OPEN LETTER

If you have any interest and desire to someday be the licensed operator/provider/ owner, or an investor who leases facilities to operators, or you are the owner of an existing company who is serious about expanding in the skilled nursing home industry then what I have to offer you will provide you the education, insight, and ability to go about it in a way that has been proven to work.

If you are a senior officer of a rather large company in the industry, some if not much of the information I have to offer you might already be aware of to a great degree. But even if that’s the case even learning one or two new things can have a significant impact. However, for someone with less exposure and experience in the industry as it relates to nursing facility acquisitions what I have to offer will prove to be invaluable and go a long way toward evening the playing field and allowing a person to go about leasing, buying, or investing in their first facility(s) with confidence and certainty.

In my career as a commercial real estate broker, I have over 25 years of experience specializing in transactions involving skilled nursing facilities. In addition, during my career I worked for Zevko Enterprises, who at the time, was the largest skilled nursing facility private investor in the country. Also, for a period I was the Director of Acquisitions and Development for the second largest skilled nursing home operator/provider in the country, Sun Healthcare Group, Inc. During my career I have been involved in transactions involving over 200 skilled nursing facilities, and during this time have been exposed to very sophisticated contractual agreements and related transaction documents, forms, etc. In addition, I have owned a skilled nursing facility, and was part owner of a Memory Care facility both located in Salem, Oregon.

I know how transactions come about, how they get negotiated, structured, financed, and closed right through escrow. What I am offering to you is something I’m relatively certain you will not find anywhere out there in the industry to match what I am making available to you. If you are interested then I am offering you some invaluable information in various formats that will allow you to put into action a plan that is without question going to provide you with the documents, and other necessary items to address to allow you to someday either start your own company or rapidly expand your existing operations, and this is really more valuable to the smaller existing companies, start-up, or even a relatively small regional company who has immediate plans to expand. Even medium or larger providers may find useful and beneficial certain items I am offering in this package.

The contractual redacted documents include seven (7) Purchase and Sale Agreements, eight (8) Operating Lease Agreements, and three (3) Management Agreements In addition to the contracts mentioned above I am offering in this package ten (10) letters of intent (LOI), depending on the language these can also be considered contracts to initially tie-up potential transactions, due diligence checklists, facility summary forms used to determine variables in valuing facilities, Confidentiality Agreements for your review and exposure, and a comprehensive physical plant inspection report. These documents in some ways are just as important as the purchase and sale agreements, operating leases, and management contracts I’ve mentioned above. What I am offering you will give you the tools to prepare yourself to acquire your first facility or allow for smaller sized companies to expand operations perhaps in ways that are not apparent to you at this time, or ways in which to identify more meaningful parameters to do so.

In the event you are in the position of wanting to start your first company or acquire your first facility(s) and you’re just not sure how to do it, then you will find that what I am offering will be of extreme value to you. This I know for certain. If after purchasing what I’m offering and educating yourself and you believe you can acquire whatever facility(s) you want without any help, then by all means do so. However, if you need or want some assistance in whatever capacity you need to close the transaction then I am willing to help you. You would have the option of retaining me on a consulting basis, or include me in some way as a partner, member of an LLC, etc.

The key important thing at this stage is to educate yourself on the technicalities and language involved in a transaction so you can move quickly when the opportunity comes about, and it will if you develop a mindset and system to make it happen. Like any discipline in the world, skilled nursing transactions has its own language as does commercial real estate in general. Once you have engaged a seller you must move fast so you can capitalize on the situation. If you don’t then somebody else might easily take the deal away from you since they are prepared and know how to quickly ask meaningful questions, analyze the situation, and put facility(s) under contract.

