4 Things to Consider Before Signing That Lease
Healthcare renters may face unexpected issues when moving into certain locations.
Doctors are rarely leasing experts, a fact that became clear to Roger Bradley when his previous employer acquired a physician practice that included 12 buildings. The leases all favored the landlord in terms of how expenses were divided.
“What we did was buy out those leases on 25 cents on the dollar to get out of them,” says Bradley, currently regional director of facilities for BayCare Integrated Service Center in Tampa, Florida.
Had the physicians in this case known a little more about key provisions in healthcare leases, they may have cut a better deal with the landlord in the first place. Below are four key issues to consider before signing a lease.
Who Pays for What?
The most common lease in any commercial situation is called “triple net.” This was the type of lease the physicians in the case above had signed, Bradley says. In this type of lease, the tenant pays a prorated share of the building’s property tax, insurance, common utilities, and common area maintenance costs, in addition to the rent.
Landlords love triple net leases because it removes much of their risk—if taxes or maintenance costs go up, the tenants cover it. Even better for the landlord—and worse for the tenant—is the “absolute triple net” lease, which means the tenant also is responsible if a catastrophe wrecks the building or major repairs are required.
Better for the tenant is a “full service” or “gross” lease, which means the tenant pays rent and nothing else. Next best is “single net,” in which the tenant pays rent plus a prorated share of the property tax. In a “double net” lease, the tenant pays rent, a share of property tax, and a prorated share of property insurance.
“In many cases, people don’t understand the difference between the single, double, triple, and absolute triple leases,” Bradley says. “They blindly sign the lease and forget about looking at the fine details.”
These expenses can frequently be negotiated during lease discussions, particularly if the healthcare organization is a desirable tenant looking at a space that’s hard to fill.
“A landlord wants to monetize their asset to the fullest, and they will argue that they don’t have control over the taxes any more than the tenant does,” says Andrew Maguire, partner in the law firm McCausland Keen + Buckman in Devon, Pennsylvania. “So they’re reluctant to sign a lease that requires them to cover the taxes, unless the tenant and the lease terms are so attractive that the landlord decides to swallow that cost.”
Even in cases that the landlord holds all the cards and won’t negotiate, it’s wise for the healthcare tenant to be aware of the type of lease they’re signing, so they can adjust for the risk as needed.
Is Subleasing Allowed?
Hospitals often plan to involve other providers when they acquire external facilities, but not all leases allow subleasing.
“Often the initial draft of a lease prohibits subleasing,” Maguire says, “so the tenant need to work that language into the lease.”
There are several types of agreements with sub-tenants in medical facilities. A traditional sublease is one common agreement, but in many cases the sub-tenants will not need the space every day, so they may prefer a different arrangement.
Bradley says a “time share” lease allows sub-tenants to pay based on the space and support staff time that is consumed only while they are in facilities. “Specialty groups in larger urban areas may want to see patients in smaller communities, but don’t want to rent space there,” Bradley explains. “For example, if specialists come out two times a month, they pay for their space and staff just for those trips.”
Regardless of the arrangement, the original lease-holder should make sure sub-tenant activity is allowed in the lease.
What Are the Permitted Uses?
As more providers open external facilities in strip malls or other retail locations, they are facing zoning restrictions and competitive restrictions that they did not worry about in more traditional locations.
“It’s quite likely that the zoning designation of a strip mall permits only traditional retail use, and it might even specifically exclude medical use,” Maguire says. In that case, the tenant has to make sure zoning relief is obtained before they commit to leasing the space.”
Maguire explains that zoning relief can often be pursued by either party—the tenant or the landlord—but it should be made clear in the initial agreement that the lease won’t become effective unless and until zoning allows the desired healthcare occupancy.
Another permitted use issue that healthcare renters may face when they move into retail locations is restrictions that other tenants have negotiated into their leases that prevent competitors from moving in. A common scenario is a pharmacy whose lease specifies that no other drug retailer can be part of the development. That restriction is designed to prevent a Walgreens from moving in next to a CVS, but in effect it could also prevent a medical clinic from dispensing drugs to patients.
A similar situation may occur if the original tenant, such as a Walgreens, has its own primary care clinic. Its lease may prevent any other tenant from seeing patients.
In either situation, the landlord may have to persuade the original tenant to waive that requirement, Maguire says, or negotiate some limitation to it. “For example, if the new tenant is a pediatric healthcare provider, maybe they’ll agree to limit the number of non-pediatric patients that they treat at that location,” he says. “That way they can mollify the existing drug store tenant.”
Another use issue may involve after-hours access. If the healthcare tenant wants to provide appointments in the evenings or weekends, it’s important to make sure the lease does not restrict access to normal business hours.
What About HIPAA?
What does HIPAA have to do with leasing? Part of any healthcare organization’s patient information security plan involves preventing unauthorized personnel from seeing patient records, so they need to ensure that non-employees—such as a landlord’s cleaning service—are not able to freely access workspaces after hours.
“HIPAA needs to be accounted for in any lease where the tenant is a healthcare provider,” Maguire says. “For example, in a multi-tenant building where a landlord hires a janitorial service company to clean, if medical records are left out or not secured in a designated area, you could unintentionally trigger a HIPAA violation. So it’s imperative that the lease clearly delineates what areas the landlord, and the agents of the landlord, can’t access.”
Landlords may complain about this provision, Maguire says, because they need access in emergencies. He suggests giving the landlord a phone number to call in an emergency to alert the healthcare organization that someone needs to enter the restricted space, which gives the tenant an opportunity to secure any records.
Read the Lease
The bottom line is that leases are complicated documents that carry long-term ramifications. “Read the lease,” Bradley advises. “In fact, make sure a group of people read the lease, and don’t assume that the lease is providing everything you need.”
Ed Avis is a freelance writer, Chicago.
Interviewed for this article:
Roger Bradley is regional director of facilities, BayCare Integrated Service Center, Tampa, Florida.
Andrew Maguire is a partner, McCausland Keen + Buckman, Devon, Pennsylvania.