and are seeking waivers with respect to existing defaults under many of our debt obligations to avoid acceleration of these obligations. Specifically, we have stopped or reduced payments for our German communities, development projects, our Fountains portfolio and our Aston Gardens venture, each as described in more detail below. We are in the process of discussing a comprehensive restructuring plan with the lenders to our German communities, the lender to our Fountains portfolio, our venture partner in the Fountains portfolio and certain other lenders. Our lenders to eight of our nine German communities have agreed not to foreclose on the communities that are collateral for their loans or to commence or prosecute any action or proceeding to enforce their demand for payment by us pursuant to our operating deficit agreements until the earliest of the occurrence of certain other events relating to the loans or March 31, 2009. As of February 27, 2009, we have not stopped funding the ninth community as the next payment date is March 6, 2009. We do not intend to make the principal and interest payment due on that date and will seek waivers with respect to this default after that date. As of February 27, 2009, the lender for the Fountains venture had not yet agreed to our request for a standstill agreement through March 31, 2009. We are also engaged in discussions with various venture partners and third parties regarding the sale of certain assets with the purpose of increasing liquidity and reducing obligations to enable us to continue operations. There can be no assurance that any of these discussions will result in the consummation of any transaction.
 
We believe that it will be in the best interests of all creditors to grant such waivers or reach negotiated settlements with us to enable us to continue operating. However there can be no assurance that such waivers will be received or such settlements will be reached. If the defaults are not cured within applicable cure periods, if any, and if waivers or other relief are not obtained, the defaults can cause acceleration of our financial obligations under certain of our agreements, which we may not be in a position to satisfy. There can be no assurance that any of these efforts will prove successful. In the event of a failure to obtain necessary waivers or otherwise achieve a restructuring of our financial obligations, we may be forced to seek reorganization under the U.S. Bankruptcy Code. The existence of these factors raises substantial doubt about our ability to continue as a going concern and our auditors have modified their report with respect to the 2008 consolidated financial statements to include a going concern reference.


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There were $95.0 million of outstanding borrowings and $24.4 million of letters of credit outstanding under our Bank Credit Facility at December 31, 2008. During 2008, we entered into several amendments to our Bank Credit Facility to, among other things, waive compliance with the financial covenants in the Bank Credit Facility for a period of time. On January 20, 2009, we and the lenders under the Bank Credit Facility executed the Tenth Amendment to the Bank Credit Facility which provided that we are not required to comply with the financial covenants contained in the Bank Credit Facility until March 31, 2009. However, there can be no additional borrowings and no issuances of any new letters of credit under the Bank Credit Facility until April 1, 2009, and then only if we achieve compliance with the financial covenants of the loan documents. The Tenth Amendment also modifies certain negative covenants to limit our ability, among other things, to (i) pledge certain assets or grant consensual liens on such assets; (ii) incur additional indebtedness for borrowed money; and (iii) dispose of real estate, improvements or other material assets. The Tenth Amendment increased the interest rate for Eurodollar Rate Loans to 475 basis points over LIBOR, and increased the interest rate for Base Rate Loans to 325 basis points over the Base Rate (as defined in the Tenth Amendment). In connection with the execution of the Tenth Amendment, we paid a modification fee of $0.4 million and repaid $1.5 million of principal.
 
Prior to the execution of the Tenth Amendment, we were not in compliance with the Bank Credit Facility covenants at December 31, 2008, and we currently do not expect that we will be in compliance with the financial covenants in the Bank Credit Facility on March 31, 2009. Accordingly, if we are unable to revise and restructure our Bank Credit Facility, or otherwise obtain sufficient proceeds to pay off the Bank Credit Facility, before March 31, 2009, the lenders under the amended Bank Credit Facility could, among other things, exercise their rights to accelerate the payment of all amounts then outstanding under the amended Bank Credit Facility, exercise remedies against the collateral securing the amended Bank Credit Facility or require us to replace or provide cash collateral for the outstanding letters of credit or pursue further modifications with respect to the amended Bank Credit Facility. In the event of an acceleration of our Bank Credit Facility, we may not be able to fully repay our outstanding borrowings.
 
 
Our German communities are operated through our German venture, in which we used to have a 20% ownership interest and recently obtained a controlling ownership interest through the exercise of an option, as described below. To fund the construction of the German communities, each of our German communities entered into loan agreements with certain lenders. As of December 31, 2008, the book value of such loans amounted to approximately $185.9 million. Sunrise is not a guarantor under these loan agreements, but has provided operating deficit guarantees to the lenders. Under these operating deficit guarantees, in the event that the German communities fail to pay certain amounts owed to the lenders in respect of interest and principal (but excluding principal due on the final maturity date), Sunrise is obligated to pay such amounts. Pursuant to the operating deficit guarantees, Sunrise also committed to fund the operating losses incurred by the German communities until the maturity date of the loans. In January 2009, our German communities suspended payment of principal and interest on all loans, in spite of Sunrise’s operating deficit guarantees.
 
In addition to our German communities, one of our German entities purchased undeveloped land at Hoesel where a tenth community was contemplated with the proceeds of a loan in the amount of $1.2 million, for which Sunrise has guaranteed 25% of the principal balance. This loan, which is secured by the undeveloped land, came due on December 31, 2008 and remains unpaid.
 
As a result of the failure to make payments of principal and interest to the lenders to our German communities and Sunrise’s failure to pay the operating deficits, our German communities are in default under their loans, and Sunrise is in default under its financial guarantees for the loans of our German communities and the Hoesel land. We informed the lenders to our German communities and the Hoesel land that we would seek a comprehensive restructuring of the loans and our operating deficit guarantees. We have commenced discussions regarding restructuring of potential related claims that certain lenders and joint venture partners, including the lenders to the German communities, may have. There can be no assurance, however, that such discussions will lead to any


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agreements or understandings with any of such lenders or venture partners, and we may or may not enter into any agreement with any of them. Such discussions and agreements may or may not be disclosed separately in the future.
 
We recently entered into standstill agreements with lenders to eight of our nine German communities and the land at Hoesel. Pursuant to such standstill agreements, such lenders have agreed, among other things, not to foreclose on the communities that are collateral for their loans or to commence or prosecute any action or proceeding to enforce their demand for payment by us pursuant to our operating deficit guarantees, and to commence discussions and negotiations with us relating to our and our German communities’ obligations. Such standstill agreements will generally remain in effect until the earliest of the occurrence of certain other events relating to the loans or March 31, 2009. On December 24, 2008 and February 20, 2009, we described in our Current Reports on Form 8-K, the standstill agreements with Natixis, London Branch, relating to our communities in Hannover and Munich, Germany. The other standstill agreements were not material to us and, therefore, were not separately disclosed by us. As of February 27, 2009, we have not stopped funding the ninth community as the next payment date is March 6, 2009. We do not intend to make the principal and interest payment due on that date and will seek waivers with respect to this default after that date.
 
As mentioned above, historically, we had a 20% ownership interest in our German communities and recently obtained a controlling ownership interest through the exercise of an option. On September 1, 2008, we acquired the option to purchase from our majority partner in our German venture its entire equity interest in the venture through a two-step transaction in 2009. We paid €3.0 million ($4.6 million) for this option, which we exercised in January 2009. Our decision to purchase and exercise this option was based on the fact that because Sunrise had provided operating deficit guarantees for the German communities, Sunrise had 100% of the risk for operating deficits of the Germany venture, but only had 20% of the ownership in, and no control over, the Germany venture. Neither the purchase of the option nor the exercise of the option in January 2009 altered our obligation under any financial guarantees for which we are responsible or altered any of the recourse/non-recourse provisions in any of the loans. We closed two of the German communities on January 31, 2009, and we are pursuing sales of some or all of the nine communities (including the two closed communities). Under FASB Interpretation No. 46R, Consolidation of Variable Interest Entities (“FIN 46R”), the purchase of the option is a “reconsideration event,” and we determined that as of September 1, 2008 the venture is a variable interest entity and we are the primary beneficiary, which requires us to consolidate the venture. FIN 46R requires that assets and liabilities be consolidated at current fair value. We recorded a non-cash extraordinary pre-tax loss of $22.1 million related to the consolidation of the Germany venture.
 
 
On October 29, 2008, we determined that we would provide no additional funding to our subsidiary, Trinity Hospice, Inc. (“Trinity”), following a review of our sources of cash and future cash requirements. As a result, we wrote off the remaining goodwill and other intangible assets related to Trinity of approximately $9.8 million in the fourth quarter of 2008. As a result of our decision to cease funding, Trinity determined to discontinue operations and ceased operations in December 2008. As of December 31, 2008, we have separately presented the operating results of Trinity under the caption “discontinued operations” in our consolidated statements of income. The liabilities of Trinity exceed the assets.
 
In January 2009, Trinity filed a plan of liquidation and dissolution before the Delaware Chancery Court. The Chancery Court will supervise the disposition of the assets of Trinity for the benefit of its creditors. At December 31, 2008, the recorded assets of Trinity are $8.4 million and the recorded liabilities of Trinity are $36.1 million. The recorded liabilities of $36.1 million do not include: (1) approximately $2.7 million of obligations under long-term leases for office space used in the Trinity operations that are expected to be reduced or eliminated by the legal requirement for the landlord to mitigate damages by re-leasing the vacated space, (2) any amount that may be due to the plaintiffs related to the investigation of Trinity by the OIG and the Qui Tam Action discussed in Note 17 to the consolidated financial statements or (3) any amounts due to us.


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In connection with our development ventures, we have provided project completion and operating deficit guarantees to venture lenders and in some cases the ventures themselves. These financial guarantees are designed to assure completion of development projects in the event of cost overruns and, after depletion of reserves established pursuant to the loan agreement, guarantee periodic principal and interest payments and operating losses during the term of the guarantee. At December 31, 2008, we had committed financing for 26 communities under construction in North America and the United Kingdom (not including two additional projects, both of which are wholly-owned by us). Of these communities under construction, three communities in the United States are wholly-owned by us, and the rest are in development ventures. We are not in compliance with the terms of many of these construction loans, and, as a result, the lenders could cease funding the projects. We are working with our lenders and venture partners to address the defaults, and we have explained to these lenders that we do not believe that there will be material cost overruns and that there are adequate established reserves to fund the lease-up period once the projects are completed. We believe, and have stated to our lenders that, in our opinion, the best course of action for these construction lenders is to continue to fund these projects through completion. There can be no assurance, however, that these lenders will continue to fund the construction and development of these projects. We estimate that it will cost approximately $251 million to complete the 26 communities we have under construction (excluding two projects that are suspended) as of December 31, 2008. The two projects under construction that did not yet have debt financing as of December 31, 2008 are currently suspended and have a carrying value of $38.1 million and estimated costs to complete of approximately $51.7 million for a total estimated cost of $89.8 million. Construction of these two projects has been suspended until we can obtain suitable construction financing. We do not believe we will have to make further equity contributions for projects under construction (excluding the two suspended projects) as of December 31, 2008, assuming the lenders continue to fund existing construction loan financing commitments.
 
We agreed with our U.S. development partners to suspend four construction projects scheduled to start in the fourth quarter of 2008, and we and our partners are evaluating our alternatives for these projects. We had no U.S. construction starts in the fourth quarter of 2008. We and our U.K. development partner declined to proceed with a land closing for which construction financing was not yet available. We do not expect to commence construction of any projects in the United States and expect to commence only two projects in the United Kingdom in 2009. We plan to reduce our U.S. development group from 70 people to less than 10 people through June 30, 2009 as a result of our decision to scale back our development activities for 2009.
 
We intend to sell 19 land parcels which have a carrying value of $70.8 million and related debt of $34.3 million. Certain of these land loans are in default. Nine of these land parcels which meet all of the criteria to be classified as held for sale at December 31, 2008 are recorded at a fair value of $46.0 million in the “Assets Held for Sale” portion of the Consolidated Financial Statements.
 
 
In 2008, we suspended the development of three condominium projects and we wrote off approximately $27.7 million of development costs. Also, based on our decision to decrease our development pipeline, we wrote off approximately $68.1 million of costs relating to 215 development projects we discontinued during 2008. Our remaining balance of construction in progress at December 31, 2008 is $88.9 million, consisting of $82.9 million related to three wholly owned projects under construction (including two projects that have been suspended pending obtaining suitable construction financing) and $6.0 relating to a condominium renovation project.
 
 
We have determined not to fund any new seed capital projects of our Greystone subsidiary. Through December 31, 2008 we have invested $27.8 million in seed capital ventures and have outstanding commitments of approximately $3.2 million. We typically invest 50% of the seed capital in these entities and these seed capital entities are consolidated by us. The expenditures of these seed capital entities are expensed as incurred for financial reporting purposes. We have also informed the management of Greystone that we are exploring strategic options for the subsidiary and are currently working with our financial advisors to assist in this matter. The carrying value of


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Greystone at December 31, 2008 is $(9.3) million which includes $43.6 million of goodwill and intangible assets, $2.6 million of working capital and $62.4 million of deferred revenue. Since the carrying value of Greystone is negative there is no impairment as a result of our decision to sell this business.
 
 
We initiated a plan in the third quarter of 2008 to reduce our general and administrative expense, development and venture support headcount and certain non-payroll costs. We recorded severance expense of $15.2 million in 2008 and expect to record an additional $2.0 million in the first and second quarters of 2009 based on actions taken to date. We vacated part of our office space at our McLean, Virginia headquarters and recorded a $2.9 million expense. We are actively seeking a sub-tenant for the space. Even if our refinancing and restructuring activities are successful, we will need to substantially reduce our current overhead costs.
 
 
In July 2008, we received notice of default from our equity partner alleging a default under our management agreement for six communities as a result of the venture’s receipt of a notice of default from a lender. In December 2008, the venture’s debt was restructured and we entered into an agreement with our venture partner under which we agreed to resign as managing member of the venture and manager of the communities when we are released from various guarantees provided to the venture’s lender. The management fees for the years 2008 and 2007 were $3.2 million and $3.7 million, respectively.
 
At loan inception, we provided the lender a guarantee of monthly principal and interest payments and during 2008 we made payments under this guarantee since the venture did not have enough available cash flow to cover the default interest payments. Advances under this guarantee are recoverable in the form of a loan in a capital or refinancing event prior to the repayment of capital to the partners but subordinate to the repayment of the debt. Through December 31, 2008, we have funded $6.2 million under this guarantee.
 
 
In 2008, the Fountains venture, in which we hold a 20% interest, failed to comply with the financial covenants in the venture’s loan agreement. The lender has been charging a default rate of interest (6.68% at December 31, 2008) since April 2008. At loan inception, we provided the lender a guarantee of monthly principal and interest payments, and in 2008 we funded payments under this guarantee as the venture did not have enough available cash flow to cover the full amount of the interest payments at the default rate. Advances under this guarantee are recoverable in the form of a loan to the venture, which must be repaid prior to the repayment of equity capital to the partners, but is subordinate to the repayment of other venture debt. Through December 31, 2008, we have funded $14.2 million under this operating deficit guarantee which has been fully reserved. These advances under the operating deficit guarantee are in addition to what we have funded during 2008 under our income support guarantee to our venture partner, which also has been fully reserved. The default was taken into consideration by the venture when testing its assets for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” and the book value of the venture’s assets exceeds the fair value by approximately $52 million. Based on that estimate, we recorded our proportionate share of the impairment, or approximately $10.3 million, during 2008.
 
In January 2009, we informed the venture’s lenders and our venture partner that we were suspending payment of default interest and payments under the income support guarantee, and that we would seek a comprehensive restructuring of the loan, our operating deficit guarantees and our income support guarantee. Our failure to pay default interest on the loan is an additional default of the loan agreement, the management agreement and our agreement with our venture partner. We have requested that the lender for the Fountains portfolio agree not to foreclose on the communities that are collateral for their loans or to commence or prosecute any action or proceeding to enforce its demand for payment by us pursuant to our operating deficit agreements through March 31, 2009. As of February 27, 2009, the lender had not yet agreed to our request for a standstill agreement through March 31, 2009.


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Our accounting policy prescribes that we evaluate the carrying value of goodwill annually on October 1, 2008. As a result of this assessment and our decision to cease funding Trinity we wrote off the remaining goodwill and intangible assets of $9.8 million. We also recorded an impairment charge of $121.8 million related to all of the goodwill for our North American business segment which resulted from our acquisition of Marriott Senior Living Services, Inc. (“MSLS”) in 2003 and Karrington Health, Inc. in 1999.
 
 
In July 2008, we were given notice of termination of a management contract covering 11 communities related to contracts that we acquired from Marriott International, Inc. (“Marriott”). These contracts were terminable at the discretion of the owner of the communities. We do not own any portion of these facilities. We were terminated as manager in December 2008. The management fees for the years 2008 and 2007 were $4.6 million and $5.0 million, respectively. We can be terminated in 2009 from management of 13 other communities which failed to comply with their financial covenants in 2008. The management fees for the years 2008 and 2007 were $3.0 million and $2.9 million, respectively.
 
 
Our agreements with Marriott related to our purchase of MSLS in 2003 provide that Marriott has the right to demand that we provide cash collateral security for assignee reimbursement obligations, as defined in the agreements, in the event that our implied debt rating is not at least B- by Standard and Poors or B1 by Moody’s Investor Services. Assignee reimbursement obligations relate to possible liability with respect to leases assigned to us in 2003 and entrance fee obligations assumed by us in 2003 that remain outstanding (approximately $8.9 million at December 31, 2008). Marriott has informed us that they reserve all of their rights to issue a notice of collateral event under the assignment and reimbursement agreement.
 
 
The senior living industry encompasses a broad spectrum of senior living service and care options, which include independent living, assisted living and skilled nursing care.
 
  •   Independent living is designed to meet the needs of seniors who choose to live in an environment surrounded by their peers where they receive services such as housekeeping, meals and activities, but are not reliant on assistance with activities of daily living (for example, bathing, eating and dressing), although some residents may contract out for those services.
 
  •   Assisted living meets the needs of seniors who seek housing with supportive care and services including assistance with activities of daily living, Alzheimer’s care and other services (for example, housekeeping, meals and activities).
 
  •   Skilled nursing meets the needs of seniors whose care needs require 24-hour skilled nursing services or who are receiving rehabilitative services following an adverse event (for example, a broken hip or stroke).
 
In all of these settings, seniors may elect to bring in additional care and services as needed, such as home-health care (except in a skilled nursing setting) and end-of-life or hospice care.
 
The senior living industry is highly fragmented and characterized predominantly by numerous local and regional senior living operators. Senior living providers may operate freestanding independent living, assisted living or skilled nursing residences, or communities that feature a combination of senior living options such as continuing care retirement communities (“CCRCs”), which typically consist of large independent living campuses with assisted living and skilled nursing sections. The level of care and services offered by providers varies along with the size of communities, number of residents served and design of communities (for example, purpose-built communities or refurbished structures).


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Senior Living Services
 
Throughout our history, we have advocated a resident-centered approach to senior living and offered a broad range of service and care options to meet the needs of our residents. In select communities, we offer independent living services, which include housing, meals, transportation, activities and housekeeping, and in some communities, we provide licensed skilled nursing services for residents who require 24-hour skilled nursing care. The majority of our communities currently provide assisted living services, which offer basic care and services for seniors who need assistance with some activities of daily living.
 
 
Upon a resident’s move-in to an assisted living community, we assess each resident, generally with input from a resident’s family and physician, and develop an individualized service plan for the resident. This individual service plan includes the selection of resident accommodations and a determination of the appropriate level of care and service for such resident. The service plan is periodically reviewed and updated by us and communicated to the resident and the resident’s family or responsible party.
 
We offer a choice of care levels in our assisted living communities based on the frequency and level of assistance and care that a resident needs or prefers. Most of our assisted living communities also offer a Reminiscence neighborhood, which provides specially designed accommodations, service and care to support cognitively impaired residents, including residents with Alzheimer’s disease. By offering a full range of services, we are better able to accommodate residents’ changing needs as they age and develop further physical or cognitive frailties. Daily resident fee schedules are generally revised annually. Fees for additional care are revised when a change in care arises.
 
Basic Assisted Living
 
Our basic assisted living program includes:
 
  •   assistance with activities of daily living, such as eating, bathing, dressing, personal hygiene, and grooming;
 
  •   three meals per day served in a common dining room;
 
  •   coordination of special diets;
 
  •   emergency call systems in each unit;
 
  •   transportation to stores and community services;
 
  •   assistance with coordination of physician care, physical therapy and other medical services;
 
  •   health promotion and related programs;
 
  •   housekeeping services; and
 
  •   social and recreational activities.
 
Medication Management
 
Many of our assisted living residents also require assistance with their medication. To the extent permitted by state law, the medication management program includes the storage of medications, the distribution of medications as directed by the resident’s physician and compliance monitoring. We charge an additional daily fee for this service.
 
Assisted Living Extended Levels of Care
 
We also offer various levels of care for assisted living residents who require more frequent or intensive assistance or increased care or supervision. We charge an additional daily fee based on increased staff hours of care and services provided. These extended levels of care allow us, through consultation with the resident, the resident’s


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family and the resident’s personal physician, to create an individualized care and supervision program for residents who might otherwise have to move to a more medically intensive community.
 
Reminiscence Care
 
We believe our Reminiscence neighborhoods distinguish us from many other senior living providers. Our Reminiscence neighborhoods provide a specialized environment, extra attention, and care programs and services designed to meet the special needs of people with Alzheimer’s disease and other related memory impairments. Specially trained staff members provide basic care and other specifically designed care and services to these residents in separate areas of our communities. Residents pay a higher daily rate based on additional staff hours of care and services provided. Approximately 13.9% of our residents participated in the Reminiscence program on December 31, 2008.
 
Independent Living and Skilled Nursing
 
In some of our communities, we also offer independent living for residents, and in other communities, we offer skilled nursing care. Independent living offers the privacy and freedom of home combined with the convenience and security of on-call assistance and a maintenance-free environment. Skilled nursing care offers a range of rehabilitative therapies to promote our residents’ emotional health and physical well-being. We have team members specially trained to serve residents in these communities in compliance with the appropriate state and federal regulatory requirements.
 
 
Through our acquisition of Trinity in September 2006, we entered the hospice care industry. On October 29, 2008, we determined not to provide any additional funding to our Trinity subsidiary due to our review of our sources of cash and future cash requirements. As a result, we wrote-off the remaining goodwill and other intangibles related to Trinity of approximately $9.8 million in the fourth quarter of 2008. As a result of this decision to cease funding by us, Trinity’s board of directors decided to discontinue Trinity’s operations. Trinity ceased operations in December 2008.
 
 
While we serve the vast majority of a resident’s needs with our own staff, some services, such as hospice care, physician care, infusion therapy, physical and speech therapy and other ancillary care services may be provided to residents in our communities by third parties. Our staff members assist residents in locating qualified providers for such health care services.
 
