The (Not-So) Hidden Risks of RIDEA Investment Structures

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Many Real Estate Investment Trusts (REITs) have embraced the REIT Investment Diversification and Empowerment Act (RIDEA) structure for their senior housing asset investments. Non-REIT institutional investors sometimes employ similar structures; however, it is unclear whether the market fully appreciates the inherent risks.

Healthcare assets carry risks not present in other asset classes (resorts, multi-family, etc.). Use of 3rd party tenants and managers theoretically reduces risks to property owners; however, the ability to use a Taxable REIT Subsidiary (TRS) can make operating problems, owner problems (legal or reputational).

Under Pre-RIDEA structures, REITs were “passive” landlords under triple net leases. The tenant was always a third party that either operated the community or subcontracted management to a third party manager. The REIT was 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).

Under RIDEA, the REIT can now own a material interest in the TRS, which in most states will be the licensed operator. Recent headline news stories have illuminated the risks inherent in this structure.

REITs can mitigate these risks through the following considerations:

• Manager Selection/Underwriting,

• Legal Structure,

• Management Agreement/Lease,

• Control Rights Reserved to REIT/Landlord, Insurance, Licensure, Employees, Reporting, Appropriate Manager Sponsored Compliance Infrastructure and others.

In each of these, there are practical considerations (cost/benefit) but also scope issues — such as how much control is too much or is there not enough control? REITs (and non-REIT investors using similar structures) should carefully consider these issues and adopt (and follow) policies and procedures to address them.

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Topics:  Business Assets, Healthcare, Institutional Investment, Non-Exempt Assets, REIT, Risk Assessment, Risk Mitigation

Published In: Business Organization Updates, Commercial Real Estate Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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