Investing in nursing homes: too many risks for too little return!

I frequently represent clients in the renegotiation or renewal of nursing home leases. I can only share here the disappointments faced by many nursing home co-owners! They discover that their commercial lease, so often presented as “secure,” does not protect them, particularly when it comes time to renew the lease. In fact, they often face: – requests to contribute to the costs of bringing the facility up to code or modernizing it—costs that were supposed to be covered by the operator – requests for rent reductions that more than offset past rent indexations – requests to renew the lease with changes to clauses regarding repairs, three-year termination provisions, representation at general meetings, etc.—all clauses likely to depreciate the value of the co-owners’ properties. – unacceptable “pseudo-appraisals” of rental value. In residential complexes where service areas are not under the co-owners’ control, property managers and their advisors do not hesitate to attempt a “distribution” of rental value that is highly unfavorable to the co-owners. Co-owners do not know how to expose the “manipulation” of the appraisal, nor how to confront the operator’s advisors—some of whom have written glowing books about this type of investment, which they then help turn into a disaster for the “duped” readers of their works. – Surprising pressure—or even manipulation—from certain property managers and their advisors to secure quick signatures on their urgent requests for rent reductions and lease amendments.

This is how co-owners often discover that their properties bear no resemblance to Haussmann-style buildings. There is now no hope of capital gains, given both the low interest rates and the low current yields! What happened over the past decade will not happen again. Falling yields led to artificial price increases, which some people did not hesitate to take advantage of by selling their properties mid-lease to investors eager for this type of investment. These “latecomer” investors are now suffering more than anyone else! They are paying dearly—far too dearly—for their late entry into the “gray gold” market.

The rapid evolution of regulations, the aging resident population—which is growing older and more dependent— and the growing imbalance of power between co-owners and operators—further exacerbated by the Pinel Law—all contribute to making investment in nursing homes an increasingly risky choice! A return of 4.3% on new developments and 5.3% on “resales” is woefully inadequate given the real risks of this investment. Too expensive! Too risky! Not profitable enough! I am well aware that this “product” is easy to sell and profitable for financial advisors; however, respect for their clients and their duty to provide sound advice should make some of them more cautious. Philip Pechayre.