 
In addition to communities we manage for ourselves, we manage 203 communities in which we have a minority ownership interest and 160 communities for third-party owners.
 
As of December 31, 2008, 61 of the communities we managed for unconsolidated ventures were owned by ventures with Ventas. One of our privately owned capital partners is the majority owner of 50 communities. At December 31, 2008, HCP Inc. owned 90 of the communities managed by us.
 
Our management agreements have terms generally ranging from five to 30 years with various performance conditions and have management fees generally ranging from five to eight percent of community revenues. In addition, in certain management contracts, we have the opportunity to earn incentive management fees based on monthly or yearly operating results.
 
 
Until recently when we decided to suspend new development due to the state of the capital markets, we developed senior living communities in top U.S. and international markets. We developed these senior living communities for ourselves, for ventures in which we retain an ownership interest and for third parties. We targeted


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sites for development in major metropolitan areas and their surrounding suburban communities. In evaluating a prospective location, we considered a number of factors, including:
 
  •   market area demographics;
 
  •   market area demand and competitive supply;
 
  •   target site characteristics;
 
  •   probability of obtaining zoning approvals; and
 
  •   the ability to cluster our communities to optimize management resources.
 
On December 31, 2008, we had 26 communities under construction with resident capacity of approximately 2,700.
 
 
In 2005, we acquired Greystone Communities, Inc. and certain of its subsidiaries and affiliated entities (collectively, “Greystone”), a premier developer and manager of CCRCs. Through our acquisition of Greystone in 2005, we expanded into the not-for-profit sector which is the largest segment of the CCRC industry.
 
Greystone, which is based in Irving, Texas, has been in the business of building successful relationships with clients since 1982. During that time, it has engaged with more than 350 clients in 41 states. Greystone offers a broad range of services to its senior living community clients including strategic planning, project planning, development, resident marketing, capital acquisition and pre-opening and operations management services. Greystone has been involved in developing more than 100 communities.
 
Greystone-developed communities are typically full-service CCRCs offering a mix of independent living, assisted living, Alzheimer’s care and skilled nursing care. Historically, Greystone’s post-opening management contracts generally have been fixed-fee contracts with an average length of approximately five to seven years.
 
Since the acquisition of Greystone, we, along with third-party partners, have invested in the pre-finance stage of certain Greystone development projects. When the initial development services are successful and permanent financing for the project is obtained, the partners are repaid their initial invested capital plus fees generally between 50% and 75% of their investment.
 
As of December 31, 2008, Greystone had 78 current projects for which it provided consulting, development and/or management services. We have investments in six ventures that are investing in the pre-finance stage of Greystone development projects as of December 31, 2008. As of December 31, 2008, Greystone has 27 communities under management. We have determined not to fund new seed capital projects until the bond financing markets improve. We have also informed the management of Greystone that we are exploring strategic options for the subsidiary and are currently working with our financial advisors to assist in this matter.


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On December 31, 2008, we operated 435 senior living communities with a resident capacity of approximately 54,340 and had 26 communities under construction with a resident capacity of approximately 2,700. We manage communities that we own, communities in which we have an ownership interest and communities owned by third parties.
 
The following tables summarize our portfolio of operating communities and communities under construction on December 31, 2008. “Consolidated” communities consist of communities which we wholly own. “Variable Interest Entities” consists of communities in ventures of which we are the primary beneficiary and are consolidated in our financial statements for 2008. “Unconsolidated Ventures” communities consist of communities in which we own an equity interest but that are not consolidated in our financial statements for 2008, as applicable. “Managed” communities consist of communities which are wholly owned by third parties. “Total Resident Capacity” means the number of residents that can occupy a community. While most of our units are single-occupancy, we do have a number of semi-private rooms, particularly in our skilled nursing and Reminiscence areas.
 
                                         
   
Number of Communities
       
          Consolidated
                   
          Variable Interest
    Unconsolidated
             
    Consolidated     Entities     Ventures     Managed     Total  
 
Beginning number December 31, 2007
    61       1       199       174       435  
Opened (developed by us)
    3       1       12       3       19  
Terminations/Sales
    (2 )                 (17 )     (19 )
Expansion/Other adjustments(1)
          8       (8 )            
                                         
Ending number December 31, 2008
    62       10       203       160       435  
                                         
 
                                         
   
Total Resident Capacity
       
          Consolidated
                   
          Variable Interest
    Unconsolidated
             
    Consolidated     Entities     Ventures     Managed     Total  
 
Beginning number December 31, 2007
    8,312       371       22,340       22,894       53,917  
Opened (developed by us)
    293       110       1,374       783       2,560  
Terminations/Sales
    (65 )                 (2,158 )     (2,223 )
Expansion/Other adjustments(1)
    59       829       (888 )     89       89  
                                         
Ending number December 31, 2008
    8,599       1,310       22,826       21,608       54,343  
                                         
 
(1) Consolidation of Germany venture.


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2008 Operating Communities
 
                                                 
    Number of Communities     Total Resident Capacity  
          Unconsolidated
                Unconsolidated
       
Location
  Consolidated     Ventures     Managed     Consolidated     Ventures     Managed  
 
Alabama
                1                   194  
Arizona
    2       5       1       250       843       386  
Arkansas
                1                   167  
California
    8       31       13       909       2,995       1,909  
Colorado
    1       7       3       71       623       479  
Connecticut
    2       1       2       168       102       402  
District of Columbia
    1       1       1       110       190       172  
Delaware
          1                   82        
Florida
    5       8       5       1,687       2,744       1,570  
Georgia
    2       6       9       72       718       827  
Hawaii
                1                   392  
Illinois
    1       14       12       334       1,466       1,474  
Indiana
    4             2       279             451  
Kansas
          3       2             268       406  
Kentucky
                2                   327  
Louisiana
    1       1       2       91       70       98  
Maryland
    2       2       10       513       233       1,160  
Maine
          1                   185        
Massachusetts
          9       6             699       571  
Michigan
    1       12       3       77       1,376       300  
Minnesota
          4       6             358       566  
Missouri
    1       3       2       76       504       179  
Nebraska
                1                   166  
Nevada
          1       2             105       306  
New Jersey
    2       15       11       495       1,311       1,264  
New Mexico
    1                   99              
New York
          15       2             1,499       243  
North Carolina
    2       1       7       166       207       758  
North Dakota
                                   
Ohio
    12       4       4       841       236       410  
Oklahoma
          1       3             291       419  
Pennsylvania
    4       18       1       765       1,582       180  
South Carolina
                5                   513  
Tennessee
                1                   115  
Texas
    1       4       12       145       434       2,488  
Utah
          2       1             254       164  
Virginia
    7       8       10       1,529       854       890  
Washington
          2       5             226       404  
West Virginia
                1                   167  
Wisconsin
                1                   192  
United Kingdom
          20                   1,937        
Germany
    9                   939              
Canada
    3       3       9       293       434       899  
                                                 
Total
        72           203           160       9,909       22,826           21,608  
                                                 


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2008 Communities Under Construction
 
                                 
    Number of Communities     Total Resident Capacity  
          Unconsolidated
          Unconsolidated
 
Location
  Consolidated     Ventures     Consolidated     Ventures  
 
Alabama
                       
California
    3       2       301       156  
Colorado
          1             243  
Florida
          1             94  
Georgia
          1             93  
Illinois
          1             164  
Indiana
          1             162  
Kentucky
          1             94  
Louisiana
          2             181  
Maryland
          1             83  
Michigan
          1             95  
New York
                       
North Carolina
          1             85  
Ohio
          1             95  
Pennsylvania
          1             94  
South Carolina
                       
Texas
          1             99  
Washington
                       
United Kingdom
          7             687  
                                 
Total
        3           23           301           2,425  
                                 
 
 
 
We have four operating segments for which operating results are separately and regularly reviewed by key decision makers: domestic operations, Germany, international operations (including Canada) and Greystone. See Note 22 to our Consolidated Financial Statements in Item 8 of this Form 10-K for additional information.
 
Our international headquarters are in McLean, Virginia, with two smaller regional offices located in the U.K. and Germany to support local operations. Our North American international headquarters provide centralized accounting, finance, development and other key operational functions to support our operating communities and company growth. As a result, our community-based personnel are able to focus on delivering excellent care and service consistent with our resident-centered operating philosophy. Greystone maintains separate offices in Texas. Greystone also has its own staff and its operations are decentralized.
 
 
For our senior living business, regional and community-based team members are responsible for executing our strategy in local markets. This includes overseeing all aspects of community operations: local marketing and sales activities; resident care and services; the hiring and training of community-based team members; compliance with applicable local and state regulatory requirements; and implementation of our development and acquisition plans within a given geographic region.
 
Our North American operations are organized into three geographic regions: Eastern United States, Midwest/Northwest/Canada and Southwest/Heartland/California. Senior team members are based in each of these regions for close oversight of community operations (open and under development) in these locations. A similar organizational structure is in place in the United Kingdom and Germany.
 
Each region is headed by a senior vice president of operations with extensive experience in the health care and senior living industries, who oversees area managers or vice presidents of operations. Each region is supported by sales/marketing specialists, resident care specialists, a human resource specialist and a dining specialist.


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The international headquarters functions include establishing strategy, systems, policies and procedures related to: resident care and services; team member recruitment, training, development, benefits and compensation; facility services; dining; sales and marketing strategy and support; corporate communications; accounting and finance management, including billing and collections, accounts payable, general finance and accounting and tax planning and compliance; legal; asset management; community design; and real estate development.
 
Community Staffing
 
We believe that the quality and size of our communities, along with our strong service-oriented culture, our competitive compensation philosophy and our training and professional growth opportunities, have enabled us to attract high-quality, professional team members. Each of our communities has an executive director responsible for the day-to-day operations of the community, including quality of care, resident services, sales and marketing, financial performance and regulatory compliance. The executive director is supported by department heads, who oversee the care and services provided to residents in the community by “care managers,” as well as other specialists such as a nurse, who is responsible for coordinating the services necessary to meet residents’ health care needs, and a director of community relations, who is responsible for selling and marketing our services. Other key positions include the dining services coordinator, the activities coordinator and the maintenance coordinator.
 
Care managers, who work on full-time, part-time and flex-time schedules, provide most of the hands-on resident care, such as bathing, dressing and other personalized care services. As permitted by state law, care managers who complete a special training program also supervise the storage and distribution of medications. The use of care managers to provide substantially all services to residents has the benefits of consistency and continuity in resident care. As such, in most cases, the same care manager assists the resident in dressing, dining and coordinating daily activities to encourage seamless and consistent care for residents. The number of care managers working in a community varies according to the number of residents and their needs.
 
We believe that our communities can be most efficiently managed by maximizing direct resident and staff contact. Team members involved in resident care, including the administrative staff, are trained in the care manager duties and participate in supporting the care needs of the residents.
 
Staff Education and Training
 
All of our team members receive specialized and ongoing training. We pride ourselves on attracting highly dedicated, experienced personnel. To support this effort, we offer a full schedule of educational programs, job aids and other learning tools to equip every team member with the appropriate skills that are required to ensure high-quality resident care. All managers and direct-care staff must complete a comprehensive orientation and the core curriculum, which consists of basic resident-care procedures, Alzheimer’s care, communication systems, and activities and dining programming. For the supervisors of direct-care staff, additional training provides education in medical awareness and management skills.
 
For executive directors and department managers, we have developed the “Getting Started 1-2-3” program, which offers a structured curriculum to support those either newly hired or promoted to these positions. This program provides them with the tools, support and training necessary for the first 120 days on the job, including a self-study program, one-to-one training experience and a series of group trainings with scenario-based opportunities to solve multiple business case challenges. The program also includes three meetings with a supervisor to review the individual’s progress at 30 days, 60 days and 120 days into the position.
 
Quality Improvement Processes
 
We coordinate quality assurance programs at each of our communities through our corporate headquarters staff and through our regional offices. Our commitment to quality assurance is designed to achieve a high degree of resident and family member satisfaction with the care and services we provide.


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Sales and Marketing
 
Our sales and marketing strategy is intended to create awareness of and preference for our unique products and services among potential residents, family members and key community referral sources such as hospital discharge planners, physicians, clergy, area agencies for the elderly, skilled nursing communities, home health agencies, social workers, financial planners and consultants, and others. A marketing team from headquarters supports the field and communities by developing overall strategies, systems, processes and programs for promoting Sunrise in local markets, and monitors the success of the marketing efforts.
 
Each community has at least one dedicated sales person responsible for community-specific sales efforts. The community-based sales staff and executive director are supported by an area sales manager who is responsible for coaching, development, and performance management of community sales staff, as well as supporting the development and implementation of the local marketing strategy.
 
 
Greystone, which we acquired in 2005, is a wholly owned subsidiary that develops and manages CCRCs in the not-for-profit sector, the largest segment of the CCRC industry. The company is based in Irving, Texas, but operates across the country.
 
The majority of CCRCs in the United States are developed for and owned by not-for-profit entities. This segment of the market appeals to an increasing number of seniors, as CCRCs tend to be larger and offer a wider array of personal and health care services than independent and assisted living communities typically provide. Many seniors find this type of community offers them a reassurance that, as their needs change through the years, care services will be available within the community without having to move.
 
Greystone consults with clients to provide planning, development and management services which includes regulatory compliance, assisting clients with development planning, identifying sites, coordinating project teams, securing approvals, arranging financing, managing marketing, arranging for construction, providing project updates, preparing draw packages, cost reporting, preparing for opening, budgeting, financial reporting and managing delivery of resident services. These services are provided by professionals with backgrounds that include architecture, construction, real estate development, accounting, banking and management.
 
Greystone develops and manages CCRCs on a fee basis. The buildings are owned by the not-for-profit clients. Therefore neither we nor Greystone typically have an ownership interest in the real estate.
 
 
We are a large global provider of senior living services. We compete with numerous organizations that provide similar senior living alternatives, such as other senior living providers, home health care agencies, community-based service programs, retirement communities and convalescent centers. We have experienced and expect to continue to experience competition in our efforts to develop and operate senior living communities. This competition could limit our ability to attract residents or expand our senior living business, which could have a material adverse effect on our revenues and earnings. Please see our risk factor sections “Risks Related to the Senior Living Industry” under Item 1A. “Risk Factors” for more details related to the effects of competition on our business.
 
 
Senior Living. Senior living communities are generally subject to regulation and licensing by federal, state and local health and social service agencies, and other regulatory authorities. Although requirements vary from state to state and community to community, in general, these requirements may include or address:
 
  •   personnel education, training, and records;
  •   administration and supervision of medication;
  •   the provision of limited nursing services;
  •   admission and discharge criteria;


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  •   documentation, reporting and disclosure requirements;
  •   staffing requirements;
  •   monitoring of resident wellness;
  •   physical plant specifications;
  •   furnishing of resident units;
  •   food and housekeeping services;
  •   emergency evacuation plans; and
  •   resident rights and responsibilities.
 
In several of the states in which we operate or intend to operate, laws may require a certificate of need before a senior living community can be opened. In most states, senior living communities are also subject to state or local building codes, fire codes, and food service licensing or certification requirements.
 
Independent living communities are unregulated and not subject to state or federal inspection. However, communities that feature a combination of senior living options such as CCRCs, consisting of independent living campuses with a promise of future assisted living and/or skilled nursing services and an entrance fee requirement, are regulated by state government, usually the state’s department of insurance. CCRCs are subject to state regulation of minimum standards to ensure financial solvency and are required to give annual disclosure regarding such things as the community’s financial standing, the contractual obligations of services to the residents, residents’ rights and costs to residents to reside in the community.
 
Communities licensed to provide skilled nursing services generally provide significantly higher levels of resident assistance. Communities that are licensed, or will be licensed, to provide skilled nursing services may participate in federal health care programs, including the Medicare and Medicaid programs. In addition, some licensed assisted living communities may participate in state Medicaid-waiver programs. Such communities must meet certain federal and/or state requirements regarding their operations, including requirements related to physical environment, resident rights, and the provision of health services. Communities that participate in federal health care programs are entitled to receive reimbursement from such programs for care furnished to program beneficiaries and recipients.
 
Senior living communities that include assisted living facilities, nursing facilities, or home health care agencies are subject to periodic surveys or inspections by governmental authorities to assess and assure compliance with regulatory requirements. Such unannounced surveys may occur annually or bi-annually, or can occur following a state’s receipt of a complaint about the community. As a result of any such inspection, authorities may allege that the senior living community has not complied with all applicable regulatory requirements. Typically, senior living communities then have the opportunity to correct alleged deficiencies by implementing a plan of correction. In other cases, the authorities may enforce compliance through imposition of fines, imposition of a provisional or conditional license, suspension or revocation of a license, suspension or denial of admissions, loss of certification as a provider under federal health care programs, or imposition of other sanctions. Failure to comply with applicable requirements could lead to enforcement action that can materially and adversely affect business and revenues. Like other senior living communities, we have received notice of deficiencies from time to time in the ordinary course of business. However, we have not, to date, faced enforcement action that has had a material adverse effect on our revenues.
 
Regulation of the senior living industry is evolving. Future regulatory developments, such as mandatory increases in the scope of care given to residents, revisions to licensing and certification standards, or a determination that the care provided by one or more of our communities exceeds the level of care for which the community is licensed, could adversely affect or increase the cost of our operations. Increases in regulatory requirements, whether through enactment of new laws or regulations or changes in the application of existing rules, could also adversely affect our operations. Furthermore, there have been numerous initiatives on the federal and state levels in recent years for reform affecting payment of health care services. Some aspects of these initiatives could adversely affect us, such as reductions in Medicare or Medicaid program funding.
 
Other. We are also subject to certain federal and state laws that regulate financial arrangements by health care providers, such as the Federal Anti-Kickback Law. This law makes it unlawful for any person to offer or pay (or to solicit or receive) “any remuneration...directly or indirectly, overtly or covertly, in cash or in kind” for referring or


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recommending for purchase any item or service which is eligible for payment under a federal health care program, including, for example, the Medicare and Medicaid programs. Authorities have interpreted this statute very broadly to apply to many practices and relationships between health care providers and sources of patient referral. If a health care provider were to violate the Anti-Kickback Law, it may face criminal penalties and civil sanctions, including fines and possible exclusion from government programs such as Medicare and Medicaid. Similarly, health care providers are subject to the False Claims Act with respect to their participation in federal health care reimbursement programs. Under the False Claims Act, the government or private individuals acting on behalf of the government may bring an action alleging that a health care provider has defrauded the government and seek treble damages for false claims and the payment of additional monetary civil penalties. Many states have enacted similar anti-kickback and false claims laws that may have a broad impact on health care providers and their payor sources. Under provisions of the Deficit Reduction Act of 2005, Congress has encouraged all states to adopt false claims laws that are substantially similar to the federal law. While we endeavor to comply with all laws that regulate the licensure and operation of our senior living communities, it is difficult to predict how our revenue could be affected if it were subject to an action alleging such violations.
 
We are also subject to federal and state laws designed to protect the confidentiality of patient health information. The U.S. Department of Health and Human Services has issued rules pursuant to the Health Insurance Portability and Accountability Act of 1996 (HIPAA) relating to the privacy of such information. In addition, many states have confidentiality laws, which in some cases may exceed the federal standard. We have adopted procedures for the proper use and disclosure of residents’ health information in compliance with the relevant state and federal laws, including HIPAA. Although HIPAA requirements affect the manner in which we handle health data and communicate at covered communities, the cost of compliance does not have a material adverse effect on our business, financial condition or results of operations.
 
 
At December 31, 2008, we had approximately 37,800 employees, also referred to as team members throughout this 2008 Form 10-K, of which approximately 660 were employed at our corporate headquarters. We believe employee relations are good. A portion of the employees at one Sunrise community in Canada voted to be represented by a union in 2006. There has been no contract or other agreement as of January 2009 although negotiations are ongoing.
 
 
Our Internet website is http://www.sunriseseniorliving.com. The information contained on our website is not incorporated by reference into this report and such information should not be considered as part of this report. We make available free of charge on or through our website our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC.


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Item 1A.   Risk Factors
 
In connection with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, set forth below are cautionary statements identifying important factors that could cause actual events or results to differ materially from any forward-looking statements made by or on behalf of us, whether oral or written. We wish to ensure that any forward-looking statements are accompanied by meaningful cautionary statements in order to maximize to the fullest extent possible the protections of the safe harbor established in the Private Securities Litigation Reform Act of 1995. Accordingly, any such statements are qualified in their entirety by reference to, and are accompanied by, the following important factors that could cause actual events or results to differ materially from our forward-looking statements. If any of the following risks actually occur, our business, financial condition or results of operations could be negatively affected, and the trading price of our common stock could decline.
 
These forward-looking statements are based on management’s present expectations and beliefs about future events. As with any projection or forecast, these statements are inherently susceptible to uncertainty and changes in circumstances. There may be additional risks and uncertainties not presently known to us or that we currently deem immaterial that also may impair our business operations. You should not consider this list to be a complete statement of all potential risks or uncertainties.
 
We have separated the risks into the following categories:
 
  •  Liquidity risks relating to our compliance with our credit agreements and financial obligations;
 
  •  Risks related to our business operations;
 
  •  Risks related to the pending SEC investigation and pending litigation arising out of the previous announcement of our restatement of historical financial statements for 2005 and prior periods, other pending government proceedings and other pending litigation;
 
  •  Risks related to the senior living industry; and
 
  •  Risks related to our organization and structure.
 
 
As described in Significant 2008 and 2009 Developments, we are presently operating under waivers of our Bank Credit Facility and certain other financial agreements including project completion and operating deficit agreements and guarantees and those waivers expire on March 31, 2009.
 
In the absence of a further waiver of compliance with the financial covenants in the Bank Credit Facility or a restructuring of the Bank Credit Facility, we do not expect to comply with the covenants in the Bank Credit Facility as of March 31, 2009. Failure to comply with these covenants would be a default under that Facility and would permit the lenders to accelerate repayment of the indebtedness, which we currently do not expect we will be able to repay on March 31, 2009. In addition, in January and early February 2009, we suspended payments of principal and interest on eight of the communities in our Germany venture, which resulted in defaults under the loan agreements relating to those ventures. The lenders to eight of our nine German communities have agreed not to foreclose on the properties that collateralize the loans or to commence or prosecute any action or proceeding to enforce payment under our operating deficit guarantees, and to commence discussions and negotiations with us relating to our and our German communities’ obligations, until the earliest of the occurrence of certain other events relating to the loans or March 31, 2009. On December 24, 2008 and February 20, 2009, we described in our Current Reports on Form 8-K the standstill agreements with Natixis, London Branch, relating to our communities in Hannover and Munich, Germany. The other standstill agreements were not material to us and, therefore, were not separately disclosed by us. We intend to suspend payment of principal and interest for the ninth community in Germany in early March 2009. We are also in default under certain financial covenants in the Fountains venture loan agreement, and in January 2009, we informed the lender to, and the venture partner in, the Fountains venture that we would suspend payment of default interest and payments under the income support guarantee. We have requested that the lender agree not to foreclose on the properties that collateralize its loan or to commence any action under our operating deficit guarantees through March 31, 2009. As of February 27, 2009, we have not stopped funding the ninth community as the next payment date is March 6, 2009. We do not intend to make the principal and interest


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payment due on that date and will seek waivers with respect to this default after that date. As of February 27, 2009, the lender to the Fountains venture has not yet agreed to our request for a standstill agreement through March 31, 2009.
 
