Leasing a Skilled Nursing Facility or Assisted Living Facility
Whether it’s smarter to lease a skilled nursing (SNF) or assisted living facility (ALF) or purchase a SNF or ALF for sale is a question that comes up frequently for senior housing brokerages. Everyone would prefer to own the underlying real estate to their operations, however, there are benefits to leasing over purchasing a skilled nursing or assisted living facility. The decision depends on where the operator is at in their acquisition cycle and what is currently available in the market place. The benefits of leasing or buying a skilled nursing or assisted living facility can vary greatly.
Benefits of Leasing a Skilled Nursing or Assisted Living Facility
The transaction to lease a SNF or ALF typically can close much faster than the transaction to buy SNF’s or ALF’s simply because there are fewer components to the transaction and typically lower purchase prices.
Fortunately, in the SNF arena, lease opportunities are abundant for skilled nursing operators currently on the acquisition hunt.
Leasing SNFs and ALF’s also allow smaller operators to grow quickly, building a portfolio with multiple healthcare properties under their management. Operators may lease these facilities from small single asset investors, private equity investors or even large publicly traded REIT’s. Leasing from larger institutions allows for greater deal flow for the operator as well as allowing them to be very competitive on the purchase price.
There is generally less liability for operators choosing to lease. Operators report to the landlord and not the bank, which also opens up the ability for landlords to help operators in moments of crises.
Disadvantages of Leasing
The majority of the value for skilled nursing and assisted living facilities lies in the real estate. The actual business typically only accounts for 20 to 30 percent of the total valuation. As a leasing operator, the margin for increasing your equity position is much lower in the business versus the real estate.
Additionally, financing these leasehold acquisitions can be difficult. Potential buyers may have the option to negotiate seller financing, otherwise they will need to find mortgages to finance the leasehold purchase or pay all cash. The downside to leasehold mortgages is that often landlords will not allow them and the terms are often strict and unfavorable with high interest rates and the loans are usually due within five to 10 years.
Leasing operators are typically bound to the triple net (NNN) lease, which holds them responsible for all repairs within the building, insurance and the real estate taxes. Occasionally repairs can be extremely expensive, costing the operator money for a building they do not own.
Leasing to Purchase
In the end, if you do decide to lease a skilled nursing or assisted living facility, we highly recommended that you attempt to negotiate a purchase option with the landlord.
A purchase option allows you to acquire the building and real estate at a pre-negotiated formula or price. At the very least, you know that the investments you make into the building belong to you in the long run and not the landlord.
If you cannot obtain a purchase option, try for the right of first refusal. This means that when the landlord decides to sell the real estate, you have the first chance at buying it.
Your Choice for the Premier Skilled Nursing and Assisted Living Brokerage
The experts at the JCH Group know the senior housing marketplace better than anyone else. As a leader in senior housing transactions, your team at the JCH Group can provide you with intelligent information so you can make the best decision possible when it comes to your healthcare properties. Call us today for a free market analysis of your facility or the facility you are thinking about purchasing.