ISSUES IN MEDICAL OFFICE LEASING

A CONFERENCE CALL PRESENTED BY THE

AMERICAN BAR ASSOCIATION SECTION OF

REAL PROPERTY TRUST & ESTATE LAW

LEASING GROUP

EMERGING AND SPECIALTY LEASES COMMITTEE

October 8, 2009

Andrew Dick

Hall, Render, Killian, Heath & Lyman, P.C.

Indianapolis, Indiana

Andrew Gardner

McDonald Hopkins LLC

Cleveland, Ohio

ISSUES IN MEDICAL OFFICE LEASING

  1. Overview
  2. Landlord and Tenant frequently have business arrangements beyond the Landlord-Tenant relationship.
  3. The medical industry is likely the most regulated industry in the U.S. and business arrangements, including landlord-tenant arrangements are subject to scrutiny in an increasingly strict regulatory environment.
  4. Stark
  5. Anti-Kickback
  6. HIPAA
  7. Medical professionals leasing space in office settings have special needs beyond those of “typical” office tenants.
  8. Was the facility designed to be a medical office building or a general office building?
  9. Are other tenants also medical providers? Unlike other office buildings, medical tenants likely have relationships and will interact both in their capacity as tenants and in other roles. Landlords should consider confidentiality clauses in their lease to avoid tenants comparing notes.
  10. Medical offices are now entering retail space quickly. “Retail” clinics are spreading across the country. There were about 1,000 this time last year and the number is growing. While not a completely new area to retail landlords, there are some differences and issues that the Landlord should be aware of when leasing to a retail clinic or to a Tenant that may house a retail clinic. Legislation in this area is coming from the State legislatures.
  11. Percentage rent can be an issue if it is sharing of medical fees (state prohibitions against the corporate practice of medicine).
  12. Tenants may require business associate agreements if Landlords have access to Protected Health Information (“PHI”).
  13. Tenant Organization and Structure
  14. Huge variety of business structures that can occupy space as a medical provider, whether as a traditional medical practice, as a retail clinic or in an ancillary field. They include:
  15. Solo practitioners
  16. Independent medical groups
  17. Hospital owned medical groups
  18. Laboratories
  19. Urgent Care Centers
  20. Retail Clinics—This is a more recent trend where small medical offices for care of common non-emergent ailments, sometimes referred to “urgent care lite”. These facilities, typically only a couple of hundred square feet and staffed by a nurse practitioner or physician assistant, are subleased inside of retail stores (everything from “big boxes” to pharmacies). While it is not new to have medical practices in retail spaces (Optomotrists in vision stores), these are new in the scope of the types of patients being treated and the issues involved in their place.
  21. For Example, is the person staffing this licensed to perform the services that are being performed and are they being supervised by a physician if required?
  22. Landlords should require copies of licenses, permits and related items.
  23. Include specific compliance with law provisions and provide that rent is payable regardless of the facility’s licensure status. State authorities are placing these facilities under increasing scrutiny.
  24. Office Sharing is a more and more common practice in the medical area. As physicians increase the geographical scope of their practices, they need to have more locations, but only have the need for these locations for a few hours each week.
  25. Issues to consider by overlandlord and by prime tenant when entering into office sharing arrangements:
  26. Maintain record of agreements. These arrangements are frequently done very informally, which can result in major issues if the arrangement becomes subject to governmental review.
  27. Who is subtenant, is it the physician individually or their group? Which physicians/specialties will be occupying the space and for which days and hours? If the tenant is an entity, does the entity have the use of the subleased facility or just this physician? Does lessor need a personal guaranty from the physician if the physician’s professional corporation is the party to the lease?
