Podcast - States Propose New Laws Affecting Healthcare Real Estate Investors and Owners

Jeffrey Calk: Hello, everyone. Thank you for joining this podcast, "Real Estate Law Unlocked." I'm Jeff Calk in our Nashville office. I call myself a healthcare real estate lawyer. I do healthcare-focused real estate transactions all across the country, representing both health systems, but also real estate investment trusts (REITs) and other funds who invest in healthcare properties. So I have a strong overlay of the regulatory part of the healthcare practice as well as the real estate. I'm joined by John, who is more of a true healthcare lawyer than a dirt lawyer like me. Tell us about yourself, John. 

John Saran: Thanks, Jeff. I joined H&K about two years ago, and as you say, yes, I consider myself a healthcare attorney, although I'm technically in the healthcare transactions group here Holland & Knight, but we have one of the largest healthcare practices in the country with several hundred lawyers, consistently, I would say, at the forefront of regulatory issues. We are constantly closing deals for folks, and not just doing mergers and acquisitions (M&A), in-house counsel type of work, but we're also doing financing and restructuring. So we truly cover the full spectrum of healthcare.

The topic for today's podcast is a subset of healthcare law that frankly has come onto the scene in the last three or four years or so in healthcare generally. This concept of reporting transactions or providing information about ownership, it's not really new. If you're a hospital, you have a license, you have to do that, or if you are enrolled in Medicare you have to tell the government sort of who owns you, who are the officers. But in the last few years, there's been a subset of the healthcare industry that has been involved on a lot of transactions, a lot of movement, that may not have fallen into those traditional lanes where the state sort of had a sense of what was happening. And what you had was a few high-profile health system failures, hospital failures, providers kind of experiencing extreme financial difficulties, and a lot of questions were being asked to both federal and state legislators, to say, why didn't you know about this? And so that started just a flurry of federal and state laws that are focusing on healthcare consolidation in areas that historically have not been touched. And I was sort of one of the first ones out there tracking these bills, in Oregon in particular, and then over the last few years of reading, writing, speaking. We have HK Navigator, which is an online tracker for bills that have been enacted and provides a great tool for our clients and frankly, other stakeholders, including, I'm aware of even state governments using it as a way to keep on track of what's been going on.

Jeffrey Calk: Very good. Well, I do appreciate you joining us today. When I started practicing in the healthcare real estate area in the early '90s, there was not a real estate healthcare sector. Medical office building, any surgery center-type asset, was really just considered a part of commercial office. And then in the '90s, it became its own sector and all kinds of investors started wanting to invest in pure healthcare or medical properties. And then, you know, folks wanted to start doing sale leasebacks for hospitals. And as John said, the focus of our podcast today is this rash trend of legislative action or proposed bills or enacted laws that are coming up at the state level to, I think, the intent is to sort of protect healthcare providers who might get into arrangements that perhaps one could argue they shouldn't have or should have. But we're not here today really to talk about whether the legislation is needed or advocate for it or advocate against it. We're just trying to alert you and then educate ourselves and you about the landscape of the legislation that we are seeing. And it is affecting what I call healthcare facilities. John will probably educate us more on the specific terms that are used in the legislation, but to me, that includes hospitals, skilled nursing facilities, LTACs, it could include a medical office building, it could include a physician practice. That's part of the complexity. And as John said, he has been tracking this, and one of the few, if the only, who's been tracking that. And I will reach out to him from time to time and say, what's going on in this state or that? So John, if you would, give us from your perspective a high-level summary of what the various states are doing and which states have actually passed legislation. And I know we won't have time to cover each act or bill in detail. Just kind of highlight for us the complexity and why you really need to be tracking this stuff. And if you're a player in the industry, why you probably need to be lobbying or otherwise participating in the legislative process.

John Saran: So let's start off with this sort of broader trend, and then we can focus on the sale in leasebacks and REITs and all that. So, in '22 and '23, you had a surge of M&A activity in the healthcare market, and you started to see states really throw their hand up in the air to say, hey, we want to understand what's happening, that we're not already seeing through our attorney general reporting processes or state licensure processes. And we want to understand the effects of healthcare consolidation, healthcare transactions on access to care, quality of care, costs of care. You know, the real effects on patients. In '22 and '23 and '24, bills started coming out focused on physician practice acquisitions or tier-point hospitals and health systems. Oregon was probably one of the first that was truly broad that captured nearly all healthcare, any kind of business that provided healthcare in the state. And that definition started to really grow from there to include things like even private equity investing in healthcare or management services organizations managing these types of businesses, and you saw it spread. So it kind of started in Oregon, Washington, California. And then you saw it started kind of filling in on the East Coast with the New England states. And then it kind of made its way into the middle of the country of the Midwestern states. But again, still focused on, I would say, traditional healthcare providers and the transactions that they were doing. Sometimes, like I said, they would venture into dental practices or others, but that was more rare. It was, I think, in like '24, there was one bill that hit the — I think it was Minnesota, if I recall — that focused on real estate investment trusts. It died. And so it hit my map, I thought about it, and [it] died. There was one person that asked me about it, and it went away. Then in '25, in around '24, '25, there's been a lot of discussion about some very high-profile health systems that failed. And there was a sale, a leaseback element to it, you know, lease control and rents and all that were all part of those discussions.

