Investments in German nursing properties have reached significant numbers in recent years. 2018 was a record year, with investments amounting to over EUR3 billion. And investments in nursing homes are still significant, reaching EUR1.3 billion in the first three quarters of 2019. Increased demand for care facilities in general is to be expected in the coming years. Interested parties, such as investors, operators or nursing home builders, are facing several legal issues arising from health sector specifics.

Legislative powers spread to different levels

As legislative powers are assigned to different bodies of the German state, the regulatory framework of nursing homes differs slightly depending on the location of the facility. The Federal Republic of Germany has legislative power in terms of the general healthcare framework, including operating authorization requirements, relationship to health insurance bodies, parts of funding and zoning law. However, as a consequence of the reform of the federal system in 2016, the 16 different federal states in Germany have additional legislative powers relating to nursing homes (e.g. minimum construction law requirements and minimum staff requirements). Therefore, the German nursing home environment is not uniform all over Germany.

Overview of 16 federal states in Germany

Zoning law classifies nursing homes as residential buildings

Nursing homes are classified as residential buildings. Therefore, construction of such facilities is generally permitted in different types of residential areas. Such different types of residential areas can be defined by the respective local municipality in a development plan. In areas where the municipality has not issued a development plan, residential buildings are permitted in naturally developed residential areas.

Non-uniform minimum construction and occupancy requirements

Various acts of legislation of the federal states stipulate different minimum requirements in terms of construction and occupancy. Almost all federal states have made use of their legislative competence and specifically regulated structural requirements with stricter requirements compared to the respective ordinance, with minimum building requirements in place on a federal level until then. This results in different construction and occupancy frameworks within the different federal states:

• Some federal states stipulate a single room ratio; e.g. Hamburg and Baden-Wuerttemberg 100%, North Rhine-Westphalia 80% (new buildings 100%), Schleswig-Holstein 75% and Berlin 60%.
• Some federal states stipulate limitations in terms of maximum numbers of beds (e.g. 100 or 80 in North Rhine-Westphalia or Baden-Wuerttemberg).
• Requirements in terms of equipment, constructive design and compliance with technical building regulations (e.g. relating to accessibility) are stricter in some of the federal states.
• Some of the federal states grant grandfathering rights to old facilities or provide exemptions based on economic unreasonableness.

Effective monitoring of compliance crucial for all stakeholders

Nursing homes are closely monitored by the respective surveillance authorities. Under the acts and regulations of federal states, surveillance authorities are entitled to audit compliance with the mandatory requirements (e.g. regarding construction or qualification of staff). The frameworks in most federal states provide for audits by the authorities on a regular basis. Non-compliance can have severe consequences for operators: authorities are entitled to prosecute non-compliance as administrative offences and impose fines. Moreover, they can impose corrective measures culminating in a shutdown of facilities in extreme cases. Apart from potential liability of the operator and its management, such measures have a significant impact on profitability of the facilities. Therefore, it is crucial for all stakeholders to closely monitor the applicable local requirements and implement effective internal compliance system measures.

Further specific healthcare system implications

As nursing homes are integrated in the broader healthcare system, respective facilities and operations are subject to different regulatory requirements and specifics of the healthcare system.

Funding of operations is overlaid by health sector-specific regulatory requirements. In order to be entitled to participate in funding from the healthcare system, nursing homes must enter into contracts with statutory care insurance funds. The rights and duties of care facilities are defined in Federal Act on Social Security No. 11.

Further, in transaction scenarios – in addition to the usual legal issues arising in the acquisition of real estate – a potential buyer must also deal with the market peculiarities of the health sector. In particular, the public funding of nursing care under non-profit organizations presents the seller with special legal features. Property may be burdened with a restriction on use, or a priority notice of conveyance for a conditional claim in favor of a municipality or similar body.

Further, some properties have been sold at a reduced price, whereas the municipalities often demand a commitment to use them in a specific way. As a result, the property may only be used as a nursing home for a certain period of time (usually 20 years).

Outlook – Market developments and public debates

Apart from the pure value of investments, there are ongoing public debates around several issues that are of relevance for operators, residents, public funding bodies and healthcare insurance funds, as well as for investors. The German market is facing a significant shortage of nursing staff, resulting in a rise of alternative recruiting models (e.g. personnel leasing models, attracting qualified personnel from abroad). Recent developments such as Ambient Assisted Living (AAL) aim to provide technological assistance for elderly and care-dependent people. In recent years significant public funds have been granted for research and developments projects in this field which could further facilitate upcoming market developments. All in all, the nursing home market is moving. It is quite an interesting market for investors but several legal specifics need to be considered.