Parties typically involved in the ownership or operation of a skilled nursing facility (“SNF”) or assisted living facility (“ALF”) include the property owner, operator/licensee, and management company. For a variety of reasons, current operators may shift in this structure, becoming the facility’s management company engaged by a new operator (e.g., the parties may wish to implement a RIDEA structure, named after the REIT Investment Diversification and Empowerment Act). However, before shifting a licensee to manager, there are important steps from a regulatory and practical standpoint that should be completed and/or considered.
- “Change of Ownership”: First and foremost, a new operator must obtain state approval in order to become the facility licensee. This typically involves an application of varying length and complexity, with some consisting of only a few pages and others a few hundred pages. Once filed, states will also take varying times to process — anywhere from 10 days to more than a year. Additionally, the state may require a site inspection or a meeting with the applicant to determine fitness for a change of ownership. While the application is processed, operational responsibility must remain with the current licensee, though certain interim arrangements may be workable depending on the state and circumstances.
- Resident Agreement: State SNF and ALF licensing authorities typically require that the operator, as licensee, be the party to the agreement with individual residents (and not the management company). When a current operator becomes the management company, the resident agreement will either need to be terminated, with a new agreement put in place, or assigned. However, many states will not allow assignment, so parties to such a change should consult state law well in advance of an operator/manager change.
- Trade Names: An issue that frequently pops up in these types of changes involves the trade or “doing business as” name. Where a previous licensee becomes the management company (or where the licensee is removed entirely with a new third-party manager coming in), the previous licensee may refuse to allow the new licensee to use the trade name currently on file with the state licensing authority. This should be an early point of negotiation so that there are no surprises when the transition occurs.
- Management Agreement: The new management agreement between the licensee and third-party manager must be carefully negotiated, with an eye toward appropriate delegation of responsibilities (i.e., what responsibilities can and cannot be delegated to a manager from a licensing standpoint), legal compliance, and setting out a relationship that can be practically implemented.
The items listed above are only a subset of the pieces that will need to be considered when a transition will occur. Often, the key to implementing a successful transition will be early and frequent communication between the parties and the state licensing authority. This will help minimize surprises and get everyone on the same page so that the process can move as quickly and efficiently as possible.
For more information, please contact AGG Healthcare attorneys Hedy Rubinger or Alexander Foster.
The Arnall Golden Gregory Change of Ownership (CHOW) team leads all regulatory aspects of healthcare transactions for investors, operators, managers, capital partners, and developers of every size in all 50 states. The team streamlines the regulatory process so that clients close their transactions on or ahead of schedule. Whether obtaining licensure and Medicare/Medicaid approvals, structuring transactions to expedite closings, anticipating issues to minimize cash flow disruption, negotiating regulatory terms in deal documents, creatively resolving diligence issues, or advising on CHOW guidelines and compliance, the team provides extensive experience and practical solutions. To date, the CHOW team has served as primary regulatory counsel in transactions valued at more than $35 billion.