BUYER BEWARE
BUYER BEWARE
Are you considering purchasing or selling an existing licensed assisted living home in Arizona? If so, here 5 tips to be aware of:
1) Assisted living business licenses are not transferable in Arizona. However, if a license is presently listed in the name of a limited liability company (“LLC”) the parties MAY agree to transfer ownership of the LLC by changing the members of that entity through legal forms and filings with the Arizona Corporation Commission. That is not considered a license transfer, because the entity remains the licensee. Buyers should be aware, however, that by doing so, they are likely assuming all of the liabilities of that LLC, known and unknown. This includes past survey results, any potential litigation against the business, and possibly even tax obligations.
a. Thus, we typically recommend to Buyers that they form a new entity or entities, and take title to the assets only, under a Change of Ownership application, otherwise known as a “CHOW.”
2) The CHOW application process is the same as other applications made pursuant to Ariz. Rev. Stat. §36-422. As of the date of this writing, fees submitted (based on number of beds, etc.) are refundable, except the $50 base application fee is non-refundable. The Arizona Department of Health (“DHS”) has 30 days to review applications. We recommend that Buyers submit their applications as promptly as possible because DHS is likely to send you a list of requirements (or “application deficiencies”). The Buyer will want to receive as soon as possible, not only to know what additional documentation they must supply, but also because that letter will include the license number that will eventually be issued to the Buyer. Having that number can give Buyer a head-start on applying for CGL insurance, and an AHCCCS ID number, if the Buyer wishes to accept ALTCS residents. Also, in our experience, after that initial requirements letter is issued, action is typically taken very promptly by DHS on additional documents or clarifications that are submitted following that first review letter.
a. New builds or renovated homes being licensed for the first time have to comply with Ariz. Rev. Stat. §36-421, which has a 120-day review timeframe and more stringent requirements concerning architectural plans and safety rules.
3) According to Ariz. Rev. Stat. §36-422(D), the Seller must give notice at least 30 days before termination of operation or a change of ownership is to take place. Previously, the Arizona Department of Health (“DHS”) generally accepted a generic 30 day notice, but now DHS is also requiring the name of the buyer. The problem that sometimes arises is that the contracts are typically written in the name of a buyer, or its assigns. Presuming the Buyer follows the path outlined in #1 above and forms a new entity for purposes of the transaction, that entity might not be formed 30 full days prior to the closing. We can suggest some ways to address that if a client encounters that situation.
a. We’ve found that Sellers are hesitant to give the 30-day notice fearing that their license will end after 30 days, even if the settlement does not occur by then. That fear is unfounded. The current licensee paid for a year-long license; thus it remains in effect until it either expires because a renewal fee hasn’t been paid, or a new (paper) license is issued for that physical address, after the buyer completes all of their application requirements. The Seller does not receive any refund based on time left on its license. We have seen enforcement fines imposed where Sellers have not given the requisite 30-day notice, and transactions get delayed because Buyers have not ensured that Sellers have fulfilled their obligation under this statute.
4) In addition to the state licensing, the Buyer should also do its due diligence to ensure that the assisted living home has a certificate of occupancy from the municipality where it’s located for the same number of beds or occupants as the DHS license. The certificate of occupancy “runs with” the property, but updates may be required if a permit for renovations has been pulled. In addition to certificates of occupancy, current fire permits and fire suppression or alarm systems should be evaluated. Most Arizona municipalities require the new property owner to obtain a new fire permit, so the Buyer will want to know if any upgrades need to be performed since the last permit was issued.
a. Out of state buyers can engage us or other local counsel to assist with due diligence to determine if the existing operations meet permitting requirements, or if a change of ownership would qualify the new Buyer to be grandfathered into the municipal ordinances that existed when the home was initially licensed. Buyers should NOT assume that a new operator will be grandfathered-into local building and fire codes.
5) Both Parties should always ensure that they have professionals who are licensed real estate agents; escrow agents; and/or legal counsel involved with the transaction, even if this is not their first assisted living home purchase or sale. Unfortunately, we get called too often to fix problems after a deal has “gone sideways” and either the parties are unable to consummate the transaction, or one party (usually the Buyer), feels like they did not get the full benefit of their bargain after ownership transfers. These are hybrid real estate and business transactions within the purview of several regulatory agencies, and a state-licensed professional advisor knowledgeable in ALL areas is recommended. Not only are there significant dollars typically involved, but the lives of vulnerable adults residing in these homes will also be impacted.
a. We work with several consultants whom we respect as knowledgeable advisors in specific areas such as: operations, financing, compliance, etc. A good consultant will realize when he or she is crossing the line of the unauthorized practice of law, and recommend that you seek legal counsel. Likewise, we recognize when a third-party may be able to more economically assist with due diligence and post-sale requirements. We are happy to work with (or recommend) other advisors as part of your transaction team.
Look for more weekly blog posts on topics of interest to Arizona Assisted Living and Behavioral Health operators. The information herein is intended to be educational and an introduction to the subject matter presented. It is NOT specific legal advice to be relied upon for specific individual circumstances. Contact your own legal professional or reach out to our firm if you would like specific advice on this topic. We welcome topic suggestions! Write to info@pinkowskilaw.com to recommend a particular subject for us to explore. If you would like to comment or discuss this blog, please feel free to contact info@pinkowskilaw.com