Investing in Nursing Homes: What Should Landlords Be Concerned About When the Lease Ends?

Landlords often take this opportunity to ask for a rent reduction and sometimes even use the threat of not renewing the lease to justify it.

A nursing home in Puy-de-Dôme (63).

For private investors who have purchased units in a nursing home as part of a tax-exemption program, the end of the first lease term is an important and often delicate moment.

In fact, it is not uncommon for investor-landlords to be forced to deal with the tenant’s decision:

– Either to vacate the premises: on the grounds, depending on the case, that the building is too old and that, unless extensive renovations are carried out, the facility can no longer operate as a nursing home. While this is not inaccurate, the explanation is often incomplete: given market trends and legal requirements, a nursing home with about sixty beds is not profitable, and that expanding the facility and bringing the older section up to code would be more expensive than building a new nursing home. It is worth noting in this regard that a building is classified as a nursing home solely by virtue of the operating permits granted by the Regional Health Agency (ARS) to the operator, meaning that the operator can effectively vacate the premises once authorized to do so by said administrative authority (see previous article: Investing in Nursing Homes: Do You Know What You’re Buying?).

“To scare the co-owners with the prospect of the operator leaving, in order to negotiate a new lease with significantly reduced rent.”

– Or to request a rent reduction: the end of the lease is one of the times when the tenant can indeed request a reduction in commercial rent. They will then cite increased competition and the pressure they’ve faced to lower their prices, an aging building, the need for renovations… All of this is intended to demonstrate that their rent-to-revenue ratio (rent paid to landlords relative to revenue) is too high, such that they will agree to renew the lease only on the condition that the rent be reduced, sometimes drastically (40 to 50%). Formally, this may involve sending a simple letter to initiate discussions or a formal notice served by a bailiff requesting renewal of the lease at a reduced rent. (For further steps to take, see the previous article: Investing in Nursing Homes: Do You Know What You’re Buying?).

Investors may also face indecision on the part of the tenant (whether genuine or feigned). Specifically, the tenant will question—or pretend to question—their intentions: whether to leave the building or request a rent reduction. In this scenario, the goal is often to scare the co-owners with the prospect of the tenant leaving, in order to negotiate a new lease with significantly reduced rent.

In any case, investors in nursing homes should be aware that the end of a lease is rarely a smooth process.

Coming up: Investing in EHPADs: Negotiation, the Rent Tribunal, and Premature Termination.