Master lease at a fixed rent, or a percentage of resident revenue? Same house, same operator, very different risk

I'll ask the thing I'd have been embarrassed to ask. Why is percentage rent tied to gross revenue at all, when the risk you named is that gross climbs while margin collapses? If the whole argument for structure two is sharing the upside of rising acuity and rates, why not tie the participation to something closer to what actually pays the rent?

I don't know how those clauses are normally drafted in this sector, and drafting it is a lawyer's job. But your own paragraph says gross revenue is a bad proxy for her ability to pay, and then the poll offers gross revenue as the upside option. Seems like the deal you'd actually want is a third one where the participation kicks off something she can't inflate by taking heavier residents she can't staff.

Flat, every time, and I'd take a smaller flat number to get it.

I do fast deals on thin margins so I've been on the wrong end of participation structures twice. Both times the upside clause was fine and the reporting was the problem. Monthly census and revenue statements from a 10-bed operator are whatever her bookkeeper feels like producing, and by the time you notice the numbers stopped arriving on time, you're six months into a conversation about why she needs relief.

The other thing solder said and then moved past: your debt service isn't self-correcting. That's the whole answer. A lower base with upside is a great structure for an all-cash owner and a bad structure for a levered one. If you're borrowing against this house, the lender is going to size to the base anyway, so you're paying for the option in proceeds and getting the upside only if she performs. You've bought a call and financed it with less leverage.

compass is right that the participation should key off something better than gross. I'd still rather not have participation at all than have to police the definition of whatever that something is.

I'm still building my list rather than signing anything, but the flat-lease case here has a hole in it that I'd want solder to price before voting.

A 10-year flat lease with a fixed escalator in a sector where occupancy is heading toward two-decade highs means you've locked your rent at today's market for a decade while her revenue per bed runs ahead of it. That's the mirror image of flint's point. The flat lease is safe against her failing and unprotected against her succeeding. If NIC's shortage picture holds from 2027 on, market rent for a licensed 10-bed in a supply-constrained area could move a lot faster than a 3 percent bump.

So the real question isn't upside versus safety. It's whether the escalator you can negotiate roughly tracks where you think rents go. A CPI-linked escalator with a floor and a cap gets you most of the protection flint wants and most of the participation her structure offers, without audit rights or census reports you'll never read. I voted for the hybrid.

One more thing. solder, you've built for her twice, which means you know her work. That's worth something but it isn't operator diligence. Ask for her state survey history on the existing home and her turnover numbers, because a lease of any shape is only as good as the operator standing behind it.