The battle for quality healthcare properties is about to be turned up a notch with the birth of a new real estate investment trust.
But this new REIT, called ElderTrust, boasts an edge over the competition. As an "umbrella partnership REIT," ElderTrust offers sellers of long-term-care real estate certain income and estate tax advantages that traditional healthcare REITs cannot. That makes ElderTrust a cheaper alternative to traditional REIT financing, says D. Lee McCreary Jr., its vice president and chief financial officer.
"What it is that we really bring to the healthcare market is the UPREIT structure," McCreary says.
In an UPREIT, the sponsoring organization contributes properties to a newly formed operating partnership. In exchange, the sponsor gets units of limited partnership interest. After some specified period, the partners' units are exchangeable for cash or REIT shares. Future sellers of real estate also may earn units for properties contributed to the partnership.
The UPREIT structure softens the blow a nursing home owner, for example, might endure when selling a property whose value has appreciated, by deferring taxes due. There's another benefit, too. If the owner passes away, instead of saddling his estate with a single, taxable asset, partnership units earned through the UPREIT may be liquidated to cover any estate-tax liabilities.
On the downside, UPREITs have been criticized for their complexity and potential conflicts of interest between sponsors and public shareholders.
One other healthcare REIT, Beverly Hills, Calif.-based G&L Realty Corp., shares the UPREIT structure. G&L mainly invests in medical office buildings, skilled-nursing facilities and assisted-living facilities.
ElderTrust, which filed a registration statement Oct. 8 with the Securities and Exchange Commission, expects to go public early next year. The company will plow proceeds into making loans and acquiring properties.
Initially, 48% of the REIT's assets will be properties and other assets used by Kennett Square, Pa.-based Genesis Health Ventures, its sponsor. ElderTrust maintains other connections to the mothership. Genesis Chairman and Chief Executive Officer Michael Walker will be ElderTrust's chairman. Edward Romanov Jr., the REIT's president and CEO, had been senior vice president of development at Genesis.
"From the Genesis perspective, what you would like to be able to do is have an entity that you can have a long-term, continuing commitment with that also has a commitment with you," McCreary says. "That's probably the biggest reason why Genesis' (managers) created the REIT themselves."
But ElderTrust intends to go after deals with other operators in the assisted-living, independent-living and skilled-nursing businesses as well.