Those pondering the advisability of owning or leasing the real estate that houses their senior housing/healthcare business typically find there’s not a world of difference between the options.
There are more similarities than differences when comparing these choices, says Cambridge Realty Capital Companies Chairman Jeffrey A. Davis.
Cambridge is one of the nation’s leading senior housing/healthcare lenders, with more than $5.5 billion in closed transactions. The company’s investment strategy includes direct property acquisitions, joint ventures and sale/leaseback transactions.
“Whether the real estate is owned or leased, the business owner has the right to occupy the property and keep the profits earned. Either way, the license is in the business owner’s name, the owner is responsible for property maintenance, and the physical appearance of the building will look the same.
“The essential differences between the owning and leasing options are economical,” he points out.
“There isn’t a right or wrong way to go, but there are advantages and disadvantages with either option. Obviously, those leasing a building or buildings must pay the property owner a security deposit while those buying the real estate must come up with a much larger amount for a down payment,” he said.
When leasing the property, Mr. Davis said money saved can be put to work in other ways. For example, it might be used as working or operating capital to finance future growth and capital improvements are another possibility as well.
The disadvantage for lessees is they cannot obtain 100 percent of appreciation in the property. Lease costs may be higher, but not always, and the lessee must pay for capital improvements that enhance the building’s value, he noted.
The business owner who owns the real estate has a psychological edge – the pride of ownership, which counts for something. Also, capital used for improving buildings can enhance the value of the property and the value of the owner’s investment.
With mortgage interest rates still hugging bottom, real estate can be a great place to invest. But purchasing requires 25 percent to 30 percent equity when borrowing from a bank or institutional lender, which is a huge barrier for many, Mr. Davis said.
Also counted among the disadvantages to purchasing is the fact that buyers need a good credit score and solid bank or other types of financing relationships. There’s also the possibility that capital used for buying buildings might be better purposed elsewhere.
“It’s important for the business not to be undercapitalized,” Mr. Davis stressed.
“Lessees may be confused about various control issues related to property modifications or expansion, the length of the lease and so forth. Will I be in my building for a long time, they ask?
Mr. Davis says that among owners who purchase senior care real estate, misconceptions related to passive investments and the terms and conditions of loan options are not uncommon. Also, borrowers should not delude themselves into believing credit ratings are not important or that HUD financing is easy.
“The idea that if the market changes there will always be somebody around to buy the building may not be applicable in some markets,” he said.