Over the past few years, the senior living sector has endured some hard times. In 2023, many operators found themselves in distress and facing a sale or court-governed proceeding. Interest rates, wage inflation, staffing shortages and patient volume decline post-pandemic all impact operational risk and investment opportunities.
McGuireWoods is seeing multiple distressed clients and client borrowers in the behavioral space (autism, substance abuse, IDD), subacute care (skilled nursing, assisted living, continuing care retirement communities) and memory care. These distressed properties can provide a lucrative investment opportunity if the proper issues are considered. Here are a few things senior living facilities interested in purchasing a distressed property, or those that fear being in a distressed situation themselves, should know about the process of a senior living facility going through a restructuring and/or bankruptcy.
- Community Assessment. Due diligence on the community is the very first step when dealing with a distressed senior living facility. Understanding the community’s payor mix, agreements, corporate structure and governance, vendor/supplier relationships, labor agreements, staffing and capital structure are paramount to formulating a path forward. Once diligence is complete, a picture of how the community became distressed should be clear so steps can be taken to prevent such a situation going forward.
- Property Assessment. Before the best path forward can be determined, the community’s property must be analyzed. Does the community own its real estate or is it leased? Is the property collateral for a loan? Property ownership governs the community’s ability to use, sell and lease the property. To the extent the community’s assets are collateral for a loan, the Bankruptcy Code limits the use of “cash collateral” unless certain requirements are met.
- Valuation and Protection. Asset valuation is a critical issue to any acquisition, restructuring or bankruptcy case. It is important to assess the value and condition of the senior living facility itself. This may involve property inspections and appraisals to determine the property’s current and potential market value. As mentioned above, a debtor’s use of cash collateral in a bankruptcy case is restricted. To obtain approval to use cash in a bankruptcy case, the debtor generally must demonstrate that the collateral is adequately protected. While many factors and elements go into the demonstration and evidence that a lender is adequately protected, a central issue will be the value of the collateral.
- Creditor Constituents. As noted above, a senior living facility will need to address the interests of its creditor constituents in any restructuring or bankruptcy. An open dialogue with existing creditors is critical to the progress and ultimate success of any such process.
- Professional Involvement. An acquisition or restructuring involves a number of professionals: investment bankers, financial advisers, property managers, third-party report vendors and legal advisers. Finding the appropriate professionals is key to a successful sale or restructuring in this industry.
- Agency Involvement. Senior living is a highly regulated industry on both state and federal levels. Consequently, understanding the governing agencies’ authority and requirements is paramount. Often a gap exists between the legal standard and the practical reality when it comes to a federal or state agency’s rights to approve or consent to a distressed transaction; transactions should be structured and timed with this distinction in mind.
- Path Determination. Distressed communities and their investors have a number of options, including an asset sale, refinancing, entering into a forbearance agreement or filing bankruptcy. This consideration can materially impact the relative advantages and disadvantages of an in-court versus an out-of-court transaction. For example, even if a court cannot or will not compel an agency to approve a transaction, it is often helpful to use the disclosure and public-forum elements of an in-court proceeding, such as a bankruptcy filing, to capture an agency’s attention and to use the proceeding to facilitate an agreement.
- Automatic Stay. In a bankruptcy restructuring, understanding the timing and breadth of the automatic stay is paramount. Upon the filing of a petition in bankruptcy court, nearly all collection activities against the debtor must immediately stop, including the commencement or continuation of most legal proceedings.
- Communication Strategy. Regardless of the path chosen, it is important to place a high priority on communicating change. Buyers should communicate with the community’s internal and external audiences (employees, patients/residents, media, government/regulatory) as early as possible. Make sure all communications surrounding the change are honest and clear.
- Resident Reception. The last component of a successful path for a distressed living facility is having satisfied residents. Senior living is a people-intensive industry and resident participation is critical in a senior living sale, restructuring or bankruptcy case. Although not required, the path is unlikely to be successful without resident involvement.
