2. What Should the Appraiser Ask the Broker or Principal of the Sale When Confirming a Transaction? Presented By Jeff Binder, MAI Senior Living Investment Brokerage, Inc. binder@seniorlivingbrokerage (314) 961-0070

3. Is the Sale an Asset or Stock Sale? Asset sale transfers the (1) real estate rights, (2) FF&E and (3) some of the intangible assets. Most transactions are asset sales They exclude accounts receivable, cash, and other assets on the asset side, and usually all liabilities. SNFs are more complicated transactions since licensure, Medicare and Medicaid certifications, employment and third-party contracts, and successor liabilities, among other issues may be transferred to the buyer and affect price.

4. Few sales are stock sales, whereby the buyer acquires the entire set of assets and liabilities of the ownership --- these sales are rare beyond one shareholder selling their interest to another or the sale involves a much larger acquisition or merger of a public company. Multiple entities are typically involved with the ownership of a senior housing property -- does the sale price incorporate their contributions from these various entities?

5. What are the various entities that may be involved in the going concern of a senior housing or skilled nursing facility?

6. Ownership divisions often include: Real estate owner – leases property to an operator Operating entity, which runs the frontline business, holds the licenses, certifications, and enters various employment and vendor contracts to operate the facility Management company – often a separate ownership and used as a vehicle to siphon some profits from the real estate and operating entities. Buyers will typical push management profits back into the operator NOI when pricing their bids – many lenders and REITs place restrictions on management fee.

7. Other related party providers may include therapy, home healthcare and pharmacy companies that provide “ancillary” services to the “subject” as well as other facilities controlled by the same ownership as well as unrelated clients – individual patients and facilities. The prospects of a buyer growing their “ancillary businesses” may get priced into the valuation property. These various ownership silos may have the same or different shareholders and/or proportions of ownership in each entity.

8. Were there extraordinary motivations on the part of the seller or buyer? What factors could create extraordinary motivations, i.e. cause the sale price to less or more than market value? 1.Distressed conditions, including forced sales through financial distress or licensing and certification pressures from regulators 2.Buyer having unique market economies of scales by achieving more efficient labor conditions, marketing/advertising, continuum of care, etc., reduce competiveness in the market and other factors. 3.Seller may be a non-profit that has been losing money for some tim

9. How are senior housing and long-term care facilities typically marketed? Sellers marketing their own property Buyers making unsolicited offers Brokerage companies – typically firms that specialize is this property type From a high level, describe the brokerage process Qualifying prospective buyers Confidentiality agreements in place before issuing detailed property and operational information What information is typically supplies to the prospective buyer What information should the appraiser have in making their appraisal

10. From a high level, describe the brokerage process 1.Qualifying prospective buyers 2.Confidentiality agreements in place before issuing detailed property and operational information 3.What information is typically supplied to the prospective buyer 4.Other issues

11. Importance of maintaining confidential marketing If a property is known to be for sale, the facility may lose staff, find staff recruitment more difficult and competitors will present a possible ownership transition as a negative when competing for prospective residents.

12. What are the major value drivers, or elements of comparisons NOI per unit or bed ---- but what drives NOI? Traditional real estate factors — location and physical aspects (underlying land value, building quality, age, condition, size, functionality), etc Occupancy – both for the subject and the competitive market Resident mix– this is especially important for nursing facilities as the payor source (Medicare, Medicaid, private-pay and commercial insurance) pay at different levels and create different profitability profiles. In some states Medicaid rates made be affixed to a property in a manner that creates a long-term profit or loss condition that will extend to a buyer – i.e. capital reimbursement

13. Let’s talk NOI or EBITDAR (earnings before interest, depreciation, amortization, rent – or EBITDARM – “M” for management NOI = EBITDA? Learn the story about regarding the trailing, in-place, or pro forma revenues, expenses and NOI What NOI does the market use to set price or bid – trailing, in-place or pro forma? What is the relative importance of the seller’s actual historical revenue and expenses vs. the buyer’s pricing and cost structures? What adjustments, if any does the market apply to expenses for changes in property taxes, cap-ex and management fee/expenses? Similarly, regarding nursing facilities, do you see prospective buyers adjusting revenues for probably changes in Medicaid reimbursement levels that are result from a change of ownership?

14. Finally, what can you discuss the market’s prospective in purchase price allocations between real estate, FF&E and intangible values? Do buyers and seller actually think in terms of pricing the various assets separately, or do they simply think in terms of a single price for the going concern or property? Do buyers and sellers actually agree to an allocation of price between these assets? If so, are these allocations spelled out in the purchase agreement or a side agreement? Are these allocations primarily based on tax issues, such as depreciated cost basis, property tax assessment reporting, divisions among the seller’s realco, opco and manco entities, or for financial strategies?

15. This is a legal-type question, but answer if you can: When the transaction is an asset purchase and the seller has various entities, (realco, opco, manco, etc.) is the entire price or consideration to the seller typically placed specifically into a purchase agreement of the real estate entity or does the contract and price extend to cover the operating entity? As you see the market relative to asset price allocation, do you see any preferred allocation techniques, for example: Depreciated costs? Capitalized management fee? Capitalized market rent? HUD’s proprietary earnings approach Allocation of certain soft costs to intangibles, e.g. absorption or start- up costs and developer’s profits to intangibles?