  28. Termination Rights. What if the physician using this space becomes incapacitated or dies? What if he or she separates from their medical group?
  29. Use of staff, supplies and equipment should be addressed.
  30. Insurance Issues. What insurance is the subtenant carrying and is it sufficient to comply with the master lease?
  31. Further sharing or subleasing?
  32. Does Subtenant need to have own phone line?
  33. Master Landlord Consent Issues.
  34. The arrangement should be clear about ownership of the physician’s files and HIPAA obligations of the physician.
  35. With respect to equipment leasing, note “per click” regulations. These took effect October 1, 2009. This restricts situations where the lessor of equipment is making referrals to the user/lessee of equipment and charging rent “per click” or per use. The formula for the equipment rent can not be based upon services performed based on the revenue raised (percentage rent) if the equipment lessor is referring patients to the equipment lessee.
  36. Also, note that “per click” applies if a Tenant is treating patients of the Landlord of a facility and the facility rent is based on a formula of patient referrals or visits.
  37. Individual Physician Tenant Issues
  38. Death and Disability. Solo practices and even some small group practices can not function without the physician. This creates a need for the physician to negotiate a termination right if the physician dies or becomes disabled.
  39. Termination of Physician or Separation of Physician from Group. Can the practice support the rent if they lose one or more physicians? Right to surrender space or terminate.
  40. Medical Malpractice Insurance. Especially in “high-risk” practices, there is a concern that medical malpractice insurance will become too expensive or not be made available. Structure termination right and renewals based upon malpractice renewal cycle.
  41. Consolidation. If a physician’s practice is acquired, provide in lease for assignment to new entity. What is happening in that physician’s area.
  42. Office Sharing. As noted above, physicians are locating in more offices, for less time. Right to sublease or license is important.
  43. Personal Guaranty.
  44. Separation of Doctor from office. Release or replacement of guaranty.
  45. Landlord Issues
  46. Defining the Scope of the Landlord-Tenant Relationship
  47. If the Landlord is a service provider or a local hospital, ask the following questions?
  48. Does the Tenant receive referrals from the Landlord?
  49. Is the Tenant required to be on the Landlord’s Medical Staff or maintain privileges?
  50. Does the Tenant pay below-market rent?
  51. The relationship between the parties (overlandlord, sublandlord (prime tenant) and subtenant must be examined to confirm the lease does not lead to a violation of anti-kickback, anti-fraud or Stark laws.
  52. Safe Harbors provided under Anti-Kickback Statutes. See Office of Inspector Generals Special Fraud Alert at:
  53. Generally, the Anti-Kickback Safe Harbor requires:
  54. Fair Market Value Rent is paid and no calculation based upon referrals or volume of patients is included in the calculation.
  55. Term is for one year or more.
  56. Rental amount is stated in advance.
  57. Space is specified in the Lease, covers all space leased for the term and is not more than is commercially necessary for the Tenant’s purposes.
  58. If the agreement is intended to provide the tenant with access to the premises for periodic intervals of time rather than on a full-time basis for the term of the rental agreement, the rental agreement specifies exactly the schedule of such intervals, their precise length, and the exact rent for such intervals.
  59. Agreement is in writing, signed by the parties.
  60. Tenant Use and Location Issues
  61. Use Restrictions
  62. Make sure other tenants are complementary (or that this is not an issue):
  63. Psychology Practice
  64. Drug/Alcohol Rehab
  65. Pain Management Clinics
  66. Tenant Exclusives
  67. Must check tenant exclusives as well as REA’s when tenant requests sublease to retail clinic.
  68. Medical clients are requesting exclusives
  69. Examples: Plastic, dermatology, dentistry
  70. Sleep studies-pediatricians
  71. Pediatricians-Drug/Alcohol rehab

