Question
November 17, 2005
Mr. JamesFerkingstad
Federal TradeCommission
600 Pennsylvania Avenue, N.W.,
Washington, D.C. 20580
VIA EMAIL: JFERKINGSTAD@WFTC.G0V
Re: Proposed Transaction to Acquire 25 Properties
Dear Mr. Ferkingstad:
Myfirm represents a company and its affiliates (collectively, "ManagementCompany") engaged in the business of operating a number of health carefacilities, including skilled nursing. homes and assisted living facilities.The Management Company is a closely held entity owned by a single individual.Twenty-five of the facilities operated by Management Company, consisting of 23skilled nursing facilities, one assisted living facility, and one Alzheimer'scare facility, are owned by a real estate holding company or its affiliates("RET"). There is a proposal that RET sell these facilities toManagement Company.
Aswe've discussed on the telephone, the purpose of dais letter is to describe thefacts regarding the current ownership structure and the proposed saletransaction in order to obtain your advice regarding possible implicationsunder the Hart-Scott-Rodino Act ("HSR").Based upon our preliminary analysis, we believe Management Company and RET meetthe "size of person" tests, and the aggregate value of the proposedtransaction is approximately $200 million. However, we also believe thetransaction may be exempt under various HSRregulations discussed below.
Ownership of Facilities Prior to 1993 and Sale to .RET
Eachof the 25 facilities was either built or acquired by Management Company priorto 1993. Over a period of several years prior to 1995, the Management Companyentered into a series of transactions in which the 25 properties were sold toRET, and in all but 4 instances, the Management Company .immediately leased theproperties back from the RET. In each of the 21 sale/lease-back agreements,Management Company had an option to purchase the facilities back at a priceequivalent to the fair market value of the facility. Four of the 25 facilitieswere not leased-back due to business reasons, but the parties entered into amanagement agreement in which Management Company managed the property, and eachof these management agreements contained an option to purchase the facilities.
RET Ownership
Ourunderstanding is that RET was formed in 1993 for the purpose of investing inthese facilities with the intent to lease them back to Management Company. Toour knowledge. RET does not hold any facilities other than the 25 facilitiesoperated by Management Company. RET is privately held by four individuals, twoof whom were employees of Management Company prior to 1993. We also understandthat the individuals who own the RET have each been actively engaged in otherbusiness pursuits, including airplane leasing activities, owning othercommercial real estate such as shopping centers, and owning and operating a fewhealth care and retirement facilities unrelated to the facilities operated byManagement Company.
Operation of the Facilities
ManagementCompany has maintained the regulatory licenses for the 21 facilities which itleases. RET holds the regulatory license for the 4 facilities that are subjectto tile management agreements with Management Company. Management Company hasoperated the 25 facilities continuously since 1993. RET's involvement in eachof the 25 facilities since 1993 has been limited to owning the real estate andholding the regulatory license for the 4 facilities subject to the managementagreements. The lease agreements are "triple-net" leases, so that theManagement Company incurs all risks, generating a fixed rate of return for theRET with respect to the leased facilities, based upon the RET's investment inthe facilities, similar to a traditional financing arrangement. All employeesat the 25 facilities are employees of Management Company. With respect to the21 facilities leased, Management Company is entitled to all profits and at riskfor all losses incurred from operation of the facilities. With respect to the 4other properties, Management Company is obligated to share a percentage of theprofits with RET, but is still at risk for all losses incurred from operationof the facilities.
Structure of Proposed SaleTransaction
Oneof the leases has reached maturity, and the RET and the Management Company haveentered into an agreement in which the Management Company will purchase all 25properties. The transaction will occur in 3 phases and is expected to becompleted with closings occurring in 2005 and 2006. The aggregate purchaseprice is estimated at approximately $200 million. Approximately $161.5 millionof the purchase price will be paid for the 21 properties being leased andapproximately $38.5 million will be paid for the four properties which are notcurrently being leased by Management Company.
ManagementCompany will finance, approximately $72 million of the purchase by enteringinto an agreement with a publicly held health care real estate investment trustor an affiliate of such trust ("New RET"). Title to eight propertieswill be held in the name of New RET, and the agreement will provide for New RETto lease the properties to Management Company, with an initial annual rentalpayment equal to 8.5% of the purchase price and an option for ManagementCompany to purchase the properties at the end of the term for a price equal to $72million plus a percentage of any appreciation In the value of the facilities.
Withrespect to the purchase of the remaining facilities, these properties will beacquired by single purpose entities which will be owned by the same individualwho owns Management Company, or an entity controlled by the individual who ownsManagement Company. The owners of the facilities will lease the facilities toManagement Company.
Analysis of Transaction
Basedupon the facts set forth above, it appears to us that the original sale of thefacilities to RET in 1993 by Management Company was effectively a financingtransaction exempt from the reporting requirements, as described in 16 CFR 802.63(a), although since 4 of the facilities were not subject toa lease-back provision, these facilities arguably would not be included in thefinancing. We believe the proposed sale to the Management Company of the 21facilities presently under lease represents a winding-down of the financingtransaction, as contemplated by the exemption provided in 16 CFR 802.2(b). However, some of the facilities were originallyacquired by Management Company as existing facilities prior to 1993 instead ofbeing built as new facilities by Management Company.
ManagementCompany has continually operated the facilities since they were originallyowned by Management Company prior to 1993, and has continually held theregulatory licenses for the 21 facilities leased since they were previouslyowned by Management Company. Management Company will continue to operate andhold the licenses for the facilities after completion of the proposedtransactions described above. We do not believe the transfer in actualownership of the underlying real estate would raise any competitive issuesintended to be addressed under the HSR.
Wewould like to arrange a call with you to discuss whether you concur with ourbelief that the proposed transaction would be exempt from filing notificationunder the HSR. We appreciate your assistance in thismatter. Please contact me at the number above so that we may discuss theseissues further.