Commitments and Contingencies

12 Months Ended

Dec. 31, 2011

Commitments and Contingencies

Commitments and Contingencies

11. Commitments and Contingencies

        During 2011, we purchased four skilled nursing properties with 524-beds in Texas as described in Note 6. Real Estate Investments. As part of the purchase agreement, we paid cash at closing and committed to provide contingent earn-out payments if certain operational thresholds are met. The contingent earn-out payment arrangements require us to pay two earn-out payments totalling up to $11,000,000 upon the properties achieving a sustainable stipulated rent coverage ratio. We estimated the fair value of the contingent earn-out payments using a discounted cash flow analysis. This fair value measurement is based on significant input not observable in the market and thus represents a Level 3 measurement. The contingent earn-out payments were recorded at the date of acquisition in the amount of $9,841,000 and were included on the consolidated balance sheet line item "earn-out liabilities." During 2011, we recorded non-cash interest expense of $464,000 related to the earn-out liabilities which represents the accretion of the difference between the current fair value and estimated payment of the contingent earn-out liabilities. Also during 2011, we paid $4,000,000 related to the first contingent earn-out payment. At December 31, 2011, the remaining contingent earn-out payments had a fair value of $6,305,000.

        The following table summarizes our capital improvement commitments as of December 31, 2011 (dollar amounts in thousands):

Commitment			Expiration Date		Used Commitment at 12/31/11		Open Commitment at 12/31/11			Estimated Yield			Property Type	Properties		Major Operator
$	100			8/1/12	$	—	$	100				(2)	SNF		1	N/A
	730			8/31/13		674		56	(7)		9.00%	(3)	Other(1)		2	N/A
	8,250			10/11/13		50		8,200			9.00%	(4)	SNF(8)		—	N/A
	5,000	(6)		12/31/14		—		5,000				(5)	ALF		37	ALC
$	14,080				$	724	$	13,356

(1)

Other senior housing properties consist of independent living properties and properties providing any combination of skilled nursing, assisted living and/or independent living services.

(2)

The yield is included in the initial lease rate.

(3)

Minimum rent will increase on the 1st of each month by the amount advanced in the previous month multiplied by the estimated yield.

(4)

Minimum rent will increase upon final funding and project completion or in some cases, the improvement deadline as defined in each lease agreement.

(5)

9.5% plus the positive difference, if any, between the average yields on the U.S. Treasury 10-year note for the five days prior to funding, minus 420 basis points (expressed as a percentage).

(6)

$5,000 per year for the life of the lease.

(7)

In January 2012, we funded this $56 commitment.

(8)

During 2011, we acquired a vacant parcel of land in Texas and entered into a commitment to fund the construction of a skilled nursing property with 120 beds which will replace an existing 90-bed skilled nursing property.

        The following table summarizes our loan commitments as of December 31, 2011 (dollar amounts in thousands):

Commitment			Expiration Date		Used Commitment at 12/31/11		Open Commitment at 12/31/11		Yield			Property Type(1)	Properties		Major Operator
$	50			3/31/12	$	20	$	30		10.00	%	Other		1	N/A
	2,500	(2)		12/31/12		232		2,268		8.50	%	Other		2	N/A
$	2,550				$	252	$	2,298

(1)

Other senior housing properties consist of independent living properties and properties providing any combination of skilled nursing, assisted living and/or independent living services.

(2)

Represents a construction and term loan for capital improvements at two senior housing properties we own and lease to the borrower. Upon the earlier of the full funding of the commitment or December 31, 2012, construction distribution under this loan will cease and this loan will fully amortize to maturity in November 2017.