5. INVESTMENTS IN SENIOR LIVING FACILITIES

On July 18, 2012, Newcastle completed the acquisition of eight senior housing assets for an aggregate purchase price of approximately $143.3 million plus acquisition-related costs. These assets comprise more than 800 beds in senior living facilities located in California, Oregon, Utah, Arizona and Idaho. In connection with the acquisition of the senior living assets described above, the assets acquired and the liabilities assumed were recorded at fair value. A summary of the initial recording of the acquisition on July 18, 2012, is as follows:

In determining the allocation of the purchase price between net tangible and identified intangible assets acquired and liabilities assumed, management made estimates of the fair value of the tangible and intangible assets and liabilities using information obtained as a result of pre-acquisition due diligence, marketing, leasing activities, and independent appraisals. The fair value of the tangible assets acquired is determined by valuing the property as if it were vacant. Management allocated the purchase price to net tangible and identified intangible assets acquired and liabilities assumed based on their fair values. The determination of fair value involved the use of significant judgment and estimation.

The following is a summary of the significant accounting policies related to the senior living facilities:

Investments in Real Estate

Newcastle recorded the acquired facilities at their estimated fair value. Depreciation on the senior living facilities is computed using the straight-line method over the estimated useful lives of the assets as follows:

Expenditures for ordinary maintenance and repairs are expensed as incurred. Renovations and improvements which improve and/or extend the life of the assets are capitalized and depreciated over their estimated useful lives. Newcastle will periodically assess the carrying value of the senior living facilities to determine if facts and circumstances exist that would suggest that assets might be impaired or that the useful lives should be modified. In the event that an impairment in value occurs and we believe that the carrying amount of the facilities will not be recovered, a provision will be recorded to reduce the carrying basis of the facilities to their estimated fair value. The following table summarizes Newcastle’s investments in senior living real estate as of September 30, 2012:

Resident Lease Intangibles

Resident lease intangibles reflect the fair value of in-place resident leases at acquisition. Newcastle estimates the fair value of in-place leases as (i) the present value of the estimated rents that would have been forgone, offset by variable costs that would have otherwise been incurred during a reasonable lease-up period, as if the acquired units were vacant, and (ii) the estimated absorption costs, such as additional marketing costs that would have been incurred during the lease-up period. The acquisition fair value of the in-place resident lease intangibles is amortized over the average length of stay of the residents at the senior living facilities of 24 months on a straight-line basis. Newcastle will periodically assess the carrying value of the resident lease intangibles to determine if facts and circumstances exist that would suggest that the intangible assets might be impaired or that the useful lives should be modified. In the event an impairment in value occurs and we believe that the carrying amount will not be recovered, a provision will be recorded to reduce the carrying basis of the resident lease intangibles to their estimated fair value.

As of September 30, 2012, Newcastle’s resident lease intangibles are detailed as follows:

Rental Revenue, Care and Ancillary Income Recognition

Newcastle records rental revenue, care and ancillary income as they become due as provided for in the residents’ leases.

Community Fees

Community fees are non-refundable and initially recorded as deferred revenue and amortized over the average length of stay of the residents using the straight line method.