Question
VIA ELECTRONICMAIL AND FIRST CLASS MAIL
Mr. B. Michael Verne
Federal Trade Commission
Premerger Notification Office
600 Pennsylvania Avenue, NW
Washington, D.C. 20580
Re: ProposedTransaction to Acquire 33 Properties
Dear Mr. Verne:
Werepresent a company and its affiliates (collectively, the "Operator")engaged in the business of operating a number of health care and residential facilities,including skilled nursing facilities, an assisted living facility and a seniorhousing facility. The Operator is a closely-held entity that is beneficiallyowned by two (2) individuals. The real property and certain of the equipment(collectively, the "Real Property Interests") used by the Operator atthirty-three (33) of these facilities (consisting of thirty-one (31) skillednursing facilities, one (1) assisted living facility and one (l) senior housingfacility (collectively, the "Facilities" is currently beingleased to the Operator by a publicly-traded real estate investment trust or itsaffiliates (collectively, the "REIT") under two (2) Master LeaseAgreements.
Itis proposed that the REIT will sell the Real Property Interests to the Operator(and/or affiliates of the Operator to be formed) for a purchase price of$167,000,000.00. Based upon our preliminary analysis, we believe that the REITand the Operator meet the "size of person" tests. However, Vie believethat this transaction should be exempt from the premerger notification andreporting requirements of the Hart-Scott-Rodino Antitrust Improvements Act of1976 ("HSR Act"). The purpose of this letter is to set forth thefacts regarding the current ownership structure and the proposed saletransaction in order to obtain your advice as to whether the transaction isexempt from the pre-merger notification and report under the HSR Act.
CURRENT OWNERSHIP OF THE REAL PROPERTY INTERESTS
TheOperator acquired use of the Facilities by means of three (3) separatetransactions. Specifically, in 2003 the Operator acquired use of twenty (20) ofthe Facilities (consisting of eighteen (18) skilled nursing facilities, one (1)assisted living facility and one (1) senior housing facility); in 2004 theOperator acquired use of six (6) of the Facilities (all of which are skillednursing facilities); and in 2005 the Operator acquired use of seven (7) of theFacilities (all of which are skilled nursing facilities).
Inconnection with the 2003 transaction, it was the Operator (and not the REIT)that entered into the asset purchase agreement with the seller of suchFacilities. Of the twenty (20) Facilities involved, the seller owned the realproperty at sixteen (16) of the Facilities, and leased (from unrelated, arms-lengthowners) the real property at four (4) of the Facilities. At the closing, theOperator assigned to the REIT the Operator's right to take title to such realproperty/leasehold interests and the equipment located at the Facilities. TheREIT paid for and acquired the real property/leasehold interests and, in turn,leased such property to the Operator. Since 2003, affiliates of the Operatorhave purchased the real property at three (3) of the four (4) Facilities whichwere owned by the unrelated, arms-length owners. Such affiliates currentlylease such real property to the REIT which, in turn, sub-leases such realproperty to the Operator.
Withrespect to the six (6) Facilities acquired by the Operator in the 2004transaction, the REIT acquired title to the real property and equipment at suchsix (6) Facilities in 1998, 1999 and 2002 through three (3) separatetransactions with an operator which is totally unrelated to the Operator (the"Previous Operator"). The REIT leased the real property and equipmentto the Previous Operator. In 2004, the REIT terminated its lease with thePrevious Operator, the Operator entered into an operations transfer agreementwith the Previous Operator to transfer the operations at such six Facilities tothe Operator, and at the closing the REIT entered into a new lease agreementwith the Operator for the real property and equipment at such six (6)Facilities.
Inconnection with the 2005 transaction, the Operator (and not the REIT) enteredinto the asset purchase agreement with the seller of such Facilities. Theseller owned all of the real property and equipment at such Facilities. At theclosing, the Operator assigned to the REIT the Operator's right to take titleto such real property and the equipment located at the Facilities. The REITpaid for and acquired the real property and equipment and, in turn, leased suchproperty to the Operator.
OPERATION OF THE FACILITIES
TheOperator has continuously operated all of the Facilities since the Operatoracquired an interest in such Facilities and obtained a license to operate suchFacilities. The lease agreements between the REIT and the Operator are"triple net" leases such that the Operator possesses all of thefinancial risks with respect to the operation of the Facilities. In addition topaying all expenses in connection with the operation of the Facilities, theOperator pays rent to the REIT under the leases based on the REIT's investmentand an agreed upon rate of return. In addition, the leases contain options topurchase at certain specified purchase prices. The Operator initially appliedfor and obtained, and currently is the holder of, any and all state regulatorylicenses for the operation of the Facilities. All employees working at theFacilities are employees of the Operator. The REIT's only involvement withrespect to the Facilities is its ownership / leasehold interest of the RealProperty Interests and the leasing thereof to the Operator.
Itis anticipated that the REIT and the Operator will in the near future enterinto a purchase agreement pursuant to which the Operator will purchase the RealProperty Interests from the REIT. As previously noted, the aggregate purchaseprice for the Real Property Interests is $167,000,000.00. It is anticipatedthat, at the closing of the purchase/sale of the Real Property Interests, theownership / leasehold interests for the real property portion of the RealProperty Interests will be transferred to entities to be formed (which entitieswill have the same owners as the Operator and which will, in turn, lease suchreal property to the Operator), and title to the equipment portion of the RealProperty Interests will be transferred to the Operator. The Operator willfinance such purchase price payable to the RELT through traditional mortgagefinancing with one (1) or more lenders.
ANALYSIS OF TRANSACTION
Webelieve that the proposed transaction should be exempt from the premergernotification and reporting requirements of the HSR Act for reasons similar tothose set forth in previous Informal Staff Opinions applying 802.2(b) ofthe HSR Rules, 16 C.F.R. 802.2(b), particularly Informal Staff OpinionNo. 0511016. Although, as in that situation and others, the proposedtransaction here does not fall squarely within this exemption as drafted, webelieve that the proposed transaction similarly is within the spirit of theexemption. Further, we do not believe that the proposed transaction, any morethan the real estate transfer involved in Informal Staff Opinion No. 0511016,presents any competitive issues.
Pleaselet us know whether you concur with this analysis. Should you require anyadditional information or clarification, we, along with counsel for the REIT,would be happy to schedule a call with you in the near future to discuss theproposed transaction. Thank you in advance for your attention to this matter.