Six Top Health Care Lease Issues

Summer 2015
Building owners who lease space that is not located on a hospital campus — like this office building in Franklin, Tennessee — to medical tenants need to be aware of some unique issues.

Building owners who lease space to health care tenants must be aware of some unique issues.  

HEALTH CARE real estate continues to evolve. As hospitals, health care systems, medical providers and physicians increasingly seek to expand their brand and image as well as their ability to serve patients in convenient locations, health care leasing options have also greatly expanded, from traditional hospital campus medical office buildings to a wide range of settings. 

Whether a medical tenant is considering a site in a repurposed grocery store, shopping mall, freestanding office building or even an industrial site, these nontraditional, off-campus spaces create new issues for health care leasing. Here are six health care lease issues that building owners need to consider when leasing space to health care tenants. 

1) The Anti-kickback Statute and the Stark Law
Nonmedical landlords typically have fewer regulatory burdens than hospitals or health care systems, but if the landlord’s ownership structure consists of physicians or medical providers, the Anti-Kickback Statute and the Stark Law likely will come into play. These laws place specific limitations on the manner in which certain landlords may lease space to physician tenants.

The Anti-kickback Statute makes it a crime to knowingly offer or receive payment in exchange for referrals for services or goods that are reimbursable under Medicare or Medicaid; for example, by setting rent payments that vary with the number of patients or referrals. The Stark Law prohibits physicians from making referrals for certain designated health services, which include both inpatient and outpatient services, to entities with which the physician has a financial relationship.

The Stark Law is meant to regulate referral payments; significant civil penalties are possible if the law is violated. The Anti-kickback Statute is meant to force providers of health services reimbursable by governmental programs to consider seriously the means and manner of payment; criminal penalties may be imposed if it is violated. These laws significantly up the ante for real estate practitioners, because the ramifications of lease-related mistakes in the health care field are far more extensive than in a typical leasing transaction. 

head shot of Brooks Smith

Brooks A. Smith

2) The HIPAA Privacy Rule
If health care real estate isn’t your bread and butter, you might not fully understand leasing issues related to HIPAA (the federal Health Insurance Portability and Accountability Act of 1996). HIPAA broadly requires a covered entity, which includes most health care providers, to establish policies and procedures to safeguard the confidentiality of individuals’ protected health information. 

Many typical leases provide maintenance and janitorial personnel relatively free access to leased office space after hours. The landlord often has access to the space as well, under certain circumstances. Health care leases present a challenge when it comes to this type of access. Reasonable safeguards, such as ensuring that file cabinets are locked or that access is supervised, may have to be put in place to protect confidential information. A medical tenant may also need to educate the landlord and building staff regarding privacy issues. 

3) The Affordable Care Act
The Patient Protection and Affordable Care Act of 2010 (ACA) has had and will continue to have a profound effect on hospital operations related to leasing. Because of the ACA, many hospitals and health care systems have been forced to seek to achieve greater efficiencies by streamlining services and, in some instances, relocating physician tenants to nontraditional locations. This creates obvious challenges for health care real estate practitioners, who have two meaningful ways to meet these new demands. They can either repurpose existing unused or underutilized space or “go retail” and move medical tenants into new urban and suburban areas not currently served by the hospital or health care system.

4) Use and Zoning Issues 
The repurposing of traditional office, retail and other types of buildings for medical use can be an efficient way to reuse reasonably inexpensive space in potentially more accessible locations. For example, abandoned grocery stores, movie theaters, stand-alone fast food sites and even older or underperforming shopping malls have proven excellent opportunities into which health care providers can expand their services and their brand.  

Zoning is rarely, if ever, an issue on hospital campuses, but it can be an obstacle in general retail settings. Furthermore, other tenants’ leases may contain use restrictions that prohibit certain uses or activities within the building or shopping center. 

5) Medical Waste and Utilities 
Medical tenants typically use more power and water than most retail tenants. Both landlords and medical tenants should be careful to address utility costs as well as availability early on. Nonmedical landlords may not have much experience with biomedical and/or biohazardous waste, so medical tenants typically will bear the burden of both handling and disposing of these types of waste, as well as educating — and perhaps reassuring — their landlords about them. 

6) Tenant Improvements and Allowances
Medical tenants typically require greater buildout allowances, and structuring these can be challenging. Furthermore, improvements installed into the leased premises may be valuable to the medical tenant after the lease agreement expires or is terminated. Ownership of these leasehold improvements must be adequately addressed upfront, during lease negotiations.