Tag Archives: leases

Healthcare Facility Leasing FAQs

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We are commonly asked questions that pertain to concerns which are healthcare industry-specific, yet we can always find a way these issues relate back to the contractual obligations of real estate commitments.  As a courtesy to those that are seeking guidance explicitly for when the rubber meets the road (real estate meets healthcare), we have provided some fairly uncomplicated scenarios that will likely exist in a health facility lease transaction.

Landlord Vs. HIPAA
Commonly, a lease agreement will allow the landlord entry onto the premises for the purposes of inspections and repairs.  HIPAA provides guidelines to protect medical records and personal health information.  A lease within a medical facility will typically provide that the landlord may not enter an exam room with patients present.  Further, most leases will indicate that any location within the spatial premises leased by the tenant, if entered, will have the potential to breach privacy or confidentiality of patients or medical records.

Tenant Vs. Medical Waste
A medical lease agreement will typically include a provision that prohibits a tenant from using or storing any hazardous materials on the property without the consent of the landlord.  If the tenant will require the use of such materials, the lease will commonly indicate that the materials commonly used in concert with the permitted use of the leased premises will be allowed, as long as the materials are stored in compliance with strict regulatory commitments.

As for the disposal of hazardous waste, leases commonly provide that the landlord will be responsible for janitorial services, but will require the tenant to arrange for its own disposal of medical waste.

Stark Law Vs. Landlord/Tenant
It is important to consider if a relationship exists that has the ability to breach Stark laws, or potentially, Texas law.  The Anti-Kickback Statute deems it a felony to offer, tender or receive fee, or compensation, if the payment is determined to influence referrals for patients.  So, it is important for a lease to exist and to comply with the following:

  1. Be in Writing
  2. Identify the Premises
  3. Term of Lease at Least 1 Year
  4. If Interval (Time Share, etc), Lease to Specify Schedule and Rent for Interval
  5. Rent must be Fair Market Value

Permitted Use Vs. Technology
A lease agreement will include a permitted use provision that restricts the use of the space to certain business operations.  Yet, a tenant wants to maintain flexibility, especially with the newly minted technological changes that are required to adapt and compete within a specialty.  So, a tenant wants the provision to be as broad as possible, while a landlord seeks to restrict the use to improve tenant mix and provide other tenants with exclusive rights.  While a rare bone of contention today, technology will eventually force tenants to seek very general, or highly specific opportunities.

Building Vs. Equipment
The medical industry has some of the most cumbersome and demanding equipment.  It requires specific attention when placing on the premises of a multi-story structure.  Thus, some buildings have special provisions for weight distribution or electrical capacity.  The location and installation of necessary landlord and tenant is commonly addressed in lease.

Improvements Vs Landlord/Tenant
The lease agreement will provide how each party will become responsible for design, materials and installation of the tenant’s improvements.  While a highly negotiable item within the lease, it should determine the control of implementation and ownership of improvements.

Lease Vs. Physician Practice
A greater number of leases are requiring personal guaranties from key members within a physician group for the purposes of adherence to contractual obligations.  With more physicians defecting to hospitals, merging practices, or even leaving certain jurisdictions, we are noticing considerations for physicians to be released from guaranty if the leave the practice, while including those that enter.  Other limits include guaranty amounts proportionate to ownership share of practice.

These are abbreviated responses to a few common inquiries pertaining to medical real estate, none of which constitute legal advice.  Please make sure to contact Robert S. “Bob” Lowery for guidance with your healthcare real estate decisions.

Hospitals Employing Physicians: Is It Different This Time?

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Around 15 years ago, physician practices were purchased by hospitals at compellingly high prices. Unfortunately for these hospital systems, within a matter of just a few years, the physicians were re-injected back into the community, largely because the hospital systems had not realized a return on investment. Fast forward to 2012, we hear similar stories about physicians becoming incorporated into a hospital’s network.
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The reasons for hospital systems obtaining physician groups may be many. But, most conversations boil down to either a specialty or geographic play, whereby hospitals seek entrance or command of certain designated fields or locales. Also, with the establishment of healthcare reform, and impetus from both hospital and physicians for greater reimbursements, as well as a movement to adopt a more streamlined, technologically advanced care distribution model — we think this time may be different.
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Based on casual conversations, the motivations to join a hospital from a physician perspective is appearing much greater today than it was in the mid-90′s. A weakened economy, high employment or practice costs, entry barriers, a more savvy-consumer, and the potential for declining reimbursements, are among the top justifications that we hear from physician groups.
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There seems to be a greater number of differences in how the hospital systems are purchasing medical practices today, though, when compared to that of years past. Mainly, hospital systems are not offering to pay exorbitant prices, likely as a result of previous miscalculations. As for those that we speak with, many are not seeking to purchase practices outright (staff, equipment, management, real estate, in some cases). Instead, the hospital is offering employment compensation, with greater emphasis on incentives for productivity, to a select group of physicians for a number of years. Also, because reform will include greater regulatory oversight of physician purchases, this may be an incentive for hospitals to complete acquisitions prior to 2014, when the majority of reform’s initiatives take effect.
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The most common way that a physician practice group is absorbed by a hospital is through a method where physician owners and practice administrators keep an ongoing operation in place, essentially subjecting to less guidelines and oversight, but to assume some naming rights, some jurisdiction, as well as partnership for likely for potential future transaction.

