CREJ - Healthcare Properties - January 2018
This article is Part 1 of a series of articles discussing real estate issues that are unique to senior living facilities transactions. The number of U.S. citizens over the age of 65 is projected to increase by 79 percent by 2030. By 2050, those over the age of 60 globally will outnumber those under the age of 15 – an unprecedented event. This demographic shift, together with the market’s perception of future demand for housing options for an aging population, is driving a marked increase in the number of senior housing developments across Colorado. Senior living facilities encompass several different types of housing arrangements and levels of care. Independent living communities are designed for residents who do not need individual services or care, but offer amenities and programming appealing to seniors, including meal services and entertainment options. Assisted living facilities are multifamily properties that provide a midrange of services for residents who are unable to live independently. Some assisted living facilities include memory care floors for residents suffering from Alzheimer’s disease and dementia. Skilled nursing facilities provide a higher level of care that includes daily nursing care and rehabilitation services. A modern trend in senior housing is continuing care retirement communities, which offer a combination of the foregoing level of services, with the intent that residents can age in a single facility and move to a more intensive level of care if and when needed. Because certain senior housing facilities provide medical care, they are regulated and licensed at the state level (and even for those that are not licensed at the state level, such as an independent living facility in Colorado, issues associated with the Fair Housing Act and the Americans with Disabilities Act take on a clearer focus and importance). To help preempt regulatory and licensing roadblocks, there are several key considerations for parties when drafting purchase and sale agreements for licensed senior living facilities due to the unique regulatory requirements that vary by state. One key consideration when structuring a purchase and sale of a licensed senior living facility is whether the sale will constitute a “change of ownership.” If so, the purchaser will be required to apply for and obtain a license for the operation of the facility post-closing. Therefore, it is imperative to understand what constitutes a “change of ownership” in the applicable state. For example, in some states, such as Arizona, California and Florida, the sale of the property comprising the facility does not, alone, constitute a change of ownership. In these states, the operator of the property holds the license. As long as the operator does not change, there is no change of ownership. If the facility is being acquired from an owner-operator, the parties may be able to avoid a change of ownership by structuring the transaction as a sale-leaseback transaction. If the property is managed by or leased to a third party, the parties may be able to avoid a change of ownership if the purchaser can assume or enter into a new management agreement or lease with the existing operator. If the transaction is not structured to avoid a change of ownership, then the parties must draft the purchase and sale agreement to address the purchaser’s application for an operational license for the facility (a “CHOW application”). A major issue in processing CHOW applications is timing. Most states have regulations or statutes that state the number of days in which the regulatory agency will process a CHOW application. Accordingly, the seller will want to include provisions in the purchase agreement that require the purchaser to submit a “completed” CHOW application by a certain date to accommodate the parties’ targeted closing date. The purchaser, on the other hand, will want to negotiate for flexibility regarding the closing date if the CHOW application is not processed by the regulatory agency in a timely fashion. Another issue that must be addressed is what happens if the purchaser is unable to obtain the required licensure. A purchaser will want to include issuance of a license or regulatory approval as a condition to the purchaser’s obligation to close. The seller, on the other hand, should require that the buyer use commercially reasonable and good faith efforts to obtain all required licenses and regulatory approval. If the purchaser is financing the acquisition with a loan, it must address several additional issues. For example, most lenders require the issuance of an opinion letter stating that the facility will be licensed and able to operate on the closing date. The purchaser should arrange for health care counsel to issue this opinion early in the due diligence process. While the above represents several key issues relevant to the purchase and sale of senior living facilities, it is not an exhaustive discussion of the issues that need to be addressed when negotiating and structuring the transaction. Senior living facilities are specialized properties and, as such, transactions related thereto must be carefully tailored, taking into account the various regulatory requirements and hurdles.