New Entrants, RIDEA Among Hot Topics in Senior Housing Legal Landscape

Legal risk is inherent with any business, but it’s especially apparent in senior housing. After all, operators and owners are looking after older adults, many of whom are frailer or sicker than the general population.

As senior housing providers navigate the industry’s perilous legal landscape, they very often seek the advice of experienced attorneys. One of those legal experts is Mike Okaty, partner at Milwaukee-based commercial law firm Foley & Lardner. The firm has 24 offices across the U.S., and employs roughly 1,100 attorneys.

Earlier this month, Okaty was appointed chair of the American Bar Association’s (ABA) Senior Housing and Assisted Living Committee. With that in mind, Senior Housing News caught up with him to talk about some of the legal issues providers are facing, and how he views the legal outlook for U.S. senior housing providers.

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SHN: What legal issues do you flag as important for today’s senior housing providers?

Okaty: I would anticipate we’re more likely to see increased regulations in the future, just as a general rule. As more people move into senior living communities, as more of these communities exist, there’s going to be more of a need and an opportunity for new regulations. That’s on a macro scale.

On a micro scale, you have something like what happened in Florida a year ago with the hurricane, and some unfortunate circumstances with communities that didn’t evacuate and lost power. The governor issues an executive order mandating generators and a certain number of days supply of fuel. And it’s an unfunded mandate, and it applies across the board, and in many cases it doesn’t comply with local ordinances for fire safety.

So, it’s a political response to a tragedy and I get it, but at the same time, it’s a real challenge to the industry. Politicians are going to be responding to a headline. Both macro and micro, you’ll see increased regulation on the pure legal side.

I think as you have new entrants into the market, if you have lenders, for example, entering the market for the first time, capital providers, whether it’s REITs or private equity, as you have operators or developers entering for the first time, and all of their other prior experience has been with other asset classes … their first deal in the senior housing industry sometimes can be funky, for lack of a better term. Because, there’s a learning curve.

What we see as lawyers is, sometimes we can tell when we’re doing a deal with somebody who’s never done a senior housing deal before. it comes across in the comments made, the document drafts proffered, some of the diligence questions asked. And that’s fine. There’s a learning curve.

It’s helpful when they hire professionals, advisors, lawyers or accountants, who have operated in this space before. Sometimes that lack of experience can come across in the form of increased legal attention and legal spend. That’s opposed to the deals where it’s the same cast of characters, and we all say, “Nice to see you again.”

What about litigation risks? Anything senior housing providers should key in on?

When you’re taking care of the elderly, in some cases at the end stages of their life, whether they’re in skilled nursing or memory care, things are going to happen. It’s not reasonable to think that you could go for entire cycles and just not have accidents, for example.

It’s important to recognize that it’s not a risk-free business to be in. That said, there are all kinds of best practices for risk mitigation. There are best practices for staffing, oversight, quality control, acuity testing to make sure people are in the appropriate level of care.

There’s a degree of risk inherent in the industry. I think, as you have new entrants, and new operators, it highlights the desire, the need, to have experienced operators. And if you’re a new capital provider entering the market, it’s important to pick an operator/manager that has their skill set.

I think educating the capital markets as people invest is important. Investors need to know there’s some modicum of risk that is inherent in the industry, but that the people they’re investing with are going to be taking appropriate asset management measures. Picking a good manager in the first place is also important. Having good insurance. Having good procedures. Oversight, but not too much oversight. All those things will hopefully help mitigate risk but not necessarily eliminate it.

Are there any specific regulatory or compliance issues that are leading to legal headaches these days?

The Florida generator rule is a great example. It’s regulated state by state. That makes it more challenging if you operate in multiple states.

The labor and employment side with background screening is another area. As you dig deeper into the workforce, we’re finding problems with operators having a zero-tolerance policy about prior criminal records, or cannabis. If you have a drug-free workplace policy, that may be a laudable policy, but it may also end up with you having no workers in your community.

Those are areas of some increased attention. You’ve got an industry thats struggling with finding adequate workforce, but also dealing with those labor and employment policy things on the other side.

But I would say that the future is bright for the industry. We have a large aging population. That, generally speaking, bodes well.

The industry also becomes more robust. You’re going to have a bigger portion of the population living in senior housing. So, you’ll have all the other issues that come with that. Litigation will increase. Employment will increase. Defaults. It’s just a bigger industry and a bigger mover in the overall economy. The legal issues will just follow along.

Any other issues you think are important to follow?

One thing that has gotten a lot of press is the whole RIDEA structure. It’s not new by any stretch. It meant that the REIT could also have the TRS, taxable REIT subsidiary, and be the operator. They still had to hire a third-party independent manager.

So, for REITs, whether they’re publicly traded or public non-traded or even private with a wide array of investors, that changes the game a little bit. They went from purely being a real estate owner to being the license holder, the operator in the eyes of the states, but still using a contracted third-party manager. It also allows REITs to partner with their managers, and not only be arm’s length contractors, but to to joint venture with each other on communities.

That changes the alignment. If you’re hiring me as your lawyer, I’m an arm’s length service provider for a fee and I’m independent. But if I’m the lawyer [for example] … and I also own 5%-10% [of the business], that just changed our relationship.

On the one hand, you could say, well, we’re aligned because I’m going to give you the best legal advice I can, maybe even moreso now, because I have an economic interest at stake. And that’s true. But on the other hand, there could be times where my advice is tainted by the fact that I’m an owner. So, on the one hand, [RIDEA joint ventures] create alignment, and on the other hand it creates new conflicts.

To joint venture under a RIDEA structure or not? That is the question. We have clients who swear by it, and clients who swear against it. So, I think the jury is still out on that one, and it’s not clear what the ultimate long-term result will be.

This interview was edited for clarity and length.

Written by Tim Regan

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