As for the outright sale of a practice to a hospital, it may be achieved in several different ways. A hospital may purchase a practice’s tangible assets with physicians and staff as employees of the practice, whereby the unit is obtained as a separate entity. In another instance, the hospital may acquire the assets, physicians and staff to become employees of the hospital, in which the practice discontinues. As for unique circumstances, the staff becomes employees of the hospital, but the physicians remain separate.

A certain consideration should be made by physician groups as to the value of their practice to the hospital system. Because anti-kickback laws exist, the hospital cannot pay a physician group more than ‘fair value’ for their practice. Any payment that is beyond a certain amount could be considered a ‘kickback’ for services provided to the hospital. Also, keep in mind, the revenue generated by physicians for referrals outside of the practice itself are not considered in the valuation.

Another issue that comes from a practice purchase is that physicians are not relieved of their responsibilities. This is because the acquisition is commonly considered a separate operating division or profit center of the hospital. Consequently, the physicians compensation is still tied to the profitability of their previous medical practice. This provides troublesome if physicians are nearing retirement.

One last reminder, and a stark reminder of how this time may be different, is how the practice’s patients now can easily become part of hospital’s affiliated practice, especially with the advent of electronic medical records. In essence, the hospital now owns and operates all patient lists and records that have been accumulated by the practice group.

While I will leave you with the determination of whether it is better to sell, partner or lease with a hospital, MREA has established healthcare real estate professionals, accountants and attorneys to whom you have access. Contact us for our wide range of client responsibilities that incorporate business strategies with extensive real estate capabilities.

Analyzing the Leases of a Commercial Real Estate Investment

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As the market climbs out of the doldrums and lease activity picks up, it may be time to wipe the dust from the broker’s offering memorandum and take a closer look at that commercial real estate investment.   While, in this environment, we defer to the buyer to make that determination based on associated need and risk,  but currently some buildings and pockets of Houston are attracting attention from the pent-up commercial real estate investor class.

Because we understand that the market has changed so quickly, in such a brief period of time, new investment capital is no longer looking for land appreciation as the sole driver to the investment decision.  They will now be focused on what makes the property truly worth its weight: strong leases.

The buildings that have the strongest leases and are located favorably, per their specific asset type, will be the most marketable and sellable over the next few years. For the others, and there are many, the asset values will continue to decline on a similar path with land values.  And, if maintenance for the property becomes deferred and tenants not properly managed, the outcome will be much worse.

Regarding those buildings that are truly sellable, we have provided you, the user/investor, with some expertise regarding the examination of leases when purchasing commercial investment property.  Here are seven important lease items to analyze prior to, and during, the due diligence period:

