32.02.01.23

.23 Sale, Transfer, or Other Disposition of Assets.

A. Definitions.

(1) In this regulation, the following terms have the meanings indicated.

(2) Terms Defined.

(a) "Days cash on hand ratio" means the ratio created by the following calculation: [Unrestricted current cash and investments + Unrestricted noncurrent cash and investments] divided by [(Total operating expenses— Depreciation and amortization) divided by 365].

(b) "Debt service coverage ratio" means the ratio created by the following calculation: [Total excess of revenues over expenses + Interest, depreciation and amortization expenses—Amortization of deferred revenue + Net proceeds from the collection of entrance fees] divided by [Maximum annual debt service or annual lease payments].

(c) "Future service obligation" means a financial obligation of a provider that equals any positive number resulting from the calculation to determine the amount by which the present value of the net costs of future services and the use of facilities to be provided to the current subscribers exceeds the balance of deferred revenue from entrance fees, which calculation is required to be performed annually by generally accepted accounting principles.

(d) "Liquid resources" means an asset that is easily converted to cash.

(e) "Maximum annual debt service" means the greatest amount required to pay the debt service requirements of any long-term indebtedness for any fiscal year, excluding any year in which the amount due is defined in the applicable financing documents as a balloon payment.

(f) "Operating ratio" means the ratio created by the following calculation: [Total operating expenses—Depreciation and amortization expenses] divided by [Total revenues—Amortization of deferred revenue].

(g) "Ordinary course of business" means transactions that occur on a routine basis without the involvement of the board of directors, or other governing body, such as paying employees and vendors, collecting fees, and selling and purchasing investments.

(h) "Transfer" means a sale, disposition, donation, lease, or other transaction that diminishes the ownership rights that the provider has in any assets.

B. Transactions Not Included. The following transactions are not considered sales, transfers, or other dispositions of assets for purposes of §§C and D of this regulation:

(1) Those undertaken under contractual obligations in effect on October 1, 1996;

(2) Those made in the ordinary course of business of operating the facility;

(3) Refunds of amounts under contracts entered into in the ordinary course of business;

(4) Transfers of cash, securities, or other investment properties in connection with ordinary investment transactions;

(5) Grants of mortgages, deeds of trust, or security interests to unrelated third parties;

(6) Those involving easements, rights-of-way, road widening, and similar conveyances for the benefit of public bodies or utilities; and

(7) Those made for an expansion or renovation.

C. Transfers of 10 Percent or Less of Assets.

(1) A provider that holds an initial or renewal certificate of registration may not transfer assets that are equal to or less than 10 percent of the provider's total assets, based on the certified financial statements for the most recent fiscal year for which a certified financial statement is available at the time of the transfer, if the transfer is likely to have an unreasonably adverse:

(a) Impact on the financial stability of the provider; or

(b) Effect on the provider's capacity to perform its obligations under continuing care agreements to which it is a party.

(2) Unlike a transfer of assets greater than 10 percent of total assets, a transfer of assets equal to or less than 10 percent of total assets does not have to be approved in advance by the Department unless one or more of the following circumstances exists:

(a) The transfer would result in insufficient liquid resources to cover the provider's future service obligation after the proposed transfer; or

(b) The provider believes that the transfer may have an unreasonably adverse:

(i) Impact on its financial stability, or

(ii) Effect on its capacity to perform its obligations under its agreements.

(3) In order to have a transfer subject to §C(2) of this regulation approved in advance by the Department, the provider shall submit to the Department the following:

(a) Identification of the assets or assets to be sold, transferred, or otherwise disposed of;

(b) Documentation as to why the proposed transfer is needed to maintain the financial viability of the provider;

(c) A 10-year financial plan, prepared in accordance with generally accepted accounting principles by an independent consultant, that demonstrates the effects of the proposed transfer and includes projected balance sheets, income statements, statements of cash flows, and the key assumptions of the plan; and

(d) Any further information the Department requires.

(4) Within 60 days of receipt of the information required by §D(3) of this regulation, the Department shall issue a written determination that either:

(a) Approves the transfer;

(b) Denies the transfer; or

(c) Seeks more information to evaluate the transfer.

(5) If the determination of the Department is not to approve the proposed sale, transfer, or other disposition, the Department shall set forth the reasoning supporting its determination in a written communication to the provider.

