All Forum Posts by: Mitch Conrad

Ok. I appreciate you're thoughtfulness and I will continue monitoring this thread to see if any other good ideas come up that we can all use. 

Quote from @Matt Ridenour:

Thanks for weighing in guys!  @Mitch Conrad I'm only thinking of escrow so the senior will have peace of mind that I'm not going to run off with the money.  Also, there may be some tax benefits if they can qualify for federal funding based on low income.  I do love the senior living wing of a business strategy.  Our boomer population's housing needs are exploding!  And I love that you are cognizant of the appearance of impropriety.  Our industry can easily get a bad rap for taking advantage of people.

Hey Matt.  I'm still trying to understand your thoughts around putting money in escrow.  How does an escrow account benefit the senior?  For a senior to qualify for Medicaid, there is a 5-year "look-back" period for determining their assets.  If they owned the house within the past 5 years, it will count as an asset even if it's been sold.  Most Medicaid communities aren't nearly as nice as private-pay communities so if a senior can afford private-pay, they will almost always want to go that way instead of trying to qualify for Medicaid.

Secondly, how does escrow benefit you?  If you're going to put the purchase price of the home in an escrow account you would still be using the same amount of capital.  Are you saying you would temporarily put money in an escrow account until you flip the property as a way to give the senior more security?  If that's the case, you might as well just pay them.  It seems like lease-purchase and seller-carry are better strategies but perhaps it's only because I don't yet understand the nuances of your escrow strategy.

Hi Matt. My wife and I have a portfolio of senior living homes and communities. I also like to find win-win scenarios for seniors looking or needing to move into some level of assisted living. Your lease purchase arrangement would be good as long as the senior or their family have enough money for assisted living care until you execute the purchase. We sometimes have seniors who need to move into assisted living immediately without much cash but they have significant equity in their home. I'm a real estate agent and my wife is the operator of our senior living business. She will allow seniors to move in with little or no money as long as I'm the agent listing their property. I list on the MLS but if the property needs updating I also have a list of flippers for these projects. I've thought about making an offers myself but I haven't so far because I don't want any appearance of taking advantage of seniors moving into our care.

I'm a bit unclear how your escrow strategy would benefit the senior.  If I were in their shoes, I would prefer you pay me directly for control the money used for care and other expenses. I also don't see how it helps you if you put the funds in escrow since you won't be able to access those funds. Please explain, because if I'm missing something, perhaps I can add another strategy to my tool belt. 

Quote from @James Jones:

Quote from @Mitch Conrad:

There are models where you rent to an operator but that wasn't for us.  It can work really well or really bad.  I've picked up several really good deals because a tenant operator ran the business into the ground to a point where the property owners just wanted or needed out.  The operations will make or break you.  We weren't willing to take that risk.

My wife operated our first home and after a few months we found a really solid knowledgeable manager who took over operations while still working closely with my wife.  My wife continued to be the administrator of record with the state as we added homes to our portfolio and she would assign the house manager as the administrator designee for the home.  With this strategy, we knew exactly how each house was operating and we could intervene or change leadership of the house if necessary to assure operations were going as we expected.  As we continued to scale, we eventually added a positions to start taking some of my wife's responsibilities.  Now we have a full leadership team handling various roles.  We also have a team of VAs assisting the leadership team and tracking KPIs so we know if any location is faltering and needs attention.  As our team has grown, it's become easier to cover responsibilities if someone quits, goes on vacation, or if we terminate employment, compared to when we had one or two homes.  It's also easier to handle dips in census similarly to dealing with rental vacancy if you have one rental property compared to a larger apartment building.

My wife loves the operations but we have steadily been working her out of the day-to-day stuff.  Since we have been moving to the larger commercial senior living community properties, she is directing the transition to our systems and evaluating their leadership to determine if they will fit well with us.  Eventually we will pass that responsibility on to someone on our leadership team too.

So the route we chose is definitely not passive, but it also made us more comfortable with the investment.  Without my wife's direct involvement, I think some of our homes would have struggled to stay afloat. 

 Thanks for sharing, Mitch. This is similar to what we are doing as well. I do like the idea of VAs tracking KPIs I got to let the team know! Mainly my sister is the main admin and we hire a facility manager for reach house. Glad to see we are on the right track of scaling. 

Glad to hear we are on similar paths. I'm sure we can learn from each other so let's stay in touch!

There are models where you rent to an operator but that wasn't for us.  It can work really well or really bad.  I've picked up several really good deals because a tenant operator ran the business into the ground to a point where the property owners just wanted or needed out.  The operations will make or break you.  We weren't willing to take that risk.

