The Nuances of Leasing Medical Office Space

by CoyDavidson on January 3, 2010

medical office

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 space that have not come to the attention of the practice and they understand how to structure terms and covenants of the lease agreement to fit the unique needs of the healthcare provider.

Some of these key issues include:

  1. 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.
  2. 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 un-necessary utility expenses.
  3. Compliance with 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.
  4. Landlord Inspection & Privacy: Generally, commercial leases provide the landlord 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 non-access to patient records.
  5. Anti Kick-back 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 the landlord-tenant relationship exists.
  6. 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 tenant’s use of its space. In medical office buildings it can be prudent to get exclusivity for your specific specialty practice.
  7. Death & Disability Clauses: In the case of solo practitioners, the concept of getting a death and disability clause in the lease providing for the ability to cancel the lease (typically with penalty) in the event the physician is unable to practice due to death or disability should be explored. Landlords will resist with the argument that the tenants insurance should provide for this, but in some cases, this provision can be successfully negotiated into lease agreements.
  8. 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 modest office design can run $40.00-$60.00 per square foot. The extensive plumbing, millwork and equipment compliance issue creates additional cost as well as specific lease and transaction issues, including:
  • Term: As a result of the typically higher tenant finish out costs it common for medical office leases to be 7-10 years in term as opposed to 3-5 years for general office tenants. The longer term should result in a larger tenant improvement allowance for the Landlord.
  • Architect & Contractor: Landlord’s generally like to have 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 a 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 and careful planning can insure selection of the right location and a well structure a transaction and lease agreement to fit the unique needs of the healthcare provider.

  • Kirsten

    If a landlord asks a tenant to relocate within the building, who should pay the upfit costs for the new suite? Our LL asked us to move into our current suite when we last renewed in 2012. Now that the lease is up for renewal again, he’s trying to charge us “retroactively” for the upfit costs he incurred in 2012. Thanks.

  • http://www.coydavidson.com/ CoyDavidson

    It all depends on what the lease says. A good tenant representative broker will either negotiate to have the reloction clause stricken or if not attainable then require the landlord to pay for all the improvement costs to relocate the tenant as well as moving costs.

  • http://www.coydavidson.com/ Coy Davidson

    Who pays for the cost to relocate the tenant is dependent on how the lease is written. A good tenant representative will attempt to have the right to relocate clause stricken from the lease. If the Landlord won’t agree to this, then it is pretty common to negotiate that the Landlord incur all the relocation costs including the buildout as well as moving costs.

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