D. Transfer of More than 10 Percent of Assets.

(1) A provider that holds an initial or renewal certificate of registration may not transfer, in any 12-month period, assets in excess of 10 percent of its total assets, based on its certified financial statements for the most recent fiscal year for which a certified financial statement is available at the time of the transfer, unless the provider obtains the approval of the Department for the transfer in accordance with this regulation.

(2) A provider subject to §D(1) of this regulation shall, at least 60 days before the proposed transfer, file with the Department a statement of intent to transfer assets and, at least 30 days before the proposed transfer, give written notice to the Department.

(3) A statement of intent required to be filed with the Department under §D(2) of this regulation shall include the following information:

(a) Identification of the asset or assets to be sold, transferred, or otherwise disposed of;

(b) If the provider is subject to §E(1) of this regulation by reason of a series of transfers that have cumulatively exceeded the 10 percent amount, the provider shall identify all of the assets that resulted in exceeding the 10 percent amount; and

(c) The reason for the transfer.

(4) A notice required to be filed with the Department by §D(2) of this regulation shall include the following information:

(a) A statement that demonstrates that the proposed transfer is not likely to have an unreasonably adverse:

(i) Impact on the financial stability of the provider, or

(ii) Effect on the provider's capacity to perform its obligations under the agreements to which it is a party;

(b) Computations, prepared by an authority recognized by the Department, of the following financial ratios for the 3 fiscal years before and after the proposed transfer:

(i) Operating ratio,

(ii) Days cash on hand ratio, and

(iii) Debt service coverage ratio;

(c) If the provider is required by generally accepted accounting principles to perform a future service obligation calculation, a statement from an independent consultant that explains why:

(i) The provider will have sufficient liquid resources to cover the provider's future service obligation, if one exists, after the proposed transfer, or

(ii) The proposed transfer will have a positive impact on the provider's ability to perform its obligations in accordance with the terms of its continuing care agreements; and

(d) Any other information the Department requires.

(5) If the provider cannot meet the financial standards set forth in §E(2) of this regulation, the notice required by §D(2) of this regulation shall include the following additional information:

(a) A 10-year financial plan, prepared in accordance with generally accepted accounting principles by an independent consultant, that demonstrates the effects of the proposed transfer and includes:

(i) Projected balance sheets,

(ii) Income statements,

(iii) Statements of cash flows, and

(iv) The key assumptions of the plan;

(b) A statement from the independent consultant that after taking into account the provider's historic performance and future assumptions, which future assumptions the independent consultant concludes are not unreasonable, the provider will have the financial ability after the transfer to perform its obligations under the provider's agreements; and

(c) Any further information that the Department requires.

E. Approval of Transfer of More than 10 Percent of Assets.

(1) The Department shall approve the sale, transfer, or other disposition of assets in excess of 10 percent unless it determines that the sale, transfer, or other disposition is likely to have an unreasonably adverse:

(a) Impact on the financial stability of the provider; or

(b) Effect on the provider's capacity to perform its obligations under the continuing care agreements to which it is a party.

(2) The Department shall approve a proposed transfer of assets in excess of 10 percent if the information required by §D(4) of this regulation adequately demonstrates that the provider:

(a) Will be able to achieve at least one of the following financial ratios by the end of the third fiscal year after the transfer:

(i) An operating ratio less than or equal to 0.95,

(ii) A days cash on hand ratio of greater than 90 days, or

(iii) A debt service coverage ratio greater than or equal to 1.25; and

(b) Meets one of the following standards if the provider is required by generally accepted accounting principles to perform a future service obligation calculation:

(i) Will have sufficient liquid resources to cover the provider's future service obligation after the proposed transfer, or

(ii) The proposed transfer will have a positive impact on the provider's ability to perform its obligations in accordance with the terms of its agreements.

(3) The Department shall communicate its determination in writing to the provider by the 25th day after the date the Department receives the written notice required by §D(2) of this regulation, unless extended by the Department for good cause. If the determination of the Department is not to approve the proposed sale, transfer, or other disposition, the Department shall set forth the reasons supporting its determination in the written communication to the provider.

F. Appeal of an Department Decision. The determination by the Department with respect to a proposed transfer of assets is subject to appeal only by the provider in accordance with Regulation .36 of this chapter. No other person may be deemed to be a party in interest to the proceedings.

G. Effective Date of a Transfer of Assets. A transfer of assets subject to review by the Department under this regulation may not be completed until after the fifth day following the later of:

(1) The day on which the Department issues a determination approving the transfer; or

(2) If an appeal is taken under §F of this regulation, the day a hearing officer or administrative law judge renders a final decision permitting the transfer of assets.