Item 1.02 Termination of a Material Definitive Agreement.
As previously disclosed, Regional Health Properties, Inc. (the “Company”), through one of its subsidiaries, owns an assisted living facility (“ALF”) and a specialty care, or memory care, ALF (“SCALF”), each located at 509 Pineview Avenue, Glencoe, Alabama (the ALF and the SCALF, together, the “Facility”), which Facility the Company leases to CRM of Meadowood, LLC (“CRM”). On December 14, 2021, CRM and the Alabama Department of Public Health (the “Department”) entered into two Consent Agreements (one for the ALF and one for the SCALF) pursuant to which CRM will no longer be permitted to operate or manage the Facility. On December 14, 2021, the State Board of Health for the State of Alabama issued final administrative Consent Orders with respect to the Consent Agreements.
The Consent Agreements provide, among other things, that: (i) on or before March 1, 2022, a new entity or individual responsible for the operation and management of the Facility shall be identified; (ii) on or before April 1, 2022, the operation and management of the Facility shall be relinquished to an entity or individual approved and licensed by the Department to operate the Facility, effective April 1, 2022 or on such earlier date as may be agreed upon with the Department; and (iii) by April 15, 2022, if a proposed entity or individual has not received a license to operate the Facility, or if for other reasons the operation and management of the Facility is not or cannot be relinquished to an entity or individual licensed by the Department to operate the Facility, then the Facility shall (a) on April 15, 2022, send a written notice of discharge to each resident or resident sponsor, and (b) provide for the safe and appropriate discharge of each resident, and close and cease all operation of the Facility, on or before June 1, 2022.
The Company leases the Facility to CRM pursuant to a long-term, triple net operating lease, executed May 1, 2017, which provides for: (i) a 13-year initial term with one five-year renewal option; (ii) base rent of $37,500 per month; (iii) a rental escalator of 2.0% per annum in the initial term and 2.5% per annum in the renewal term; and (v) a security deposit equal to one month of base rent. The Consent Orders constitute an event of default by CRM under the lease, and the Company intends to exercise all of its rights and remedies under the lease and applicable law, including the termination of the lease.
CRM is an affiliate of C. Ross Management, LLC (“CR Management”). In addition to the Facility, the Company leases to affiliates of CR Management five of the Company’s facilities pursuant to triple net operating leases. For additional information regarding our relationship with affiliates of CR Management, see our consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2020 and in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2021.
Additionally, pursuant to the $3.5 million mortgage loan dated October 1, 2022 between the Company and the lender, the Exchange Bank of Alabama, (the “Meadowood Credit Facility”), the Company must obtain written consent from the Exchange Bank of Alabama to lease the Facility to the proposed entity or individual approved by the Department. The Meadowood Credit Facility is cross collateralized with a $5.1 million mortgage loan dated September 30, 2021, owed to the Exchange Bank of Alabama (the “Coosa Credit Facility”). The Coosa Credit Facility is secured by the assets of the Company’s subsidiary Coosa Nursing ADK, LLC (“Coosa”) which owns the 124-bed skilled nursing facility located in Glencoe, Alabama (the “Coosa Facility”) and the assets of the Company’s subsidiary Meadowood Property Holdings, LLC which owns the Facility.
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