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Senior facilities: Operator management agreements

Noelle Riccardella
Shareholder, Brownstein Hyatt Farber Schrek

As discussed in the first three articles in this series, changing demographics and an aging population mean that the number of seniors in Colorado, and nationally, is growing. With that growth comes an increased need for housing options that both appeal to and provide for the needs of the senior population, which has in turn prompted more real estate developers and investors to enter the market to build and own senior living facilities.

Rick Thomas
Associate, Brownstein Hyatt Farber Schreck

Because many of those developers and owners do not have operational experience for this unique real estate product, often they will partner with an experienced operator to manage the day-to-day operations of the facility. The duties, responsibilities and liabilities of the owner and operator typically will be set forth in a property management agreement for the facility.

When negotiating such management agreements, many of the same considerations applicable to property management agreements in the retail or multifamily sectors apply. For example, the management agreement will impose a broad mandate on the operator to manage and operate all aspects of the facility in a manner comparable with other similar facilities in the geographical area and in compliance with all laws (for newer, higher-end facilities, the agreement may require a higher standard, like operating the facility in a first-class manner). Then, the agreement will list the specific tasks that the manager is responsible for. During the preopening phase, these responsibilities may include assisting with marketing and procuring residents. Following the opening, the duties typically include maintaining the property, establishing resident rates, collecting funds, maintaining books and records, and providing periodic reporting to the owner. Unique to senior living facilities, the manager also will assist the owner in obtaining and keeping the license for the facility.

A management agreement for a senior living facility also will need to address in detail the manager’s responsibility to hire, train, employ and supervise appropriate skilled employees as needed for the operation of the facility. Typically this will include an executive director, operational personnel, maintenance personnel, food services directors and employees, resident aides and other services necessary to serve the community. A key industry challenge is finding and keeping qualified employees, so this is an important consideration for operation and management of senior living communities.

Like standard property management agreements, the agreement also will cover things like the operator’s preparation of budgets for owner approval; collection and expenditure of funds in accordance with the budget; detailed terms as to what property and operational costs are paid for by the owner, and what internal business costs and other items are absorbed by the operator; terms governing the maintenance of and access to bank accounts; allocation of responsibility for maintaining liability and property insurance; and the right to terminate the operator for cause if the operator is not performing (and possibly a right to terminate for the owner’s convenience, subject to a negotiated termination fee). The agreement will, of course, also address the manager’s fee – typically this will be based on a percentage of the gross revenue of the facility, but the manager will usually receive a set fee for the pre-opening period when the property is not yet generating revenues and a minimum base fee during the initial opening phase when the property is not yet stabilized.

Management agreements for a senior housing facility also will need to address other considerations unique to the use. For example, the agreement likely will cover address branding and intellectual property rights. Typically, the operator owns and controls the brand of the facility and will reserve all trademarks and goodwill associated with the brand. The agreement also will usually provide for a temporary license to be granted to the owner for use of the trademark and other intellectual property upon termination of the agreement to allow the owner a transition period to engage a new manager. Owners also may request restrictions on the operator’s ability to operate additional facilities in the immediate area. The owner is relying on the reputation and brand of the operator to establish the quality of the facility, attract residents and deliver an income stream, and if the operator opens nearby competing facilities, both the brand and the income stream could be diluted.

Owners also will want to require that the manager not take any actions to jeopardize the license for the facility, and that the manager provide prompt notice of any issues so that the owner can work to quickly correct in order to protect the license. The owner also will want to require the manager to implement procedures to comply with data privacy laws so that the owner does not become subject to violation claims, which can carry hefty penalties. In particular, in Colorado, owners should ensure that the manager complies with the newly enacted Colorado Privacy Law, which went into effect Sept. 1 (and owners should be aware that other states have similar requirements).

As noted above, there are unique issues that need to be addressed in management agreements for senior living facilities. It is important to address these issues, in addition to other standard property management terms, in a comprehensive management agreement that serves as the baseline to set expectations for a long-term, mutually beneficial relationship. Accordingly, both owners and operators should carefully assess and analyze their management agreements to ensure that they are consistent with the parties’ anticipated roles in operating the facility.

Featured in the October 2018 issue of Health Care Properties Quarterly

Edited by the Colorado Real Estate Journal staff.