Transactions with Sabra

12 Months Ended

Dec. 31, 2011

Transactions with Sabra [Abstract]

Transactions with Sabra

(14)  Transactions with Sabra

For the purpose of governing certain of the ongoing relationships between us and Sabra after the Separation and to provide mechanisms for an orderly transition, we and Sabra entered into various agreements. The most significant agreements are as follows:

Distribution Agreement

The Distribution Agreement provides for the various actions taken in connection with the Separation,the conditions to the Separation and the relationship between the parties subsequent to the Separation.Pursuant to the Distribution Agreement, any liability arising from or relating to legal proceedings involving Old Sun's healthcare business prior to the Separation will be assumed by us, and we will indemnifySabra against any losses arising from or relating to such legal proceedings. The Distribution Agreement provides that any liability arising from or relating to legalproceedings involving Old Sun's real property assets now owned by Sabra are assumed by Sabra. Any liability arising from or relating to legal proceedings prior to the Separation,other than those arising from or relating to legal proceedings involving Old Sun's healthcare business or such realproperty assets, are assumed by us.

In addition, the Distribution Agreement provides for cross-indemnities that require (i) Sabra to indemnifyus (and our subsidiaries, directors, officers, employees and agents and certain other related parties) againstall losses arising from or relating to the liabilities being assumed by Sabra or the breach of the DistributionAgreement by Sabra and (ii) us to indemnify Sabra (and its subsidiaries, directors, officers, employees andagents and certain other related parties) against all losses arising from or relating to the liabilities being assumedor retained by us or the breach of the Distribution Agreement by us.

We and Sabra have agreed in the Distribution Agreement that we will pay all costs associated with the Separation and REIT Conversion Merger that are incurred prior to the Separation. All costs relating to the Separation orREIT Conversion Merger incurred after the Separation will be borne by the party incurring such costs.

Master Lease Agreements

Sabra received substantially all of Old Sun's owned real property in the Separation and leases such real property to us under eighteen master lease agreements which set forth the terms governing each of the leased properties (the "Lease Agreements").

Certain of our subsidiaries (each a "Tenant") entered into the Lease Agreements with subsidiaries of Sabra (each a "Lessor") pursuant to which the Tenants lease the 86 healthcare properties owned by subsidiaries of Sabra following the Separation (consisting of 67 skilled nursing facilities, ten combined skilled nursing, assisted and independent living facilities, five assisted living facilities, two mental health facilities, one independent living facility and one continuing care retirement community). We guarantee the obligations of the Tenants under the Lease Agreements.

The Lease Agreements provide for the lease of land, buildings, structures and other improvements on the land, easements and similar appurtenances to the land and improvements, and equipment relating to the operation of the leased properties. There are multiple bundles of leased properties under each Lease Agreement with each bundle containing one to fourteen leased properties. The Lease Agreements provide for an initial term of between 10 and 15 years and no purchase options. At the option of the Tenant, the Lease Agreements may be extended for up to two five-year renewal terms beyond the initial term at the then currently in place rental rate plus an annual rent escalator equal to the lesser of the percentage change in the Consumer Price Index or 2.50% (but not less than zero). If the Tenant elects to renew the term of one or more expiring Lease Agreements, the renewal will be effective as to all, but not less than all, of the leased property then subject to the applicable Lease Agreements.

The Lease Agreements are commonly known as triple-net leases. Accordingly, in addition to rent, the Tenant will be required to pay the following: (1) all facility maintenance, (2) all insurance required in connection with the leased properties and the business conducted on the leased properties, (3) taxes levied on or with respect to the leased properties (other than taxes on the income of the Lessor) and (4) all utilities and other services necessary or appropriate for the leased properties and the business conducted on the leased properties.

Under the Lease Agreements, the initial annual aggregate base rent payable by our subsidiaries is $70.2 million. The Lease Agreements provide for an annual rent escalator equal to the lesser of the percentage change in the Consumer Price Index or 2.50% (but not less than zero).

Tax Allocation Agreement

Under the Tax Allocation Agreement, we are responsible for and will indemnify Sabra against (i) allfederal income taxes, including any taxes resulting from the restructuring of Old Sun's business and the distributionof shares of our common stock to Old Sun's stockholders, that are reportable on any tax return for periods priorto and including the Separation that includes Sabra or one of its subsidiaries, on the one hand, and us orone of our subsidiaries, on the other hand, (ii) all state and local income taxes in jurisdictions in which it isexpected that net operating losses or other tax attributes will be sufficient to offset tax liability for such returns in such periods, and (iii) all transfer taxes resulting from the restructuring of Old Sun's business and the distribution of shares of our common stock to Old Sun's stockholders. With respect to non-income taxes (other than transfer taxes) and income taxes in state and local jurisdictions in which it is not expected that net operating losses orother tax attributes will be sufficient to offset tax liability, tax liability will be allocated between us andSabra using a closing of the books method on the date of the Separation.

After the 2010 tax year, we and Sabra have agreed, to the extent allowable by applicable law, to allocate all limitations to utilizeNOL carryforwards to us. We will prepare, at our own cost, all taxreturns and elections for periods prior to and including the date of the Separation. In addition, we willgenerally have the right to control the conduct and disposition of any audits or other proceeding with regard tosuch periods. In addition, from and after the distribution date of the Separation, we will be entitled to anyrefund or credit for such periods.

We included in the cash allocation made to Sabra pursuant to the Distribution Agreement, an amount equal to an estimate of such unpaid taxes described above for the 2010 taxable year. We will only indemnify Sabra against such taxes if, and to the extent, such taxes exceed such estimate. With respect to any period in which Sabra has made or will make an election to be taxed as a real estate investment trust ("REIT"), we will not make any indemnity payments to Sabra in an amount that could cause Sabra to fail to qualify as a REIT. The unpaid amount, if any, of such indemnity will be placed in escrow and will be paid to Sabra only upon the satisfaction of certain conditions related to the REIT income requirements under the Code. Any such amount held in escrow after five years will be released back to us.

The Tax Allocation Agreement is not binding on the IRS or any other governmental entity and does not affect the liability of each of us, Sabra, and their respective subsidiaries and affiliates, to the IRS or any other governmental authority for all U.S. federal, state or local or non-U.S. taxes of the Old Sun consolidated group relating to periods through the distribution date for the Separation. Accordingly, although the Tax Allocation Agreement will allocate tax liabilities between us and Sabra, either Sabra and its subsidiaries or we and our subsidiaries could be liable for tax liabilities not as allocated under the Tax Allocation Agreement in the event that any tax liability is not discharged by the other party.