'25, you started to see more bills pop up. I thought it was [an] anomaly in '24, '25, we saw Massachusetts, Louisiana [and] Maine. Louisiana didn't make it, but Maine made it. There's actually a moratorium until June or mid-June of '26 that does not allow for a REIT transaction involving a hospital. It's a one-year moratorium, and private equity's lumped in with them as well. In Massachusetts, they sort of toggled their healthcare transaction reporting bill to expand it to include sale and leaseback transactions, some of the models that REITs have used are captured in that bill as well. And actually not that long ago in the last year's annual cost hearing meeting for Massachusetts, there was a REIT that had to provide written testimony as to sort of their operations in the state and their effects on the healthcare market in Massachusetts. So you started to see a renewed interest in REITs. Also, at the end of the year last year, we had a federal bill proposed that focused on REIT arrangements. And frankly, part of the provisions in that federal bill included the federal government would have to review leases, which is a new concept. I hadn't seen that in some of the state proposals. And when I saw that, knowing from what I know from this broader trend, there was similarly, a federal bill that targeted private equity investment, didn't go anywhere, but then spurred a bunch of state action. Now we have a federal REIT-focused bill that then spurred a bunch of state action, which then translated into in '26. Now we have four or five bills that are out there that now are looking at sale and leaseback transactions. In some cases, some states are even saying things like considering putting a higher level of scrutiny on them. And the states that are looking at these types of bills are in New England. So Rhode Island, Connecticut, Maine. It's where some of the issues and some of those health systems did not have great results in. In fact, Washington also just recently proposed upgrades to their bill that also now pick up, say, on leaseback transactions. And as of today, that Washington bill passed both chambers of the legislature and is going to the governor for review. So it was sort of focused on physicians, hospitals, then maybe private equity. REITs were kind of on the fringes, and then now it's starting to become part of this broader trend of we're not just looking at private equity more, we're looking at all stakeholders, and REITS are now at the table.

Jeffrey Calk: I'm not the expert on this legislation or this series of possible bills, but everything I saw early on seemed to be focused on a private equity buyer, for-profit buyer, buying a non-profit hospital, ballpark. Basically, was protecting nonprofits, health systems being acquired by for-profit — could be private equity, could be a publicly traded hospital company for that matter. And historically, again, you have the attorney general (AG) of that state involved, right? To buy or sell a non-profit hospital. And that buyer is typically buying to own the business and operate the business, and be the healthcare provider or the equity behind the healthcare provider, whereas your real estate investment trusts, which are special tax entities that get their income from rent, typically, or mortgage payments, they just want to buy the real estate. They don't want to operate the businesses, right? A lender wants to loan money and secure it with a mortgage or deed of trust, the REIT just wants to own it and lease it back. So they don't want to provide any healthcare services. But what I've seen is they're now lumping in REITs with these, what they call, private equity buyers. Is that a fair statement?

John Saran: They are. And they definitely are. I mean, keep in mind too, that not every state, if there's a nonprofit element to it — you're right, states have review processes — but not every health system or hospital is a nonprofit. Not every state has a hospital transactions review process, and so every state is going to have their own sort of patchwork. But I think at the end of the day, you had some bad results in some states and across the country, and the underlying transactions that preceded those bad results were not hitting the radars of either the health agencies or the AGs to give them the ability to have a say in those transactions. And so you're seeing now not just reporting, but then, just using [an] example, there was a bill proposed in Rhode Island that not only requires you to report a REIT-involved transaction involving a hospital to the AG, you also would need to post a financial bond that essentially is almost like an insurance policy that the state can tap into, and this case is geared at, it's like roughly like a year's worth of operational expenses plus amounts that could fund almost like an independent supervisor, so that if there is a bad result, the state has that insurance policy to tap into to make sure that operations continue, access to care continues, all of that. At the end of the day, this is all rooted in cost, quality [and] access to care in the state, but now they're just broadening the lens on all the different models and all the different ways that healthcare deals are getting done.

Jeffrey Calk: Let's talk for a minute about what I've heard so far, is, if I am an investor buying a hospital or certain other healthcare facilities, I might be subject to these new laws when they're enacted. But I've also heard that even if I'm not buying into the operations, but I'm buying some assets or real estate from that healthcare facility and engaging in some type of contractual relationship with the healthcare facility, I might be subject to the legislation, too, right? So I now know pretty much everybody has to be thinking about it, but what types of healthcare facilities need to be involved generally for this type of legislation to trigger it? I heard hospitals, but if I'm buying a skilled nursing facility, if I'm doing a joint venture between a physician group and a hospital, if I'm buying an imaging center from the operator, in your view, are the proposed bills capturing anything in the healthcare or is it more hospital-centric?

