New Financing Option for Senior Living Facilities The TIC Offering

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1 New Financing Option for Senior Living Facilities The TIC Offering Presenters Stephen I. Burr, Business Law Department Matthew J. Murer, Health Care Industry Team Friday, April 27, 2007 Today s Presenters Stephen Burr Boston Matthew Murer Chicago 1

2 Housekeeping We will take questions throughout the program via the Q & A box at the bottom of your screen and live questions at the end of the program Foley will apply for CLE credit after the Web conference. If you did not supply your CLE information upon registration, please it to mlopez@foley.com Today s program is being recorded and will be available on our Web site For audio assistance please press *0 For full screen mode, go to View on your toolbar and select Full Screen or press F5 on your keyboard New Sale-Leaseback Option The return of capital Consolidation of the marketplace 2006 Brookdale Senior Living acquisition of American Retirement Corporation for $1.2 billion results in a company with 535 facilities in 34 states with the ability to serve 50,000 residents The vast majority of facilities in the U.S. are independently owned or are part of smaller state-wide or regional companies 2

com Today s program is being recorded and will be available on our Web site For audio assistance please press *0 For full screen mode, go to View on your toolbar and select Full Screen or press F5 on

3 Senior Living Industry Recent statistics indicate that there are 36,451 licensed assisted living facilities in the U.S. From the number grew form 32,886 to 36,399 Some communities were built in the 1970 s and are looking to modernize and expand Senior Living Industry (cont d) Industry is looking for new tools to continue expansion: Emergence of REITs and sale leaseback arrangements Purchase of portfolios Diversification of property types (CCRCs, SNF, IL and AL) 3

modernize and expand Senior Living Industry (cont d) Industry is looking for new tools to continue expansion: Emergence

4 Tenant-in-Common (TIC) Offerings What Is a TIC Offering? A private placement of interests in incomeproducing real estate, typically to 5-15 accredited investors The Transaction is structured as a sale of the real estate by the owner ( Sponsor ) to the investors Each Investor owns an undivided fractional interest in the entire property as a tenant-incommon (hence TIC ) TIC interests qualify as like kind property for investors engaged in a 1031 like-kind exchange 4

$an undivided fractional interest in the entire property as a tenant-incommon (hence TIC ) TIC interests qualify as$

5 The Exchange Market BLOWN% / EXCHANGE SIZE Over 200,000 Form 8824s filed annually $ in Bilions $200 $100 20%/$1.0MM 15%/$1.25MM 10%/$1.5MM Blown exchange %, exchange size and overhang are increasing Exchangor Goals are NOT being met $0 Source: Direct Capital Securities & Omni Brokerage research Federal Capital Gains Tax + Recapture + State Tax The TIC Market in 5 Years TIC Market Growth Estimates thru 2007 $6,000,000,000 $5,000,000,000 $4,000,000,000 $3,000,000,000 Product Sales $2,000,000,000 $1,000,000,000 $ Source: Direct Capital Securities estimates 5

Brokerage research Federal Capital Gains Tax + Recapture + State Tax The TIC Market in 5 Years TIC Market Growth Estimates thru 2007

6 The Background: IRS Revenue Procedure In 2002, the IRS issued Rev. Proc , which provides ruling standards for determining whether an arrangement constitutes a tenancy in common and not a partnership or other entity is a safe harbor and is considered to define relatively conservative standards that must be met in order to obtain an IRS ruling Certain of the requirements of are difficult to satisfy in real transactions, and virtually no TIC arrangements currently marketed, meet all 15 requirements set forth in Law firms have nonetheless regularly issued should opinions, based on the conclusion that the arrangement is a TIC even if it does not fully comply with the safe harbor Advantages and Problems with TICs A properly structured TIC is an interest in real estate, and qualifies as like kind property in a 1031 exchange TICs, however, are generally very complex, awkward arrangements Biggest problem is that a TIC cannot have centralized management, and so TIC members have on-going management responsibilities that are awkward (at best) to discharge TIC members all have a right of partition, and so the arrangement has inherent instability 6

2002-22, which provides ruling standards for determining whether an arrangement constitutes a tenancy in common and not a partnership or other entity 2002-22 is a safe harbor and is considered to

7 New Development: Revenue Ruling In 2004, the IRS ruled in Rev. Rul that, on the facts presented, an interest in a Delaware Statutory Trust ( a DST ) holding real estate was like kind property for a 1031 exchange of real estate The DST arrangement has some potential advantages over a TIC, principally that it allows centralized management through a trustee and eliminates the partition and management problems The bad news is that DSTs require a very rigid, fixed unit investment trust structure that is not always suitable for a particular transaction Who Can Be a Sponsor? Any reputable, experienced real estate owner/manager Preference is given to potential sponsors who have a functioning back-of-the-house, real management experience and who are committed to doing a series of transactions, at least 2-3 per year 7

2004-86 that, on the facts presented, an interest in a Delaware Statutory Trust ( a DST ) holding real estate was like kind property for a 1031 exchange of real estate The DST arrangement has some