  1. Bank and Personal Guarantees: An investment property comprises leases and other documents which support tenant occupancy. A normal leasing process would involve and create some form of guarantee to be provided by the tenant to the landlord for the duration of the lease. It is important that this guarantee has both strength and substance to reimburse the landlord in situations where the tenant defaults under the terms of the lease. At the time of property sale, these guarantee documents should have some form of ability to be transferred or re-issued to the incoming purchaser. This process is called an assignment of the guarantees. You should consult with the landlord’s agent to identify the types of guarantees involved and the ease in which this can be achieved at time of sale.
  2. Income and Rent Analysis: The income for the property is a reflection of the leases and occupancy licenses therein. It is essential to understand that the rent has been collected in accordance with the leases or licenses and that all rental matters are up to date. Part of this process will also involve the checking of the rent review profile and the expiry profile of all leases. A property with a volatile leases or leases that are soon to expire is likely to impact the price or the buyer interest. When reviewing tenant occupancy against leases, you should review the original documents and cross reference this to the tenancy schedule and any discussions or information provided by the landlord.
  3. Lease disputes: Rarely is there a property that does not have an existing lease dispute or has been impacted by a previous lease dispute. For this reason it pays to question the matters of lease dispute and resolution. If in doubt, seek a copy of correspondence and any subsequent agreement between the appropriate parties. Unresolved lease disputes can jeopardize or slow the process of property sale.
  4. Rent reviews: A significant concern in the sale of a property is the size and stability of future rent reviews. It is the rent reviews which will underpin the cash flow and hence the attractiveness of the property to purchasers. It is essential that the real estate broker or agent read all of the leases, before any assessment of price or method of sale is given. It is quite possible that the rent reviews projected and detailed in the leases can either hinder or attract purchasers to the property.
  5. Rent arrears: Existing rent arrears should be identified with the owner of a property. Any matters of associated legal pursuit should also be identified. It is possible that the property has had a history of rent arrears and instability. Look for these matters and question the cash flow stability. A history of financial performance from the property over the last few years is the best way to achieve this.
  6. Short term leases: Many properties have short term leases or casual occupancy active at any point in time. It is vital to know the mechanism under which this occupancy occurs and how it will be terminated. You do not want a short-term occupancy to jeopardize the stability and processes of the sale.
  7. Undocumented lease occupancy: Some may call this a casual lease; however a casual lease can create concern and uncertainty in the process of sale. Some tenants may claim a long-term occupancy from the existence of a previous casual lease arrangement with the landlord. Claims of this type must naturally satisfy the requirements of law to be sustained or upheld by the courts; however you should be cautious in such circumstances given that it can slow down or hinder the sale process.

This article was republished from Robert S. “Bob” Lowery’s original article, “Lease Issues That Arise When Purchasing Commercial Property”

Consummating Lease Transactions Requiring Greater Creativity & Skill

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Right now, landlords and tenants need one another other in ways that have not been seen for quite a while — if not ever. Landlords are having difficulty replacing their rental income, especially with leasing velocity at multi-decade lows.  And, tenants may not want to expend significant sums on moving costs and build-out or might not be able to justify a disruption that is inherent in moving.

For such situations, the importance of creativity when structuring existing or new lease deals is apparent as both sides need concessions from the other.  Our tenant representation group has posed a few questions for tenants and landlords to contemplate prior to negotiations.

Tenants — Take a serious look at your balance sheet and business needs both now and in the future.

  • Is there predictability in your business model?
  • Will you need more space five, 10 or 15 years from now?
  • What do you need now to help your business weather these economic times?
  • What will you need in the latter part of your lease term from the landlord so your business can thrive and expand?
  • Can you extend your lease and make concessions to the landlord on matters the landlord may need to run the building and refinance?

Landlords – Take a serious look at your buildings and the rental market / competition in your area as well as where the pent-up demand may come.

  • What are your short-term needs and long-term plans?
  • What concessions can you afford to offer a tenant in exchange for early renewal of the tenant’s lease?
  • Can you support tenant concessions or free rent now?
  • Can these be layered into the lease for future application?
  • Does selling the property to your tenant now or in the future look like an attractive option?
  • Tenants may have the ability to finance an owner/user purchase more easily than landlords with only local holdings can refinance, particularly if the landlord wants to take money out of the asset now.

The opportunities for both landlords and tenants are limited only by the imagination of the parties and their advisors. By involving experienced real estate practitioners early on in the process will allow all parties to view a variety of deal structures they may not have considered. Experienced broker representatives can also keep the parties on track to mutually beneficial solutions. Bargaining position in this economy doesn’t need to be about relative size or power. Successful landlords and tenants can find solutions that will benefit both sides.

This post was republished from Robert S. “Bob” Lowery’s March 23rd, 2010 post, “To: Landlords and Tenants”

Prior To Election, Houston Office Leasing Slowed to a Crawl

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A quick and scary statistic…

During the two months leading up to the 2010 election, only 47 new office leases were signed.

During the same two month period in 2009, 187 new office leases were signed.

Stay tuned!

Data includes all Greater Houston area office buildings

Provided by Costar.com

Lease Issues That Arise When Purchasing Commercial Property

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As the market climbs out of the doldrums and lease activity picks up, if not accelerates, it may be time to wipe off that offering memorandum and take a closer look at that commercial real estate investment.   While, in this environment, we defer to the buyer to make that determination based on associated need and risk, we have determined that some buildings and pockets of Houston will attract attention from the pent-up commercial real estate investor class.