John Saran: I mean, it's going to depend on state, but yes, it's all the above. So, the way that I tell our clients is, you know, first tell me the state, and then tell me what you're doing, and now let's look to see what's enacted, what's proposed, what the likelihood of those bills passing and then help you make the right decision. There's always a level of anxiety and, fear of the unknown and all that. But with up-to-date intel, you can make good strategic decisions. I think the good news is, is that, look, this is not like you're coming into something that's been a well-established process for 20 years. And there's not really any way to navigate. You're sort of stuck with what you have. We are in the middle of this happening, all real time. And so that means anything that has passed, right, needs to be ironed out through regulations, guidance, participation, all that. Things that are proposed, no one knows what the right solution is. And so the best way to kind of really address this generally is to be a part of those discussions that [are] happening [in] real time. You know, obviously there was a need or an impetus for these bills hitting the docket in those states, which, generally speaking, is going to be one side of the discussion. It's really important — and we've seen success across the country in the last few years — when the other side is also discussed. This is the type of effect it's going to have on investment. If you eliminate these types of transactions from the market, then this is what happens, right? When not fancy lawyers and lobbyists, but actual providers, actual stakeholders in the market get in front of legislators and actually tell these stories, you start to see better legislation. You start to see, sometimes even, folks will say, hey, these are really good points. Let's not ram this through right now. Let's take some time. Let's think about it, let's work on it over the next year or so. And so I really encourage, especially now for like these types of REIT-focused bills, we're still in the early stages. It's only been really Massachusetts and Maine, you know, the Maine moratorium is going to go away here in a few months. Not much has been enacted yet, so I would really encourage folks to get out there and be a part of the discussion, especially right now on the East Coast and New England.

Jeffrey Calk: In your experience looking at or tracking all of this, what obstacles or new hurdles are these bills creating to get a deal done? For example, you mentioned you got to post in one state, Rhode Island, you have to post a bond that would cover seven years. Is it mostly you got to give notice or you got to get approval? Or you give notice and if they don't reject you with such a deadline, you can proceed? Are they prohibiting the transfers or just requiring consent?

John Saran: No, I mean, it's again, all the above. There's a reporting flavor of these bills. There's a consent flavor of these bills. And then we would like to impose almost like a public interest-type standard for these transactions. We view sale leaseback transactions as against the public interest, or we're going to raise the bar for that particular type of transaction because of these bad things that have happened. So it's just really important, if you can get in now and be able to have these discussions so that, all right, let's start with notice first. We don't need to start with "these are all prohibited" because that's going to have this effect. And again, folks have been able to do this in other states and kind of come to a reasonable solution that balances addressing the need with the industry. And it just lends itself to the more you do now proactively, I think the easier it'll be to operate later on.

Jeffrey Calk: Well, unfortunately, we're running out of our time here. Just to wrap up, John, is there something you would like to [say], parting message? I mean, you've hammered down that we have to be alert, we have to be aware, we have to be involved in the industry rather than wait to hear what happened. You suggested people be more involved in the legislative process. Any other parting thoughts?

John Saran: I will say, I think just if we can learn from lessons from the past, I think [that] some of the challenges that I've seen out there is that sometimes, let's say you have these bills, they capture 12 different stakeholders. When each of the 12 stakeholders only look out for their own interests and not think more broadly, sometimes, you can get the six to go after the other six and then they can't all agree, and then there's a bad result or there's a coalition that then falls apart because some people get their carveouts because they're shortsighted. And then the bill passes. That, with a trend that is national, meaning that it's proliferating across all the states, and with the amount of shared information and you're seeing the same provisions be recycled time and time again, it's short-sighted to just get your carveout in one state and then not care about it. Because then the next state will copy like, oh, this state just passed this bill. We're going to copy and paste it, make it broader, and kind of go from there. And so I've tried to encourage folks to take a, you know, this is a long-term discussion. It's a long-term effort. It is not just one and done, get your carve out, and I've tried to encourage when it was just maybe only focused on private equity, I try to encourage providers, REITs, health insurers, too, are now also being targeted for affiliating with healthcare providers, I try to encourage all of them, participate now, because it's going to come to you eventually, and it did. And so like if there's only a moratorium that focuses on this one thing, it could focus on you in the next state. So try to keep that long-term strategy in mind for this.

Jeffrey Calk: Thank you, John. John Saran at Holland & Knight in Chicago, I'm Jeff Calk at Holland & Knight in Nashville. We appreciate you participating today. Thank you.

John Saran: Yeah, thanks, Jeff.