December 18, 2019
Jason Punzel

Should I sell or lease my Senior Living Community?

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Should I sell or lease my Senior Living Community?  – By Jason Punzel

When considering options of disposing of a senior living community, many owners ask us, “Should I sell or lease my Senior Living Community?”  There are advantages and disadvantages of each option.

Selling:

The biggest advantage of selling an assisted living community (or independent living community) is that an owner receives all of their cash up front and has no future financial liabilities or risk (other than the reps and warranties agreed to in the Purchase Agreement).  The owner no longer has the risk of the market going down in the future, new government regulations, overbuilding, etc.   Additionally, the owner no longer has the time commitment in owner and managing the community.  The biggest disadvantage of selling is paying the capital gains tax.  This can be substantial for those owners who have owned their communities for a number of years and/or did a 1031 exchange when purchasing the community.   One alternative to paying the capital gains tax, is doing a 1031 exchange into a replacement property.  However, this requires finding a suitable replacement property that the owner wants acquire.

Leasing:

Leasing, on the other hand, has the advantage of not having to pay capital gains tax and the advantage of receiving monthly rent.  For those owners who do not have a need for the cash upfront, leasing can provide a great residual income for years.    However, the disadvantages of leasing are many.  An owner must find a quality tenant that has the operational and financial ability to run the community for the length of the lease.   If the operator defaults on the lease, the owner could be in the position to have to take over the operations of the facility, which most likely will be in poor condition.  Additionally, at the end of the lease, the owner still has to make a decision on what to do with the facility.  If the market is worse, and/or if there are new competitors in the area, the community could be worth substantially less than at the beginning of the lease.

Conclusion:

When the market to sell a senior living community is good, like it is today, it typically makes more sense to sell and eliminate the risk of an operator defaulting and/or the community being worth a lot less at the end of the lease.    However, when the market to sell is not as good (like it was in 2009-2010) it might make more sense to lease the facility to a quality operator.

For more information on different exit strategies, contact Jason Punzel at punzel@slibinc.com or (630) 858-2501 x 233.