It doesn’t matter if your opportunity to purchase or lease comes along in two months or two or five years or a longer time. The important thing is that you are prepared and know at least in a general way what you’re doing to capitalize on the situation. This is very possible; I have seen and helped several start-up companies acquire their first facility(s). When the opportunity comes around, you’ll be ready to present a letter of intent (LOI) quickly. If you know what you’re doing, you can even issue a letter of intent during your first conversation with a seller. This is the primary reason that you must develop a boilerplate LOI so that you only have a few items to include such as the offered price, the legal entity selling, identification of the facilities, and whatever else you deem appropriate for the specific transaction. But this is very basic, and I have 10 sample Letters of Intent (LOI) that you’ll be able to modify to your liking, or perhaps ideas you can incorporate into any existing LOI you may have crafted to date.

I can assure you that LOIs can range as simple as 2-3 pages up to 6 plus pages depending on the complexity of the transaction. It is up to you whether you want to employ an attorney at this stage to construct or review the LOI being submitted. If you are just starting out, you may want to make sure you are addressing everything that you should so retaining legal counsel would be advised. Once you do several transactions, or sooner depending on your exposure and experience with previous positions, you will be able to craft your own LOI. However, if you are uncertain or uncomfortable then retain legal counsel.

Obviously, the Purchase and Sale Agreement, Operating Lease, or Management Contract should be constructed by your legal counsel with of course your involvement during that process. Depending on your experience and the deal dynamics you may wish to negotiate almost every aspect of the transaction. However, some people are much more comfortable having their attorney negotiate portions or even most of the contracts. However, this is mostly to your benefit if your legal counsel has a proven track record specializing in skilled nursing facility transactions.

As far as what price to offer can be approached in different ways, and at this stage your LOI will have conditions involving financial statements and other documents that you must review and approve prior to the transaction closing. This is where a comprehensive Due Diligence Checklist (DDC), and facility summary forms comes in, and I have created a very comprehensive form based on years of being exposed to many different companies DDC. If you wait to construct a basic LOI until you come across a potential deal, then you will waste precious time starting from ground zero and not 100% certain what you are going to do next.

If you are going to go about engaging an attorney to construct the LOI it may take more time than you think, perhaps even a couple weeks, and it will certainly slow down any momentum that you had built and, in many cases, indicate to the seller that you really aren’t ready, or know what you’re really doing. You must be ready to pounce when the opportunity presents itself. Otherwise, you’ll be trying to figure out what to do next and you will lose out on transactions to companies who do know what they’re doing and how to tie up and close transactions.

At the time of this letter the prevailing average cap rate is around 11.5 to 12%. And that number is reflective of transactions involving fee simple unencumbered by an existing lease. Meaning that you would be purchasing the real estate along with the operations. The pricing or cap rates are different if the transaction is fee simple subject to a lease in place, or for the sale of an existing lease, or how any sublease may be structured.

The higher the risk on any given deal the higher the cap rate. And conversely the lower the risk the lower the cap rate. Interest rates as it relates to loans also have an impact on the cap rate, and many other factors such as age and condition of physical plant, location, proximity to acute care hospitals, economic viability where facility is located, patient mix, bed configurations, physical plant waivers, occupancy/census, status of most recent state health survey, and more.

However, as equally important if not more so is the actual cash-on-cash (CoC) return that the investment would yield to a buyer. There are several different ways this number is arrived at depending on the structure of financing, etc., and you should either know what these are or speak to a CPA firm who thoroughly understands how these returns are achieved. However, in general a quick “thumbnail” calculation, or acid test for the calculation or formula is, NOI minus annual debt service (ADS) divided by the cash invested to secure financing. For an investor who in turn will lease the facility the calculation is treated as though the annual lease payment were in effect the NOI. Thus, the equation would be the annual lease payment minus the ADS divided by the cash down-payment to secure the financing.