3,Landlord must be cautious when it considers leasing for generic medical uses.

  1. Specific Procedures Prohibited
  2. Surgery
  3. Particular Equipment.
  4. Religious and Ethical (Reproductive Matters)
  5. Examples. If on hospital grounds or in hospital owned facility, particularly a facility with a religious affiliation, confirm use is appropriate. Please also note, you can have a recorded land use restriction. Request title search or representations if operating a family planning facility, fertility clinic or if client may perform abortions.
  6. Privacy Issues
  7. Inspection Provisions of Lease
  8. Consider use/privacy of patients when allowing Landlord inspections. Do not allow inspections of patient areas during office hours.
  9. Restrict access to files (see PHI below).
  10. HIPAA
  11. Requires the protection of the confidentiality of private health information (“PHI”)
  12. Require language to protect PHI in the event of entry by Landlord and for maintenance and cleaning staff. Require that any information be held confidential. Prohibit accessing information.
  13. Business Associate Agreement will typically be requested.
  1. Construction/Build-Out Issues
  2. Expense in Medical Office Buildouts
  3. Plumbing (Exam Room Sinks)
  4. Special Needs-Dental
  5. Exam Sinks in each exam room
  6. X-Ray development (although digital is quickly taking over)
  7. Smaller Spaces
  8. Many exam rooms and small offices are needed, so leased area is more divided than other spaces. Results in more walls, more controls, more expense for buildout.
  9. Floor Loads with Paper Files or Heavy Machinery.
  10. Electronic Health Records are ameliorating the need for high density files, but bring their own issues (server rooms with enhanced HVAC to service the computer equipment).
  11. Heavy diagnostic machinery (Cat Scan, PET Scan, MRI etc. may require heavier floor loads).
  12. Note, avoidance of vibration that can disturb sensitive medical testing equipment.
  13. Ability to install a WI-FI network for data and imaging machines.
  14. Electrical Loads
  15. Need to handle typical office as well as special equipment (CAT Scan, PET Scan, MRI etc.).
  16. Review with architect and manufacturer, it is easier to build this in rather than upgrade later.
  17. Restrooms-Are private restrooms typically needed for patient use (sampling).
  18. Building Standards should be higher than typical office buildings due to increased traffic with volume of patients.
  19. Specialty Concerns. Discuss with your tenant client. What are the special needs of their practice? Review the Building Standard improvements to determine what improvements are necessary. What is your ability to expand in the future?
  20. Examples:
  21. Window Coverings (One thinks to make sure people can’t see in, but is it good enough for an Opthamology Office)
  22. Sleep Studies (Quiet Location, inside and outside); is a pediatrician’s office with its heavy traffic and noisy patients in the next office?
  23. Specialized Equipment
  24. Electromagnetic shielding, radiation protection etc.
  25. Specialized Facilities—Work with Architect/Consultant to assist with standards for facility.
  26. Surgical Suite
  27. Back-up Power
  28. Wider Doors
  29. Elevator Capacity
  30. Air/Medical Gas Lines
  31. Ceiling Heights for Lighting
  32. Enhanced Ventilation
  33. Ambulance access
  34. Special Entrance to Plastics Clinic
  35. Special Exits from Psychiatry Facilities
  36. Regulatory Issues
  37. Regulatory Provisions in Lease
  38. Hazardous Materials/Medical Waste/Sharps Disposal
  39. Hazardous Materials
  40. X-Ray Machines, Nuclear Medicine
  41. Use in compliance with law.
  42. Proper disposal
  43. Medical Waste Disposal
  44. Proper Storage, Labeling
  45. Proper Disposal
  46. Sharps Disposals
  47. Central pick-up points
  48. Hallway pick-ups?
  49. Oxygen and Medical Gas Storage
  50. Limit quantities
  51. Storage in compliance with standards and laws
  52. Remove upon vacating.
  53. Controlled Substances
  54. Chemotherapy/Nuclear Medicine Vaults
  55. Cleaning Schedule, Excluded Areas.
  56. Cleaning schedule for tenant space as well as building should be above and beyond typical office building.
  57. Do not want perception of “dirty” or “old” building.
  58. HIPAA and Files
  59. Access rights for hazardous/medical/sharps disposal companies and location and visibility of pickup boxes.
  60. Review building procedures.
  61. Other Issues
  62. Location
  63. Close to Door/Elevator
  64. Elevator with capacity for Stretcher
  65. Eliminate Relocation Rights if Patient access would be significantly impeded.
  66. Property Taxes
  67. Tax Exemptions for Health Care Facilities
  68. Challenged by local authorities who need funds.
  69. Private inurement issues.
  70. Parking
  71. Handicapped Spaces-Confirm enough are available for use by the practice.
  72. Expectant Mother Spaces. New trend.
  73. Regardless, make sure parking is ample as patient turnover is frequent, more so than in a typical office building.
  74. Building Hours
  75. Are these sufficient for patient visits in the evening and on weekends?
  76. Security/Life Safety
  77. Storage of Drugs and enhanced standards.
  78. Unstable patients
  79. Central Alarm
  80. Right to install AED Center with alarm

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