Cambridge Realty Capital President Jeffrey Davis urges SNF operators who think owning their facility is just a pipe dream to think again. “Many SNF operators dream of simply being both operator and owner,” Davis asserts. Throughout his decades of experience in the senior living and healthcare industry, Davis has tapped into the mindset of the SNF landlord and says that operators can use what Davis has learned to their advantage in negotiating a sale, even if the owner wasn’t thinking of selling. Not only that, but you may even be able to have the owner provide a portion of your equity financing.
According to Davis, SNF owners have secrets they don’t necessarily want to reveal to their operators. If you know what they are, you can use them as bargaining chips to negotiate the sale of your facility to you, the operator.
First and foremost, an operator must have a good relationship with the owner/landlord. “The relationship is the foundation on which successful negotiations are built,” Davis contends. If your relationship is strained, you won’t have a leg to stand on, so to speak.
Laying down a strong foundation starts with the most basic of your operator/landlord exchange: paying your rent. “Always pay your rent on time,” Davis implores. It might seem like basic common sense, but sometimes operators simply get busy and may miss the deadline by a day or two and aren’t necessarily being neglectful or delinquent. However, a late payment negatively affects the landlord’s business in numerous different ways and doesn’t bode well for the long-term state of the relationship or an operator’s integrity.
Davis advises operators to not only to make rent payments on time, but to ensure that the landlord doesn’t have to hunt you down on rent day. “Do whatever it takes to get that check or deposit to him on time. In fact, strive to get it in early if possible. If nothing else, get it to him at the beginning of the day rather than waiting until the very last minute.” Doing so will give you the credibility you’ll need when negotiation time comes.
Paying rent on time is perhaps the most important step, but it’s only the first one. According to Davis, it is also critical to deliver mandatory reports on time. “It’s easy to develop some lazy habits around this,” notes Davis. Operators may see reporting deadlines as less imperative than financial ones. This is far from true. There’s a lot riding on those reports when it comes to your landlord’s business. He has creditors, lenders, and local, state and federal agencies to report to. If you’re late, he’s late.
For this reason, Davis advises operators to “know your lease cold and what needs to be reported to your landlord. Know what happens in your building and what happens to your landlord if you are late reporting certain covenants that your landlord has agreed to tell lender by a certain date. Also, know what happens when you’re on time.” Not only will this give you insight into your owner’s world, you may uncover information you can use to negotiate the purchase of your facility.
Next, Davis counsels operators to know what happens between a monetary default and a non-monetary default. (If my rent payment is late and my landlord can’t make his mortgage payment, what is his penalty? What if I forget to submit a report? Is it an automatic default for the owner?) Again, this is great information to tuck away in your back pocket for use later on when approaching your landlord about a potential purchase.
Once you’ve laid this groundwork, you can chart the course of your future as operator/owner when the time comes to negotiate your next lease. According to Davis, there are two ways you can buy your building over the next 2 to 5 years with help from your landlord by:
* Negotiating your lease with the lowest rent and a fixed price purchase option: The fixed price option should begin being available not less than after two lease years and should give you the option to execute a purchase option during any time frame after that period. You also may want your landlord to provide some form of financing to you in a second mortgage or mezzanine mortgage or some other type of arrangement.
* Or, be transparent and forthcoming up front during your lease negotiation. Tell your landlord you look forward to being his tenant, you like his building very much, but your ultimate goal as an operator is owning your real estate. Let him know that you want his help in financing your real estate ambitions and goals via a second mortgage, mezzanine loan, soft second, or some other technique. Then focus on being that model tenant, doing all of the things previously mentioned, demonstrating that you are not only serious but worth the risk and the investment.
“As the operator, you hold the key and the owner holds the lock,” Davis maintains. “It’s up to you as the operater to make the key fit.”