Nursing Homes: Is There Life After the First Lease?

More and more co-owners of nursing homes are facing issues related to rent, renovations, or other threats from the operator… Let’s take a look at the various challenges and how to address them.

Our firm is increasingly being consulted to assist co-owners of nursing homes who are facing demands for substantial rent reductions, requests to pay for repairs that are not their responsibility under the lease, threats of lease termination by the operator, or even “transfer ” of the facility…

How did we get to this point? How can one respond without acting too late, too early, too much, or too little?

Many private nursing homes were established in the early 2000s. – Yields were higher. – Leases were commonly indexed to the ICC (construction cost index). – Obtaining LMP status was easy at the time and sparked a great deal of interest and many “scams.” – The nursing home product was “sold” easily and with hefty commissions, like a “financial” product: an overvalued price bearing no relation to real estate prices in exchange for a return on investment (falsely) presented as guaranteed by an “operator” who was always reputable (even though some turned out to be complete amateurs or even outright fraudsters). – “sorcerer’s apprentices,” sometimes lawyers, advised operators to “retain” ownership of the service areas (under the guise of tax considerations), which accounted for more than 30% of the total floor space, even though the price of the units sold to co-owners was more than sufficient to cover the cost of all the sold space… If the newly built residence has been well managed and properly sized (number of beds, room size, location), renewing leases does not pose an overly difficult problem: only a too-rapid increase in the ICC sometimes requires a downward rent adjustment, while still providing the co-owners with an attractive return compared to current yields… In this scenario, a well-assessed and well-conducted negotiation typically concludes within a few weeks with an agreement that satisfies both the landlords and the operator.

“Scams and artificial schemes from the start”

If the residence was older or renovated when it was first marketed (or “remarketed”) in the early 2000s, things get more complicated… – The premises are sometimes no longer adaptable to new standards without major renovations (such as showers compliant with the 2015 accessibility standards for people with reduced mobility). – Too many double rooms (which are unpopular and discouraged by the ARS) hinder occupancy rates. – Some residences, too small (fewer than 60 beds), do not always have the potential for expansion, and their profitability is hampered by their small size, which does not allow them to offset the increasingly high costs of care and staff—costs that are independent of size. – Certain deals involving older nursing homes have been marketed by aggressive sales networks as if they were new facilities—and at the same prices…

In such cases—which are particularly difficult—negotiations are bitter, tense, and protracted… There is no way for the co-owners to emerge with dignity unless they are fully united and stand in solidarity, which is what we always urge them to do in the cases we handle.

Finally, there are the cases of outright “scams” based on artificial schemes from the outset: prices that are grossly inflated with financial assistance, units that already fail to meet standards at the start of the lease, situations “kept under wraps,” or even resales during the lease term, involving properties with “strained” profitability that have allowed certain advisors to make hefty capital gains by taking advantage of falling yields and frequently neglecting their obligations to provide advice and information… In such cases, we are compelled to identify those responsible and determine liability, and the legal profession once again takes on a “judicial” character.