No Place Like Home: Treatment of SNF Leases Under § 365
In this article, co-written with Christine Tobin-Presser of Bush Kornfeld, FTI Consulting experts Jennifer Byrne and Rick Arrowsmith examine the treatment of skilled nursing facilities (SNF) under §365.
This is an extract from ABI Journal, first published in July 2021. The whole publication is available at https://www.abi.org/abi-journal/no-place-like-home-treatment-of-snf-leases-under-%c2%a7-365
"There are approximately 15,000 skilled nursing facilities (SNFs) in the U.S., which is a highly fragmented industry that has struggled with low reimbursement rates and high expense growth. Further exacerbating this challenging financial dynamic is the rise of the operating entity/property-owning entity (OpCo-PropCo) structure, in which the owner of the real property is a separate entity than the entity operating the SNF, and the proliferation of for-profit ownership in this important subsector of the health care ecosystem. Long-term leases, with fixed annual rate increases (generally ranging from 2-4 percent), contribute to the financial distress as in many states reimbursement rates, particularly for Medicaid, have failed to keep pace with the Consumer Price Index year over year.
The OpCo-PropCo structure has the added benefit of reducing the attractiveness of the skilled-nursing space to the plaintiff bar due to the fact that the primary asset in an SNF — its real estate — has been stripped away and is thus shielded from litigation attack in the context of wrongful-death suits. For many nursing homes, the lease between the PropCo landlord and OpCo tenant is the primary financial arrangement around which much of the decision-making revolves. Given the commercial nature of the operating entity, the protections afforded to residential leaseholds under the Bankruptcy Code would appear to be unavailable to the SNF OpCos. This article explores a contrary position that has recently emerged."
Reprinted with permission from the ABI Journal, Vol. XL, No. 7, July 2021.