If we are not able to obtain additional funding or are not able to restructure our financial obligations that are in default by March 31, 2009, we will not have sufficient financial resources to meet our financial obligations under the loan agreements. In that event, we could be forced to seek reorganization under the U.S. Bankruptcy Code and in Germany.
 
As described in Significant 2008 and 2009 Developments, we are currently in discussions with our lenders and venture partners to implement a restructuring of our financial obligations. However, there can be no assurances that these efforts will prove successful and we could be forced to seek reorganization under the U.S. Bankruptcy Code.
 
We are in default under a number of our financial obligations with respect to our lenders and our venture partners. In addition, our substantial indebtedness adversely affects our financial condition and limits our ability to obtain necessary additional financing while we are required to dedicate a substantial portion of our cash flows from operations to payments on our indebtedness. We are in the process of discussing a comprehensive restructuring plan of potential related claims, and we are seeking waivers with respect to all defaults and are seeking to reach negotiated settlements with our various creditors to preserve our liquidity and to enable us to continue operating. However, there can be no assurance that we can succeed in accomplishing such restructuring plan of our financial obligations or that such waivers will be received or such settlements will be reached. If the defaults are not cured within applicable cure periods, if any, and if waivers or other relief are not obtained, the defaults can cause acceleration of our financial obligations under the agreements, which we may not be in a position to satisfy. In the event of a failure to obtain necessary waivers or otherwise achieve a restructuring of our financial obligations, we could be forced to seek reorganization under the U.S. Bankruptcy Code.
 
Risks Relating to Our Business Operations
 
Recent disruptions in the financial markets could affect our ability to obtain financing for development of our properties and other purposes, including any refinancing of our Bank Credit Facility or other debt due in 2009 or 2010, on reasonable terms and could have other adverse effects on us and the market price of our common stock.
 
The United States stock and credit markets have been experiencing significant price volatility, dislocations and liquidity disruptions, which have caused market prices of many stocks to fluctuate substantially and the spreads on prospective debt financings to widen considerably. These circumstances have materially impacted liquidity in the financial markets, making the terms for certain financings less attractive, and in some cases have resulted in the unavailability of financing. Continued uncertainty in the stock and credit markets may negatively impact our ability to access additional financing for the continuation of our operations and other purposes, including the refinancing of our Bank Credit Facility or other debt due in 2009, at reasonable terms, which may negatively affect our business. We have significant current maturities of long-term debt and a significant amount is in default. There are also current maturities of venture debt due in 2009 of approximately $460 million and approximately $735.9 million of debt that is in default. A prolonged downturn in the financial markets may cause us to seek alternative sources of potentially less attractive financing, and may require us to further adjust our business plan accordingly. These events also may make it more difficult or costly for us to raise capital, including through the issuance of common stock. The disruptions in the financial markets have had and may continue to have a material adverse effect on the market value of our common stock and other adverse effects on us and our business.
 
Due to the dependency of our revenues on private pay sources, events which adversely affect the ability of seniors to afford our monthly resident fees or entrance fees (including downturns in housing markets or the economy) could cause our occupancy rates, revenues and results of operations to decline.
 
Costs to seniors associated with independent and assisted living services are not generally reimbursable under government reimbursement programs such as Medicare and Medicaid. Only seniors with income or assets meeting or exceeding the comparable median in the regions where our communities are located typically can afford to pay


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our monthly resident fees. The length of the current economic downturn or future downturns or changes in demographics could adversely affect the ability of seniors to afford our resident fees. In addition, downturns in the housing markets, such as the one we are currently experiencing, could adversely affect the ability (or perceived ability) of seniors to afford our resident fees as our customers frequently use the proceeds from the sale of their homes to cover the cost of our fees. If we are unable to retain and/or attract seniors with sufficient income, assets or other resources required to pay the fees associated with independent and assisted living services and other service offerings, our occupancy rates, revenues and results of operations could decline. In addition, if the recent volatility in the housing market continues further, our results of operations and cash flows could be negatively impacted.
 
In addition, a reduction in occupancy rates, revenues and/or results of operations at any of our venture communities due to economic downturns or otherwise, may trigger credit support or income support obligations or may give the venture partner certain rights to terminate our management agreements, which would adversely affect our financial results and could adversely affect our cash flows as discussed under the risk factors entitled:
 
  •   Our results of operations could be adversely affected if we are required to perform under various financial guarantees or support arrangements that we have entered into as part of our operating strategy”;
 
  •   Our failure to comply with financial obligations contained in debt instruments could result in the acceleration of the debt extended pursuant to such debt instruments, trigger other rights and restrict our operating and acquisition activity, and in the case of ventures, may cause acceleration of the venture’s debt repayment obligations and any of our correlated guarantee obligations”; and
 
  •   Early termination or non-renewal of our management agreements could cause a loss in revenues.
 
If our venture communities experience poor performance, we also may need to write down the value of our investment in the venture, which would adversely affect our financial results.
 
Our international operations are subject to a variety of risks that could adversely affect those operations and thus our profitability and operating results.
 
Our future plans may involve additional expansion in the U.K. when the capital markets improve. On December 31, 2008, we operated 15 communities in Canada, 20 communities in the United Kingdom and nine communities in Germany (including two communities that were closed in January 2009) with a total resident capacity of approximately 4,500. Our international operations are subject to numerous risks including: exposure to local economic conditions; varying laws relating to, among other things, employment and employment termination; changes in foreign regulatory requirements; restrictions and taxes on the withdrawal of foreign investment and earnings; government policies against businesses owned by foreigners; investment restrictions or requirements; diminished ability to legally enforce our contractual rights in foreign countries; withholding and other taxes on remittances and other payments by subsidiaries; and changes in and application of foreign taxation structures including value-added taxes. In addition, we have limited experience developing and operating senior living facilities in international markets. If we are not successful in operating in international markets, our results of operations and financial condition may be materially adversely affected.
 
Our failure to lease up or sell all or some of our Germany facilities may negatively impact our results of operations and cash flows.
 
From 2003 through 2006, we invested $13.1 million for our portion of the equity required for our Germany venture. Our partner invested $52.4 million. Our equity investment was reduced to zero by the end of 2006 due to start-up losses recorded from 2003 through 2006 and, accordingly, we had no investment carrying value. In 2006, we recorded a $50.0 million loss for expected payments under financial guarantees (operating deficit guarantees) given to lenders to our nine German communities. In 2007, we recorded an additional loss of $16.0 million for a cumulative loss of $66.0 million for expected future non-recoverable payments under financial guarantees. On September 1, 2008, we paid €3.0 million ($4.6 million) to the majority partner in our Germany venture for an option to purchase its entire equity interest in the venture through a two-step transaction in 2009. We exercised our option in January 2009 and acquired a 94.9% controlling ownership interest. We are pursuing restructuring of loans with venture lenders, and potential sales of some or all of the nine communities in the venture. There can be no assurance


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that we will realize any appreciation in the communities or will be able to restructure operations in Germany to make the operations viable.
 
Our failure to attract partners for developing senior living communities in the future could adversely affect our revenues and results of operations, and harm our ability to finance the construction of new communities.
 
Historically, we have developed senior living communities with third-party partners and entered into long-term management contracts to manage these communities. This strategy of developing senior living communities with partners has enabled us to re-deploy our capital into new development projects, finance development and expand our portfolio of managed communities. The development of new communities with third-party partners is subject to various market conditions and the attractiveness of other investment opportunities available to our partners. Based on current market conditions, we cannot give any assurance that we can continue to develop communities. If we are unable to continue to develop senior living communities with third-party partners on terms that are acceptable to us, we may have a significantly reduced growth rate.
 
Early termination or non-renewal of our management agreements could cause a loss in revenues.
 
We operate senior living communities for third parties and unconsolidated ventures pursuant to management services agreements. At December 31, 2008, approximately 83.4% of our communities were managed for third parties or unconsolidated ventures. The term of our third-party management services agreements generally ranges from five to 30 years. In most cases, either party to the agreements may terminate upon the occurrence of an event of default caused by the other party. In addition, in some cases, subject to our rights to cure deficiencies, community owners may terminate us as manager if any licenses or certificates necessary for operation are revoked, if there is a change in control of Sunrise or if we do not maintain a minimum stabilized occupancy level in the community or certain designated performance thresholds. We were terminated as manager in December 2008 for a management contract covering 11 communities that we acquired from Marriott. The management fees for the years 2008 and 2007 were $4.6 million and $5.0 million, respectively. We can be terminated in 2009 from management of 13 other communities which failed to comply with their financial covenants in 2008. The management fees for the years 2008 and 2007 were $3.0 million and $2.9 million, respectively.
 
In addition, our contract with Ventas, Inc. has a combined performance termination test that permits Ventas to terminate our contract for all communities failing a specified targeted termination threshold based on net operating income of the community if there is a failure by more than 25% of all communities we manage for Ventas, Inc. The targeted termination threshold increases each year based on CPI. A significant number of communities (but less than 25% of the communities) failed the specified termination threshold in 2008.
 
With respect to communities held in ventures, in some cases, the management agreement can be terminated in connection with the sale by the venture partner of its interest in the venture or the sale of properties by the venture. Also, in some instances, a community owner may terminate the management agreement relating to a particular community if we are in default under other management agreements relating to other communities owned by the same owner or its affiliates. In some of our agreements, the community owner may terminate the management agreement for any reason or no reason provided it pays the termination fee specified in the agreement. Early termination of our management agreements or non-renewal or renewal on less-favorable terms could cause a loss in revenues and could negatively impact earnings.
 
Ownership of the communities we manage is heavily concentrated with three of our business partners.
 
As of December 31, 2008, 90 of our managed communities were owned by HCP Inc. As of December 31, 2008, Ventas, Inc. was the majority owner of 61 communities which we manage. Another one of our privately owned capital partners is the majority owner of an additional 50 communities that we manage.
 
The communities that we manage for these business partners are generally subject to long-term management agreements (up to 30 years) as well as other agreements related to development, support and other guarantee arrangements. This sizeable concentration could give these partners significant influence over our operating strategies and could therefore heighten the business risks disclosed above. A significant concentration might also make us more susceptible to an adverse impact from the financial distress that might be experienced by a partner.


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Any inability or unwillingness by any of these business partners to satisfy its obligations under their agreements with us could adversely affect our business, financial condition, results of operations and cash flows.
 
Our operations and the operations of entities that we have acquired or may acquire, directly or through an ownership interest in a venture, may not be integrated successfully or the intended benefits of such transactions may not be realized or may be subject to unforeseen liabilities, any of which could have a negative impact on our revenues, expenses and operating results.
 
Our acquisitions, including a 25% interest in the Aston Gardens venture and three San Francisco Bay Area CCRC’s in 2006, as well as our acquisition of Greystone and a 20% interest in the Fountains venture in 2005, have not performed as expected and as a result, we have recognized significant losses associated with these acquisitions. Our recent acquisitions pose continued risks for our ongoing operations, including the risks that:
 
  •   business operations may continue to deteriorate due to various factors, including changes in macro-economic conditions;
 
  •   diversion of management attention to the integration of the operations of the acquisitions could have a material adverse effect on the continued operation and expansion of our existing business;
 
  •   we may not effectively integrate the operations of these acquisitions;
 
  •   we may experience difficulties and incur greater than anticipated expenses related to the assimilation and retention of the employees from these acquisitions; and
 
  •   following any one of these acquisitions, we may not achieve any expected cost savings and operating efficiencies in connection with such acquisition, such as the elimination of redundant administrative costs and community management costs.
 
In addition, once the capital markets improve, any future acquisition of other entities in the ordinary course of business may pose risks to us similar to those discussed above. If we fail to successfully integrate future acquisitions and/or fail to realize the intended benefits of those transactions, these failures could have a material adverse effect on our revenues, expenses and operating results and the market price of our common stock could decline from its market price at the time of completion of such acquisitions. In addition, our profitability may suffer because of acquisition-related costs, impairment of acquired goodwill or amortization costs for other intangible assets. Similarly, we could encounter unforeseen difficulties and expenditures relating to our acquisition, including contingent or other unexpected liabilities.
 
Our current and future investments in ventures could be adversely affected by our lack of sole decision-making authority, our reliance on venture partners’ financial condition, any disputes that may arise between us and our venture partners and our exposure to potential losses from the actions of our venture partners.
 
As of December 31, 2008, we had a minority equity interest in ventures that we do not control which owned 203 senior living communities. These ventures involve risks not present with respect to our consolidated communities or the communities that we manage only. These risks include the following:
 
  •   we share decision-making authority with our venture partners regarding major decisions affecting the ownership or operation of the venture and the community, such as the sale of the community or the making of additional capital contributions for the benefit of the community and the approval of the annual operating and capital budgets, which may prevent us from taking actions that are opposed by our venture partners;
 
  •   prior consent of our venture partners may be required for a sale or transfer to a third party of our interests in the venture, which restricts our ability to dispose of our interest in the venture;
 
  •   our venture partners might become bankrupt or fail to fund their share of required capital contributions, which may delay construction or development of a community or increase our financial commitment to the venture;


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  •   our venture partners may have business interests or goals with respect to the community that conflict with our business interests and goals, which could increase the likelihood of disputes regarding the ownership, management or disposition of the community;
 
  •   disputes may develop with our venture partners over decisions affecting the community or the venture, which may result in litigation or arbitration that would increase our expenses and distract our officers and/or directors from focusing their time and effort on our business, and possibly disrupt the day-to-day operations of the community such as delaying the implementation of important decisions until the conflict or dispute is resolved; and
 
  •   we may suffer losses as a result of the actions of our venture partners with respect to our venture investments.
 
The refinancing or sale of communities held in ventures may not result in future distributions to us.
 
When the majority equity partner in one of our ventures sells its equity interest to a third party, the venture frequently refinances its senior debt and distributes the net proceeds to the equity partners. Distributions received by us are first recorded as a reduction of our investment. Next, we record a liability if there is a contractual obligation or implied obligation to support the venture including through our role as a general partner. Any remaining distributions are recorded as income. We refer to these transactions as “recapitalizations.” Additionally, most of our ventures are structured to provide a distribution to us upon the sale of the communities in the ventures. None of the agreements governing our venture arrangements require refinancings of debt in connection with the sale of equity interests by our venture partners. If the venture does not refinance senior debt or the property has not appreciated we would not receive any distributions in connection with the sale of equity interests by our venture partners. In addition, there can be no assurance that future “recapitalizations” or asset sales will result in distributions to us. In addition, if market conditions deteriorate or our communities experience poor performance, the amounts distributed to us upon “recapitalizations” or assets sales could be materially reduced or we may not receive distributions in some cases.
 
Liability claims against us in excess of insurance limits could adversely affect our financial condition and results of operations.
 
The senior living business entails an inherent risk of liability. In recent years, we, as well as other participants in our industry, have become subject to an increasing number of lawsuits alleging negligence or similar claims. Many of these lawsuits involve large claims and significant legal costs. We maintain liability insurance policies in amounts we believe are adequate based on the nature and risks of our business, historical experience and industry standards.
 
We purchase insurance for property, casualty and other risks from insurers based on published ratings by recognized rating agencies, advice from national insurance brokers and consultants and other industry-recognized insurance information sources. Moreover, certain insurance policies cover events for which payment obligations and the timing of payments are only determined in the future. Any of these insurers could become insolvent and unable to fulfill their obligation to defend, pay or reimburse us for insured claims.
 
Certain liability risks, including general and professional liability, workers’ compensation and automobile liability, and employment practices liability are insured in insurance policies with affiliated (i.e., wholly owned captive insurance companies) and unaffiliated insurance companies. We are responsible for the cost of claims up to a self-insured limit determined by individual policies and subject to aggregate limits in certain prior policy periods. Liabilities within these self-insured limits are estimated annually by management after considering all available information, including expected cash flows and actuarial analysis. In the event these estimates are inadequate, we may have to fund the shortfall and our operating results could be negatively impacted.
 
Claims may arise that are in excess of the limits of our insurance policies or that are not covered by our insurance policies. If a successful claim is made against us and it is not covered by our insurance or exceeds the policy limits, our financial condition and results of operations could be materially and adversely affected. Our obligations to pay the cost of claims within our self-insured limits include the cost of claims that arise today but are reported in the future. We estimate an amount to reserve for these future claims. In the event these estimates are


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inadequate, we may have to fund the shortfall and our operating results could be negatively affected. Claims against us, regardless of their merit or eventual outcome, also could have a material adverse effect on our ability to attract residents or expand our business and could require our management to devote time to matters unrelated to the operation of our business. We also have to renew our policies periodically and negotiate acceptable terms for coverage, exposing us to the volatility of the insurance markets, including the possibility of rate increases, and we cannot be sure that we will be able to obtain insurance in the future at acceptable levels. We have established a liability for outstanding losses and expenses at December 31, 2008, but the liability may ultimately be settled for a greater or lesser amount. Any subsequent changes are recorded in the period in which they are determined and will be shared with the communities participating in the insurance programs.
 
Our results of operations could be adversely affected if we are required to perform under various financial guarantees or support arrangements that we have entered into as part of our operating strategy.
 
As part of our normal operations, we provide construction completion guarantees, debt guarantees, operating deficit guarantees/credit facilities, credit support arrangements and liquidity support agreements to some of our ventures, lenders to the venture, or third party owners. In addition, we may also undertake certain financing obligations in connection with acquisitions. The terms of some of these obligations do not include a limitation on the maximum potential future payments. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” for a description of construction completion guarantees, debt guarantees, operating deficit guarantees/credit facilities, credit support arrangements and liquidity support agreements provided to certain of our unconsolidated ventures or third-party owners, lenders to ventures, venture partners and certain financing obligations undertaken in connection with acquisitions. If we are required to fund or perform under these arrangements, the amounts funded either become loans to the venture, or are recorded as a reduction in revenue or as an expense. If we are required to fund any amounts related to these arrangements, our results of operations and cash flows could be adversely affected. In addition, we may not be able to ultimately recover funded amounts.
 
Our failure to generate sufficient cash flow to cover required interest, principal and operating lease payments could result in defaults of the related debt or operating leases.
 
At December 31, 2008, we had total indebtedness of $636.1 million. We intend, when the capital markets improve, to continue financing our communities through mortgage financing and possibly operating leases or other types of financing. We cannot give any assurance that we or our ventures will generate sufficient cash flow from operations to cover required interest, principal and operating lease payments. Any payment or other default could cause the lender to foreclose upon the facilities securing the indebtedness or, in the case of an operating lease, could terminate the lease, with a consequent loss of income and asset value to us. A payment or other default with respect to venture indebtedness also could trigger our obligations under support arrangements, as described in the risk factor above entitled “Our results of operations could be adversely affected if we are required to perform under various financial guarantees or support arrangements that we have entered into as part of our operating strategy”. In some cases, the indebtedness is secured by the community and a pledge of our interests in the community. In the event of a default, the lender could avoid judicial procedures required to foreclose on real property by foreclosing on the pledge instead, thus accelerating the lender’s acquisition of the community. Further, because our mortgages generally contain cross-default and cross-collateralization provisions, a payment or other default by us could affect a significant number of communities. See also the risk factors above under the subsection entitled “Liquidity risks relating to our compliance with our credit agreements and financial obligations.”
 
Our failure to comply with financial obligations contained in debt instruments could result in the acceleration of the debt extended pursuant to such debt instruments, trigger other rights and restrict our operating and acquisition activity, and in the case of ventures, may cause acceleration of the venture’s debt repayment obligations and any of our correlated guarantee obligations.
 
There are various financial covenants and other restrictions applicable to us in our debt instruments, including provisions that:
 
  •   require us to satisfy financial statement delivery requirements;
 
  •   require us to meet certain financial tests;


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  •   restrict our ability to pay dividends or repurchase our common stock;
 
  •   require consent for a change in control; and
 
  •   restrict our ability and our subsidiaries’ ability to borrow additional funds, dispose of all or substantially all assets, or engage in mergers or other business combinations in which we are not the surviving entity without lender consent.
 
These covenants could reduce our flexibility in conducting our operations by limiting our ability to borrow money and may create a risk of default on our debt if we cannot continue to satisfy these covenants. If we default under our debt instruments, the debt extended pursuant to such debt instruments could become due and payable prior to its stated due date. We cannot give any assurance that we could pay this debt if it became due. Further, our Bank Credit Facility contains a cross-default provision pursuant to which a default on other indebtedness by us or by any of our consolidated subsidiaries under the Bank Credit Facility could result in the ability of the lenders to declare a default under and accelerate the indebtedness due under the Bank Credit Facility.
 
There are various financial covenants, financial statement delivery requirements, and other restrictions applicable to us in the debt instruments relating to certain of our ventures. Failure to comply with these covenants may trigger acceleration of the ventures’ debt repayment obligations and any of our correlated guarantee obligations or give rise to any of the other remedies provided for in such debt instruments. Additionally, certain of our venture agreements provide that an event of default under the venture’s debt instruments that is caused by us may also be considered an event of default by us under the venture agreement, giving our venture partner the right to pursue the remedies provided for in the venture agreement, potentially including a termination and winding up of the venture.
 
Certain of our management agreements, both with ventures and with entities owned by third parties, provide that an event of default under the debt instruments applicable to the ventures or the entities owned by third parties that is caused by us may also be considered an event of default by us under the relevant management agreement, giving the non-Sunrise party to the management agreement the right to pursue the remedies provided for in the management agreement, potentially including termination of the management agreement. See also the risk factors above under the subsection entitled “Liquidity risks relating to our compliance with our credit agreements and financial obligations.”
 
Interest rate increases could adversely affect our earnings because a portion of our total debt is floating rate debt.
 
