What Healthcare Providers and Physicians Need to Know About Leasing Medical Office Space
Medical office space users and physician practices don’t typically relocate to new buildings as often as general office tenants. However, the competition for new patients is increasingly steering physician practices to non-hospital campus properties as they seek more conveniently accessible locations for their patient base.
This trend is evident in the increased development of smaller suburban medical office projects and urgent care clinics you see in any significant metropolitan community. Furthermore, it is increasingly common to see healthcare providers take space in smaller community retail centers near hospital campuses.
Medical users also tend to sign office space leases with longer terms than your typical office tenant, which puts them in the marketplace for office space less often. While many of the same sound principles required to lease general office space apply to healthcare, there are many nuances and issues that are unique to medical users that should be considered.
One of the first decisions they should make is to retain a broker with experience in leasing medical office space. Hiring a tenant representative is prudent for any tenant. However, brokers who have experience in leasing medical office space can be particularly helpful because they may be aware of available buildings and spaces that have not come to the attention of the practice and they understand how to structure the terms and covenants of the lease agreement to fit the unique needs of the healthcare provider.
Some of these key issues include:
- Use Issues: Medical tenants use hazardous materials and generate biomedical waste. Medical tenants can use X-ray machines, CT scans, and other machines which may generate harmful radiation. As a result, this creates special requirements that need to be accounted for in the lease document to ensure compliance.
- After-Hours Access & Utilities: Medical tenants often may see patients after normal building hours and in the case of urgent care clinics operate on a 24-hour basis. Paying special attention to how the utilities are accounted for after normal building hours can save unnecessary utility expenses.
- Compliance with the Americans with Disabilities Act (ADA): Patients are more likely than the general public to have special access needs. Buildings containing health care providers are more likely to receive ADA scrutiny. As a practical matter, medical tenants to pay special attention to the ADA clause contained in the lease document.
- Landlord Inspection & Privacy: Generally, commercial leases provide the landlord with the right to re-enter your space to show the premises to future tenants, inspect for compliance with the lease, and allow access to make infrastructure repairs in the lease premises and elsewhere in the building. Yet health care providers need to limit the landlord’s access to examining rooms and other areas during certain hours of the day as well as access to patient records.
- Anti-Kickback Issues: Safe harbors created under the Federal anti-kickback laws create special requirements for leases between medical tenants and properties that are hospital or physician-owned. Proper compliance and documentation must be addressed if a landlord-tenant relationship exists.
- Exclusivity Provisions: An exclusive use provision is a lease term in which the landlord promises not to lease any other space in the development to a party whose intended use would be in direct competition with the tenant’s use of its space. In medical office buildings, it can be prudent to get exclusivity for your specific specialty practice.
- Death & Disability Clauses: In the case of solo practitioners, the concept of getting a death and disability clause in the lease that provides for the ability to cancel the lease (typically with a penalty) in the event the physician is unable to practice due to death or disability should be explored. Landlords will resist the argument that the tenant’s insurance should provide for this, but in some cases, this provision can be successfully negotiated into lease agreements.
- Parking: Medical offices have a steady stream of patients during office hours, and patient/visitor parking is an important consideration in providing a positive patient experience. 4.5 spaces per 1,000 gross square feet of building space is generally sufficient to meet MOB needs during peak hours.
- Signage: Signage may not seem like a critical issue when reviewing a medical lease, but it is an important element in how your practice is perceived. Visible signage that allows your patients and possible customers to see your business helps strengthen your brand. Request, at a minimum, to have signage rights on the monument sign. If your lease is large enough, you have the leverage to request building signage.
- Tenant Improvements: The cost of build-out for the typical medical user often greatly exceeds that of a general office tenant. In today’s market, even a standard medical office design can cost $150–$250 per square foot. The extensive plumbing, millwork, and equipment compliance issues create additional costs as well as specific lease and transaction issues, including:
- Term: As a result of the typically higher tenant finish-out costs, it is common for medical office leases to be 7–10 years in terms, as opposed to 3-5 years for general office tenants. The longer-term should result in a larger tenant improvement allowance provided by the landlord.
- Architect & Contractor: Landlord’s generally like to have the tenant finish work done by contractors with whom the landlord has a prior relationship, and in some cases, design professionals as well, in order to maintain control of the process. However, it is critical for the tenant to obtain the right to use his contractor and design and construction professionals who are experienced and qualified in medical design and build-out, as well as maintain some control in the management of the design and construction process.
- Relocation Provision: It is common for office leases to contain provisions requiring the tenant to consent to substitute premises should the landlord decide that it is in the landlord’s best interest to move the tenant from one suite in the building to another. Because of the specialized build-out needs of the medical tenant, medical tenants should resist these provisions.
- Liens: As a result of the cost of medical leasehold improvements, physician practices often finance leasehold improvement costs above the landlord allowance as well as medical equipment purchases. Lien rights provided to the Landlord should be subordinate to the Tenant’s lenders for medical equipment purchases.
- Restoration of Premises: Virtually all office space and retail leases contain provisions addressing the landlord’s and tenant’s rights and responsibilities regarding restoration obligations at the end of the lease. These provisions need to dovetail with the special situation of a medical tenant.
For the medical user, real estate is a significant multi-year financial commitment. Utilizing a knowledgeable real estate advisor with experience in healthcare real estate and careful planning can ensure the selection of the right location and a properly structured transaction and lease agreement to fit the unique needs of the healthcare provider.