My wife operated our first home and after a few months we found a really solid knowledgeable manager who took over operations while still working closely with my wife.  My wife continued to be the administrator of record with the state as we added homes to our portfolio and she would assign the house manager as the administrator designee for the home.  With this strategy, we knew exactly how each house was operating and we could intervene or change leadership of the house if necessary to assure operations were going as we expected.  As we continued to scale, we eventually added a positions to start taking some of my wife's responsibilities.  Now we have a full leadership team handling various roles.  We also have a team of VAs assisting the leadership team and tracking KPIs so we know if any location is faltering and needs attention.  As our team has grown, it's become easier to cover responsibilities if someone quits, goes on vacation, or if we terminate employment, compared to when we had one or two homes.  It's also easier to handle dips in census similarly to dealing with rental vacancy if you have one rental property compared to a larger apartment building.

My wife loves the operations but we have steadily been working her out of the day-to-day stuff.  Since we have been moving to the larger commercial senior living community properties, she is directing the transition to our systems and evaluating their leadership to determine if they will fit well with us.  Eventually we will pass that responsibility on to someone on our leadership team too.

So the route we chose is definitely not passive, but it also made us more comfortable with the investment.  Without my wife's direct involvement, I think some of our homes would have struggled to stay afloat. 

Hi James. Welcome to BP! My wife and I have 22 residential assisted living homes in Colorado and three commercial senior living communities in Colorado and Arizona. Twenty of the the homes were BRRRR and two were full conversions from single-family to assisted living. Now we are mostly scaling our business with larger communities but I've used many different creative finance strategies including seller finance, private lending, hard-money, collateral from other properties, and lease-options. I've also used traditional loans through regional banks and a few SBA loans. Now I'm looking into commercial HUD loans and perhaps starting a fund to continue scaling. Feel free to DM if you'd like to discuss any ideas!

Hey Joseph. 

Jasper had some great points and I agree with almost everything he posted.  My wife and I have 24 locations in Colorado and Arizona.  21 locations are larger residential properties (up to 16 residents) and 3 are commercial communities.  Both smaller RALs and larger commercial communities rely on word of mouth and local reputation to fill rooms, but we haven't had much luck with local health care providers.  Most health care providers say that they don't give referrals because they don't want any liability from making the referral.  Usually, they will refer to a placement agency who will tour the resident and family through at least three locations they think are the best fit for their client.  Placement agencies also advertise quite loudly that their service is free for their clients, which means that they receive anywhere from 75-100% of one month's care revenue from the senior care provider.  Placement agency costs are one the highest expenses we have and it takes a while to recoup those costs.  Consequently, we do our best to bring in organic leads through our web and social media efforts.  Our goal is 50% of our residents coming from our organic leads but we have yet to reach that goal.

There are tons of REITs in the commercial sector of senior living.  I have acquired two senior living communities from REITs that wanted to exit.  One was because of poor management and the other because the property needed major renovations to be competitive in the area. 

Quote from @Jerel Ehlert:

TL;DR version: You could have the people who want to lend you money for the real estate form an entity to loan out of but you should not be overly involved in setting it up for them. An attorney in the state where you are buying should advise them.  They should keep the number of participants low.

Longer version:

The Howie test is one of many precedence to consider.  To determine if something is a security, look at Reves v Ernest & Young (494 US 56 (1990).  Every court starts with a rebuttable presumption that everything is a security unless it's not.  Here, a Co-Op marketed an "Investment Program" of notes paid at variable interest rates on demand after a lock-out period.  Co-Op went bankrupt, buyers sued. An instrument is not a security if it resembles a family of non-securities (the "family resemblance" test).

In 2020, Kirschner v. JPMorgan out of NY - a trustee sued financial institutions claiming that broadly syndicated loans were securities.  The district court applied the Reves test and ruled that these kinds of loans were not securities.  The 2nd Court of Appeals affirmed in 2023.  US Supreme Court declined certiori (decided not to hear the case).  This means the 2nd CoA ruling is good law in those states, but because SCOTUS didn't rule on it means it is not good law across the country.  Other district courts may take that case into consideration, but are not bound by it.

Links:

Kirschner v. JPMorgan

2nd Circuit case

SCOTUS case

Now, keep in mind that "broadly syndicated loans" are a very different creature than a small, private debt fund.  These are usually used to fund  mergers, acquisitions, etc. in the $10-100s+ million in value, with 100-1000s of SOPHISTICATED or institutional investors buying fractionalized interests.  Would your loans qualify? probably not on its own.

There are a few good books that cover raising capital and complying with SEC rules.  They are dense reading by necessity.  Securities law was one of my most demanding courses in law school for a reason.

Thanks for the detailed response!  I have a lot to research...

Perhaps I should consider offering an equity position in the property (not the assisted living business) as the down payment instead of debt.  Then have a buy-out or refinance option after a certain amount of time.  We could negotiate the rent the property would generate from the business which would set the return for the investors.  What are pros and cons of that structure?  Is that something that would be attractive to investors?  This structure seems like it most certainly be classified as a security.