At December 31, 2008, we had approximately $630.7 million of floating-rate debt (including floating rate debt that may be subject to a rate cap as discussed below) at a weighted average interest rate of 4.32%. Debt incurred in the future also may bear interest at floating rates. Therefore, increases in prevailing interest rates could increase our interest payment obligations, which would negatively impact earnings. On May 7, 2008, 16 of our wholly owned subsidiaries (the “borrowers”) incurred mortgage indebtedness in the aggregate principal amount of approximately $106.7 million from Capmark Bank as lender and servicer pursuant to 16 separate cross-collateralized, cross-defaulted mortgage loans (collectively, the “mortgage loans”). In connection with the mortgage loans, we entered into interest rate protection agreements that provide for payments to us in the event the LIBOR rate exceeds 5.6145% pursuant to an interest rate cap purchased on May 7, 2008, by each borrower from SMBC Derivative Products Limited. The LIBOR rate approximates, but is not exactly equal to, the “Discount” rate that is used in determining the interest rate on the mortgage loans. Consequently, in the event the “Discount” rate exceeds the LIBOR rate, payments under the interest rate cap may not afford the borrowers complete interest rate protection. The borrowers purchased the interest rate cap for an initial period of three years for a cost of $0.3 million (including fees) and have placed in escrow the amount of $0.7 million to purchase additional interest rate caps to cover years four and five of the mortgage loans which amount will be returned to us in the event the mortgage loans are prepaid prior to the end of the third loan year. A one-percent change in interest rates would increase or decrease annual interest expense by approximately $6.3 million based on the amount of floating-rate debt at December 31, 2008. A five-percent change in interest rates would increase or decrease annual interest expense by approximately $28.9 million based on the amount of floating-rate debt at December 31, 2008 and the interest rate cap described above.


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We may be adversely affected by fluctuations in currency exchange rates.
 
We are subject to the impact of foreign exchange translation on our financial statements. To date, we have not hedged against foreign currency fluctuations; however, we may pursue hedging alternatives in the future. There can be no assurance that exchange rate fluctuations in the future will not have a material adverse effect on our business, operating results, or financial condition. At December 31, 2008, our wholly owned subsidiaries have net U.S. dollar equivalent assets/(liabilities) of $(21.6) million, $29.9 million and $(34.6) million in Canadian dollars, British pounds and Euros, respectively. We recorded $15.9 million, net, in exchange losses in 2008 ($14.2 million in losses related to the Canadian dollar and $1.7 million in losses related to the Euro and British pound).
 
Our accounting policies and methods are fundamental to how we report our financial condition and results of operations and they may require management to make estimates about matters that are inherently uncertain.
 
We have identified certain accounting estimates as being “critical” to the presentation of our financial condition and results of operations because they require our management to make particularly subjective or complex judgments about matters that are inherently uncertain and because the likelihood that materially different amounts would be recorded under different conditions or using different assumptions. The risks related to our critical accounting estimates are described under “Critical Accounting Estimates” in Item 7 of this Form 10-K. Because of the inherent uncertainty of the estimates associated with these critical accounting estimates, we cannot provide any assurance that we will not change our estimates, which could cause us to make significant subsequent adjustments to the related amounts recorded. These adjustments could have a material adverse affect on our business, results of operations and financial condition.
 
Termination of resident agreements and vacancies in communities could adversely affect our revenues and earnings.
 
State regulations governing assisted living communities generally require written resident agreements with each resident. Most of these regulations also require that each resident have the right to terminate the resident agreement for any reason on reasonable notice. Consistent with these regulations, the resident agreements signed by us generally allow residents to terminate their agreement on 30 days’ notice. Thus, we cannot contract with residents to stay for longer periods of time, unlike typical apartment leasing arrangements that involve lease agreements with specified leasing periods of up to a year or longer. If a large number of residents elected to terminate their resident agreements at or around the same time, and if our units remained unoccupied, then our revenues and earnings could be adversely affected.
 
The discovery of environmental problems at any of the communities we own or operate could result in substantial costs to us, which would have an adverse effect on our earnings and financial condition.
 
Under various federal, state and local environmental laws, ordinances and regulations, as a current or previous owner or operator of real property, we are subject to various federal, state and local environmental laws and regulations, including those relating to the handling, storage, transportation, treatment and disposal of medical waste generated at our facilities; identification and removal of the presence of asbestos-containing materials in buildings; the presence of other substances in the indoor environment, including mold; and protection of the environment and natural resources in connection with development or construction of our communities.
 
Some of our facilities generate infectious or other hazardous medical waste due to the illness or physical condition of the residents. Each of our facilities has an agreement with a waste management company for the proper disposal of all infectious medical waste, but the use of such waste management companies does not immunize us from alleged violations of such laws for operations for which we are responsible even if carried out by such waste management companies, nor does it immunize us from third-party claims for the cost to clean-up disposal sites at which such wastes have been disposed.
 
If we fail to comply with such laws and regulations in the future, we would face increased expenditures both in terms of fines and remediation of the underlying problem(s), potential litigation relating to exposure to such materials, and potential decrease in value to our business and in the value of our underlying assets, which would have an adverse effect on our earnings, our financial condition and our ability to pursue our growth strategy. In addition, we are unable to predict the future course of federal, state and local environmental regulation and


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legislation. Changes in the environmental regulatory framework could result in significant increased costs related to complying with such new regulations and result in a material adverse effect on our earnings. In addition, because environmental laws vary from state to state, expansion of our operations to states where we do not currently operate may subject us to additional restrictions on the manner in which we operate our communities, further increasing our cost of operations.
 
Unionization may impact wages rates and work rules.
 
At December 31, 2008, we had approximately 37,800 employees of which approximately 660 were employed at our corporate headquarters. In 2006, employees at one community in Canada voted to be represented by a union. There has been no contract agreement as of January 2009 and negotiations are ongoing. The Employee Free Choice Act (“EFCA”) is one of a number of labor bills being considered by Congress. The EFCA would effectively eliminate the private ballot in union organizing elections and pave the way for significant Federal intervention in the workplace. If the EFCA were to pass, an employer and a union unable to reach a contract agreement within 120 days would have a Federal arbitrator step in to unilaterally impose contract terms without a full vote of the workforce that is currently required in a union contract negotiation. A third party would set the terms and conditions of the workplace. We believe that a union free workplace is in the best interest of our residents, our team members and us and accordingly, we plan to expend significant organizational effort to maintain a union free workplace.
 
Comments from SEC staff review may require that we amend our periodic reports filed with the SEC, which could lead to significant changes in our past and current disclosure.
 
On February 25, 2009 we received several comments from the SEC staff relating to our 2007 Form 10-K filed in July 2008 and our Form 10-KA filed in December 2008. These comments questioned the timing of our recording of the impairment charge included in the 2007 financial statements of the Fountains venture included in our Form 10-KA filed in December 2008. We recorded this impairment charge in our financial statements in 2008 when we reached a conclusion that our investment was impaired. The SEC’s question is whether we should restate our 2007 financial statements. By a letter dated February 26, 2009, we responded to the SEC Staff that at the time of the filing of our 2007 financial statements in July 2008 we considered all the facts and circumstances relevant to the impairment analysis and reached a reasoned judgment that no impairment was necessary. Any change in circumstances after that issuance date is reflected as a change in estimate under SFAS 154 in the period in which the change in circumstances occurred. The financial statements of the venture were not issued until November 2008. In the fourth quarter of 2008, the outlook for purposes of evaluating the carrying value of the underlying assets was based on the significant deterioration in economic circumstances and the credit markets in the fourth quarter of 2008. We believed that the separate financial statements of the venture should include an assessment of all the circumstances at the time of the issuance of those financial statements. We do not believe that our 2007 financial statements were in error, and therefore we have expressed our view to the SEC staff that no restatement is necessary.
 
In addition, it is possible that we may receive additional comments from the SEC staff relating to new matters in this Form 10-K or other periodic reports filed by us with the SEC. The comments that we have already received and any future comments we receive may require that we amend or supplement, possibly significantly, the disclosures in our 2007 Form 10-K, this Form 10-K or other periodic reports filed by us with the SEC.
 
 
The SEC’s formal investigation and pending putative securities class action and derivative litigation have resulted in significant costs and expenses, diverted resources and could have a material adverse effect on our business, financial condition and results of operations.
 
As further described in Item 3, “Legal Proceedings” of this Form 10-K, on May 25, 2007, we were advised by the staff of the SEC that the SEC had commenced a formal investigation. As also further described in Item 3, “Legal Proceedings” of this Form 10-K, several lawsuits, including two putative shareholder class action complaints (that have since been consolidated into one action) and three putative derivative complaints (that have also been


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consolidated into one action) have been filed against us and certain of our current and former officers and directors arising out of our announcement of our intent to restate our previously issued financial statements for 2005 and prior periods, which restated financial statements were included in our 2006 Form 10-K filed on March 24, 2008, and related matters. An additional putative derivative complaint has also been filed alleging breach of fiduciary duty by the named defendants arising out of the grant of certain stock options that are also the subject of the complaints described above. We have incurred significant professional fees and other costs in responding to the SEC investigation and in defending against the lawsuits. We expect to continue to incur significant professional fees and other costs in responding to the SEC investigation and in defending against these lawsuits until resolved or settled. We have incurred cost of $84.2 million through December 31, 2008 for legal and accounting fees related to the accounting review, special independent committee inquiry and related matters.
 
In addition, our management, Board of Directors and employees have expended a substantial amount of time on the SEC formal investigation and these other matters, diverting a significant amount of resources and attention that would otherwise be directed toward our operations and the implementation of our business strategy, all of which could materially adversely affect our business and results of operations. Further, if the SEC were to conclude that enforcement action is appropriate, we could be required to pay large civil penalties and fines. The SEC also could impose other sanctions against us or certain of our current and former directors and officers. In addition, if the agreements to settle the putative class action and derivative lawsuits are not approved, and we do not prevail in a lawsuit that is not settled with court approval, we may be required to pay a significant amount of monetary damages. Any of these events could have a material adverse effect on our business, financial condition and results of operations.
 
We are involved in other litigation matters that will continue to divert our resources and attention, and could result in substantial monetary damages that could have a material adverse effect on our financial condition and results of operations if we do not prevail.
 
As described in Item 3, “Legal Proceedings” of this Form 10-K, in addition to the putative shareholder class action and derivative lawsuits, we are currently a defendant in a lawsuit filed by four former employees of Trinity on behalf of the United States government, as permitted under the qui tam provisions of the Federal False Claims Act (“FCA”), against us, Trinity and KRG Capital LLC (presumably an affiliate of some of the stockholders from whom we purchased Trinity) arising out of allegations that Trinity submitted false claims for Medicare billings. The lawsuit asserts the total loss sustained by the United States as a result of such alleged false claims is at least $100.0 million. If we do not prevail in one or more of these lawsuits, we may be required to pay substantial monetary damages, which could have a material adverse effect on our financial condition and results of operations.
 
The Trinity OIG investigation and IRS audit may result in substantial fines and penalties, which could harm our financial condition, results of operations and cash flow.
 
As more fully described in Item 3, “Legal Proceedings” of this Form 10-K, in January 2007, Trinity received a subpoena from the Phoenix field office of the OIG requesting certain information regarding Trinity’s operations in three locations for the period between January 1, 2000 through June 30, 2006, a period that was prior to our acquisition of Trinity. We have been advised that the subpoena was issued in connection with an investigation being conducted by the Commercial Litigation Branch of the U.S. Department of Justice and the civil division of the U.S. Attorney’s office in Arizona. The subpoena indicates that the OIG is investigating possible improper Medicare billing under the FCA. On February 13, 2008, Trinity received a subpoena from the Los Angeles regional office of the OIG requesting information regarding Trinity operations in 19 locations for the period between December 1, 1998 and February 12, 2008. This subpoena relates to the ongoing investigation being conducted by the Commercial Litigation Branch of the U.S. Department of Justice and the civil division of the U.S. Attorney’s Office in Arizona. In addition, the United States Internal Revenue Service is auditing our 2005, 2006 and 2007 federal income tax returns. The OIG investigation may result in the need to reimburse Medicare and payments of penalties and fines. The IRS audit may result in payments of unpaid taxes, interest and penalties. Any such reimbursements and payments could have a material adverse effect on our financial condition and results of operations.


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Our potential indemnification obligations and limitations of our director and officer liability insurance may have a material adverse effect on our financial condition and results of operations.
 
Under Delaware law, our charter and bylaws and certain indemnification agreements between us and certain of our current and former directors and officers, we may have an obligation to indemnify our current and former directors and officers with respect to the pending SEC investigation and pending putative securities class action and derivative litigation, including potentially for any liability for securities violations resulting therefrom. These indemnifiable obligations may not be reimbursable under our directors’ and officers’ liability insurance. In connection with some of the matters discussed in Item 3, “Legal Proceedings” of this Form 10-K, we have advanced legal fees and related expenses to a majority of our current directors and officers and several of our former directors and officers and expect to continue to do so while these matters are pending.
 
We purchase directors and officers liability insurance from insurers based on published ratings by recognized rating agencies, advice from national insurance brokers and consultants and other industry-related insurance information sources. Our directors and officers liability insurance covers events for which payment obligations and the timing of payments are only determined in the future. The insurers could become insolvent and unable to fulfill their obligation to defend, pay or reimburse us for insured claims. In addition, the insurer’s obligation to defend, pay, or reimburse us for insured claims would cease with respect to an individual if that individual were found to have committed a deliberate criminal or fraudulent act or in the event we ultimately determine that the individual is not entitled to indemnification.
 
Under our directors and officers liability insurance policy, we are responsible for the cost of claims up to a self-insured limit. In addition, we cannot be sure that claims will not arise that are in excess of the limits of our insurance or that are not covered by the terms of our insurance policy. Due to these coverage limitations, we may incur significant unreimbursed costs to satisfy our indemnification obligations, which may have a material adverse effect on our financial condition and results of operations.
 
 
Competition in our industry is high and may increase, which could impede our growth and have a material adverse effect on our revenues and earnings.
 
The senior living industry is highly competitive. We compete with numerous other companies that provide similar senior living alternatives, such as home health care agencies, community-based service programs, retirement communities, convalescent centers and other senior living providers. In general, regulatory and other barriers to competitive entry in the independent and assisted living segments of the senior living industry are not as substantial as in the skilled nursing segment of the senior living industry. In pursuing our growth strategies, we have experienced and expect to continue to experience competition in our efforts to develop and operate senior living communities. We expect that there will be competition from existing competitors and new market entrants, some of whom may have greater financial resources and lower costs of capital than we are able to obtain. Consequently, we may encounter competition that could limit our ability to attract new residents, increase resident fee rates, attract and retain capital partners for our ventures or expand our development activities or our business in general, which could have a material adverse effect on our revenues and results of operations. Similarly, overbuilding or oversupply in any of the markets in which we operate could cause us to experience decreased occupancy, reduced operating margins and lower profitability. Increased competition for residents could also require us to undertake unbudgeted capital improvements or to lower our rates, which could adversely affect our results of operations.
 
Our success depends on attracting and retaining skilled personnel and increased competition for or a shortage of skilled personnel could increase our staffing and labor costs, which we may not be able to offset by increasing the rates we charge to our residents.
 
We compete with various health care services providers, including other senior living providers, in attracting and retaining qualified and skilled personnel. We depend on our ability to attract and retain skilled management personnel who are responsible for the day-to-day operations of each community. Turnover rates and the magnitude of the shortage of nurses, therapists or other trained personnel vary substantially from community to community. Increased competition for or a shortage of nurses, therapists or other trained personnel or general inflationary pressures may require that we enhance our pay and benefits package to compete effectively for such personnel. We


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may not be able to offset such added costs by increasing the rates we charge to our residents or our management fees. If there is an increase in these costs or if we fail to attract and retain qualified and skilled personnel, our business, including our ability to implement our growth strategy, and operating results could be harmed.
 
The need to comply with government regulation of senior living communities may increase our costs of doing business and increase our operating costs.
 
Senior living communities are generally subject to regulation and licensing by federal, state and local health and social service agencies and other regulatory authorities. Although requirements vary from state to state and community to community, in general, these requirements may include or address:
 
  •   personnel education, training, and records;
 
  •   administration and supervision of medication;
 
  •   the provision of limited nursing services;
 
  •   admission and discharge criteria;
 
  •   documentation, reporting and disclosure requirements;
 
  •   staffing requirements;
 
  •   monitoring of resident wellness;
 
  •   physical plant specifications;
 
  •   furnishing of resident units;
 
  •   food and housekeeping services;
 
  •   emergency evacuation plans; and
 
  •   resident rights and responsibilities.
 
In several of the states in which we operate or intend to operate, laws may require a certificate of need before a senior living community can be opened. In most states, senior living communities are also subject to state or local building codes, fire codes, and food service licensing or certification requirements.
 
Independent living communities are unregulated and not subject to state or federal inspection. However, communities that feature a combination of senior living options such as CCRCs, consisting of independent living campuses with a promise of future assisted living and/or skilled nursing services and an entrance fee requirement, are regulated by state government, usually the state’s department of insurance. CCRCs are subject to state regulation of minimum standards to ensure financial solvency and are required to give annual disclosure regarding such things as the community’s financial standing, the contractual obligations of services to the residents, residents’ rights and costs to residents to reside in the community.
 
Communities licensed to provide skilled nursing services generally provide significantly higher levels of resident assistance. Communities that are licensed, or will be licensed, to provide skilled nursing services may participate in federal health care programs, including the Medicare and Medicaid programs. In addition, some licensed assisted living communities may participate in state Medicaid-waiver programs. Such communities must meet certain federal and/or state requirements regarding their operations, including requirements related to physical environment, resident rights, and the provision of health services. Communities that participate in federal health care programs are entitled to receive reimbursement from such programs for care furnished to program beneficiaries and recipients.
 
Senior living communities that include assisted living facilities, nursing facilities, or home health care agencies are subject to periodic surveys or inspections by governmental authorities to assess and assure compliance with regulatory requirements. Such unannounced surveys may occur annually or bi-annually, or can occur following a state’s receipt of a complaint about the community. As a result of any such inspection, authorities may allege that the senior living community has not complied with all applicable regulatory requirements. Typically, senior living communities then have the opportunity to correct alleged deficiencies by implementing a plan of correction. In other cases, the authorities may enforce compliance through imposition of fines, imposition of a provisional or conditional license, suspension or revocation of a license, suspension or denial of admissions, loss of certification as a provider under federal health care programs, or imposition of other sanctions. Failure to comply


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with applicable requirements could lead to enforcement action that can materially and adversely affect business and revenues. Like other senior living communities, we have received notice of deficiencies from time to time in the ordinary course of business.
 
Regulation of the senior living industry is evolving. Our operations could suffer if future regulatory developments, such as mandatory increases in scope of care given to residents, licensing and certification standards are revised, or a determination is made that the care provided by one or more of our communities exceeds the level of care for which the community is licensed. If regulatory requirements increase, whether through enactment of new laws or regulations or changes in the application of existing rules, our operations could be adversely affected. Furthermore, there have been numerous initiatives on the federal and state levels in recent years for reform affecting payment of health care services. Some aspects of these initiatives could adversely affect us, such as reductions in Medicare or Medicaid program funding.
 
We are also subject to certain federal and state laws that regulate financial arrangements by health care providers, such as the Federal Anti-Kickback Law. This law makes it unlawful for any person to offer or pay (or to solicit or receive) “any remuneration...directly or indirectly, overtly or covertly, in cash or in kind” for referring or recommending for purchase of any item or service which is eligible for payment under the Medicare or Medicaid programs. Authorities have interpreted this statute very broadly to apply to many practices and relationships between health care providers and sources of patient referral. If a health care provider were to violate the Anti-Kickback Law, it may face criminal penalties and civil sanctions, including fines and possible exclusion from government programs such as Medicare and Medicaid. Similarly, health care providers are subject to the False Claims Act with respect to their participation in federal health care reimbursement programs. Under the False Claims Act, the government or private individuals acting on behalf of the government may bring an action alleging that a health care provider has defrauded the government and seek treble damages for false claims and the payment of additional monetary civil penalties. Many states have enacted similar anti-kickback and false claims laws that may have a broad impact on health care providers and their payor sources. Recently other health care providers have faced enforcement action under the False Claims Act. It is difficult to predict how our revenue could be affected if we were subject to an action alleging violations.
 
We are also subject to federal and state laws designed to protect the confidentiality of patient health information. The U.S. Department of Health and Human Services has issued rules pursuant to HIPAA relating to the privacy of such information. In addition, many states have confidentiality laws, which in some cases may exceed the federal standard. We have adopted procedures for the proper use and disclosure of residents’ health information in compliance with the relevant state and federal laws, including HIPAA.
 
Risks Related to our Organization and Structure
 
Anti-takeover provisions in our governing documents and under Delaware law could make it more difficult to effect a change in control.
 
Our restated certificate of incorporation and amended and restated bylaws and Delaware law contain provisions that could make it more difficult for a third party to obtain control of us or discourage an attempt to do so. In addition, these provisions could limit the price some investors are willing to pay for our common stock. These provisions include:
 
  •   Board authority to issue preferred stock without stockholder approval. Our Board of Directors is authorized to issue preferred stock having a preference as to dividends or liquidation over the common stock without stockholder approval. The issuance of preferred stock could adversely affect the voting power of the holders of our common stock and could be used to discourage, delay or prevent a change in control of Sunrise;
 
  •   Filling of Board vacancies; removal. Any vacancy occurring in the Board of Directors, including any vacancy created by an increase in the number of directors, shall be filled for the unexpired term by the vote of a majority of the directors then in office, and any director so chosen shall hold office for a term expiring at the next annual meeting of stockholders. Directors may be removed with or without cause by the affirmative vote of the holders of at least a majority of the outstanding shares of our capital stock then


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  entitled to vote at an election of directors, provided, that no special meeting may be called at the request of the stockholders for the purpose of removing any director without cause;
 
  •   Other constituency provision. Our Board of Directors is required under our certificate of incorporation to consider other constituencies, such as employees, residents, their families and the communities in which we and our subsidiaries operate, in evaluating any proposal to acquire the Company. This provision may allow our Board of Directors to reject an acquisition proposal even though the proposal was in the best interests of our stockholders subject to any overriding applicable law;
 
  •   Call of special meetings. A special meeting of our stockholders may be called only by the chairman of the board, the president, by a majority of the directors or by stockholders possessing at least 25% of the voting power of the issued and outstanding voting stock entitled to vote generally in the election of directors, provided, that no special meeting may be called at the request of the stockholders for the purpose of removing any director without cause. This provision limits the ability of stockholders to call special meetings;
 
  •   Stockholder action instead of meeting by unanimous written consent. Any action required or permitted to be taken by the stockholders must be affected at a duly called annual or special meeting of such holders and may not be affected by any consent in writing by such holders, unless such consent is unanimous. This provision limits the ability of stockholders to take action by written consent in lieu of a meeting;
 
  •   Supermajority vote of stockholders or the directors required for bylaw amendments. A two-thirds vote of the outstanding shares of common stock is required for stockholders to amend the bylaws. Amendments to the bylaws by directors require approval by at least a two-thirds vote of the directors. These provisions may make more difficult bylaw amendments that stockholders may believe are desirable;
 
  •   Two-thirds stockholder vote required to approve some amendments to the certificate of incorporation. A two-thirds vote of the outstanding shares of common stock is required for approval of amendments to the foregoing provisions that are contained in our certificate of incorporation. All amendments to the certificate of incorporation must first be proposed by a two-thirds vote of directors. These supermajority vote requirements may make more difficult amendments to these provisions of the certificate of incorporation that stockholders may believe are desirable; and
 
  •   Advance notice bylaw. We have an advance notice bylaw provision requiring stockholders intending to present nominations for directors or other business for consideration at a meeting of stockholders to notify us by a certain date depending on whether the matters are to be considered at an annual or special meeting. Stockholders proposing matters for consideration at an annual meeting must provide notice not earlier than 120 days and not later than 90 days prior to the anniversary of the date on which we first mailed our proxy materials for the immediately preceding annual meeting. If, however, the date of the annual meeting is more than 30 days before or more than 60 days after such anniversary date, stockholder notice must be delivered not earlier than 120 days and not later than 90 days prior to the date of such annual meeting, provided, however, that if the first public announcement of the date is less than 100 days prior to the date of such annual meeting, then stockholder notice must be delivered not later than the 10th day following such public announcement. Stockholders proposing matters for consideration at a special meeting must provide notice not less than 120 calendar days prior to the date of the special meeting, provided, however, that if the first public announcement of the date of such special meeting is less than 130 days prior to the date of such special meeting, stockholder notice must be delivered not later than the 10th day following such public announcement.
 
