Do you know the pros and cons of leasing vs. purchasing? We do.
By Pam McDonald
JCH Consulting Group is a full service real estate brokerage focused solely on the long-term care industry. They are also a new Senior Housing Forum partner. Earlier this month, I spoke with their Senior Vice President Shep Roylance. We discussed a question he says he is often asked – whether it is better to lease or to purchase an assisted living (AL) community or skilled nursing facility (SNF)?
Shep points out that most “everyone prefers to own the real estate underlying their operation.” However, he notes, “There are benefits to leasing over purchasing a SNF or AL building. The decision depends on 1) where the operator is in their acquisition cycle and 2) what is currently available in the marketplace.”
Benefits of Leasing
According to Shep, the benefits of leasing or buying a SNF or AL can vary greatly. The transaction to lease either type of building typically closes much faster than the transaction to buy, simply because there are fewer components to the transaction and typically lower purchase prices. And, he notes, “In the SNF arena, lease opportunities are abundant for operators currently on the acquisition hunt.”
Leasing SNFs and ALs also allows 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 REITs. Shep says, “Leasing from larger institutions allows for greater deal flow for the operator as well as very competitive purchase prices.”
And, as Shep notes, “There is generally less liability for operators choosing to lease. Operators report to the landlord and not the bank, which 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 lies in the real estate. Typically the actual business only accounts for 20 to 30 percent of the total valuation. Shep says, “As a leasing operator, the margin for increasing your equity position is much lower in the business versus the real estate.”
Additionally, he points out, 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 threefold: 1) often landlords will not carry any of the financing, 2) the terms are often strict and unfavorable with high interest rates, and 3) the loans are usually due within five to 10 years.
Shep says, “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,” Shep says, “if you do decide to lease a skilled nursing or assisted living facility, we highly recommend that you attempt to negotiate a purchase option with the landlord. This would allow 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.
“And, 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,” Shep concludes.
As a leader in senior housing transactions, JCH Consulting Group can provide the intelligence senior housing operators need to make the best decision possible. Call Shep at 805-633-4649 for a free market analysis of your facility or the facility you are thinking about purchasing or visit thejchgroup.com.