Attorney General Issues Guidance on Sale of Non-Profit Nursing Homes

Earlier this month, the New York Attorney General issued a new guidance document regarding the sale of non-profit nursing homes to for-profit buyers.  

The guidance memorializes some of the practices that have developed in the Attorney General’s office in recent years and confirms that the Attorney General will take a hard look at any proposed sale to a for-profit corporation.  

The new guidance begins with a discussion of the trend in New York toward sales to for-profit operators. It notes that, in 2010, 40.5% of nursing homes in New York were non-profit. However, the document states that within the past few years, about five percent (5%) of New York’s non-profit nursing homes were sold to for-profits annually. Such sales require the approval of the New York Attorney General and/or the Supreme Court under Sections 510511 and 511-a of the Not-For-Profit Corporation Law. Those laws provide that the Attorney General will consider two factors in deciding whether to approve a sale: (1) whether the consideration paid to the buyer in the sale is fair and reasonable to the seller, and (2) whether the sale will promote the purposes of the selling charity.  

The new guidance focuses on the second factor, which the Attorney General frames broadly as the duty to promote the mission of the charity. The Attorney General proceeds from the premise that the charitable programs of non-profit nursing homes do not always continue after the sale. The guidance notes that sometimes non-profit nursing homes are effectively controlled by a related health care system that has plans for use of proceeds from the sale that are “only marginally related to the mission of the selling entity.” In other words, the Attorney General focuses on the actual mission of the selling nursing home entity rather than on a group of affiliated non-profit health care corporations as a whole.

In addition, the guidance notes that the board of a selling non-profit needs to identify the level of care and services that a purchaser is likely to provide to the nursing home’s residents. The Attorney General sees this as significant to the board’s fidelity to its mission. Notably, the Attorney General does not think the selling non-profit’s charitable purposes are furthered when the for-profit purchaser ceases to operate as a nursing home and instead commercially develops the real property it acquires. It further states that concerns are presented where purchasers were placed in control of the facility under an operating agreement prior to sale and before obtaining regulatory approvals.  

Based on its concerns about these situations, the guidance outlined a series of best practices in considering the sale of a non-profit nursing home including:

  • Factors to be evaluated in considering a sale,
  • The business process for exploring requests for proposals and evaluating bidders,
  • Protections to be provided for the class of charitable beneficiaries (that is, current and future residents) during and after the sale, and
  • Use of proceeds of the sale consistent with the nursing home’s charitable mission.

The Attorney General goes on to review each of these topics in detail. Specifically, the guidance states that in connection with the petition for approval of the sale there should be a statement by the selling charity that explores whether the sale is in the best interest of the charitable corporation and its beneficiaries. This statement should include a list of topics as set forth in the guidance. These topics are divided into four broad categories as follows:

  1. Planning. This includes a projection of the revenues and expenses for the nursing home under current ownership, whether the board explored alternative or additional sources of financing, whether the board evaluated affiliating with another non-profit facility, how the board communicated with its residents and their families, the nature of the bid process, the nature of the diligence that was done on the character and competence of the potential buyers, and how conflicts were resolved.
  2. Continuation of Care. The key factor in this category is whether the purchaser made a commitment to continue operating the nursing home for five (5) years. We have noted that the Attorney General has raised this issue in recent transactions. In addition to this factor, the continuation of care includes whether the board evaluated the ability and willingness of purchasers to provide quality services and protection from abuse and neglect, continuity of staffing, etc. In addition, this factor asks whether the board considered the Centers for Medicare & Medicaid Services (CMS) ratings of other nursing homes operated by the potential purchaser as well as how the board will obtain and enforce commitments from the purchaser for conduct after the sale.
  3. Petition Contents. The Attorney General provides specific guidance on how the petition for approval would be prepared.  The petition should include a statement of the fair market value of the assets (supported by an independent appraisal), a current listing of the corporation’s debts including evidence, information about the mix of consideration, and timing. It requires that the contract for sale be contingent upon approval of the transaction by the Attorney General.
  4. Use of Proceeds. The final factor requires a description of the proposed use of proceeds with respect to existing obligations.  The Attorney General requests that commitments for use of proceeds be attached as exhibits, including evidence of debt and invoices. Significantly, as noted above, with respect to proposed use of proceeds, the guidance states that the board should be aware that the sole member (the “parent” entity) is not entitled to proceeds unless the directors of the entity make an independent determination that such a distribution is consistent with the mission and corporate purposes of the seller.

Overall, we view the guidance as an expansion of the Attorney General’s process beyond what has customarily been the case for the typical sale transaction. Some of the provisions of the guidance, particularly the requirement that the new purchaser commit to operate the nursing home for five (5) years, may be subject to legal challenge. Until such time, selling non-profits are well advised to adhere to the criteria set forth in the guidance to ensure a smooth transaction. It will be interesting as well to see whether, and how, the principles of the guidance are applied outside of the context of nursing home sales.

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