When considering to exit the senior living industry, there are two main alternatives to consider, selling the facility fee simple, or leasing it to an operator. There are advantages and disadvantages of each option.
The biggest advantage of selling an assisted living facility (or independent living facility) is an owner receives all of their cash up front and has no future financial liabilities or risk. The owner no longer has the risk of the market going down in the future, new government regulations, overbuilding, etc. The biggest disadvantage of selling is paying the capital gains tax, which can be substantial for those owners who have owned their facilities for a number of years.
Leasing, on the other hand, has the advantage of not having to pay a large sum of capital gains tax and the advantage of receiving monthly rent. For those owners who do not need a large amount of cash upfront, leasing can provide a great residual income for years. However, the disadvantages of leasing are many. To begin with, an owner must find a quality tenant that has the operational and financial ability to run the facility 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 could 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 facility could be worth substantially less than at the beginning of the lease.
When the market to sell a senior living facility is good, like it is today, it typically makes more sense to sell and eliminate the risk of an operator defaulting and/or the facility 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.