There are other calculations that are employed by sophisticated operators and investors that go toward pricing. The amount of importance put on these individual calculations will vary from company to company. The following calculations I have identified are beyond the scope of this letter in terms of a full explanation and how they can be adjusted or applied to pricing a transaction. All these calculations can be explained in depth by research on the internet, or a sophisticated CPA firm:

• EBITDA – Earnings Before Interest Taxes Depreciation & Amortization
• EBITDAR – Earnings Before Interest Taxes Depreciation Amortization & Rent
• EBITDARM – Earnings Before Interest Taxes Depreciation Amortization Rent & Management
• EBITDAM – Earnings Before Interest Taxes Depreciation Amortization & Management
• CoC – Cash on Cash (return)
• NPV – Net Present Value
• IRR – Internal Rate of Return
• FMRR – Financial Management Rate of Return
• B-I – Band of Investment
• DCR – Debt Coverage Ratio

The most important financial number that you determine to be as accurate as possible is the Net Operating Income (NOI) because all further valuation is built off that number for the most part. Once you’ve identified and determined what the NOI is, and this could change if you’re imputing certain costs or income variables of your own, then the calculation is quite simple. NOI divided by the price equals the cap rate. A calculation I use more often is to determine the price by taking the NOI and dividing it by the target or desired cap rate which would then give you the price you would be willing to pay. This is why determining the NOI is so critical because if a buyer miscalculates the NOI to be much higher than what it is it could be the difference in the facility(s) being profitable or losing money from the start. Usually, a sophisticated lender will understand these computations and if you’ve miscalculated to a significant degree, you’ll not be able to obtain financing, and in addition you’ll certainly lose credibility with that lender. It is therefore imperative that you arrive at a very accurate NOI that either reflects the seller’s true NOI, or an NOI that is derived after you might impute or alter expenses or income based on specific and viable reason(s) for doing so.

And, obtaining financing, hence your debt structure, will be centered around an accurate NOI. And, if this is not done properly you might find that you are in violation of the debt coverage ratio (DCR) which will be a loan covenant in your financing. The DCR formula is, NOI divided by annual debt service (ADS). This is why it’s critical that you understand how to read a financial statement, or that you hire a CPA firm who can calculate the NOI for you. And I would highly recommend you retain a CPA firm that is familiar with Medicaid reimbursement and performs annual cost reports for clients, etc. These CPA firms often will advertise their services as members of each state’s Nursing Home Owner Association. Currently the DCR is averaging around 1.25. One thing you must be aware of is the difference between valuing facilities in Medicaid flat-rate states vs states that are based on cost rate where there is a component related to property cost reimbursement, again consult with a CPA firm as to this reimbursement valuation model.

Also, it is quite important that you make sure a management fee has been accounted for in the operating expenses. Management fees usually run between 5-7% of gross income. If the owner has not expensed a management fee, then you will need to impute one. Most lenders will certainly account for one when underwriting a loan. If for no other reason than if there is a default on the loan, they will need to hire a management company to operate the facility, and this will then be an expense the lender will incur since whomever the lender appoints as the management company will certainly charge one.

If you are just starting out wanting to buy or lease your first facility but are uncertain as to how you should go about it or that you don’t have enough money to get started, then please put those thoughts aside. Should you purchase what I’m offering, you will know how to go about doing so, even if you might need to consult with me for a few hours. Having the money is a separate issue for sure. However, I have helped several start-up companies acquire their first facility(s) and it may be that you’ll need to partner with someone who has the money required. That is not all that unusual. The main thing is that you get started someway somehow. And if you have structured the deal right to begin with you will have no problem finding investors, partners, etc.

Most CEOs, Presidents, COO, CFO, regional directors, many administrators, and Directors of Nursing are very viable candidates for ownership in some capacity, if not now, then at some point in the future. But rarely will a deal just fall in your lap, it happens but it’s very rare. You must make yourself known and your intentions in the marketplace. I can also show you how to do this if you’re not sure. There are many ways to go about generating leads when it comes time to approach an owner to either buy or lease their facility(s).

By educating and learning things you’re not currently aware of it will give you confidence and a mindset so you can be ready when the time comes for you to make the move into some form of ownership. If you aren’t prepared no seller who is serious will want to waste time with you while you get yourself educated as to how to go about negotiating and closing a transaction. A person’s quality or meaningful questions alone will identify you as someone who knows what they’re doing or not.

