Operator handed back the keys and the license went with him. Eleven months dark.

I buy things I intend to hold for twenty years and this one taught me something I hadn't priced.

Two purpose-converted 8-bed homes in the same suburb, bought as a pair, $610k and $575k. Leased both to a single operator, triple net, $7,500 a month each, ten year term with bumps, personal guarantee. She'd run one home for nine years and wanted to expand into two more. I checked her survey history and it was clean. I did not check her balance sheet in any real way, and the guarantee turned out to be worth roughly what a signature is worth when there's nothing behind it.

Census never got above six of eight in either house. Her payroll ran hot the whole time and she was covering shifts herself. First missed rent was month 14, partial payments through 16, keys back at 17.

Here's what I hadn't understood. In my state the license to operate is issued to the operator for that specific address, and it does not travel with the deed. When she surrendered, the license went with her. The residents were relocated over about six weeks. So I owned two empty houses with medication rooms and nurse call wiring, and any replacement operator had to apply, get through the plan review, get inspected, and get surveyed before a single resident could move in. That took the new operator seven months from signature, and I'd spent four months finding her. Licensing timelines and whether a change of operator can be expedited vary a lot state to state, and I'd assumed mine worked like a liquor license transfer. It doesn't.

The cost. Carry on both was about $9,200 a month all in, and vacancy repriced my insurance because an unoccupied care building is a different animal to the carrier. Eleven months of that, plus $14k of repairs from a building sitting with the HVAC off in August, plus legal. I'm down about $118k against where I'd have been with continuous rent, and the new lease is $6,400 each, not $7,500.

What I'd do differently. Rent at a level the operator can pay at 75 percent census rather than at full, because full is the exception in a small home. Put a monthly reporting covenant in the lease, census and payroll, with a default trigger if either crosses a line, so I hear about trouble in month four instead of month fourteen. Hold six months of rent as a deposit, not two. And find out how license transfer actually works in that state before closing, in writing, from someone who does it for a living.

4 replies

1aaron_fitz10 Get yoursPRO6

This is the exact thing that keeps pushing me back out of this category every time I look at it. In every other rental I've studied, the worst case is a vacancy and a turn. Here the worst case is a building that legally cannot be used for its purpose by anybody for the better part of a year. That's a different risk and I don't think the yield I've seen quoted pays for it.

0raj_mehta14CapitalPRO6

I'm trying to understand what the guarantee was even supposed to do. If she has nothing, the guarantee is decoration. Would it have helped at all to take security over the operating entity's receivables, so if she failed you'd at least have a claim on the money families still owed? I'm probably mixing up two things here. Residents paying a company you have a lien against sounds like it gets complicated fast, and I assume you can't just collect from families.

1joe_delgado5AP4CPRO6

I'll take the other side on the cause. The license thing cost you the eleven months, sure, but the deal was already broken at signing. $7,500 rent per house on eight beds means every bed is carrying about $940 a month of rent before she pays a single caregiver, and at six of eight it's $1,250. You said yourself she was covering shifts herself, which is what an operator does when payroll won't close. She was insolvent for a year before she stopped paying you. The new lease at $6,400 is you admitting the first number was fiction. vellum, receivables wouldn't have saved anything, there weren't any.

2ehernandez74PO2BPRO5

orchard, on the reporting covenant, has anyone actually signed one for you? I've floated similar language on a much smaller deal and the answer I got was that monthly payroll disclosure to a landlord felt like being audited by someone who isn't in the business. And if the default trigger fires at, say, two consecutive months under 70 percent census, what do you do with that? You still can't operate the building yourself. Knowing in month four only helps if there's a move available in month four, and I can't work out what that move is other than cutting the rent early. Which, reading flint's math, might be the whole answer.

Operator handed back the keys and the license went with him. Eleven months dark.

4 replies