In addition to the anti-takeover provisions described above, we are subject to Section 203 of the Delaware General Corporation Law. Section 203 generally prohibits a person beneficially owning, directly or indirectly, 15% or more of our outstanding common stock from engaging in a business combination with us for three years after the person acquired the stock. However, this prohibition does not apply if (A) our Board of Directors approves in advance the person’s ownership of 15% or more of the shares or the business combination or (B) the business combination is approved by our stockholders by a vote of at least two-thirds of the outstanding shares not owned by


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the acquiring person. When we were formed, the Klaassens and their respective affiliates and estates were exempted from this provision.
 
Our Board of Directors has adopted a stockholder rights plan that could discourage a third party from making a proposal to acquire us.
 
In November 2008, our Board of Directors amended and restated our stockholder rights plan, which was originally adopted in April 2006. The stockholder rights plan may discourage a third party from making an unsolicited proposal to acquire us. Under the plan, preferred stock purchase rights, which are attached to our common stock, generally will be triggered upon the acquisition, directly or indirectly through certain derivative positions, of 10% or more of our outstanding common stock, except that stockholders who beneficially owned more than 10% of our stock as of November 19, 2008 were permitted to maintain their existing ownership positions without triggering the preferred stock purchase rights. If triggered, these rights would entitle our stockholders, other than the person triggering the rights, to purchase our common stock, and, under certain circumstances, the common stock of an acquirer, at a price equal to one-half the market value of our common stock.
 
Our management has influence over matters requiring the approval of stockholders.
 
As of December 31, 2008, the Klaassens beneficially owned approximately 11.5% of our outstanding common stock and our executive officers and directors as a group, including the Klaassens, beneficially owned approximately 13.3% of the outstanding common stock. As a result, the Klaassens and our other executive officers and directors have influence over matters requiring the approval of our stockholders, including business combinations and the election of directors.
 
Item 1B.  Unresolved Staff Comments
 
On February 25, 2009 we received several comments from the SEC staff relating to our 2007 Form 10-K filed in July 2008 and our Form 10-KA filed in December 2008. These comments questioned the timing of our recording of the impairment charge included in the 2007 financial statements of the Fountains venture included in our Form 10-KA filed in December 2008. We recorded this impairment charge in our financial statements in 2008 when we reached a conclusion that our investment was impaired. The SEC’s question is whether we should restate our 2007 financial statements. By a letter dated February 26, 2009, we responded to the SEC Staff that at the time of the filing of our 2007 financial statements in July 2008 we considered all the facts and circumstances relevant to the impairment analysis and reached a reasoned judgment that no impairment was necessary. Any change in circumstances after that issuance date is reflected as a change in estimate under SFAS 154 in the period in which the change in circumstances occurred. The financial statements of the venture were not issued until November 2008. In the fourth quarter of 2008, the outlook for purposes of evaluating the carrying value of the underlying assets was based on the significant deterioration in economic circumstances and the credit markets in the fourth quarter of 2008. We believed that the separate financial statements of the venture should include an assessment of all the circumstances at the time of the issuance of those financial statements. We do not believe that our 2007 financial statements were in error, and therefore we have expressed our view to the SEC staff that no restatement is necessary.
 
Item 2.  Properties
 
We lease our corporate offices, regional operations and development offices, and warehouse space under various leases. The leases have terms of three to 17 years.
 
Of the 435 communities we operated at December 31, 2008, 47 were wholly owned, 15 were leased under operating leases, 10 were a consolidated variable interest entity, 203 were owned in unconsolidated ventures and 160 were owned by third parties. See the “Properties” section included in Item 1, “Business” for a description of the properties. See Note 13 to the consolidated financial statements for a description of mortgages and notes payable related to certain of our properties.


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Item 3.  Legal Proceedings
 
 
As previously disclosed, on September 14, 2006, we acquired all of the outstanding stock of Trinity Hospice Inc. (“Trinity”). As a result of this transaction, Trinity became an indirect, wholly owned subsidiary of the Company. On January 3, 2007, Trinity received a subpoena from the Phoenix field office of the OIG requesting certain information regarding Trinity’s operations in three locations for the period January 1, 2000 through June 30, 2006, a period that was prior to the Company’s acquisition of Trinity. The Company was advised that the subpoena was issued in connection with an investigation being conducted by the Commercial Litigation Branch of the U.S. Department of Justice and the civil division of the U.S. Attorney’s office in Arizona. The subpoena indicates that the OIG is investigating possible improper Medicare billing under the FCA. In addition to recovery of any Medicare reimbursements previously paid for false claims, an entity found to have submitted false claims under the FCA may be subject to treble damages plus a fine of between $5,500 and $11,000 for each false claim submitted. Trinity has complied with the subpoena and continues to supplement its responses as requested.
 
On September 11, 2007, Trinity and the Company were served with a complaint filed on September 5, 2007 in the United States District Court for the District of Arizona. That filing amended a complaint filed under seal on November 21, 2005 by four former employees of Trinity under the qui tam provisions of the FCA. The qui tam provisions authorize persons (“relators”) claiming to have evidence that false claims may have been submitted to the United States to file suit on behalf of the United States against the party alleged to have submitted such false claims. Qui tam suits remain under seal for a period of at least 60 days to enable the government to investigate the allegations and to decide whether to intervene and litigate the lawsuit, or, alternatively, to decline to intervene, in which case the qui tam plaintiff, or relator, may proceed to litigate the case on behalf of the United States. Qui tam relators are entitled to 15% to 30% of the recovery obtained for the United States by trial or settlement of the claims they file on its behalf. On June 6, 2007, the Department of Justice and the U.S. Attorney for Arizona filed a Notice with the Court advising of its decision not to intervene in the case, indicating that its investigation was still ongoing. This action followed previous applications by the U.S. Government for extensions of time to decide whether to intervene. As a result, on July 10, 2007, the Court ordered the complaint unsealed and the litigation to proceed. The matter is therefore currently being litigated by the four individual relators. The amended complaint alleges that during periods prior to the acquisition by the Company, Trinity engaged in certain actions intended to obtain Medicare reimbursement for services rendered to beneficiaries whose medical conditions were not of a type rendering them eligible for hospice reimbursement and violated the FCA by submitting claims to Medicare as if the services were covered services. The relators alleged in their amended complaint that the total loss sustained by the United States is probably in the $75 million to $100 million range. On July 3, 2008, the amended complaint was revised in the form of a second amended complaint which replaced the loss sustained range of $75 million to $100 million with an alleged loss by the United States of at least $100 million. The original complaint named KRG Capital, LLC (an affiliate of former stockholders of Trinity) and Trinity Hospice LLC (a subsidiary of Trinity) as defendants. The second amended complaint names Sunrise Senior Living, Inc., KRG Capital, LLC, aka KRG Capital Partners, LLC, KRG Capital, LLC, KRG Capital Fund II, L.P., KRG Capital Fund II (PA), L.P., KRG Capital Fund II (FF), L.P., KRG Co-Investment, L.L.C., American Capital Strategies, LTD, and Trinity as defendants. On October 21, 2008, the United States, through the Civil Division of the U.S. Department of Justice, and the U.S. Attorney’s Office for the District of Arizona, filed a motion with the District Court to intervene in the pending case, but only as the case relates to defendant Trinity Hospice, Inc. The United States has indicated that it does not intend to intervene in the case as it relates to any other defendant, including Sunrise Senior Living, Inc. The motion is currently pending. The lawsuit is styled United States ex rel. Joyce Roberts, et al., v. KRG Capital, LLC, et al., CV05 3758 PHX-MEA (D. Ariz.).
 
On February 13, 2008, Trinity received a subpoena from the Los Angeles regional office of the OIG requesting information regarding Trinity’s operations in 19 locations for the period between December 1, 1998 through February 12, 2008. This subpoena relates to the ongoing investigation being conducted by the Commercial Litigation Branch of the U.S. Department of Justice and the civil division of the U.S. Attorney’s Office in Arizona, as discussed above. Trinity is in the process of complying with the subpoena.


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At December 31, 2007, we had $6 million accrued for possible fines, penalties and damages relating to this matter. We have reduced this accrual to $1 million at December 31, 2008 based on our current estimate of expected losses.
 
 
The Internal Revenue Service is auditing our federal income tax returns for the years ended December 31, 2005, 2006 and 2007. In July 2008, our 2005 federal income tax return audit was settled with the IRS, resulting in a tax liability of approximately $0.2 million. In January 2009, the IRS reopened the audit of our 2005 federal income tax return and decided to audit our 2007 federal income tax return as a result of a refund claim filed with our 2007 federal income tax return relating to the 2007 net operating loss carryback for which we were seeking reimbursement of a certain portion of the federal income taxes we had paid in 2005.
 
In February 2009, we settled with the IRS on our employment tax audits for 2004, 2005, and 2006. The IRS determined that we were liable for payroll tax deposit penalties on stock option exercises during 2004, 2005, and 2006 for certain deposits that were made after the prescribed due dates. The total penalty was approximately $0.2 million for the three years. We paid the total penalty in November 2008.
 
 
We previously announced on December 11, 2006 that we had received a request from the SEC for information about insider stock sales, timing of stock option grants and matters relating to our historical accounting practices that had been raised in media reports in the latter part of November 2006 following receipt of a letter by us from the Service Employees International Union. On May 25, 2007, we were advised by the staff of the SEC that it had commenced a formal investigation. We have fully cooperated, and intend to continue to fully cooperate, with the SEC.
 
 
Two putative securities class actions, styled United Food & Commercial Workers Union Local 880-Retail Food Employers Joint Pension Fund, et al. v. Sunrise Senior Living, Inc., et al., Case No. 1:07CV00102, and First New York Securities, L.L.C. v. Sunrise Senior Living, Inc., et al., Case No. 1:07CV000294, were filed in the U.S. District Court for the District of Columbia on January 16, 2007 and February 8, 2007, respectively. Both complaints alleged securities law violations by Sunrise and certain of its current or former officers and directors based on allegedly improper accounting practices and stock option backdating, violations of generally accepted accounting principles, false and misleading corporate disclosures, and insider trading of Sunrise stock. Both sought to certify a class for the period August 4, 2005 through June 15, 2006, and both requested damages and equitable relief, including an accounting and disgorgement. Pursuant to procedures provided by statute, two other parties, the Miami General Employees’ & Sanitation Employees’ Retirement Trust and the Oklahoma Firefighters Pension and Retirement System, appeared and jointly moved for consolidation of the two securities cases and appointment as the lead plaintiffs, which the Court ultimately approved. The cases were consolidated on July 31, 2007. Thereafter, a stipulation was submitted pursuant to which the new putative class plaintiffs filed their consolidated amended complaint (under the caption In re Sunrise Senior Living, Inc. Securities Litigation, Case No. 07-CV-00102-RBW) on June 6, 2008. The complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, and names as defendants the Company, Paul J. Klaassen, Teresa M. Klaassen, Thomas B. Newell, Tiffany L. Tomasso, Larry E. Hulse, Carl G. Adams, Barron Anschutz, and Kenneth J. Abod.
 
The defendants’ motion to dismiss the complaint was filed on August 11, 2008. Lead plaintiffs filed their opposition brief to the motion to dismiss on October 10, 2008. The parties subsequently submitted stipulations to the court noting that they had met with a mediator and were pursuing settlement discussions, and, as a result, requested and obtained from the court extensions of the date for the defendants to file their reply brief in support of their motion to dismiss.
 
On February 27, 2009, Sunrise and its current or former directors or officers who were named individually as defendants entered into an agreement, subject to court approval, to settle the putative class action. The settlement


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calls for the certification by the court of a class consisting of persons (with certain exceptions) who purchased Sunrise common stock between February 26, 2004 and July 28, 2006, and payment of $13.5 million in cash into an interest-bearing escrow account by March 6, 2009. Upon final approval of the settlement by the court, the funds, less any costs of administration and any attorneys’ fees and expenses that the court might award to plaintiffs’ counsel, would be disbursed to participating class members according to a distribution plan to be submitted to and approved by the court.
 
Concurrently with entering into the settlement agreement, Sunrise and the Individual Defendants also are entering into agreements and releases with two of its insurance carriers, which provided primary and excess insurance coverage, respectively, under certain Directors’ and Officers’ Liability insurance policies for the relevant periods. The two insurance carriers are combining to pay $13.4 million toward the settlement amount, which will exhaust the coverage limits under the primary policy (after taking account of prior payments for related defense costs), but will not exhaust coverage limits under the excess policy. Sunrise and the Individual Defendants are providing releases to the carrier for which the coverage limits will be exhausted for all claims under its policy, and are providing to the other carrier releases as to claims under its policy relating to the settled putative class action litigation and the putative derivative litigations referenced below, in each case subject to court approval of the related settlement agreement. Taking into account the insurance contribution, the net cost of the settlement of the putative securities class action lawsuit to Sunrise is expected to be approximately $100,000. No amounts are to be paid by the Individual Defendants.
 
The settlement agreement reached in this putative securities class action litigation follows the settlement agreement, subject to court approval, entered into on February 19, 2009 by Sunrise and the individuals named as defendants in two putative stockholder derivative actions brought by certain alleged stockholders of Sunrise for the benefit of the company, entitled In re Sunrise Senior Living Derivative Litigation, Inc., Case No. 1:07CV00143-RBW, pending in the U.S. District Court in the District of Columbia, and Young, et al. v. Klaassen, et al., Case No. 2770-N (CCNCC), pending in the Delaware Chancery Court, which settlement agreement and related funding arrangements are described in greater detail below.
 
 
On January 19, 2007, the first of three putative shareholder derivative complaints was filed in the U.S. District Court for the District of Columbia against certain of our current and former directors and officers, and naming us as a nominal defendant. Counsel for the plaintiffs subsequently agreed among themselves to the appointment of lead plaintiffs and lead counsel. On June 29, 2007, the lead plaintiffs filed a Consolidated Shareholder Derivative Complaint, again naming us as a nominal defendant, and naming as individual defendants Paul J. Klaassen, Teresa M. Klaassen, Ronald V. Aprahamian, Craig R. Callen, Thomas J. Donohue, J. Douglas Holladay, William G. Little, David G. Bradley, Peter A. Klisares, Scott F. Meadow, Robert R. Slager, Thomas B. Newell, Tiffany L. Tomasso, John F. Gaul, Bradley G. Rush, Carl Adams, David W. Faeder, Larry E. Hulse, Timothy S. Smick, Brian C. Swinton and Christian B. A. Slavin. The consolidated case is captioned: In re Sunrise Senior Living Derivative Litigation, Inc, Case No. 1:07CV00143 (the “District of Columbia action”). The consolidated complaint alleges violations of federal securities laws and breaches of fiduciary duty by the individual defendants, arising out of the same matters as are raised in the purported class action litigation described above. The plaintiffs seek damages and equitable relief on behalf of Sunrise. We and the individual defendants filed separate motions to dismiss the consolidated complaint. Subsequently, the plaintiffs filed an amended consolidated complaint that did not substantially alter the nature of their claims. The amended consolidated complaint was accepted by the Court and deemed to have been filed on March 28, 2008. We and the individual defendants filed motions to dismiss the amended consolidated complaint on June 16, 2008. The plaintiffs also filed a motion to lift the stay on discovery in this derivative suit. The motion was denied after briefing.
 
On March 6, 2007, a putative shareholder derivative complaint was filed in the Court of Chancery in the State of Delaware against Paul J. Klaassen, Teresa M. Klaassen, Ronald V. Aprahamian, Craig R. Callen, Thomas J. Donohue, J. Douglas Holladay, David G. Bradley, Robert R. Slager, Thomas B. Newell, Tiffany L. Tomasso, Carl Adams, David W. Faeder, Larry E. Hulse, Timothy S. Smick, Brian C. Swinton and Christian B. A. Slavin, and naming us as a nominal defendant. The case is captioned Peter V. Young, et al. v. Paul J. Klaassen, et al., Case No. 2770-N (CCNCC) (the “Delaware action”). The complaint alleges breaches of fiduciary duty by the individual


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defendants arising out of the grant of certain stock options that are the subject of the purported class action and shareholder derivative litigation described above. The plaintiffs seek damages and equitable relief on behalf of Sunrise. We and the individual defendants separately filed motions to dismiss this complaint on June 6, 2007 and June 13, 2007. The plaintiffs amended their original complaint on September 17, 2007. On November 2, 2007, we and the individual defendants moved to dismiss the amended complaint. In connection with the motions to dismiss, and at plaintiffs’ request, the Chancery Court issued an order on April 25, 2008 directing us to produce a limited set of documents relating to the Special Independent Committee’s findings with respect to historic stock options grants. We produced those documents to the plaintiffs on May 16, 2008. Supplemental briefing on defendants’ motions to dismiss has been completed and, while the motions were pending, the plaintiffs requested that the Chancery Court stay the action, at least temporarily. The defendants did not oppose that request, and the Chancery Court granted an indefinite stay of proceedings on November 19, 2008, and directed the parties to provide a further status report by February 1, 2009. Following the parties’ status report, in which it was proposed that the stay remain in place, the Chancery Court extended the stay on February 17, 2009, and directed the parties to provide a further report by May 4, 2009.
 
On February 19, 2009, the Company and the individual defendants entered into an agreement to settle the District of Columbia and Delaware actions. Under the terms of this settlement, which is subject to court approval, the Company, in addition to corporate governance measures that it already has implemented or is in the process of implementing, has agreed to (1) require independent directors to certify that they are independent under the rules of the New York Stock Exchange and to give prompt notification of any changes in their status that would render them no longer independent and (2) implement a minimum two-year vesting period, with appropriate exceptions, for stock option awards to employees. In addition, Paul J. Klaassen, the Company’s non-executive chairman, and the Company have agreed that the 700,000 stock options granted to Mr. Klaassen in conjunction with his previous employment agreement executed in September 2000 will be repriced from (a) $8.50 per share, the price set on September 11, 2000 by the Compensation Committee of the Company’s Board based on the prior day’s closing price, to (b) $13.09 per share, the closing price on the business day prior to November 10, 2000, the date on which the Company’s full Board approved the terms of the employment agreement. The agreement also provides that if plaintiffs in the District of Columbia action apply to the court for an award of attorneys’ fees and expenses, the Company and/or its insurers will pay the amount so awarded, not to exceed $1.0 million, within 10 days following final approval of the settlement and the fee and expense award. Plaintiffs in the Delaware action will not make any separate application for an award of fees or expenses. The amount of attorneys’ fees and expenses that the court awards to plaintiffs is to be funded by one of the Company’s directors’ and officers’ liability insurance carriers under an applicable policy of insurance. No amounts are to be paid by the Company or by the individual defendants in the District of Columbia and Delaware actions.
 
 
We were a defendant in a lawsuit filed by CGB Occupational Therapy, Inc. (“CGB”) in September 2000 in the U.S. District Court for the Eastern District of Pennsylvania. CGB provided therapy services to two nursing home communities in Pennsylvania that were owned by RHA Pennsylvania Nursing Homes (“RHA”) and managed by one of our subsidiaries. In 1998, RHA terminated CGB’s contract. In its lawsuit, CGB alleged, among other things, that in connection with that termination, Sunrise tortiously interfered with CGB’s contractual relationships with RHA and several of the therapists that CGB employed on an at-will basis. In a series of court decisions during 2002 through 2005, CGB was awarded compensatory damages of $109,000 and punitive damages of $2 million. In 2005, Sunrise appealed the punitive damages award. On August 23, 2007, a panel of the U.S. Court of Appeals for the Third Circuit vacated the $2 million punitive damages award and remanded the case with instructions that the district court enter a new judgment for punitive damages in the amount of $750,000. On September 5, 2007, CGB filed a petition for rehearing with the U.S. Court of Appeals for the Third Circuit. That petition was denied on September 24, 2007. The Company paid $750,000 in damages and $149,000 in interest to CGB on February 1, 2008 in full and complete satisfaction of the judgment.
 
Pursuant to an agreement reached between the parties in May 2008, the Company settled with no admission of fault by either party the previously disclosed litigation filed by Bradley B. Rush, the Company’s former chief financial officer, in connection with the termination of his employment. As previously disclosed, on April 23, 2007,


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Mr. Rush was suspended with pay. The action was taken by the board of directors following a briefing of the independent directors by WilmerHale, independent counsel to the Special Independent Committee. The Board concluded, among other things, that certain actions taken by Mr. Rush were not consistent with the document retention directives issued by the Company. These actions consisted of Mr. Rush’s deletion of all active electronic files in his user account on one of his Company-issued laptops. Mr. Rush’s employment thereafter was terminated for cause on May 2, 2007. Mr. Rush’s lawsuit asserted that his termination was part of an alleged campaign of retaliation against him for purportedly uncovering and seeking to address accounting irregularities, and it contended that his termination was not for “cause” under the Company’s Long Term Incentive Cash Bonus Plan and the terms of prior awards made to him of certain stock options and shares of restricted stock, to which he claimed entitlement notwithstanding his termination. Mr. Rush asserted five breach of contract claims involving a bonus, restricted stock and stock options. Mr. Rush also asserted a claim for defamation arising out of comments attributed to us concerning the circumstances of his earlier suspension of employment.
 
 
In addition to the lawsuits and litigation matters described above, we are involved in various lawsuits and claims arising in the normal course of business. In the opinion of management, although the outcomes of these other suits and claims are uncertain, in the aggregate they are not expected to have a material adverse effect on our business, financial condition, and results of operations.
 
