Guest Blog: The Change of Ownership Challenge when Buying Texas Long-Term Care Facilities

Just as surely as death is inevitable, so too apparently is the trend toward consolidation in the long-term care properties industry. Publicly traded companies and real estate investment trusts are rushing headlong into the marketplace to acquire privately held senior care chains and independent facilities. While most of these targets are being effectively managed and operated, their suitors recognize an opportunity to benefit from economies of scale. What’s more, long-term care facilities and the land they are built on can retain their value and actually appreciate in what is a very challenging real estate environment. Senior living and care facilities are an especially attractive growth market as more of the Baby Boomer generation approach retirement age. Baby Boomers moving into these care facilities is not a trend, it is the new normal.

So where are these companies shopping?

Florida and California, with their favorable demographics, have been popular states in the past. These days, whether because of market saturation or high real estate prices in other states, more and more companies are looking at Texas. If not the next frontier, Texas is a frontier for opportunity. In fact, over the last 12 months, dozens of companies have looked at Texas and some have actually started filling their cart.

Once at the checkout line, however, they have learned that closing such deals can be fraught with red tape. The primary challenge in Texas is that the application for licensure requires a level of disclosure that is higher than almost every other state in the country.

In particular, Texas requires the disclosure of all “owners” in a company, even owners of 5 percent or less – all the way up the ownership chain. Other ‘controlling persons’ must also be disclosed, but the state’s definition of what is a ‘controlling person’ is ambiguous. In the past, companies have come to us right before a deal is finalized, with the hope that transferring the licenses will be a short, final step. Unfortunately, we have to tell them that transferring the licenses is not an easy process.

Our first step in representing such a client is to contact the appropriate people at the state level and answer as many questions on the front end as possible. We then work with both the state and the federal government, through its Medicare agent in Texas, called “Trailblazer,” to get applications filed.

After the paperwork is filed, the state and Trailblazer will have questions. Outside legal counsel must know how to respond to questions about complex transactions that do not fit neatly into state and federal change of ownership forms. This means serving as translators, bridging the terminology gap between national deal-makers and local regulators.

The licensure and change of ownership process in Texas is complicated as it is, but it is also continually evolving to try to accommodate new ownership structures. For example, last summer the state changed the rules to clarify that when it comes to publicly traded corporations, shareholders and lenders aren’t controlling persons’ for purposes of disclosure. If a new owner or a buyer did not know this ahead of time, they could have wasted a lot of time trying to figure out whether to disclose certain information about these groups.

This predicament for national companies is really a catch 22. On one hand, these challenges are not going to go away any time soon. On the other, neither is the value inherent in these properties. It places a premium on finding outside counsel with experience and familiarity in working with these specific state entities, streamlining the acquisition process and allowing the company to move forward with what it does best – whether it is purchasing, managing or operating long-term care facilities.

by Cory D. Macdonald. Mr. Macdonald is the lead attorney of the long-term care and retirement housing practice group at Davis & Wilkerson. He represents continuing care retirement communities, hospitals, skilled nursing facilities, physicians and other providers in a variety of issues including business formation, state licensure, Medicare/Medicaid certification, regulatory compliance, risk management, and the sale and acquisition of health care facilities.

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