Nursing Home Sale & Leaseback – The Big Decisions

Sale and leaseback transactions in the nursing home sector is a well know feature of capital structures in many countries around the world. This is particularly the case in Continental Europe and the US. It is becoming a feature of the landscape in Ireland and as advisors to the sector, we hear this on the lips of many operators. It is the new buzz word in the space. BDO believes sale and leaseback structures are worth considering and implementing in certain circumstances. The “right circumstances”. BDO believes this is not every circumstance for sure. We have advised on a number of such transactions in recent times and so we can with experience set out some of the advantages and disadvantages of sale and leaseback structures.

The advantages:

• There is record amounts of capital seeking a return which is considered secure. Therefore there is strong liquidity from the non banking sector.
• This strong liquidity has driven down yields that funds and investors are seeking and so capitalisations of values are more attractive now than they have ever been.
• Sale and leaseback transactions allow growth of operating platforms at a pace which conventional financing just can not, unless the nursing home operator brings in a strong equity partner and dilutes their shareholding considerably.
• With a sale and leaseback transaction, the rent which a tenant pays is deductible from taxable profits. With conventional debt, capital repayments are not tax deductible and so all things being equal, the tax payable under a sale and leaseback is likely to be less on a recurring basis.
• This might be a suitable capital structure if the nursing home operator intends to be in the business for many years and wants to develop and grow.
• Development agreements can be negotiated with sale and leaseback partners that allow for growth into the future.

There are reasons why it might not be suitable:

• The operator forfeits the potential upside, which usually arises on holding property over the longer term.
• Depending upon the lease agreement, rents typically rise on the lease over time (maybe in line with CPI). Of course this can also happen with interest rates rises, if the nursing home is financed by conventional capital structures.
• In a sale and leaseback, the tenant is required to sign up to a long term lease which means they should be intent on remaining in the business for at least the medium term. While the leases should be assignable (for value) in the future BDO believes it is not wise to embark on a sale and leaseback if one is considering an exit in the short to medium term.
• There are significant costs associated with the transfer of properties (capital taxes) to new landlords and in setting up sale and leaseback transactions well. And so BDO believes deep consideration needs to go into the decision making process.

Both BDO Ireland and BDO offices around the world work with and know the large property funds, Real Estate Trusts (REIT’s) and Real Estate Managers (REIM’s). We understand their needs and more importantly we understand the needs and protections required by nursing home operators in Ireland.

If you are considering a sale and leaseback transaction, why not talk to Brian McEnery of BDO who will objectively outline the possibilities, advantages and challenges.