Item 4.  Submission of Matters to a Vote of Security Holders
 
On November 13, 2008, Sunrise held its 2008 annual meeting of stockholders. The annual meeting was called for the following purposes: (1) to elect three directors for terms of one year each; (2) to approve and adopt an amended and restated certificate of incorporation, including amendments to declassify the board of directors and to provide that directors may be removed without cause (except directors currently serving terms that expire at the 2009 or 2010 annual meetings, which directors may be removed only for cause for the remainder of their current terms), but that no special meeting of stockholders for the purpose of removing any director without cause may be called at the request of stockholders; (3) to approve the Sunrise Senior Living, Inc. 2008 Omnibus Incentive Plan and (4) to transact any other business as may properly come before the annual meeting or any adjournments or postponements.
 
Each of the three director nominees (Glyn F. Aeppel, David I. Fuente and Stephan D. Harlan) were re-elected to new one year terms. The vote totals for the election of directors were as follows:
 
                 
Directors
  For     Withhold Authority to Vote  
 
Glyn F. Aeppel
    45,532,913       1,003,082  
David I. Fuente
    45,554,276       981,719  
Stephen D. Harlan
    42,779,266       3,756,729  
 
The other directors whose terms of office continue after the 2008 annual meeting are Thomas J. Donohue, J. Douglas Holladay, Paul J. Klaassen, Lynn Krominga, William G. Little and Mark S. Ordan.
 
The amended and restated certificate of incorporation, which included amendments to declassify the board of directors and to provide that directors may be removed without cause (except directors currently serving terms that expire at the 2009 or 2010 annual meetings, which directors may be removed only for cause for the remainder of their current terms), but that no special meeting of stockholders for the purpose of removing any director without cause may be called at the request of stockholders, was approved at the meeting. The vote tabulation for the proposal to amend the certificate of incorporation to declassify the board of directors was as follows: 45,384,460 votes (97.53% of the total eligible votes excluding broker non-votes) were cast for approval of the proposal, 405,452 votes (0.87% of the total eligible votes excluding broker non-votes) were cast against such approval and 746,083 votes (1.60% of the total eligible votes excluding broker non-votes) were abstentions. Broker non-votes totaled 0. The vote tabulation for the proposal to amend the certificate of incorporation to provide that directors may be removed without cause (except for directors currently serving terms that expire at the 2009 or 2010 annual meetings, which directors may be removed only with cause for the remainder of their current terms), but that no special meeting of stockholders for the purpose of removing any director without cause may be called at the request of stockholders


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was as follows: 44,934,466 votes (96.56% of the total eligible votes excluding broker non-votes) were cast for approval of the proposal, 1,521,325 votes (3.27% of the total eligible votes excluding broker non-votes) were cast against such approval and 80,204 votes (0.17% of the total eligible votes excluding broker non-votes) were abstentions. Broker non-votes totaled 0.
 
The Sunrise Senior Living, Inc. 2008 Omnibus Incentive Plan was approved at the meeting. The vote tabulation for the proposal to approve and adopt the 2008 Omnibus Plan was as follows: 34,429,184 votes (73.98% of the total eligible votes excluding broker non-votes) were cast for approval of the proposal, 7,001,300 votes (16.87% of the total eligible votes excluding broker non-votes) were cast against such approval and 70,135 votes (0.17% of the total eligible votes excluding broker non-votes) were abstentions. Broker non-votes totaled 5,035,376.
 
There was no other business that was considered before the 2008 annual meeting.


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Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Our common stock is traded on the New York Stock Exchange under the symbol “SRZ.”
 
The following table sets forth, for the quarterly periods indicated, the high and low sales prices of our common stock:
 
 
                 
Quarter Ended   High     Low  
 
March 31, 2008
  $   27.21     $   20.19  
June 30, 2008
  $ 30.65     $ 24.64  
September 30, 2008
  $ 22.30     $ 12.91  
December 31, 2008
  $ 13.90     $ 0.27  
 
                 
Quarter Ended   High     Low  
 
March 31, 2007
  $   41.50     $   30.10  
June 30, 2007
  $ 42.97     $ 36.43  
September 30, 2007
  $ 41.05     $ 33.00  
December 31, 2007
  $ 39.70     $ 26.78  
 
Holders
 
There were 275 stockholders of record at December 31, 2008.
 
 
No cash dividends have been paid in the past and we have no intention to pay cash dividends in the foreseeable future.
 
 
A summary of our repurchases of shares of our common stock for the three months ended December 31, 2008 was as follows:
 
                                 
                Shares Purchased
    Maximum Number
 
    Total Number
    Average
    as Part of Publicly
    of Shares that May
 
    of Shares
    Price Paid
    Announced Plans
    Yet be Purchased
 
    Purchased(1)     per Share     or Programs     Under the Plans  
 
October 1 — October 31, 2008
        $              
November 1 — November 30, 2008
                       
December 1 — December 31, 2008
    78,949       1.37              
                                 
Total
    78,949     $ 1.37              
 
 
(1) Represents the number of shares acquired by us from employees as payment of applicable statutory minimum withholding taxes owed upon vesting of restricted stock granted under our 2002 and 2003 Stock Option and Restricted Stock Plans, as amended.


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Item 6.   Selected Financial Data
 
The selected consolidated financial data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and notes thereto appearing elsewhere herein.
 
                                         
    December 31,  
(Dollars in thousands, except per share amounts)
  2008(1)(2)     2007(2)     2006(2)(3)(4)     2005(2)(3)(5)(6)     2004(2)  
                            (Unaudited)  
 
STATEMENTS OF INCOME DATA:
                                       
Operating revenues
  $ 1,701,643     $ 1,583,241     $ 1,628,605     $ 1,508,851     $ 1,266,225  
Operating expenses
    2,091,065       1,807,695       1,700,887       1,474,283       1,283,505  
(Loss) income from operations
    (389,422 )     (224,454 )     (72,282 )     34,568       (17,280 )
Gain on the sale and development of real estate and equity interests
    17,374       105,081       51,347       81,723       14,025  
Sunrise’s share of earnings, return on investment in unconsolidated communities and gain (loss) from investments accounted for under profit-sharing method
    (15,175 )     108,969       42,845       12,615       (70 )
(Loss) income from continuing operations
    (379,764 )     (18,227 )     15,677       82,996       (3,542 )
(Loss) income from discontinued operations, net of tax
    (37,284 )     (52,048 )     (393 )     68       75  
Extraordinary loss, net of tax
    (22,131 )                              
Net (loss) income
    (439,179 )     (70,275 )     15,284       83,064       (3,467 )
Net (loss) income per common share:
                                       
Basic
                                       
Continuing operations
  $ (7.54 )   $ (0.37 )   $ 0.32     $ 2.00     $ (0.08 )
Discontinued operations, net of tax
    (0.74 )     (1.04 )     (0.01 )            
Extraordinary loss, net of tax
    (0.44 )                        
                                         
Net (loss) income
  $ (8.72 )   $ (1.41 )   $ 0.31     $ 2.00     $ (0.08 )
                                         
Diluted
                                       
Continuing operations
  $ (7.54 )   $ (0.37 )   $ 0.31     $ 1.74     $ (0.08 )
Discontinued operations, net of tax
    (0.74 )     (1.04 )     (0.01 )            
Extraordinary loss, net of tax
    (0.44 )                        
                                         
Net (loss) income
  $ (8.72 )   $ (1.41 )   $ 0.30     $ 1.74     $ (0.08 )
                                         
BALANCE SHEET DATA:
                                       
Total current assets
  $ 304,908     $ 529,964     $ 361,998     $ 326,888     $ 282,524  
Total current liabilities
    735,421       646,311       451,982       280,684       203,998  
Property and equipment, net
    681,352       656,211       609,385       494,069       359,070  
Property and equipment subject to a sales contract, net
                193,158       255,231       473,485  
Property and equipment subject to financing, net
          58,871       62,520       64,174       28,988  
Goodwill
    39,025       169,736       218,015       153,328       121,825  
Total assets
    1,381,557       1,798,597       1,848,301       1,587,785       1,506,453  
Total debt
    636,131       253,888       190,605       248,396       191,666  
Deposits related to properties subject to a sale contract
                240,367       324,782       599,071  
Liabilities related to properties accounted for under the financing method
          54,317       66,283       64,208       24,247  
Deferred income tax liabilities
    28,129       82,605       78,632       70,638       60,692  
Total liabilities
    1,233,643       1,214,826       1,201,078       1,094,209       1,139,750  
Total stockholders’ equity
    138,528       573,563       630,708       480,864       365,122  
OPERATING AND OTHER DATA:
                                       
Cash dividends per common share
  $     $     $     $     $  
Communities (at end of period):
                                       
Consolidated communities
    72       62       62       59       57  
Communities in unconsolidated ventures
    203       199       180       153       122  
Communities managed for third party owners
    160       174       180       186       183  
                                         
Total
    435       435       422       398       362  
                                         
Resident capacity:
                                       
Consolidated communities
    9,909       8,683       8,646       7,980       7,943  
Communities in unconsolidated ventures
    22,826       22,340       20,433       16,485       10,929  
Communities managed for third party owners
    21,608       22,894       23,091       26,208       24,237  
                                         
Total
    54,343       53,917       52,170       50,673       43,109  
                                         


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(1) In 2008, we wrote-off $121.8 million of goodwill from our acquisitions of MSLS and Karrington Health, Inc., we wrote-off $95.8 million of abandoned development projects, we incurred restructuring and severance costs of $18.1 million, we incurred $36.5 million in impairment charges related to owned communities and land parcels and we consolidated our German communities on September 1, 2008.
 
(2) In December 2008, our Trinity subsidiary ceased operations. Trinity’s results of operations from acquisition in September 2006, along with two communities sold in 2008 are classified and presented as discontinued operations.
 
(3) In 2006, Five Star bought out 18 management contracts and we received $134.7 million related to their buyout. We also wrote off $25.4 in unamortized management contract intangible assets. In 2005, Five Star bought out 12 management contracts and we received $83 million related to their buyout. We also wrote off $14.6 million in unamortized management contract intangible assets.
 
(4) In February 2006, we completed the redemption of our remaining 5.25% convertible subordinated notes due February 1, 2009 through the issuance of common stock. Prior to the redemption date, substantially all of the approximately $120.0 million principal amount of the notes outstanding at the time the redemption was announced had been converted into approximately 6.7 million shares of common stock. The conversion price was $17.92 per share in accordance with the terms of the indenture governing the notes.
 
(5) In May 2005, we acquired 100% of the equity interests in Greystone, a developer and manager of CCRCs. The operating results of Greystone are included in our restated consolidated statement of income beginning May 10, 2005.
 
(6) In October 2005, we completed a two-for-one stock split in the form of a 100% stock dividend. As a result of the stock split, each stockholder received one additional share of common stock for each share on that date. All per share amounts have been adjusted to reflect the stock split for all periods presented.
 
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion should be read together with the information contained in our consolidated financial statements, including the related notes, and other financial information appearing elsewhere herein.
 
 
We are a Delaware corporation and a provider of senior living services in the United States, Canada, the United Kingdom and Germany.
 
At December 31, 2008, we operated 435 communities, including 391 communities in the United States, 15 communities in Canada, 20 communities in the United Kingdom and nine communities in Germany (including two communities that were closed in January 2009), with a total resident capacity of approximately 54,340. Of the 435 communities we operated at December 31, 2008, 47 were wholly owned, 15 were under operating leases, 10 were consolidated as a variable interest entity, 203 were owned in unconsolidated ventures and 160 were owned by third parties. In addition, at December 31, 2008, we provided pre-opening management and professional services to 26 communities under construction, of which 19 communities are in the United States and seven communities are in the United Kingdom, with a combined capacity for approximately 2,700 residents. During 2008, we opened 19 new communities, with a combined resident capacity of approximately 2,600 residents, which were developed by us.
 
As a part of our operating strategy, we may provide limited debt guarantees to certain of our business ventures, guarantee that properties will be completed at budgeted costs approved by all partners in a venture, or provide an operating deficit credit facility as a part of certain management contracts. For information regarding these various guarantees refer to “Liquidity and Capital Resources” below.
 
The stock markets and credit markets in the United States and the rest of the world have been experiencing significant price volatility, dislocations and liquidity disruptions. As a result the market prices of many stocks, including ours, have fluctuated substantially and these circumstances have materially impacted liquidity in the financial markets, making terms for certain financings less attractive, and in some cases have resulted in the unavailability of financing. Continued uncertainty in the credit markets has caused us to significantly reduce the


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scope of our development business and may negatively impact our ability to refinance our Bank Credit Facility and our maturities of long-term debt due in 2009 and 2010, at reasonable terms. There are also current maturities of venture debt due in 2009 of approximately $460 million. A prolonged downturn in the financial markets may cause us to seek alternative sources of potentially less attractive financing, and may require us to further adjust our business plan accordingly. These events also may make it more difficult or costly for us to raise capital, including through the issuance of common stock. The disruptions in the financial markets have had and may have a material adverse effect on the market value of our common stock and other adverse effects on us and our business.
 
Because of our current financial position and the significant debt maturing in 2009 and 2010, we are seeking to preserve cash, reduce our financial obligations and reach negotiated settlements with various creditors to preserve our liquidity. Specifically, we have been seeking to reduce our payments under our guarantee obligations for development projects and our operating deficit obligations for our German communities, our Fountains venture and our Aston Gardens venture, which have historically been the source of significant payments by us. In conjunction with our development ventures, we have provided project completion guarantees to venture lenders and the venture itself, operating deficit guarantees to the venture lenders whereby after depletion of established reserves, we guarantee the payment of the lender’s monthly principal and interest during the term of the guarantee, income support guarantees to venture partners and guarantees to the venture to fund operating shortfalls. Accordingly, we must reduce our debt and restructure and/or divest these burdensome financial guarantees including operating deficit funding and completion guarantee obligations. We are not in compliance with many of the financial covenants in our loan agreements and the loan agreements of our ventures. We have not made principal or interest payments on the loans for our German communities in 2009, we have not paid default interest on the loan to our Fountains venture and we have not paid income support payments to the venture partner in the Fountains venture. We have commenced discussions regarding the restructuring of claims with the lenders to our German communities, the lender for the Fountains portfolio, our venture partner in the Fountains and certain other lenders, and we will not be in compliance with the financial covenants in our Bank Credit Facility on March 31, 2009. The existence of these factors raises substantial doubt about our ability to continue as a going concern. Our auditors have modified their report with respect to the 2008 consolidated financial statements to include a going concern reference.
 
 
See Item 1. “Business” for a discussion of significant developments in 2008 and 2009.
 
 
We currently classify our continuing consolidated operating revenues as follows:
 
  •  management fees related to services provided to operating and pre-opened communities for unconsolidated ventures and third-party owners;
 
  •  resident fees for consolidated communities;
 
  •  ancillary fees for care provided in certain communities;
 
  •  professional fees from development, marketing and other services; and
 
  •  reimbursed contract service revenue related to unconsolidated ventures and third party owners.
 
Operating expenses are classified into the following categories:
 
  •  community expense for our consolidated communities, which includes labor, food, marketing and other direct community expense;
 
  •  lease expense for certain consolidated communities;
 
  •  depreciation and amortization;
 
  •  ancillary expense;
 
  •  general and administrative expense related to headquarters and regional staff expenses and other administrative costs;


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  •  venture expense for asset management and venture accounting;
 
  •  development expense for site selection, zoning, community design, construction management and financing incurred for development communities;
 
  •  impairment of goodwill and intangible assets;
 
  •  write-off of abandoned projects;
 
  •  impairment of communities;
 
  •  provision for doubtful accounts;
 
  •  loss on financial guarantees and other contracts;
 
  •  write-off of unamortized contract costs; and
 
  •  reimbursable contract service expense related to unconsolidated ventures and third-party owners.


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Our results of operations for each of the three years in the period ended December 31 were as follows:
 
                                         
                      Percent Change  
    Year Ended December 31,     2008 vs.
    2007 vs.
 
(In thousands)
  2008     2007     2006     2007     2006  
 
Operating revenue:
                                       
Management fees
  $ 139,409     $ 127,830     $ 117,228       9.1 %     9.0 %
Buyout fees
    621       1,626       134,730       (61.8 )%     (98.8 )%
Resident fees for consolidated communities
    435,580       400,238       379,442       8.8 %     5.5 %
Ancillary fees
    54,633       58,645       56,673       (6.8 )%     3.5 %
Professional fees from development, marketing and other
    59,969       38,855       28,553       54.3 %     36.1 %
Reimbursed contract services
    1,011,431       956,047       911,979       5.8 %     4.8 %
                                         
Total operating revenue
    1,701,643       1,583,241       1,628,605       7.5 %     (2.8 )%
                                         
Operating expenses:
                                       
Community expense for consolidated communities
    335,739       288,180       274,545       16.5 %     5.0 %
Community lease expense
    60,145       62,588       59,046       (3.9 )%     6.0 %
Depreciation and amortization
    51,276       52,701       47,687       (2.7 )%     10.5 %
Ancillary expense
    60,620       68,958       59,029       (12.1 )%     16.8 %
General and administrative
    163,159       181,325       131,473       (10.0 )%     37.9 %
Venture expense
    6,807       7,187       5,516       (5.3 )%     30.3 %
Development expense
    78,305       72,016       63,634       8.7 %     13.2 %
Impairment of goodwill and intangible assets
    121,828                   N/A       N/A  
Write-off of abandoned development projects
    95,763       28,430       1,329       NM       NM  
Impairment of owned communities and land parcels
    36,510       7,641       15,049       NM       (49.2 )%
Accounting Restatement and Special Independent Committee inquiry, SEC investigation and pending stockholder litigation
    30,224       51,707       2,600       (41.5 )%     N/A  
Restructuring cost
    18,065                   N/A       N/A  
Provision for doubtful accounts
    22,628       8,910       13,965       154.0 %     (36.2 )%
Loss on financial guarantees and other contracts
    5,022       22,005       89,676       (77.2 )%     (75.5 )%
Write-off of unamortized contract costs
                25,359       N/A       N/A  
Reimbursable contract services
    1,004,974       956,047       911,979       5.1 %     4.8 %
                                         
Total operating expenses
    2,091,065       1,807,695       1,700,887       15.7 %     6.3 %
Loss from operations
    (389,422 )     (224,454 )     (72,282 )     73.5 %     NM  
Other non-operating income (expense):
                                       
Interest income
    6,600       9,514       9,476       (30.6 )%     0.4 %
Interest expense
    (21,406 )     (6,650 )     (6,194 )     NM       7.4 %
Loss on investments
    (7,770 )           (5,610 )     N/A       N/A  
Other (expense) income
    (21,602 )     (6,089 )     6,706       NM       NM  
                                         
Total other non-operating (expense) income
    (44,178 )     (3,225 )     4,378       NM       NM  
Gain on the sale and development of real estate
                                       
and equity interests
    17,374       105,081       51,347       (83.5 )%     104.6 %
Sunrise’s share of (loss) earnings and return on investment in unconsolidated communities
    (13,846 )     108,947       43,702       (112.7 )%     149.3 %
(Loss) income from investments accounted for under the profit sharing method
    (1,329 )     22       (857 )     NM       (102.6 )%
Minority interests
    8,154       4,470       6,916       82.4 %     (35.4 )%
                                         
(Loss) income before provision for income taxes, discontinued operations and extraordinary loss
    (423,247 )     (9,159 )     33,204       NM       NM  
Benefit from (provision for) income taxes
    43,483       (9,068 )     (17,527 )     NM       (48.3 )%
                                         
(Loss) income before discontinued operations and extraordinary loss
    (379,764 )     (18,227 )     15,677       NM       NM  
Discontinued operations, net of tax
    (37,284 )     (52,048 )     (393 )     (28.4 )%     NM  
                                         
(Loss) income before extraordinary loss
    (417,048 )     (70,275 )     15,284                  
Extraordinary loss, net of tax
    (22,131 )                 N/A       N/A  
                                         
Net (loss) income
  $ (439,179 )   $ (70,275 )   $ 15,284       NM       NM  
                                         


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The following table summarizes our portfolio of operating communities at December 31, 2008, 2007 and 2006:
 
                                         
                      Percent Change  
    As of December 31,     2008 vs.
    2007 vs.
 
    2008     2007     2006     2007     2006  
 
Total communities
                                       
Consolidated
    62       62       62       0.0 %     0.0 %
Variable Interest Entities
    10       1             N/A       N/A  
Unconsolidated
    203       198       180       2.5 %     10.0 %
Managed
    160       178       180       (10.1 )%     (1.1 )%
                                         
Total
    435       439       422       (0.9 )%     4.0 %
                                         
Resident capacity
    54,343       53,917       52,170       0.8 %     3.3 %
                                         
 
Large and unusual items included in net (loss)/income for the three years included the following:
 
                         
(In millions)
  2008     2007     2006  
 
Impairment of goodwill
  $ (122 )   $     $  
Write-off of abandoned development projects
    (96 )     (28 )     (1 )
Loss from discontinued operations
    (37 )     (52 )      
Impairment of owned communities
    (37 )     (8 )     (15 )
Expenses relating to Accounting Restatement, Special Independent Committee inquiry, SEC investigation and pending stockholder litigation
    (30 )     (52 )     (3 )
Extraordinary loss due to consolidation of German venture
    (22 )            
Restructuring costs
    (18 )            
Write-down of equity investments
    (16 )     (25 )      
Loss on guarantees related to our condominium project
    (3 )     (6 )     (17 )
Loss on guarantees related to The Fountains venture
    (2 )           (22 )
Write-off of intangible assets associated with buyout of management contracts
                (25 )
Loss on guarantees related to our Germany venture
          (16 )     (50 )
Venture recapitalizations and refinancing
    21       57       48  
Real estate gains deferred from prior years recognized in the current period
    8       85       35  
Buyout of management contracts
    1       2       135  
                         
    $ (353 )   $ (43 )   $ 85  
                         
 
Operating Revenue
 
 
2008 Compared to 2007
 
Management fees were $139.4 million in 2008 compared to $127.8 million in 2007, an increase of $11.6 million, or 9.1%. This increase was primarily comprised of:
 
  •  $6.8 million increase from fees associated with existing communities of which $4.8 million is attributable to an increase in average daily rates in North America, $2.2 million is attributable to international communities and a decrease of $0.2 million due to lower occupancy;


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  •  $2.6 million increase in management fees from 17 communities accounted for under the deposit method through July 2007 with no management fee recognition;
 
  •  $4.0 million of expense in 2007 related to a one time refund pursuant to an agreement with a venture partner;
 
  •  $1.4 million increase of fees from communities in the lease-up phase;
 
  •  $1.2 million increase of fees related to Greystone;
 
  •  $2.4 million decrease from terminated management contracts; and
 
  •  $1.9 million decrease in incentive management fees.
 
