Most of the major healthcare-focused real estate investment trusts have utilized the RIDEA structure for at least some of their deals in the seven or so years it’s been available, but the structure bears risks as well as reward, warns a law firm in a recent blog post.
HCP is the latest major REIT to enter a RIDEA-structured joint venture, creating a continuing care retirement community platform with Brookdale Senior Living as part of a deal announced in April. In addition, Ventas and Health Care REIT both have what they call “seniors housing operating portfolios” alongside their triple-net lease senior housing portfolios.
But there are risks involved with senior living communities and other healthcare properties owned in a REIT Investment Diversification and Empowerment Act (RIDEA) structure, according to a recent post on the Foley & Lardner LLP blog, Health Care Law Today.
Operational performance risk
In a traditional triple-net lease agreement, the third-party company that manages a community on behalf of the REIT landlord typically assumes operational risks, says Foley & Lardner.
But the Taxable REIT Subsidiary (TRS) created for RIDEA-structured deals means that REITs must also share risk at the operational level. If a community performs well and produces outsize revenue and income, the REIT benefits along with the manager. But the converse is true as well: underperforming communities can drag down REIT revenue since the landlord isn’t guaranteed the same stability a triple-net lease affords.
Prior to RIDEA being passed in 2007, REITs were “passive” landlords and utilized triple-net lease structures, notes Foley & Lardner. Under those lease agreement, REITs were “largely removed from liability for health care and regulatory issues with only the most general, but indirect, duty of care tied to premises liability doctrines (i.e. not patient care),” says the blog post.
But with RIDEA deals, REITs now own a stake in the TRS, which is typically the licensed community operator. Health Care Law Today points to some headlines in the past several months—including the Frontline/PBS investigative series on Emeritus and a nursing home conglomerate that includes Ventas slammed with a $1.1 billion verdict for ‘corporate greed’—illustrating the risks inherent in these “skin in the game” joint ventures.
Similar to legal risk, REIT reputations may be at stake in a RIDEA-structured deal since they have a stake in the TRS management company. Rather than focus resting solely on a third-party manager in a high-profile wandering case or a lawsuit alleging wrongful death, any and all stakeholders may come under scrutiny.
Ways to mitigate these risks, says Foley & Lardner, include careful management selection and operator agreement underwriting, and an appropriate compliance infrastructure for all parties involved.
Read more at Health Care Law Today.
Written by Alyssa Gerace