Sale and leaseback deals within the care sector

‘Sale and leaseback’ deals are a popular way for care home operators to raise finance, as an alternative to debt funding. Whilst there are some variations within the model, traditionally, a sale and leaseback is when one entity (in this instance a care home operator or developer) sells a property and simultaneously enters into a lease with the buyer / investor.

 Leases to care home operators

A typical lease will include the following:

• Term of 35 years.
• Financial/performance covenants based on the operation of the home.
• Care-specific clauses, including obtaining Care Quality Commission (“CQC”) registrations, following CQC guidance and assessments and complying with relevant legislation.
• Full repair and insuring covenants (“FRI”), meaning that all costs of the repair and insurance of the property rest with the operator tenant. Insuring the building will often be the responsibility of the landlord, with the cost recovered from the tenant.
• RPI rent reviews with further reviews based on the turnover of the home and the financial covenant strength of the operator (such clauses are tailored to whether the operator is an SPV or established).

In addition, a tenant may have more than one asset/home leased from a particular funder. These are often linked/cross-guaranteed by framework agreements, which assess the operation and performance of the tenant at portfolio level. Failure to meet such tests can give rise to the landlord seeking forfeiture of all leases, or “cherry picking” certain assets.

Advantages of sale and leaseback – Investors

Investors involved in sale and leaseback transactions will benefit from having a valuable capital asset. The ‘lease back’ element also provides annual income from the rent paid by the operator, which will increase over time. The FRI nature of the lease also means that repair liability sits with the tenant and the care-specific clauses put the onus on the operator tenant to run the home efficiently and in accordance with all regulatory and legal requirements. This allows investors to invest in a buoyant care sector market with minimal risk or involvement in the day-to-day running of the care home. 

Advantages of sale and leaseback – Operators

The structure offers an alternative to standard debt-financing, as it releases capital that would otherwise have been tied up in the unliquidated real estate asset. This allows funds to be redirected / invested into the business, but does result in the operator paying rent. Usually, one of the main disadvantage to ‘sellers’ under a sale and leaseback model in other sectors is that they will no longer benefit from the future appreciation of the real estate asset. However, this does not affect care home operators to the same extent, as their profit comes from the operation of the care home rather than real estate investment itself. Other advantages of this method of financing are that it can avoid some of the costs associated with debt financing (for example, brokerage and bank commitment fees). It also removes debt from the balance sheet of the operator, which may improve the company’s debt to equity ratio. In summary, the documentation entered into as part of a sale and leaseback deal is tailored to the ultimate purpose of the transaction: the running of a successful care home. This is beneficial to the investor, as they will have minimal risk or involvement in the operation of the care home. The sale and leaseback financing also works for operators who want to have immediate access to cash for use in the running of their care homes. 

If you would like advice on any particular aspect of the above, please contact the Care team to discuss how we can help you.