2007 Compared to 2006
 
Management fees were $127.8 million in 2007 compared to $117.2 million in 2006, an increase of $10.6 million, or 9.0%. This increase was primarily comprised of:
 
  •  $7.2 million from fees associated with existing North American communities primarily due to increases in rates;
 
  •  $3.1 million of incremental revenues from existing international communities;
 
  •  $3.8 million of incremental revenues from 31 new communities managed in 2007 for unconsolidated ventures and third parties;
 
• $5.1 million in incremental incentive management fees; and
 
• $6.6 million decrease due to contract terminations.
 
 
In 2008, one management contract was bought out for a fee of $.6 million. In 2007, two management contracts were bought out for a fee of $1.6 million. In 2006, Five Star Quality Care, Inc. (“Five Star”) bought out 18 contracts for a total buyout fee of $134.7 million.
 
 
2008 Compared to 2007
 
Resident fees for consolidated communities were $435.5 million in 2008 compared to $400.2 million in 2007, an increase of $35.3 million, or 8.8%. This increase was primarily comprised of:
 
  •  $29.8 million from existing consolidated communities primarily resulting from increases in average daily rates;
 
  •  $11.3 million from the consolidation of nine German communities on September 1, 2008;
 
  •  $1.8 million from the addition of three consolidated Canadian communities that were opened during 2008; offset by a
 
  •  $5.2 million decrease from two communities previously accounted for under the financing method of accounting in 2007.
 
2007 Compared to 2006
 
Resident fees for consolidated communities were $400.2 million in 2007 compared to $379.4 million in 2006, an increase of $20.8 million, or 5.5%. This increase was primarily comprised of:
 
  •  $17.3 million from existing communities due to an increase in the average daily rate and fees for other services; and
 
  •  $3.4 million from the acquisition of one community.


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(In millions)
  2008     2007     2006  
 
New York Health Care Services
  $ 35.3     $ 30.6     $ 25.7  
Fountains Health Care Services
    5.5       5.9       7.0  
International Health Care Services
    13.8       13.6       4.8  
At Home
          8.5       19.2  
                         
    $ 54.6     $ 58.6     $ 56.7  
                         
 
There was an $8.5 million decrease in revenue in 2008 that resulted from the deconsolidation of Sunrise At Home in the second quarter of 2007 partially offset by a $4.7 million increase in New York health care services due to increased occupancy and increased utilization of ancillary services by our residents.
 
There was an $10.7 million decrease in revenue in 2007 that resulted from the deconsolidation of Sunrise At Home in the second quarter of 2007 partially offset by a $4.9 million increase in New York health care services due to increased occupancy and ancillary services and an $8.8 million increase in international health care services due to a full year of operations.
 
 
Professional fees from development, marketing and other were as follows:
 
                         
(In millions)
  2008     2007     2006  
 
North America
  $ 26.1     $ 8.2     $ 4.5  
International
    18.4       18.9       12.5  
Greystone
    15.5       11.8       11.6  
                         
    $ 60.0     $ 38.9     $ 28.6  
                         
 
2008 Compared to 2007
 
The $17.9 million increase in North America professional fees from development, marketing and other revenue is due to the net increase of nine communities under development in North America for which we are earning professional fees, from five communities in 2007 to 14 communities in 2008.
 
2007 Compared to 2006
 
Professional fees from development, marketing and other revenue was $38.9 million in 2007 compared to $28.6 million in 2006, an increase of $10.3 million, or 36.1% due primarily to the following:
 
  •  $5.2 million in fees for international paid to us by our ventures or venture partners as compensation for either brokering the sale of venture assets or the sale of the majority partner’s equity interest in a venture; and
 
  •  $3.2 million in North American development fees as five communities earned fees throughout all of 2007 compared to only a portion of the year in 2006.
 
 
Reimbursed contract services were $1,011.4 million in 2008, $956.0 million in 2007 and $912.0 million in 2006. The 5.8% increase in 2008 was due primarily to an increase in the number of communities managed during 2008, from 376 in 2007 to 383 (before the consolidation of our nine German communities on September 1, 2008 and the termination of 11 communities at the end of November 2008) and higher costs primarily due to inflation for items such as labor, food, and utilities partially offset by decreased labor costs in Canada as the workers in the communities are no longer our employees but are employed directly by the communities. The increase of 4.8% in 2007 was due primarily to a 4.4% increase in the number of communities managed, from 360 to 376.


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Operating Expenses
 
 
2008 Compared to 2007
 
Community expense for consolidated communities was $335.7 million in 2008 compared to $288.2 million in 2007, an increase of $47.6 million, or 16.5%. This increase was primarily comprised of:
 
  •  $26.9 million from existing communities resulting primarily from increased labor, utility, and repairs and maintenance costs;
 
  •  $16.7 million from the consolidation of our nine German communities on September 1, 2008; and
 
  •  $4.0 million from the addition of three Canadian communities that were opened during 2008.
 
2007 Compared to 2006
 
Community expense for consolidated communities was $288.2 million in 2007 compared to $274.5 million in 2006, an increase of $13.6 million, or 5.0%. This increase was primarily comprised of:
 
  •  $11.6 million increase from existing communities resulting primarily from increased labor costs; and
 
  •  $2.0 million increase from the acquisition of one community.
 
 
2008 Compared to 2007
 
Community lease expense decreased $2.4 million or 3.9% primarily due to a decrease in contingent rent of $2.9 million partially offset by a $0.6 million increase in base rent in one community. In 2008, contingent rent was $5.3 million compared to $8.2 million in 2007.
 
2007 Compared to 2006
 
Community lease expense was $62.6 million in 2007 as compared to $59.0 million in 2006, an increase of $3.5 million, or 6.0%. This increase was primarily a result of new international communities and increases in contingent rent. Contingent rent was $8.2 million in 2007 as compared to $6.5 million in 2006.
 
 
Depreciation and amortization expense by segment was as follows:
 
                         
(In thousands)   2008     2007     2006  
 
North America
  $ 44,848     $ 47,747     $ 43,985  
Greystone
    3,249       4,068       3,462  
UK and Canada
    1,182       750       160  
Germany
    1,997       136       80  
                         
    $ 51,276     $ 52,701     $ 47,687  
                         
 
Depreciation and amortization expense was $51.3 million, $47.3 million and $37.5 million in 2008, 2007 and 2006, respectively, excluding depreciation expense related to properties subject to the deposit method, financing method and profit-sharing method of accounting. See Note 8 to consolidated financial statements.
 
2008 Compared to 2007
 
The decrease in depreciation and amortization expense of $1.4 million was primarily comprised of decreases related to $6.1 million of depreciation recorded in 2007 relating to assets accounted for under the deposit method, $1.2 million related to the termination and write-off of certain development and management contracts in 2007 and $1.1 million related to sales of communities partially offset by an increase in depreciation expense of $7.0 million for assets placed in service and consolidated in 2008.


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2007 Compared to 2006
 
Depreciation and amortization expense was $52.7 million in 2007 as compared to $47.7 million in 2006. The increase in depreciation and amortization expense of $5.0 million was primarily comprised of $5.5 million from fixed assets placed in service and the acceleration of certain asset lives and $4.0 million increase in amortization due to an acceleration of certain management contract lives. The increases were partially offset by a $4.5 million decrease related to the sales of communities.
 
 
                         
(In millions)   2008     2007     2006  
 
New York Health Care Services
  $ 33.3     $ 32.7     $ 23.5  
Fountains Health Care Services
    5.1       5.7       6.0  
International Health Care Services
    22.2       21.7       8.9  
At Home
          8.8       20.6  
                         
    $ 60.6     $ 68.9     $ 59.0  
                         
 
The decrease in ancillary expenses of $8.3 million, or 12.0%, in 2008 compared to 2007 was primarily due to the deconsolidation of Sunrise At Home in the second quarter of 2007, which reduced these expenses by $8.8 million.
 
The increase in ancillary expenses $9.9 million, or 16.8% in 2007 compared to 2006 was primarily due to a $15.7 million increase in international health care services due to a full year operations and a $9.4 million increase in New York health care services related to increased volume partially offset by a $11.8 million decrease due to deconsolidation of Sunrise At Home in the second quarter of 2007.
 
 
2008 Compared to 2007
 
General and administrative expense was $163.2 million in 2008 compared to $181.3 million in 2007, a decrease of $18.1 million, or 10.6%. This decrease was primarily the result of a $19.2 million decrease in bonus expense related to our first U.K. venture.
 
2007 Compared to 2006
 
General and administrative expense was $181.3 million in 2007 compared to $131.5 million in 2006. The increase in general and administrative expense of $49.9 million, or 37.9%, was primarily comprised of:
 
  •  $29.2 million increase in bonus expense primarily relating to gains at one of our U.K. ventures. During 2007, our first UK venture in which we have a 20% equity interest sold seven communities to a venture in which we have a 10% interest. Primarily as a result of the gains on these asset sales recorded in the ventures, we recorded equity in earnings in 2007 of approximately $75.5 million. When our UK and Germany ventures were formed, we established a bonus pool in respect to each venture for the benefit of employees and others responsible for the success of these ventures. At that time, we contractually agreed with our partner that after certain return thresholds were met, we would each reduce our percentage interests in venture distributions with such excess to be used to fund these bonus pools. During 2007, we recorded bonus expense of $27.8 million in respect of the bonus pool relating to the UK venture. These bonus amounts are funded from capital events and the cash is retained by us in restricted cash accounts. As of December 31, 2007, approximately $18.0 million of this amount was included in restricted cash. Under this bonus arrangement, no bonuses are payable until we receive distributions at least equal to our capital contributions and certain loans made by us to the UK and Germany ventures.
 
  •  $2.9 million increase in legal expense related to the our exploration of strategic alternatives and the settlement of litigation;
 
  •  $2.6 million increase related to costs associated with potential acquisitions that we decided not to pursue;


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  •  $9.0 million increase related to the implementation of outsourcing of our payroll processing function to ADP; and
 
  •  $5.7 million increase in salaries, employee benefits and travel costs as the result of additional employees to support 17 additional communities in 2007.
 
 
2008 Compared to 2007
 
Venture expense was $6.8 million in 2008 compared to $7.2 million in 2007, a decrease of $0.4 million. This decrease was primarily comprised of $0.2 million in salaries and benefits expense and $0.2 million in legal and professional fees.
 
2007 Compared to 2006
 
Venture expense was $7.2 million in 2007 compared to $5.5 million in 2006. The increase in venture expense of $1.7 million was primarily comprised of $2.3 million in salaries and benefits partially offset by a decrease of $0.6 million in legal expenses related to potential acquisitions.
 
 
2008 Compared to 2007
 
Development expense was $78.3 million in 2008 compared to $72.0 million in 2007, an increase of $6.3 million, or 8.7%. This increase was primarily comprised of:
 
  •  $4.7 million increase from the write-off of prepaid insurance for development projects due to the write-off of three condominium projects and other development projects; and
 
  •  $2.1 million increase in project costs not able to be capitalized as the projects were not considered probable.
 
2007 Compared to 2006
 
Development expense was $72.0 million in 2007 compared to $63.6 million in 2006, an increase of $8.4 million, or 13.2%. This increase was primarily comprised of :
 
  •  $2.3 million increase in salaries and benefits resulting from increased staff to support development;
 
  •  $2.6 million increase in travel related to the higher level of development activity;
 
  •  $2.9 million increase in research, legal and other development expenses related to higher level of development activity.
 
 
During 2008, we recorded an impairment charge of $121.8 million related to all the goodwill for our North American business segment which resulted from our acquisition of Marriott Senior Living, Inc. in 2003 and Karrington Health, Inc. in 1999. The impairment was recorded as the fair value of the North American business was less than the fair value of the net tangible assets and identifiable intangible assets. See Item 1, “Business — Significant 2008 and 2009 Developments”.
 
 
The write-off of abandoned development projects was $95.8 million in 2008, $28.4 million in 2007 and $1.3 million in 2006. In 2008, we suspended the development of three condominium projects and we wrote off $27.7 million of development costs. Also, based on our decision to decrease our development pipeline, we wrote off approximately $68.1 million of costs related to 215 development projects we discontinued during 2008. The development project write-offs in 2007 primarily relate to the $21.0 million write-off of capitalized development costs for four senior living condominium projects we discontinued due to adverse economic conditions.


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During 2008, we recorded impairment charges of $19.3 million related to five communities in the U.S., $5.2 million related to two communities in Germany and $12.0 million related to land parcels that are no longer expected to be developed. During 2007, we recorded an impairment charge of $7.6 million related to two communities in the U.S. During 2006, we recorded an impairment charge of $15.0 million related to six small senior living communities in the U.S.
 
Accounting Restatement, Special Independent Committee Inquiry, SEC investigation and pending stockholder litigation
 
We incurred legal and accounting fees of approximately $30.2 million in 2008, $51.7 million in 2007 and $2.6 million in 2006 related to the Accounting Review, the Special Independent Committee inquiry, the SEC investigation and responding to various shareholder actions. The Special Independent committee activities and the accounting restatement were completed during the first quarter of 2008; however, we continue to incur legal fees and related expenses in connection with the SEC investigation and stockholder litigation.
 
 
During 2008, we initiated a plan to reduce our general and administrative expense, development and venture support head count and certain non-payroll costs. We have eliminated 165 positions in overhead and development, primarily in our McLean, Virginia headquarters and recorded severance expense of $15.2 million. In addition, we vacated part of our office space at our McLean, Virginia headquarters and recorded $2.9 million of expense.
 
 
2008 Compared to 2007
 
The provision for doubtful accounts was $22.6 million in 2008 compared to $8.9 million in 2007, an increase of $13.7 million. The increase is due primarily to reserving $14.2 million for the Fountains operating deficit loan and $0.5 million for the Aston Gardens operating deficit loan, both of which may not be realizable based on current economic conditions.
 
2007 Compared to 2006
 
The provision for doubtful accounts was $8.9 million in 2007 compared to $14.0 million in 2006. The decrease of $5.1 million is primarily due to the write-off of an $8.0 million receivable in 2006 resulting from prior fundings under a guarantee which were deemed to be uncollectible partially offset by 2007 write-offs of operating advances to four ventures.
 
 
Loss on financial guarantees and other contracts was $5.0 million in 2008 which was comprised of approximately $2.6 million in construction cost overrun guarantees on the condominium project discussed below and $2.5 million for income support.
 
Loss on financial guarantees and other contracts was $22.0 million in 2007. We recorded an additional $16.0 million loss related to operating deficit shortfalls in Germany discussed below due to changes in expected cash flows due to slower than projected lease up and an additional $6.0 million loss related to construction cost overrun guarantees on a condominium project discussed below.
 
Loss on financial guarantees and other contracts in 2006 includes a $50.0 million loss related to funding of operating deficit shortfalls in Germany and $22.4 million related to income support guarantees. Also in 2006, we recorded a $17.2 million loss related to construction cost overrun guarantees on a condominium project.
 
 
Write-off of unamortized contract costs was $25.4 million in 2006. These costs relate to the buyout of Five Star management contracts.


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Reimbursable contract services were $1,005.0 million in 2008, $956.0 million in 2007 and $912.0 million in 2006. The increase of 5.1% in 2008 was due primarily to an increase in the number of communities managed during 2008, from 376 in 2007 to 383 (before the consolidation of our nine German communities on September 1, 2008 and the termination of 11 communities at the end of November 2008) and higher costs primarily due to inflation for items such as labor, food, and utilities partially offset by decreased labor costs in Canada as the workers in the communities are no longer our employees but are employed directly by the communities. The increase of 4.8% in 2007 compared to 2006 was due primarily to a 4.4% increase in the number of communities managed, from 360 to 376.
 
 
2008 Compared to 2007
 
Total other non-operating expense was $44.2 million and $3.2 million for 2008 and 2007, respectively. The increase in other non-operating expense of $41.0 million was primarily due to:
 
  •  $15.9 million of foreign exchange losses in 2008 compared to $2.3 million of foreign exchange losses in 2007. In 2008, the exchange loss was comprised of $14.2 million in losses related to the Canadian dollar and $1.7 million in losses related to the Euro and British pound;
 
  •  $7.8 million unrealized loss on our investments in auction rate securities which are classified as trading securities and carried at fair value. The unrealized loss on our investments was based on an analysis of sales discounts achieved in the secondary market and management’s judgment and resulted in an estimated discount of 20% from the face amount of the securities. Due to the uncertainty in the market for auction rate securities, it is reasonably likely that this assumption could change in the future. If the discount used was 10%, the unrealized loss would have been $3.9 million. If the discount used was 30%, the unrealized loss would have been $11.7 million; and
 
  •  $14.8 million increase in interest expense due to increased borrowings and the consolidation of our nine German communities at September 1, 2008.
 
2007 Compared to 2006
 
Interest income remained consistent between years as average cash balances remained relatively unchanged from 2006 to 2007. Included in interest income is $3.5 million and $2.1 million in 2007 and 2006, respectively, from our insurance captive. Interest income from the insurance captive does not affect our net income but rather reduces premiums paid by our communities, and therefore, is offset by reductions in community expense for consolidated communities and reimbursed contract services. Interest expense increased $0.4 million in 2007 as compared to 2006 due to an increase of $4.1 million related to mortgages and other debt and $0.3 million increase in loan amortization partially offset by an increase of $4.0 million in capitalized interest due to increased development activity. Other income (expense) decreased from income of $6.7 million in 2006 to a loss of $6.1 million in 2007 due primarily to a $1.5 million performance termination cure payment made in 2007 and $1.7 million in foreign exchange losses as a result of the weakening U.S. dollar against the British pound and the Euro in 2007. 2006 had income of $5.0 million related to the settlement of the MSLS acquisition and $1.9 million of income earned from collection of a fully-reserved receivable.


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Gain on the sale and development of real estate and equity interests fluctuates depending on the timing of dispositions of communities and the satisfaction of certain operating contingencies and guarantees. Gains in 2008, 2007 and 2006 are as follows (in millions):
 
                         
    December 31,  
    2008     2007     2006  
 
Properties accounted for under basis of performance of services
  $ 9.6     $ 3.6     $ 1.8  
Properties accounted for previously under financing method
    0.5       32.8        
Properties accounted for previously under deposit method
    0.9       52.4       35.3  
Properties accounted for under the profit-sharing method
    6.7              
Land and community sales
    (0.9 )     5.7       5.4  
Condominium sales
    1.0              
Sales of equity interests and other sales
    (0.4 )     10.6       8.8  
                         
Total gains on the sale and development of real estate and equity interests
  $ 17.4     $ 105.1     $ 51.3  
                         
 
During 2008, 2007 and 2006, we recognized pre-tax gains of approximately $8.1 million, $85.2 million and $35.3 million, respectively, related to previous sales of real estate where sale accounting was not initially achieved due to guarantees and other forms of continuing involvement. The gain was recognized in the year those guarantees were released. There is no remaining deferred gain from previous sales of real estate where sale accounting was not achieved.
 
 
                         
    December 31,  
(In millions)   2008     2007     2006  
 
Sunrise’s share of earnings (losses) in unconsolidated communities
  $ (31.0 )   $ 60.7     $ (12.0 )
Return on investment in unconsolidated communities
    33.4       72.7       55.7  
Impairment of equity investments
    (16.2 )     (24.5 )      
                         
    $ (13.8 )   $ 108.9     $ 43.7  
                         
 
Our share of equity in (losses) earnings in unconsolidated communities decreased $91.7 million in 2008 from 2007 primarily due to one venture in the U.K. which had a significant transaction in 2007 whereby a venture in which we have a 20% interest sold six communities to a different U.K. venture in which we have a 10% interest. As a result of the gains on these asset sales recorded in the ventures, we recorded earnings in unconsolidated communities of approximately $75.5 million during the third quarter of 2007.
 
The remaining difference in our share of equity in earnings is primarily the result of an increase between 2008 and 2007 of pre-opening expenses and operating losses during initial lease-up periods.
 
Our share of equity in earnings and return on investments in unconsolidated communities increased $65.2 million to $108.9 million during 2007 compared to $43.7 million during 2006 primarily due to the 2007 transaction with our venture in the U.K. described above.
 
Excluding this gain, Sunrise’s share of losses in unconsolidated communities, which is primarily the result of pre-opening expenses and operating losses during the initial lease-up period, remained consistent between 2007 and 2006.
 
Sunrise’s return on investment in unconsolidated communities primarily represents cash distributions from ventures arising from a refinancing of debt within ventures. We first record all equity distributions as a reduction of our investment. Next, we record a liability if there is a contractual obligation or implied obligation to support the venture including in our role as general partner. Any remaining distribution is recorded in income.


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During 2008, our return on investment in unconsolidated communities was the result of the following: (1) the expiration of three contractual obligations which resulted in the recognition of $9.2 million of income from the recapitalization of three ventures; (2) receipt of $8.3 million of proceeds resulting from the refinancing of the debt of one of our ventures with eight communities; (3) the recapitalization and refinancing of debt of one venture with two communities which resulted in a return on investment of $3.3 million; and (4) distributions of $12.7 million from operations from investments where the book value is zero and we have no contractual or implied obligations to support the venture.
 
During 2007, our return on investment in unconsolidated communities was primarily the result of three venture recapitalizations. In one transaction, the majority owner of a venture sold their majority interest to a new third party, the debt was refinanced, and the total cash we received and the gain recognized was $53.0 million. In another transaction, in conjunction with a sale by us of a 15% equity interest which gain is recorded in “Gain on the sale and development of real estate and equity interests” and the sale of the majority equity owner’s interest to a new third party, the debt was refinanced, and we received total proceeds of $4.1 million relating to our retained 20% equity interest in two ventures, which we recorded as a return on investment in unconsolidated communities.
 
During 2006, our return on investment in unconsolidated communities was primarily the result of three venture recapitalizations. In one transaction, the majority owner of two ventures sold their majority interests to a new third party, the debt was refinanced, and the total recorded return on investment to us from this combined transaction was approximately $21.6 million. In another transaction, the majority owner of a venture sold its majority interest to a new third party, the debt was refinanced, and the total return on investment to us was $26.1 million.
 
During 2008, we wrote-down our equity investments in our Fountains and Aston Gardens ventures by $10.7 million and $4.8 million, respectively.
 
During 2007, we wrote-down equity investments in four unconsolidated ventures. The majority of the charge related to our investment in Aston Gardens, a venture which acquired six senior living communities in Florida in September 2006. In 2007 and into 2008, the operating results of the Aston Garden communities suffered due to adverse economic conditions in Florida for independent living communities including a decline in the real estate market. These operating results are insufficient to achieve compliance with the debt covenants for the mortgage debt for the properties. In July 2008, the venture received notice of default from the lender of $170.0 million of debt obtained by the venture at the time of the acquisition in September 2006. Later in July 2008, we received notice from our equity partner alleging a default under our management agreement as a result of receiving the notice from the lender. This debt is non-recourse to us, except for monthly principal payments during the term of the debt. Based on our assessment, we determined that our investment is impaired and as a result, we recorded a pre-tax impairment charge of approximately $21.6 million in the fourth quarter of 2007.
 