The matter of confidentiality in any transaction is of vital importance. Within this package I am offering you there are four Confidentiality Agreements (C/A), NonCircumvention Non-Disclosure (NCND) type documents. These types of documents you must become familiar with and use or be ready to sign as most sellers will demand that you do so before they supply you with any relevant financial information or other proprietary documentation. As a buyer, tenant, or management company you will not be the one to initiate the execution of a Confidentiality Agreement. The owner/seller is the party who’ll initiate that document. What I have provided with these documents is meant to educate you in general as to the types of provisions, subject matter, concerns, etc. Particularly if you are entering the industry with little to no experience you should seek legal counsel to help you understand the scope and risk, etc. involved. However, the NCND documents are something you would initiate when disclosing your transaction to any party you may wish to involve in your deal.

Also, if you are going to expose your transaction to potential partners, investors, etc., you will most certainly want to have that party sign whatever type of NCND or C/A that is appropriate. I would strongly advise you to employ an attorney to craft this document for your specific situation. I cannot stress how important this matter is. I have experienced myself and seen other people lose control of, or worse yet have deals taken away from them, circumvented, by someone they had exposed the transaction to, but had not signed the appropriate C/A, NCND, etc. The competition in the skilled nursing facility industry is highly competitive due to the limited number of facilities on a nationwide basis, the barriers to entry, Certificates of Need, qualifying for licensing, establishing working lines of credit, etc. If someone doesn’t want to sign an NCND and or C/A then move on to someone who will.

The adage that, “loose lips sink ships” is 100% applicable to the skilled nursing facility industry. There are any number of ways that you can by accident, or naively get taken advantage of, or circumvented. When asking someone to sign such an Agreement, you might be asked, what state is it in, how many beds does the facility have? These questions of course are posed to determine if that party has any interest in pursuing your deal any further. For example, if I asked you those two questions and you gave me accurate answers, I really don’t need to involve you any further, unless you have put the facilities under contract. I can easily circumvent you. How? Quite simple. By knowing the particular state the facility is located in and how many licensed beds it has I can call that states Nursing Home Industry Association, or any other public record to determine what facilities have X number of beds and contact the owner myself with that information.

And, even if you’re dealing with someone you know and trust if you don’t have a signed agreement then that other party has gained significant leverage in all further negotiations, and in the end you might end up with a small fraction of what you originally wanted and or even deserved in terms of ownership, equity, etc., this is especially true if the person you are talking to represents the money you need! Furthermore, in the above scenario even if you disclosed that confidential information to me and I wanted to really keep you in the dark I could speak with some other contact of mine who would then take action to close the transaction and you would never know since I wouldn’t have ever spoken to the seller myself.

I have seen and experienced such things myself and I cannot warn you enough to guard what you know as if your “financial life’ depended on it. These types of things can and do happen. Do not be overly anxious to disclose anything to anybody. Information regarding transactions is incredibly valuable and you must treat it that way, or I can almost guarantee you at some point you will be severely taken advantage of, and you might not even ever be aware of it, other than to find out at some point in the future the seller ended up selling or leasing to someone else and not you! Why, because you were careless, had naive trust, didn’t place appropriate value on what you had become aware of, etc. Just like in the business world, professional athletics, or even war, there is a game plan or strategy employed. It is no different in the world of transactions. Preparation is everything. You must have a plan that allows you to capitalize on a situation. You must have an opportunistic mindset.

Even if you’ve done several or more transactions do you believe that your attorney knows everything about everything that should be included or addressed in a purchase and sale agreement, operating lease, or management contract? It only makes sense to me that you would be quite interested to know what other buyers and sellers have addressed and agreed to in their transactions. I can assure you that every contractual Agreement is different in terms of topics, provisions, categories, deal points and the language negotiated and agreed to. Even one clause can create a dynamic that clarifies a situation avoiding a potential lawsuit in the future due to ambiguity in the language. More meaningful information leads to better decisions, better decisions lead to better transactions. What I am offering you will help you do just that.