8 What Type of Real Estate Can Be Sold to TIC Investors? Generally must be income producing and at or near stabilization with reasonable absorption and roll-over assumptions Property categories cover a broad range, including office, multifamily residential, industrial, retail and even hotels and senior living facilities Property can be single or multi-tenant Secondary and even tertiary markets are okay Deal Size Typical deal size is at least $10 million, and generally not more than $50 million Several properties can be included in one offering 8

cover a broad range, including office, multifamily residential, industrial, retail and even hotels and senior living facilities Property

9 What Are the Typical Economics Transactions are typically leveraged in the 50-60% range Investors look for cash on cash return starting as low as 6% (7.5% is more typical) and stepping up over time to as high as 10% Master Leases with single-purpose Sponsor affiliates allow sale at stabilized value 2-3 years before actual stabilization. Master Leases can also preserve some or all of the rental upside for the Sponsor Load (costs of sale) is relatively high (12-18%), but net proceeds are still typically higher than from an outright sale for non-investment grade property Sponsor typically has the right to manage the property for market management fees, and to either buy-back the property 5-7 years out or collect a 2-3% disposition fee if the property is sold to a third party Why Should a Property Owner Become a Sponsor? Provides an additional exit strategy for noninstitutional grade income producing real estate Allows a sale of property while retaining management and preserving an option to reacquire Provides repetitive access to low-cost equity capital 9

Master Leases can also preserve some or all of the rental upside for the Sponsor Load (costs of sale) is relatively high (12-18%), but net proceeds are still typically higher than from an outright

10 Senior Living TICs A Few Basics Owner of real estate Up to 35 TIC investors Owner of license, personal property and business assets Master Lessee Number of facilities Not more than two Deal size: $12 - $35 million 10

property and business assets Master Lessee Number of

11 A Few Basics (cont d) Debt 50 65% LTV Net equity raise $6 17 million Typical load 15 25% of equity raised Typical return to investors % of gross equity A Few Basics (cont d) Property type Any senior living facility with stabilized income and strong operator Value-add, i.e. turn-around, may be okay Return IRR in the low double digits is okay Mater Lease Separates the business from the real estate Master Lessee gets most or all of business upside Master Lessee has FMV option to reacquire 11

5% of gross equity A Few Basics (cont d) Property type Any senior living facility with stabilized income and strong operator

12 Owner/Operator Does Not Want to be a Sponsor Owner can do a sale/leaseback of real estate with a TIC sponsor who will conduct the offering TIC sponsor may want to condition sale on a successful offering This adds time and risk, both of which at a minimum should be paid for Deal only with well-capitalized sponsors with a successful track record Owner/Operator Wants to be a Sponsor Must be committed to dong at least 3-4 transactions per year Must be adequately capitalized and capable of providing timely and accurate financial reporting Must be approved by a third party due diligence firm Must retain Managing Broker Dealer 12

sponsors with a successful track record Owner/Operator Wants to be a Sponsor Must be committed to dong at least 3-4 transactions per year Must be adequately

13 Why be a Sponsor? Relatively low cost equity Truly passive, tax-advantaged investor Operating control and operating upside FMV option to reacquire Why Not a REIT? Less due diligence More flexibility on property type and location No security deposit Lower reserves REIT is unleveraged return More operating upside Option to purchase Less onerous reporting requirements 13

operating upside FMV option to reacquire Why Not a REIT?

14 Summary TIC Offerings can increase available price on sale of the real estate Owner/operator essentially gets 100% financing and retains operating upside and control Can not be used just to sell properties that are otherwise difficult to sell Rambling Oak Summary 14

retains operating upside and control Can not be used just to sell

15 Rambling Oak Summary (cont d) Rambling Oak Summary (cont d) 15

16 Rambling Oak Summary (cont d) Regulatory Concerns Is there a Certificate of Need Process? How long does the process take? What kind of information must be disclosed? Will the sale require a new license? How long does the process take? What kind of information must be disclosed? If owner is a person who is in a position to make referrals, does his interest fall within the investment safe harbor to the Anti-Kickback statue? 16

17 Regulatory Concerns (cont d) Is there a requirement that the licensing agency be notified in advance? 30 Days in Advance? 60 Days in Advance? May be difficult as identity of purchasers may not be known until later Have any of the owners been excluded from Medicaid or Medicare? Questions & Answers 17

May be difficult as identity of purchasers may not be known until later

18 Contact Us Stephen I. Burr Partner 111 Huntington Ave., 26 th Flr. Boston, MA Tel: Matthew J. Murer Partner 321 N. Clark St., Suite 2800 Chicago, IL Tel:

sburr@foley.com Matthew J. Murer Partner 321 N.

Cash Investments MORE: Multiple Owner Real Estate

Private Capital Corporation Inland Private Capital Corporation Cash Investments MORE: Multiple Owner Real Estate www.inland-investments.com Inland Private Capital Corporation 415 properties in 44 states