CREJ

Page 18 — Health Care Properties Quarterly — July 2018 www.crej.com A s the population in Colo- rado and across the country ages, there has been a sharp increase in the demand for senior housing facilities. In response to that demand, more real estate investors and senior housing operators are seeking to build, own and operate senior-centered hous- ing. As with other market segments, senior housing facilities are typi- cally financed through a combina- tion of equity investment and debt. Below we discuss a few unique con- siderations that apply to loans for senior housing projects. To start, there is often addi- tional upfront due diligence that a lender financing the construction or acquisition of a senior hous- ing facility may require due to the unique nature of the asset class. For example, for new construc- tion, some lenders will require an in-depth market study to ensure that the market is not oversatu- rated with senior housing facili- ties and can support an additional project. This is highly relevant to the senior housing sector because demand for the product fluctuates with demographics. Most lenders will also engage in a deep dive into the facility manager to ensure that the operator is experienced, with a track record of successful opera- tions. Some lenders also will require a consultant’s report on manage- ment and operations, and a regula- tory compliance report for senior housing properties that are subject to licensing requirements. Borrowers in the senior housing space can also expect to see unique terms in the loan documents. The following issues should be consid- ered when nego- tiating loan docu- ments secured by senior housing facilities: • Licensing. Bor- rowers should ensure that the licenses are classi- fied appropriately based on material- ity to the facility. In other words, the loan documents should treat different types of licenses different- ly based on whether the loss of the license poses a serious threat to the lender’s security for the loan. For example, the loan documents may prohibit a material modifica- tion to the licenses for the facility without the lender’s consent. While it is appropriate to include such a prohibition for a license that is required to provide assisted living or memory care services, it is not appropriate with respect to a less material license such as an elevator permit. Additionally, the loan docu- ments may provide for a default if the facility licenses are revoked or suspended. Again, this is appropri- ate with respect to the licenses required to provide regulated health care services that are necessary to provide services to residents, but not for immaterial licenses that have minimal impact on the cash flow from the property. Accord- ingly, the borrower should carefully examine how the loan documents treat the facilities licenses, and make sure to consider this concept in all places that licens- es are addressed throughout the documents. • Reporting vio- lations of law. A lender also may require the bor- rower to notify the lender if it receives notice of a viola- tion of health care laws associated with the facility or its operator. To minimize adminis- trative burdens and the potential for inadvertent defaults, a borrower should try to limit its notice obliga- tion to those violations that pose a risk of loss of a material license for the facility’s operations or which, if decided adversely, would otherwise have a material adverse effect on the facility. • Reporting resident information. Lenders also will likely require that the borrower provide periodic reports concerning the facility and its operations. To the extent these reports implicate information about the occupants of the facility, bor- rowers should ensure that their reporting obligations do not run contrary to privacy laws that pro- hibit disclosure of personal infor- mation, such as the Health Insur- ance Portability and Accountability Act and the newly enacted Colorado Privacy Law, which goes into effect Sept. 1. • HIPAA. A borrower that is not a “covered entity” under HIPAA and similar laws should ensure that the loan agreement does not obligate the borrower to comply with the requirements of such laws (i.e., any covenant of the borrower to comply with HIPPA and similar laws should only apply only if the borrower is a “covered entity”). Indeed, many operators of assisted living facilities may not constitute a “covered enti- ty” because the services that they provide are considered “activities of daily living” rather than “health care services” under HIPAA. • Medicaid and Medicare. For pri- vate-pay facilities, the loan agree- ment may prohibit the borrower from accepting payments from Medicaid or Medicare or any other third parties. It is important to ensure that the acceptance of pay- ments from private insurers is not prohibited. Also, attorneys negotiat- ing the loan documents should dis- cuss this issue with their client to confirm that this prohibition does not conflict with current operations and that there is no need to retain flexibility to accept these types of payments in the future. Lenders providing financing for licensed senior housing facilities will also frequently require a legal opinion from the borrower’s coun- sel with respect to the licensing of the facility and its operations. The scope of the requested legal opin- ions typically includes: (1) whether a certificate of need is required for the operation of the facility and, if so, whether a certificate of need has Considerations for loans secured by senior facilities CappellaLiving.com IGNITING SUCCESS & EXPANDING POSSIBILITIES Cappella Living Solutions is an innovative and comprehensive management and consulting resource for both for-pro t and not-for-pro t senior living communities. CENSUS IMPROVEMENT of 33% in 27 months Raised from 95 to 126 occupied apartments in a rural market 2018: $1,245,877 OPERATING MARGIN IMPROVEMENT 2016: ($114,523) Call us today to nd out how we can help! 720.684.4600 Senior Housing & Care Rick Thomas Associate, Brownstein Hyatt Farber Schreck Noelle Riccardella Shareholder, Brownstein Hyatt Farber Schreck Please see Thomas, Page 22