Other Assets

3 Months Ended

Mar. 31, 2020

NOTE 4. EQUITY METHOD INVESTMENT AND OTHER ASSETS

Equity Method Investment

As discussed in Note 2, our investment in the operating company, Timber Ridge OpCo, held by our Taxable REIT Subsidiary (“TRS”) and recorded in the initial amount of $875,000, arose in conjunction with the acquisition of a CCRC from LCS-WP III. We structured our arrangement with our JV partner, LCS Timber Ridge LLC, to be compliant with the provisions of the REIT Investment Diversification and Empowerment Act of 2007 ("RIDEA") which permits NHI to receive rent payments through a triple-net lease between Timber Ridge PropCo, the property company, and Timber Ridge OpCo and is designed to give NHI the opportunity to capture additional value on the improving performance of the operating company through distributions from the TRS. Accordingly, the TRS holds our 25% equity interest in Timber Ridge OpCo in order to provide an organizational structure that will allow the TRS to engage in a broad range of activities and share in cash-flows that would otherwise be non-qualifying income under the REIT gross income tests.

OpCo’s activities are managed through an "eligible independent contractor" subject to the oversight of Timber Ridge OpCo’s board. This organizational structure meets the requirements of Internal Revenue Code regulations for TRS entities. LCS is the managing member of Timber Ridge OpCo, although we have retained specific non-controlling rights. As a result of LCS’s retention of operations oversight and control over all day-to-day business matters, our participating influence at Timber Ridge OpCo does not amount to control of the entity.

As part of our acquisition of the Timber Ridge property in January 2020, we accepted the property subject to trust liens previously granted to residents of Timber Ridge. In keeping with the business model of entrance fee communities, early residents of Timber Ridge executed loans to the then owner/operators backed by liens in a form consistent with legal requirements of the State of Washington at the time. In 2008 the owner/operator from whom we acquired the Timber Ridge property satisfied the state legal requirements by entering into a Deed of Trust and Indenture of Trust (the “Deed and Indenture”) for the benefit of the trustee (now Wilmington Trust, N.A., “Trustee”) on behalf of all residents who made mortgage loans to the owner/operator in accordance with a resident agreement. The Deed and Indenture granted a security interest in the Timber Ridge property to secure the loans made by the early residents of the property. Subsequent to these early transactions, the laws of the State of Washington were changed so that it was no longer mandatory that a repayment obligation with respect to loans made to an entrance fee community be secured by the property under a deed and indenture, and the practice was discontinued at Timber Ridge.

Our entry into the Timber Ridge joint venture involved the separation of the existing owner/operator configuration into property and operating companies. Accomplishing the split required the allocation of assets and liabilities of the previously unified entity. PropCo acquired the Timber Ridge Property, subject to the resident mortgages secured by the Deed and Indenture. Accordingly, the remaining outstanding “old” loans made by the residents are still secured by a security interest in the Timber Ridge Property. The trustee for all of the residents who made “old” loans in accordance with the resident agreements, entered into

a subordination agreement concurrent with our acquisition, pursuant to which the Trustee acknowledged and confirmed that the security interests created under the Deed and Indenture were subordinate to any security interests granted in connection with the loan made by NHI to PropCo.

With the periodic settlement of some of the outstanding resident loans in the course of normal entrance-fee community operations, the balance owing on the Deed and Indenture at the date of our acquisition on January 31, 2020 had been reduced to $20,063,000 and was further reduced to $18,974,000 at March 31, 2020. By terms of the resident loan assumption agreement, during the term of the lease (7 years with two renewal options), OpCo is to indemnify PropCo for any repayment by PropCo of these liabilities under the guarantee. NHI estimates that no material outflow of cash will result from PropCo’s secondary obligation as guarantor under the resident mortgages. Accordingly, no liability was recorded on NHI’s books for the guarantee obligation upon acquisition and as of March 31, 2020.

OpCo meets the criteria to be considered a variable interest entity based on ASC Topic 810, Consolidation. However, we are not the primary beneficiary of Timber Ridge OpCo as our participating rights do not give us the power to direct the activities that most significantly impact Timber Ridge OpCo’s economic performance. As a result, we report our investment in Timber Ridge OpCo under the equity method of accounting as prescribed by ASC Topic 970, Real Estate - General, Subtopic 323-30 Equity Method and Joint Ventures. Our equity share in the losses of Timber Ridge OpCo during the three months ended March 31, 2020 was $442,000. Under the equity method, we decrease the carrying value of our investment for losses in the entity and distributions to NHI for cumulative amounts up to and including our basis plus any commitments to fund operations. Our commitments are currently limited to an additional $5,000,000 under a revolving credit facility and our guarantee, discussed above. Under the equity method, we will not write down the asset below zero. The investment is increased for any share of income attributed to NHI.

Our equity method investment and other assets consists of the following (in thousands):


	March 31, 2020		December 31, 2019
Accounts receivable and prepaid expenses	$	3,635	$	3,212
Unamortized lease incentive payments	10,565		10,146
Regulatory escrows	8,208		8,208
Restricted cash	33,769		10,454
Equity method investment	433		—
	$	56,610	$	32,020

Regulatory escrows include mandated deposits in connection with our entrance fee communities in Connecticut. Restricted cash includes amounts required to be held on deposit with a qualified intermediary subject to an IRC §1031 exchange agreement or in accordance with agency agreements governing our Fannie Mae and HUD mortgages.