A buyer’s guide for preparing a closing checklist in a skilled nursing home property acquisition

Cynthia J. Mitchell

Below you will find a general checklist to help guide those who are planning to purchase, finance or develop a property on which a skilled nursing facility exists or will be built. This checklist pertains to the purchase of the fee interest and not the transfer of the underlying operations.

The ideal first step prior to acquiring any real estate, including a healthcare related property, is to perform a proper due diligence investigation. The results of a Buyer’s investigation should make the Buyer aware of any material facts or issues relevant to the use of the property as a skilled nursing facility or any ancillary uses. Generally, a Seller of commercial real estate will negotiate so that its liability is limited to the representations and warranties that the Seller expressly makes in the signed purchase and sale agreement between the Seller and the Buyer. Accordingly, it is the Buyer’s obligation during the due diligence (i.e. inspection) period to conduct examinations and determine whether there are any problematic facts or issues relating to the purchase of the property. Even if the Seller does make a contractual representation and/or warranty about the state of facts at the property, this should not be a substitute for due diligence as such representation or warranty may only provide the Buyer with limited recourse or prove challenging to enforce or to effect collection.

The following non-exhaustive checklist is meant to offer a Buyer general guidance for how to conduct a meaningful due diligence investigation for a property that is intended to be used as a skilled nursing facility. Remember that this checklist was drafted from the Buyer/Borrower’s perspective and the scope and focus of any due diligence investigation depends upon the party for whom the investigation is being conducted, as it will vary according to the party’s role in the transaction. Also, factors such as where the particular property is located, the intended use of the property, whether that use is for-profit or not-for- profit, as well as other deal specific factors, will dictate what additional due diligence should be conducted.

I. Putting Together the Checklist

The first step in a deal is putting together the closing checklist for the transaction which, in addition to the diligence items, sets forth all of the transaction documents, loan documents, title documents and delivery requirements necessary to close the deal.

  1. The Purchase and Sale Agreement (“PSA”) sets forth the terms on which the property will be conveyed and lists the documents and diligence items that are required to be delivered by the Buyer and by the Seller.
  2. The Loan Commitment and/or Application sets forth many of the documents and diligence items which will be required for the loan portion of the transaction.
  3. The Closing Checklist reflects the PSA requirements, the loan application/commitment and subsequent checklist requirements and lists various other document/diligence/ delivery requirements. The closing checklist should be continuously updated throughout the course of the transaction and distributed to the client.

II. Acquisition and Property Diligence

In order to create the appropriate list of diligence/delivery requirements, it is important to ask yourself the following questions:

  1. What type of property is the Buyer acquiring (vacant land, improved land, semi-improved land, fully improved etc.)? Is there an existing tenant/operator? Are there any other third parties with rights to the property? This section of the checklist will usually request items such as:
    1. Certified Rent Roll/Census Report - the items detailed on the rent roll should at least include the following: (a) name of tenant, (b) commencement and expiration dates of the lease and any renewal terms; (c) rent amount and all other sums payable by the tenant(s) or credited to the tenant(s); (d) options to purchase or to extend or renew the term; (e) amount of security deposit; and (f) other security including, for instance, the identity of any guarantor of any lease. Generally the sole tenant on a property operated as skilled nursing facility is the operator of the facility (subject to a triple net lease), although there may be other subleases or licenses in place for related uses (i.e. beauty salons, therapy gyms, etc. located in the facility).
    2. Copies of all Lease Agreement(s), Licensing Agreements, and Other Occupancy Agreements which are important factors in the determination of the value of collateral and value determines loan amount. Cash flow from leases (and other sources) is important to the Buyer/ Landlord as it pays the debt service and property expenses.
    3. Copies of all Management Agreement(s) - Pay particular attention to: (a) term, (b) fees, (c) identify whether the manager is an affiliate of the property owner; and (d) differentiate between “property” management, “asset” management and “leasing” management, and “operations” management.
    4. Copies of Service Contracts.
    5. Copies of all Certificates of Occupancy.
    6. Other Applicable Building Permits.
    7. Property Level Financial Statements & Tax Returns.
    8. Real Estate Tax Bills.
    9. List of Personal Property
    1. First, as to the real estate: Is the actual real estate zoned for such use? What are the rules and restrictions? Is there appropriate street access, sufficient utilities, sufficient parking etc.? This section of the checklist will usually contain items such as:
      1. Appraisals.
      2. Market Study.
      3. Survey and Flood Certificates.
      4. Zoning Report/Zoning Letter.
      5. Engineering/Architectural evaluations.

      This section of the checklist will usually contain items such as:

      1. Standard Form of Residency/Admission Agreement.
      2. Other Applicable Operating Permits.
      3. Copies of all existing State Licenses.
      4. Copies of all Certificates of Need (if applicable).
      5. Medicare and Medicaid Participation Letters and Provider Agreements; as well as any other third party payor information (such as the Veteran’s Administration, managed care companies or health maintenance organizations).
      6. Centers for Medicare & Medicaid Services (CMS) Survey Reports (usually last 3 years).
      7. Material Correspondence with Government Programs and/or Payor Intermediaries (re: overpayment/underpayment/billing/coding/etc.).
      8. Copy of Corporate Compliance Program, if any.
      9. Copy of HIPAA Compliance Policy.
      10. Copies of all Healthcare Provider Service Contracts.
      11. Claims Loss History.
      12. To the extent permissible pursuant to applicable law, copies of: (i) resident lists and information regarding Resident Trust Funds, (ii) patient medical records, financial records and employee records relating to the skilled nursing facility, (iii) operating procedure manuals, and (iv) any other material agreements.
      1. If there are improvements, what physical condition are they in? Are they structurally sound? This section of the checklist should request items such as:
        1. Property Condition Report (including Code Searches).
        2. Operations & Maintenance Plan (commonly called an “O & M Plan”).
        3. Termite Inspection Report.
        4. Engineering/Architectural evaluations.
        5. Copies of Insurance Certificates:
          1. Property and Casualty,
          2. Evidence of Flood Insurance (if necessary),
          3. General and Professional Liability, and
          4. Worker’s Compensation.
          1. Phase I Environmental Report.
          2. Phase II Environmental Report, Geotechnical Report or any other report recommended in the Phase I Environmental Report.

