Owning versus leasing is not always a clear cut decision, but there are many questions long-term care owners large and small should ask in advance of transitioning into ownership from leasing, or vice versa.
Understanding the advantages and disadvantages — including common misconceptions — of one’s next real estate move will help achieve the best outcome, said Jeffrey A. Davis, chairman and president of Cambridge Realty Capital Companies, during a recent webinar hosted by the American Health Care Association (AHCA), National Center for Assisted Living (NCAL) and Cambridge Realty Capital.
“There’s never one absolute way of doing a transaction,” Davis said. “Flexibility is the key when making these decisions.”
Here are some of the top questions to ask when considering your next real estate move in senior living.
What Are the Key Attributes of Leasing and Owning?
Both leasing and owning allow long-term care facility operators the right to keep profits and the right to occupy. In addition, the operator/licensee has responsibility for property maintenance in both scenarios.
Some of the main differences come down to cash, Davis said. When leasing, a cash down payment is not required, but it is for those looking to own. Alternately, to lease a property requires a security deposit while owning does not.
What are the Advantages and Disadvantages of Leasing?
“The advantages of leasing are, ‘I can keep most of my cash — cash is king,” Davis said, adding that credit rating is not so important when leasing.
Capital can be used for rapid growth, and for operating and working capital.
“You are the owner for all practical points,” he said.
But not being able to obtain 100% appreciation of the property is one disadvantage of leasing, and lease costs can be higher than the cost of real estate ownership, he said.
What are the Advantages and Disadvantages of Owning?
With ownership comes pride, Davis said, noting that now is a good time to buy as mortgage rates are low. And, capital used for improving buildings can enhance the value of the building, he said.
“Real estate is a great place to invest capital if you have capital to invest,” he said. “All cash flow benefits you as the owner.”
And ownership costs can be lower cost than leasing in many instances, but not all.
Ownership also requires 25 to 30% equity and good credit, which may be a disadvantage for some.
Often, one needs bank or other types of financing relationships.
And, “capital used for buying buildings may be better purposed for other corporate needs — it may not be the right time to buy the building,” Davis said.
Is This Deal in My Best Interest?
For administrators looking to be a first-time owner, it’s almost always best to lease the building first, Davis said, noting that often first-time owners don’t often have a lot of working capital.
“The key is developing your operation and company and being able to show that platform to new landlords or new lenders,” he said.
A common misconception is that buying a facility is a passive investment, which couldn’t be further from the truth.
“There’s nothing passive about running these buildings — not in seniors housing,” he said.
In addition, first-time buyers might assume their bank has their best interest at heart.
“Another misconception is, ‘My bank will take care of me,’” Davis said. “We have heard that many times, and your version of them taking care of you and their version of them taking care of you often tend to be different.”
Overall, it’s really about what works best for the business and the population it serves.
“One thing people never need to lose sight of in senior housing and health care is that it is a hybrid business — it’s not just in real estate but much more in health care,” he said. “What you really need to focus on is being a great operator.”
Written by Cassandra Dowell