A greedy businessman hides money in his suit pocket

Tax policies meant to benefit real estate investment trusts as “passive investors” in nursing homes should be reviewed with an eye toward their active operational influences, say economists behind a new study.

Changes may be needed due to the major role REITs have played in nursing home consolidation, as well as their increasing influence on operational costs and performance.

“Scholars and policy makers need to take a much closer look at REIT activities,” wrote researchers at the Institute for New Economic Thinking in an article published Monday. It accompanies an 80-page report that takes a damning view of REITs and their growing prevalence in the skilled nursing sector. 

“Their profits and executive compensation have been extraordinary in recent years, with little discomfort caused by the COVID pandemic,” noted Eileen Appelbaum, co-director of the Center for Economic and Policy Research, and Rosemary Batt, a professor at the Industrial Labor and Relations School at Cornell University. “Their financial transactions offer little or no transparency, and taxpayers deserve a clear assessment of how much they are subsidizing yet another asset class that may be contributing to greater inequality in the US economy.”

In an interview with McKnight’s Long-Term Care News Tuesday, paper co-author Tamar Katz, a former real estate investment banker-turned-research analyst with the Center for Economic Policy Research, underscored how REITs work with private-equity investors to split real estate from operations and the pressure they face to derive profits.

“It’s a really big problem in healthcare because of how easy and how prevalent it is for private equity firms to extract value to the harm, to the detriment of elderly patients,” said Katz, who co-authored a JAMA Health Forum study earlier this year that put REIT ownership of SNFs at about 12% nationally in 2021.

The new paper, which includes case studies of the HCP-Carlyle Partners-HCR ManorCare and Health Care REIT-Formation Capital-Genesis Healthcare relationships, found that separating the REIT strategy of separating real estate from care operations “poses serious risks and dangers for patient care.” When the strategic interests of the real estate company are not necessarily aligned with the operating company, the authors wrote, REITs may invest less in quality of care and buildings where patients live.

Bill Kauffman, senior principal at the National Investment Center for Seniors Housing & Care acknowledged on Tuesday that the current national nursing home payment system incentives investments in real estate, rather than investments in facility, infrastructure or even staffing. 

In June, ATI Advisory issued a report commissioned by NIC that found “ uncoordinated policy decisions … have resulted in a failure to attract needed capital to modernize skilled nursing facilities.”  ATI called on federal policymakers to address the “misalignment of the public-private partnerships that attract capital to own skilled nursing facility real estate instead of investing in innovating operations and modernizing facilities.”

But Kauffman also said that attacking a specific type of investor or targeting them for additional regulation —  rather than encouraging additional forms of public-private partnership —  could drive investment away from the sector and leave providers in want of more help.

“Transparency and accountability should be there, but we need to do it in a way that incentivizes investment in care,” Kauffman said. “Otherwise, we’ll have a standstill.”

History of rent pressure builds

The think tank authors trace a history of private investment in nursing homes that has been swayed by regulatory reform and market pressures, and outline how it has evolved with the current trend of REITs and private equity investors working together. They accuse PE firms of taking proceeds from sale-leasebacks to pay dividends to themselves and their investors, “rather than using them to improve healthcare services for patients.”

Katz and her co-authors argue that a role aligned with PE firms has undermined providers’ financial stability, making REITs more than just passive investors.

“If landlords raise rent, then operators may have to pay for the increases by shifting resources away from operations or staffing, directly affecting patient care,” the authors wrote. “Nursing home operators have relatively fixed budget models, with limited flexibility for shifting resources.”

REITs are categorized as tax “pass through” entities and pay no corporate taxes if they invest at least 75% of their assets in real estate, derive 75% of their gross income from real property, and pay out at least 90% of taxable income as dividends annually.

Katz said the purpose of the study wasn’t necessarily to advocate for new tax laws. Instead, she said the authors hoped to illustrate just how much the rent pressures and other actions by REITs are shaping care delivery in nursing homes, hospitals and even hospitality settings.

“For these REITs, the underlying properties are just interchangeable pieces of the puzzle,” she said. “But because they are financing mechanisms, they contribute to the financialization of places you and I occupy every day of our lives.”