Many of you are owner-operators of your assisted living facility. You own your facility and you operate the facility yourself. It’s not only your own investment but it’s your full-time job, too.
There are others who are investors only. Is that you? You see the investment opportunity in ownership of assisted living facilities and other senior care real estate but you have no interest in managing one yourself.
Your investment in an assisted living facility can take on many forms or structures, and a recent question from a reader asked about the best structure for an investment.
There isn’t just one investment structure that’s best – it really depends on a number of things to find which one is best for you. So let’s take a look at some of the options that investors have to structure their investment in an assisted living facility.
Leases
Many operators lease their real estate from investors. As the investor, you sign a long-term lease with a qualified operator and then, in theory, sit back and collect monthly checks. Your investment might go that smoothly but not every investment turns out so simple when issues come up that require your involvement.
When you own a facility leased to an operator you should still keep a close eye on your property to make sure that the operator is maintaining it properly. You also want some safeguards in place to help make sure they are remaining financially sound and able to keep paying your rent.
Leases for assisted living facilities are normally triple net leases (the tenant takes responsibility for property taxes, insurance, and maintenance), although many will have some variation that leaves some financial responsibility in the hands of the investor.
Owning a leased asset takes away some of the burden and risk, assuming the tenant is financially capable of sustaining the rent payments to you if (or when) their resident census drops. But, as the investor, your upside with a leased asset may be limited too. Still, while the tenant might be able to keep more of the profits in a lease when the building does well, this only makes your investment that much more secure so.
Management Contracts
When you’re an investor that wants more involvement in the operations of your assisted living facility but you don’t day to day involvement, then you might want to enter into a management contract.
Third-party management companies bring their expertise and more to your property. Yes, you’ll have someone handling all the day to day management. And, yes, they will have direct responsibility for the staff. You should avoid those night and weekend calls that inevitably happen when you’re the manager.
But with a third-party management company you might also receive the benefit of their systems, their connections, and their vendors. Many first-time owners of assisted living facilities are surprised when they learn about all the business, healthcare, human resource, and other issues come up after they purchase an assisted living facility. A good management company should be able to deal with these issues with the systems that they already have in place from other facilities they manage.
Management companies will normally charge a monthly fee that may be 5% to 7% or more of revenue depending on the size and type of your facility. It may seem like a lot. But when you think about the cost of not having first-class management for your facility, it can seem like a bargain.
Which one is best?
So should you go with a lease or with a management contract?
That really depends on how much involvement and risk you want to take. If you hire a management company, you will be involved in high-level matters and you’ll also need to backstop any financial shortfalls that may happen. If you lease to an operator, you might have fewer issues to deal with and a more consistent check each month, but you’ll also have less potential upside.
One more word of caution – no matter which structure you pick, be sure that any contract or lease is set up to plan ahead for the end of the relationship. Think ahead with your attorney about what that looks like and how to help ensure that everyone works together at the end of the relationship. That’s where challenges can really flare up when you’re an investor in an assisted living facility.
This post is a quick overview of this subject. If you have any questions, please leave a comment below and we’ll follow up.
Thanks for the question Jeff!
And, please remember my disclaimer…
This blog post is not intended to provide legal, tax, investment, or other advice that should come from professionals who know both you and your specific situation. This article is only intended to offer general business information about this topic that may or may not be applicable or helpful to you. But I hope it helps!