 
(Loss) income from investments accounted for under the profit sharing method was as follows:
 
                         
    December 31,  
    2008     2007     2006  
 
Revenue
  $ 16,635     $ 23,791     $ 19,902  
Expenses
    (12,056 )     (17,450 )     (16,528 )
                         
Income from operations before depreciation
    4,579       6,341       3,374  
Depreciation expense
                 
Distributions to other investors
    (5,908 )     (6,319 )     (4,231 )
                         
(Loss) income from investments accounted for under the profit-sharing method
  $ (1,329 )   $ 22     $ (857 )
                         


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Minority interests were $8.2 million, $4.5 million and $6.9 million in 2008, 2007 and 2006, respectively. The change was due primarily to increased expenses incurred by the Greystone development entities that we consolidate and the consolidation of our Germany venture beginning September 1, 2008.
 
 
The benefit from (provision for) income taxes was $43.5 million, $(9.1) million and $(17.5) million in 2008, 2007 and 2006 respectively. Our effective tax benefit (rate) was 10.3%, (98.9)% and (52.8)% in 2008, 2007 and 2006, respectively. At December 31, 2008 and 2007, our net deferred tax liabilities were $2.8 million and $49.0 million, respectively and at December 31, 2008 and 2007, we had a total valuation allowance against deferred tax assets of $138.8 million and $12.4 million, respectively. The effective tax rate in 2008 is significantly impacted by the increase in the valuation allowance as of December 31, 2008 as we determined that as of the end of 2008, we are no longer able to conclude that it is more likely than not that net deferred tax assets will be realized. In 2008 the effective tax rate was significantly impacted by the write-off of goodwill that was partially non-deductible for tax purposes.
 
Discontinued Operations
 
Discontinued operations consist of our Trinity subsidiary which ceased operations in December 2008 and is in the process of being dissolved and liquidated, in addition to two communities sold in 2008 for which we have no continuing involvement. The related tax benefit associated with discontinued operations was $18.3 million and $0.3 million for 2007 and 2006, respectively. There was no related tax benefit associated with our discontinued operations as we expect to have a net operating loss carryforward as of December 31, 2008.
 
 
Under FASB Interpretation No. 46R, Consolidation of Variable Interest Entities (“FIN 46R”), the purchase of the option to acquire our German venture is a “reconsideration event” and we determined that as of September 1, 2008 the venture is a variable interest entity and we are the primary beneficiary which requires us to consolidate the venture. FIN 46R requires that assets and liabilities be consolidated at fair value. In accordance with FIN 46R, the excess of the consideration paid, the reported amount of any previously held interests and the fair value of the newly consolidated liabilities over the sum of the fair value of the newly consolidated assets be reported as a non-cash extraordinary loss if the variable interest is not a business. As we currently do not have any plans to develop additional communities in Germany, we consider this to be an option to purchase nine communities as opposed to a business with intangible value and therefore, we recorded a non-cash pre-tax extraordinary loss of $22.1 million. There was no related tax benefit associated with our extraordinary loss as we expect to have a net operating loss carryforward as of December 31, 2008.
 
 
 
We had $29.5 million and $138.2 million of unrestricted cash and cash equivalents at December 31, 2008 and December 31, 2007, respectively. To date, we have financed our operations primarily with cash generated from operations and both short-term and long-term borrowings.
 
In connection with our development ventures, we have provided project completion and operating deficit guarantees to venture lenders, and, in some cases the ventures themselves. These financial guarantees are designed to assure completion of development projects in the event of cost overruns, and, after depletion of reserves established in the loan agreements, guarantee principal and interest during the term of the guarantee. At December 31, 2008, we had committed funding for 26 communities under construction in North America and the U.K. (not including two additional projects, both of which are wholly-owned). Of these communities under construction three communities in the U.S. are wholly owned and the rest are in development ventures. We are not in compliance with the terms of many of these construction loans, and, as a result the lenders could cease funding the


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projects. We are working with our lenders and venture partners to address the defaults, and we have explained to these lenders that we do not believe that there will be material cost overruns and that there are adequate established reserves to fund the lease-up period once the projects are completed. We believe, and have stated to our lenders that, in our opinion, the best course of action for all parties, including the lenders, is to continue to fund these projects through completion. There can be no assurance that these lenders will continue to fund the construction and development of these projects. We estimate that it will cost approximately $251 million to complete the 26 communities we have under construction (excluding two projects that are suspended) as of December 31, 2008. The two projects under construction that did not yet have debt financing as of December 31, 2008, are currently suspended and have a carrying value of $38.1 million and estimated costs to complete of approximately $51.7 million for a total estimated cost of $89.8 million. Construction of these two projects has been suspended until we can obtain suitable construction financing. We believe that we will have no further equity contributions for projects under construction (excluding the two suspended projects) as of December 31, 2008, assuming the lenders continue to fund existing construction loan financing commitments.
 
We agreed with our U.S. development partners to suspend four construction projects scheduled to start in the fourth quarter of 2008 and we and our partners are evaluating our alternatives for these projects. We had no U.S. construction starts in the fourth quarter of 2008. We and our U.K. development partner declined to proceed with a land closing for which construction financing was not yet available. We do not expect to commence construction of any projects in the U.S. and only two projects in the U.K. in 2009. We plan to reduce our U.S. development group from 70 people to less than 10 people through June 30, 2009 as a result of our decision to scale back our development activities for 2009.
 
In 2008, we suspended the development of three condominium projects and we wrote-off approximately $27.7 million of development costs. Also in 2008, based on our decision to decrease our development pipeline, we wrote off approximately $68.1 million of costs relating to 215 development projects we discontinued during 2008. Our remaining balance of construction in progress at December 31, 2008 is $88.9 million, consisting of $82.9 million related to three wholly owned projects under construction (including two projects that have been suspended pending obtaining suitable construction financing) and $6.0 million relating to a condominium renovation project.
 
We intend to sell 19 land parcels which have a carrying value of $70.8 million and related debt of $34.3 million. Certain of these land loans are in default. Nine of these land parcels which met all of the criteria to be classified as held for sale at December 31, 2008 are recorded at a fair value of $46.0 million in the “Assets Held for Sale” portion of the Consolidated Financial Statements.
 
We do not intend to begin construction in the United States in 2009 and we have only two construction starts projected for the U.K. in 2009. We do not contemplate funding new seed capital projects related to our Greystone subsidiary at least until the bond financing markets improve. We will reconsider future development when market conditions stabilize and the cost of capital for development projects is in line with projected returns.
 
Additional financing resources will be required to refinance existing indebtedness that comes due within the next 12 months as discussed in more detail below.
 
During October and November of 2008, we received federal income tax refunds of $30.1 million. Additional tax refunds of approximately $27 million related to the filing of our federal, state and foreign tax returns for 2008 and 2007 are anticipated to be received during 2009.
 
 
From 2003 through 2006, we invested $13.1 million for our portion of the equity required for our Germany venture. Our partner invested $52.4 million. Our equity investment was reduced to zero by December 31, 2006 due to start-up losses recorded from 2003 through 2006 and, accordingly, we had no investment carrying value. In 2006, we recorded a $50.0 million loss for expected payments under financial guarantees (operating deficit guarantees) given to lenders to our nine German communities. In 2007, we recorded an additional loss of $16.0 million for a cumulative loss of $66.0 million for expected future non-recoverable payments under financial guarantees. On September 1, 2008, we paid €3.0 million ($4.6 million) to the majority partner in our Germany venture for an option


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to purchase its entire equity interest in the venture through a two-step transaction in 2009. We exercised our option in January 2009 and acquired a controlling interest of 94.9%. Also on September 1, 2008, we entered into an agreement with our partner that gave us permission to immediately pursue potential restructuring of loans with venture lenders, pursue potential sales of some or all of the nine communities in the venture and to merge certain subsidiaries of the venture to improve operational efficiencies and reduce VAT taxes paid. Our decision to purchase this option was based on the fact that we had 100% of the risk for the Germany venture but did not have control and had only 20% of the equity ownership. Neither the purchase of the option nor the exercise of the option altered our obligation under any financial guarantees for which we are responsible or altered any of the recourse/non-recourse provisions in any of the loans.
 
Under FASB Interpretation No. 46R, Consolidation of Variable Interest Entities (“FIN 46R”), the purchase of the option is a “reconsideration event” and we determined that as of September 1, 2008 the venture is a variable interest entity and we are the primary beneficiary which requires us to consolidate the venture. FIN 46R requires that assets and liabilities be consolidated at current fair value. In accordance with FIN 46R, the excess of the consideration paid, the reported amount of any previously held interests and the fair value of the newly consolidated liabilities over the sum of the fair value of the newly consolidated assets is required to be reported as an extraordinary loss if the variable interest is not a business. As we currently do not have any plans to develop additional communities in Germany, we consider this to be an option to purchase nine communities as opposed to the acquisition of a business with intangible value and therefore, we recorded a non-cash extraordinary pre-tax loss of $22.1 million.
 
After our purchase of the option, we restructured the debt for four of the nine communities. As a result of the debt restructuring, the lender assigned a participation interest in the loan to us in the amount of €30.2 million ($44.3 million) for a purchase price of $6.388 million in cash and a note that has full recourse to Sunrise Senior Living, Inc. in the amount of $25.6 million, resulting in a discount of $12.3 million. The remaining debt balance due to the lender after the participation is €50.0 million ($73.4 million), which is non-recourse to us, except we have guaranteed the debt to the extent that the sale price of the four Germany communities securing the debt is less than a stipulated release price for each community. The fair value of the communities approximates the €50.0 million due to the lender.
 
For the remaining five communities, we have provided guarantees to the lenders of the repayment of the monthly interest payments and principal amortization until the maturity dates of the loans. We have not guaranteed repayment of the remaining principal balance due upon maturity.
 
We closed the Reinbeck community, which is one of the four properties with a minimum release price, in January 2009. We are marketing the Reinbeck community for sale. If the Reinbeck community is sold for less than the minimum release price, we would be obligated to pay the difference between the minimum release price and sale price to the lender. We have also closed our Hannover community, and we are marketing this property, as well. The loan on the Hannover community is non-recourse to us, but there is an operating deficit guarantee until debt maturity. Our guarantee of scheduled principal and interest payments for the Hannover community through 2011 is as follows (in thousands):
 
                 
2009
  1,718     $ 2,421  
2010
    1,183       1,667  
2011
    1,013       1,428  
                 
    3,914     $ 5,516  
                 
 
Our estimated future fundings to our German operations for operating losses are as follows (in thousands):
 
                 
2009
  10,471     $ 14,758  
2010
    5,482       7,727  
2011
    1,781       2,510  
2012
           
                 
    17,734     $ 24,995  
                 


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Scheduled principal repayments of our Germany venture debt also are included in the Long-Term Debt table in the next section.
 
In January 2009, we informed the lenders to our German communities and the Hoesel land, an undeveloped land parcel, that our German subsidiary was suspending payment of principal and interest on all loans for our German communities and that we would seek a comprehensive restructuring of the loans and our operating deficit guarantees. As a result of the failure to make payments of principal and interest on the loans for our German communities, we are in default of the loan agreements. We recently entered into standstill agreements with our lenders to eight of our nine German communities. Pursuant to such standstill agreements such lenders have agreed not to foreclose on the communities that are collateral for their loans or to commence or prosecute any action or proceeding to enforce their demand for payment by us pursuant to our operating deficit agreements until the earliest of the occurrence of certain other events relating to the loans or through March 31, 2009. On December 24, 2008 and February 20, 2009, we described in our Current Reports on Form 8-K, the standstill agreements with Natixis, London Branch, relating to our communities in Hannover and Munich, Germany. The other standstill agreements were not material to us and, therefore, were not separately disclosed by us. As of February 27, 2009, we have not stopped funding the ninth community as the next payment date is March 6, 2009. We do not intend to make the principal and interest payment due on that date and will seek waivers with respect to this default after that date.
 
 
At December 31, 2008, we had $636.1 million of outstanding debt with a weighted average interest rate of 4.3%. Of the outstanding debt we had $5.4 million of fixed-rate debt with a weighted average interest rate of 6.8% and $630.8 million of variable rate debt with a weighted average interest rate of 4.3%. Principal maturities of long-term debt at December 31, 2008 are as follows (in thousands):
 
                                                         
          Mortgages,
          Variable
    Germany
             
    Bank Credit
    Wholly-Owned
    Land
    Interest
    Venture
             
    Facility     Properties     Loans     Entity Debt     Debt     Other     Total  
 
2009
  $ 95,000     $ 86,346     $ 34,327     $ 23,905     $ 185,901     $ 46,970     $ 472,449  
2010
          37,217                               37,217  
2011
          2,364       3,080                         5,444  
2012
          15,033                               15,033  
2013
          100,539                               100,539  
Thereafter
          5,449                               5,449  
                                                         
    $ 95,000     $ 246,948     $ 37,407     $ 23,905     $ 185,901     $ 46,970     $ 636,131  
                                                         
 
In addition to the amounts due under our Bank Credit Facility, the 2009 maturities include mortgages due on two wholly owned communities (one for $5.1 million and one for $39.9 million) and mortgage debt on three wholly owned communities that are currently in default as we have failed to comply with various financial covenants (one for $2.9 million, one for $5.1 million and one for $31.2 million); $34.3 million in land loans related to properties we intend to sell, $23.9 million of debt related to variable interest entities as the debt is in default; $12.4 million of principal payments related to the debt of our German communities that is due in 2009 and the remaining amount of the German venture debt which is classified as current as it is in default as we have stopped paying monthly interest and principal payments in 2009; a $21.4 million margin loan collateralized by auction rate securities with a book value of $31.1 million and a $25.6 million loan which is related to our German communities and is in default as we intend to stop paying monthly interest payments in 2009.
 
 
On January 31, February 19, March 13, July 23, November 6, 2008 (“Ninth Amendment”) and January 20, 2009 (“Tenth Amendment”), we entered into further amendments to our Bank Credit Facility. These amendments, among other things:
 
  •  temporarily (in February 2008) and then permanently (in July 2008) reduced the maximum principal amount available under the Bank Credit Facility to $160.0 million; and


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  •  waived compliance with the financial covenants through March 30, 2009.
 
Our Bank Credit Facility contains various financial covenants and other restrictions, including provisions that (1) require us to meet certain financial tests; (2) require consent for changes in control; and (3) restrict our ability and our subsidiaries’ abilities to borrow additional funds, dispose of all or substantially all assets, or engage in mergers or other business combinations in which we are not the surviving entity, without lender consent.
 
In connection with the March 13, 2008 amendment, we executed and delivered a security agreement to the administrative agent for the benefit of the lenders under the Bank Credit Facility. Pursuant to the security agreement, among other things, we granted to the administrative agent, for the benefit of the lenders, a security interest in all accounts and contract rights, general intangibles and notes, notes receivable and similar instruments owned or acquired by us, as well as proceeds (cash and non-cash) and products thereof, as security for the payment of obligations under the Bank Credit Facility arrangements.
 
In the Ninth and Tenth Amendments, the Bank Credit Facility provided that:
 
  •  we are generally prohibited from declaring or making any payment in the form of a stock repurchase or payment of a cash dividend or from incurring any obligation to do so;
 
  •  effective on the date of the Ninth Amendment, the borrowing rate in US dollars, was LIBOR plus 3.75% or the Base Rate (the higher of the Federal Funds Rate plus 0.50% and Prime) plus 2.25% (through the end of the then-current interest period). Notwithstanding anything to the contrary in the Bank Credit Facility, the minimum rate upon which interest could accrue upon any of the loans at any time could not be less than 5% per annum;
 
  •  effective on the date of the Tenth Amendment, the borrowing rate in US dollars, will be LIBOR plus 4.75% Eurodollar Rate Loans and Base Rate (as defined in the Tenth Amendment) plus 3.25% for Base Rate Loans (5.18% at December 31, 2008);
 
  •  there can be no additional borrowings and no issuances of any new letters of credit until April 1, 2009, and then only if we achieve compliance with the financial covenants of the loan documents;
 
  •  compliance with the financial covenants of the Bank Credit Facility from December 30, 2008 through March 30, 2009 is waived;
 
  •  triggering of the cross default section of the Bank Credit Facility through March 30, 2009 for certain events of default which might occur under other credit facilities is waived; and
 
  •  we make principal repayments to lenders of $1.5 million and a modification fee of $0.4 million.
 
The Tenth Amendment also modifies certain negative covenants to limit our ability, among other things to (i) pledge certain assets or grant consensual liens on such assets; (ii) incur additional indebtedness; and (iii) dispose of real estate, improvements or other material assets.
 
In the event that we are unable to revise and restructure our Bank Credit Facility before March 30, 2009, the lenders under the amended Bank Credit Facility could, among other things, exercise their rights to accelerate the payment of all amounts then outstanding under the amended Bank Credit Facility, exercise remedies against the collateral securing the amended Bank Credit Facility, require us to replace or provide cash collateral for the outstanding letters of credit. In the event of an acceleration of our Bank Credit Facility, we may not be able to make a full repayment of our outstanding borrowings.
 
As of December 31, 2008, we had no borrowing availability under the Bank Credit Facility. With our cash balance of approximately $26.1 million at December 31, 2008 we cannot be certain of sufficient liquidity through March 30, 2009 and beyond to operate the business. Borrowings under our Bank Credit Facility are considered short-term debt in our consolidated financial statements.
 
We paid the lenders aggregate fees of approximately $2.5 million for entering into these 2008 amendments.


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On May 7, 2008, 16 of our wholly owned subsidiaries (the “Borrowers”) incurred mortgage indebtedness in the aggregate principal amount of approximately $106.7 million from Capmark Bank (“Lender”) as lender and servicer pursuant to 16 separate cross-collateralized, cross-defaulted mortgage loans (collectively, the “mortgage loans”). Shortly after the closing, the Lender assigned the mortgage loans to Fannie Mae. The Borrowers must repay the mortgage loans in monthly installments of principal and variable interest. Principal payments are based on a 30-year amortization schedule using an interest rate of 5.92%. Variable monthly interest payments are in an amount equal to (i) one third (1/3) of the “Discount” (which is the difference between the loan amount and the price at which Fannie Mae is able to sell its three-month, rolling discount mortgage backed securities) plus (ii) 227 basis points (2.27%) times the outstanding loan amount divided by twelve (12). The maturity date on which the mortgage loans must be repaid in full is June 1, 2013.
 
In connection with the mortgage loans, we entered into interest rate protection agreements that provide for payments to us in the event the LIBOR rate exceeds 5.6145%, pursuant to an interest rate cap purchased on May 7, 2008, by each Borrower from SMBC Derivative Products Limited. The LIBOR rate approximates, but is not exactly equal to the “Discount” rate that is used in determining the interest rate on the mortgage loans; consequently, in the event the “Discount” rate exceeds the LIBOR rate, payments under the interest rate cap may not afford the Borrowers complete interest rate protection. The Borrowers purchased the rate cap for an initial period of three years for a cost of $0.3 million (including fees) and have placed in escrow the amount of $0.7 million to purchase additional interest rate caps to cover years four and five of the mortgage loans which amount will be returned to us in the event the mortgage loans are prepaid prior to the end of the third loan year.
 
Each mortgage loan is secured by a senior housing facility owned by the applicable Borrower (which facility also secures the other 15 mortgage loans as well), as well as the interest rate cap described above. In addition, our management agreement with respect to each of the facilities is subordinate to the mortgage loan encumbering such facility. In connection with the mortgage loans, we received net proceeds of approximately $103.1 million (after payment of lender fees, third party costs, escrows and other amounts).
 
 
Certain of our ventures have financial covenants that are based on the consolidated results of Sunrise Senior Living, Inc. In all such instances, the construction loans or permanent financing provided by financial institutions is secured by a mortgage or deed of trust on the financed community. The failure to comply with financial covenants in accordance with the obligations of the relevant credit facilities or ancillary documents could be an event of default under such documents, and could allow the financial institutions who have extended credit pursuant to such documents to seek the remedies provided for in such documents.
 
 
In connection with our development ventures, we have provided project completion guarantees to venture lenders and the venture itself, operating deficit guarantees to the venture lenders whereby after depletion of established reserves we guarantee the payment of the lender’s monthly principal and interest during the term of the guarantee and guarantees to the venture to fund operating shortfalls. As guarantees entered into in connection with the sale of real estate prevent us from either being able to account for the transaction as a sale or to recognize profit from that sale transaction, the provisions of FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (“FIN 45”), do not apply to these guarantees.
 
In conjunction with the formation of new ventures that do not involve the sale of real estate, the acquisition of equity interests in existing ventures, and the acquisition of management contracts, we have provided operating deficit guarantees to venture lenders and/or the venture itself as described above, guarantees of debt repayment to venture lenders in the event that the venture does not perform under the debt agreements and guarantees of a set level of net operating income to venture partners. The terms of the operating deficit guarantees and debt repayment guarantees match the term of the underlying venture debt and generally range from three to seven years. The terms of the guarantees of a set level of net operating income range from 18 months to seven years. Fundings under the


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operating deficit guarantees and debt repayment guarantees are generally recoverable either out of future cash flows of the venture or upon proceeds from the sale of communities. Fundings under income support guarantees are generally not recoverable. Operating deficit guarantees related to consolidated properties are not separately accounted for as the operating losses and interest expense are recorded in the consolidated financial statements.
 
The maximum potential amount of future fundings for outstanding guarantees subject to the provisions of FIN 45, the carrying amount of the liability for expected future fundings at December 31, 2008 and fundings during 2008 are as follows (in thousands):
 
                                         
                            Fundings
 
          FIN 45
    FAS 5
    Total
    From
 
          Liability
    Liability
    Liability
    January 1,
 
          for Future
    for Future
    for Future
    2008
 
    Maximum Potential
    Fundings at
    Fundings at
    Fundings at
    Through
 
    Amount of Future
    December 31,
    December 31,
    December 31,
    December 31,
 
Guarantee Type
  Fundings     2008     2008     2008     2008  
 
Debt repayment
  $ 1,510     $ 169     $     $ 169     $  
Operating deficit
    Uncapped       947             947       20,426  
Operating deficit for Germany
    Uncapped                         20,038  
Income support
    Uncapped       740       11,991       12,731       7,000  
Other
                  125       125       125  
                                         
Total
          $ 1,856     $ 12,116     $ 13,972     $ 47,589  
                                         
 
As of September 1, 2008, the operating deficit guarantees for Germany are no longer reported as financial guarantees due to the consolidation of this venture for financial reporting purposes. See further discussion in Note 9.
 
 
In July 2008, we received notice of default from our equity partner alleging a default under our management agreement for six communities as a result of the venture’s receipt of a notice of default from a lender. In December 2008, the venture’s debt was restructured and we entered into an agreement with our venture partner under which we agreed to resign as managing member of the venture and manager of the communities when we are released from various guarantees provided to the venture’s lender. The management fees for the year