When someone says, “I want to buy an Assisted Living Facility in Florida,” one of the first questions should be: What exactly are you buying?
Many first-time buyers assume that purchasing an ALF automatically means purchasing the house or building where the facility operates. That is not always the case.
An Assisted Living Facility is an operating business, while the property where that business operates is a separate real estate asset. Depending on the transaction, you may be purchasing the ALF business only, the real estate only, or both the business and the property together.
Understanding that difference can completely change the investment.
OPTION 1: OWNING THE ALF BUSINESS AND THE REAL ESTATE
For many operators, owning both can provide greater long-term control.
Instead of paying rent to a landlord every month, you are investing in a property that may appreciate over time. You also have greater control over improvements, renovations and the future use of the property, subject to applicable zoning, licensing, building, fire-safety and other requirements.
Ownership may also protect the operator from one major business risk: losing control of the location because a landlord decides not to renew a lease, sells the property or proposes substantially different lease terms.
There is another potential advantage.
You are building value in two different assets: the operating ALF business and the underlying real estate.
Years later, an owner may potentially have several choices. Depending on the circumstances, the owner could sell the business and property together, sell the business while retaining the real estate and leasing it to the new operator, or potentially sell the real estate separately.
But ownership also has disadvantages.
Purchasing real estate normally requires substantially more capital. There may be a down payment, financing costs, property taxes, insurance, repairs, maintenance and improvements required to make or keep the property appropriate for ALF operations.
That additional investment can reduce the amount of cash available for staffing, marketing, furnishings, reserves and operating expenses.
OPTION 2: OWNING THE ALF BUSINESS BUT RENTING THE PROPERTY
This structure can offer a completely different advantage: lower initial real estate investment.
Instead of committing substantial capital to purchasing a property, an operator may lease an appropriate property and concentrate more of the available capital on establishing or acquiring the business.
For someone trying to grow multiple locations, leasing may also provide greater flexibility.
However, renting creates a different type of risk.
Your ALF may develop an excellent reputation, establish a strong resident base and generate significant revenue while operating from a property that belongs to someone else.
That makes the lease extremely important.
A prospective operator should understand the length of the lease, renewal options, rent increases, maintenance responsibilities, insurance requirements, permitted improvements and what happens if the property is sold.
The property must also be appropriate for the intended operation. A lease by itself does not guarantee that a property can legally or practically operate as an ALF.
THE PURCHASE PRICE CAN BE MISLEADING
Imagine seeing two ALFs advertised for sale.
ALF A: $250,000
ALF B: $850,000
At first glance, ALF A appears dramatically less expensive.
But what if ALF A represents only the operating business and requires the buyer to assume a lease, while ALF B includes both an operating business and valuable South Florida real estate?
Those are two completely different transactions.
That is why buyers should not compare ALFs based only on the advertised asking price.
They should determine exactly what is included.
BEFORE BUYING AN ALF, ASK THESE QUESTIONS
Is the real estate included in the sale?
If not, how many years remain on the lease?
Are there renewal options?
How much is the current rent and how can it increase?
Who is responsible for repairs and major property improvements?
Is the facility currently licensed for the represented number of beds?
What licenses and approvals apply to the specific location?
What equipment, furniture and other assets are included?
What are the facility’s actual revenues and operating expenses?
What insurance coverage will be necessary after the transaction?
And most importantly: Am I purchasing real estate, an operating business, or a combination of both?
There is no universal answer saying that owning is always better than leasing.
A buyer with sufficient capital who wants long-term control may prefer owning the property.
Another buyer may prefer to invest less capital in real estate and concentrate resources on operating and growing the ALF business.
The correct decision depends on the property, business, financing, lease terms, licensing requirements and the buyer’s long-term strategy.
At ALF for Sale Miami, our goal is to help buyers and sellers look beyond the asking price and understand the complete transaction. Whether you are considering buying an ALF, selling an existing Assisted Living Facility, purchasing the real estate associated with an ALF, or exploring insurance options for your facility, understanding how the business and real estate work together is an important first step.
Ready to explore your options? Contact us today for a confidential consultation on buying or selling an ALF in Florida.
Leave a Reply