Commitments and Contingencies

9 Months Ended

Sep. 30, 2011

Commitments and Contingencies

Commitments and Contingencies

7. Commitments and Contingencies

During the nine months ended September 30, 2011, we purchased four skilled nursing properties with 524-beds in Texas as described in Note 2. 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 the three and nine months ended September 30, 2011, we recorded non-cash interest expense of $177,000 and $354,000, respectively, 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. During the three months ended September 30, 2011, we paid $4,000,000 related to the first contingent earn-out payment. At September 30, 2011, the remaining contingent earn-out payments had a fair value of $6,195,000.

We committed to provide a lessee of a senior living property with a combination of assisted living units and skilled nursing beds a line of credit agreement up to $50,000 at an interest rate of 10.0%.  This commitment matures on March 31, 2012.  As of September 30, 2011 we invested $20,000 under this agreement.

At September 30, 2011, we committed to provide the following capital improvement commitments (dollar amounts in thousands):

Commitment			Expiration Date	Used Commitment		Open Commitment		Estimated Yield		Property Type (1)	Properties	Major Operator
100			8/1/12	—		100			(3)	SNF	1	N/A
700			8/31/12	195		505		9.00	%(2)	Other	2	N/A
5,000		(4)	12/31/14	—		5,000			(3)	ALF	37	ALC
$	5,800	(5)		$	195	$	5,605		(5)

(1)Other senior housing consists of independent living properties and properties providing any combination of skilled nursing, assisted living and/or independent living services.

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

(3)The yield is included in the initial lease rate.

(4)$5,000 per year for the life of the lease.

(5)Subsequent to September 30, 2011, we committed to fund $8,250 for the construction of a skilled nursing property. This commitment expires on 10/11/13 and has an estimated yield of 9.00%.  Minimum rent will increase upon final funding and project completion as defined in the lease agreement. We funded $50,000 of this commitment.