Because we understand that the market has changed so quickly, in such a short period of time, new investment capital is no longer looking for land appreciation as the sole driver to the investment decision.  They will now be focused on what makes the property truly worth its weight: strong leases.

The buildings that have the strongest leases and are located favorably, per their specific asset type, will be the most marketable and sellable over the next few years. For the others, and there are many, the asset values will continue to decline on a similar path with land values.  And, if maintenance for the property becomes deferred and tenants not properly managed, the outcome will be much worse.

Regarding those buildings that are truly sellable, we have provided you, the user/investor, with some expertise regarding the examination of leases when purchasing commercial investment property.  Here are seven important lease items to analyze prior to, and during, the due diligence period:

  1. Bank and Personal Guarantees: An investment property comprises leases and other documents which support tenant occupancy. A normal leasing process would involve and create some form of guarantee to be provided by the tenant to the landlord for the duration of the lease. It is important that this guarantee has both strength and substance to reimburse the landlord in situations where the tenant defaults under the terms of the lease. At the time of property sale, these guarantee documents should have some form of ability to be transferred or re-issued to the incoming purchaser. This process is called an assignment of the guarantees. You should consult with the landlord’s solicitor to identify the types of guarantees involved and the ease in which this can be achieved at time of sale.
  2. Income and Rent Analysis: The income for the property is a reflection of the leases and occupancy licenses therein. It is essential to understand that the rent has been collected in accordance with the leases or licenses and that all rental matters are up to date. Part of this process will also involve the checking of the rent review profile and the expiry profile of all leases. A property with a volatile leases or leases that are soon to expire is likely to impact the price or the buyer interest. When reviewing tenant occupancy against leases, you should review the original documents and cross reference this to the tenancy schedule and any discussions or information provided by the landlord.
  3. Lease disputes: Rarely is there a property that does not have an existing lease dispute or has been impacted by a previous lease dispute. For this reason it pays to question the matters of lease dispute and resolution. If in doubt, seek a copy of correspondence and any subsequent agreement between the appropriate parties. Unresolved lease disputes can jeopardize or slow the process of property sale.
  4. Rent reviews: A significant concern in the sale of a property is the size and stability of future rent reviews. It is the rent reviews which will underpin the cash flow and hence the attractiveness of the property to purchasers. It is essential that the real estate broker or agent read all of the leases, before any assessment of price or method of sale is given. It is quite possible that the rent reviews projected and detailed in the leases can either hinder or attract purchasers to the property.
  5. Rent arrears: Existing rent arrears should be identified with the owner of a property. Any matters of associated legal pursuit should also be identified. It is possible that the property has had a history of rent arrears and instability. Look for these matters and question the cash flow stability. A history of financial performance from the property over the last few years is the best way to achieve this.
  6. Short term leases: Many properties have short term leases or casual occupancy active at any point in time. It is vital to know the mechanism under which this occupancy occurs and how it will be terminated. You do not want a short-term occupancy to jeopardize the stability and processes of the sale.
  7. Undocumented lease occupancy: Some may call this a casual lease; however a casual lease can create concern and uncertainty in the process of sale. Some tenants may claim a long-term occupancy from the existence of a previous casual lease arrangement with the landlord. Claims of this type must naturally satisfy the requirements of law to be sustained or upheld by the courts; however you should be cautious in such circumstances given that it can slow down or hinder the sale process.

Required Reading

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The Tenant’s Guerilla Guide To Office Leasing: For Tenants Large and Small Control the leasing process and outwit the Landlord

Amazon Product Description:

In the real estate world, the landlord usually holds the cards. It is the landlord who builds or buys the building, arranges the financing, constructs the interiors, as well as hires the leasing agent and property management company. The landlord writes the leases, and pays for the attorney to avoid the leases being changed. The landlord knows exactly how much money he will spend on construction, leasing commissions and concessions; he knows exactly how much he will spend on operating expenses and exactly how much he will charge the tenants. Finally, in office leasing, there is a book designed specifically for the tenant a comprehensive weapon containing all the inside knowledge required to do more than just level the playing field with the landlord, but to actually grant the control to the tenant. The Tenant’s Guerilla Guide to Office Leasing contains all the inside information to avoid landlord tricks, control many costly details and manage a lengthy process.

About the Author

Christopher D. Desloge parlayed his experience in leasing major metropolitan and suburban office towers into a successful career representing office tenants. He has published numerous articles on tenant controlled office leasing and was a founding member and member of the Board of Directors of the International Tenant Representative Alliance (ITRA).