          The property section of the checklist will usually contain items such as:

          1. Title Commitment - The primary title insurance policy forms are known as the American Land Title Association (ALTA) Owners and Lenders Policy forms.
          2. Copy of Recorded Documents/Exceptions (e.g. Easement Agreements).
          3. Pro-Forma Title Policy with endorsements - An owner’s title insurance policy indemnifies the insured against loss or damage incurred by the insured by reason of: (a) title being vested other than as stated in the policy, (b) any defect in or lien or encumbrance on title, (c) unmarketability of title, and (d) lack of right of access.
          4. Survey - The survey illustrates the physical relationship between the property, the buildings and improvements on the property and the easements and other matters contained in recorded documents, and may disclose rights or interests in the property not reflected by the public records. A lender will usually require an ALTA survey.
          5. Payoff Letter for existing indebtedness (if any).
          6. Copies of Mortgage/Other Lien Releases.
          1. The parties. As the Buyer you will want to know a little bit about your Seller. Is your Seller an individual or an entity? Do they have the necessary approvals and legal authority to enter into this transaction? Additionally, the Lender will want to know about its Borrower, is it a person or an entity? If it is an entity where are they formed, are they in good standing, are the persons signing on behalf of the entity authorized to bind the entity? This section of the checklist will usually require the following information:
            1. Formation Document (e.g. Articles, Certificate of Formation, Certificate of Limited Partnership).
            2. Governing Agreement (e.g. Bylaws, Operating Agreement, Partnership Agreement).
            3. Incumbency Certificate.
            4. Resolutions which authorize the transaction, the appropriate officers to enter into the transaction on behalf of the entity and ratify any actions already taken with respect to the transaction.
            5. Good Standing Certificate - Generally, if an entity is more than 60 days old, it is likely that the lender and/ or the title company will require a Good Standing Certificate from both the state it is formed in and the state in which it does business (if different) stating that the entity is good standing.
            6. Qualification/Authority to Do Business - A Borrower must qualify to do business in the state where the property is located if the different from its state of formation. Note that some states require that managing members or general partners of the property owner also qualify.
            7. Federal Tax I.D. Number (W-9).
            1. Purchase Agreement.
            2. Deed of Real Property.
            3. Bill of Sale of Personal Property.
            4. Assignment and Assumption of Contracts.
            5. Termination of Existing Lease or Assignment of Existing Lease (each, as necessary).
            6. FIRPTA.
            7. New Lease Agreement (if necessary).
            8. Closing Settlement Statement.
            9. Operations Transfer Agreement (if the operations of the facility are being transferred).

            III. Financing Diligence

            1. What may your Lender require?
              1. What loan terms have the Borrower and its Lender agreed to? What is the collateral? What type of loan is this? Are there reserve requirements (interest, repair, real estate taxes, insurance)? Is there a Loan Commitment fee or “good faith deposit” due upon the Borrower’s acceptance of the Loan Commitment and/ or Lender’s acceptance of Borrower’s application? This section of the Lender’s requirements/checklist will list items such as:
                1. Term Sheet.
                2. Loan Agreement.
                3. Mortgage/Deed of Trust.
                4. Promissory Note(s).
                5. Environmental Indemnity Agreement.
                6. Guaranty - which may be full, partial, secured or unsecured payment guaranties, collection guaranties or a variety of other types of guaranties as may be required by Lender.
                7. Construction and Repair Escrow Agreement, Copies of construction manager and other construction agreements, Architect Agreement, Building Permits, Site Plans and Specifications, and other construction documentation (if it is a Construction Loan).
                8. Automatic Payment Authorization.
                9. UCC-1 Financing Statements.
                10. Assignment of Leases and Rents.
                11. Subordination and Collateral Assignment of Management Agreement(s).
                12. Tenant Estoppel Certificate(s).
                13. Subordination and Attornment Agreement.
                14. Opinion(s) of Borrower’s, Guarantor’s, Operator’s Counsel.
                1. UCC, Judgment, Tax Lien, Bankruptcy and Litigation Searches for Borrower, Seller and Tenant.
                2. UCC, Judgment, Tax Lien, Bankruptcy and Litigation Searches for Principal/Guarantor.

                IV. Third Party Debt Documents

                1. Buyer’s mortgage lender will want to see any documents relating to any other financing arrangements of Buyer or of Buyer’s tenant (if any). Customary requirements would be copies of loan documents for any:
                  1. Accounts receivable financing/credit facility - An operator of a skilled nursing facility will almost always have this type of credit facility in place.
                  2. Affiliated financing.
                  3. Second Lien financing.
                  4. Mezzanine financing.

                  Conducting the Due Diligence Investigation is important. The contractual “due diligence period” typically provides for an “out” so that the Buyer can walk away from the property and possibly even receive a repayment of some or all of the deposit the Buyer has put down, if a Buyer determines its intended use for the property is not legally possible or financially feasible. The above checklist should provide the Buyer of a proposed skilled nursing home property with a meaningful place to start its investigation; however, every transaction is different and it is important that a Buyer tailor its due diligence review to the facts and circumstances surrounding the specific property and business that will be purchased.