Cambridge Realty Capital has established a strong reputation in the industry – both among clients and the industry as a whole. In October, Cambridge Realty Capital presented a webinar for the American Health Care Association (AHCA) and the National Center for Assisted Living (NCAL). The full presentation can be heard here.
The bottom line: there is no absolute across-the-board right answer. There are advantages and disadvantages of either buying or leasing facilities. When a facility operator has a choice between the two, they should consider the differences between the two and evaluate them in the context of the facility operator’s goals. The operator’s identity, experience, and connections also impact whether leasing or owning is the better option. For example, for a variety of reasons, leasing is typically the best approach for former administrators.
Advantages and Disadvantages of Leasing
Though, owning provides a number of real benefits, some of its appeal is also based on perception: the perception that ownership is better and offers more control over the property. The reality is that from an operational standpoint owners and lessors have very similar control over the property. A lessor, like an owner, has the right to occupy the property, can keep its profits, takes responsibility for property maintenance, can put its name on the building, and holds the license to operate the facility.
One of the biggest advantages of a lease is that the operator can keep most of its cash because it is not required to put down a down-payment, which tend to be substantial on healthcare properties; of course, a security deposit may still be required. The saved cash can be put towards other uses – like operating expenses – that will help the company. Leasing can also be advantageous because deals are negotiated directly with the landlord who often has more leeway in pricing and choice of whom to lease to than a large institutional lender.
The disadvantages of leasing are that the cost can be greater than the cost of ownership; the lessee cannot obtain all of the business appreciation; and the lessee is the party that funds capital improvements that enhance the building’s value.
Advantages and Disadvantages of Owning
With current low interest rates, ownership costs are often (but not always) lower than leasing costs. The purchase of a building is not only the acquisition of an asset for use in business operations, it is a financial investment, and will likely be a good one. Finally, with ownership, the operator gets all of the cash flow benefits.
Of course, cash-flow can also be a disadvantage of ownership. A lot of cash will be tied up in the property – typically 20%-30% down is required. Operations of facilities, like nursing homes and assisted living facilities, are cash intensive ventures and, if undercapitalized, are at grave risk of failing.
The staff and owners of Cambridge Realty Capital specialize in senior housing and long-term care financing. The company’s decades of experience make it an asset to its customers who return time and time again.