Commercial Real Estate Markets Benefit from Healthcare Industry Growth

by Pullman & Comley, LLC

The slowly recovering economy has presented challenges for most businesses over the past several years, and commercial landlords are no exception.  The recent recession resulted in higher vacancy rates and downward pressure on rents, resulting in a tenant’s market for commercial space in most areas of Connecticut.  But despite these challenges, some commercial landlords have been benefitting from the healthcare industry’s continued growth..  .  In fact, most markets saw strong demand for medical office space in 2013 and most brokers expect this demand to continue. 

This growth is a reflection of the healthcare industry’s continuing expansion. As healthcare employment grows and industry consolidation continues, so will the demand for first-class medical office space.  Landlords trying to meet this demand will often find that negotiating leases with healthcare provider tenants can present unique issues and concerns.  And as individual doctors and medical practice groups merge into larger healthcare organizations, these providers and their new parent organizations must carefully navigate the leasing, sale and management of their real estate assets in order to position themselves for continued growth while avoiding violations of federal law.  While healthcare providers would undoubtedly prefer to focus exclusively on their patients, they have been forced to divert at least some part of their attention to the many regulatory and legal compliance issues they confront  involving  the very office spaces where their services are provided. 

The most common compliance concerns for healthcare tenants typically include three pieces of federal legislation: the Stark Law, the Anti-Kickback Statute and the Health Insurance Portability and Accountability Act (better known as, “HIPAA”). The Stark Law regulates referrals among physicians, and the Anti-Kickback Statute prohibits compensating any person in exchange for referral of healthcare business.  While these laws were intended to counter the abuse of claims made under Medicaid and Medicare, they have very real implications on the terms under which a healthcare provider may enter into a commercial lease and with whom they may do so.  The HIPAA Privacy Rule and Security Rule regulate the access, use and disclosure of patients’ protected health information (“PHI”), and healthcare service providers must ensure that they properly manage patient PHI held at their offices in order to avoid liability under the law.

Healthcare tenants must ensure that they meet certain conditions when leasing office space, while  larger, more sophisticated healthcare providers will typically seek certain representations from landlords that are intended to provide additional protection from liability under the Stark Law and Anti-Kickback Statute.  Generally, these representations focus on whether the landlord is a healthcare provider and whether the landlord has any financial relationships with healthcare providers.  The tenant will also generally seek terms establishing that the lease is at “arms’ length,” that rent is set according to fair market value, and that no agreements directing referrals exist between the landlord and tenant.  Also common are specialized terms limiting landlord access to the premises (or to areas of the premises where PHI is stored), and establishing procedures for instances when the landlord or its agents (such as janitorial staff) may inadvertently come into contact with PHI. 

Landlords that are experienced in dealing with healthcare tenants have their own concerns to address.  For instance, medical offices typically generate biomedical waste, some of which may be considered hazardous waste regulated by state and federal law.  Landlords should consider lease terms that address the types of waste that a tenant can produce and how that waste must be collected as a means of  maintaining control over a landlord’s potential liability for the presence of these potential environmental concerns on their property.  Another concern lies in the fact that medical offices may use vastly different quantities of utilities depending on the type of services they provide.  A practice that offers diagnostic imaging using magnetic resonance tomography (MRI) or x-ray computed tomography (CT scans) has the potential to use substantial amounts of electricity.  Conscientious landlords will want to ensure that utility costs are allocated fairly among tenants in the event that direct metering is not possible. 

Healthcare providers are often very attractive tenants and the market has responded in trying to accommodate the demand for new space.  The healthcare industry’s continuing growth will create new opportunities for real estate developers, investors and landlords.  For landlords, these opportunities may bring novel issues and concerns in dealing with healthcare tenants.  For those healthcare tenants, a changing regulatory environment and an industry under consolidation  continue to create new compliance challenges- and the need to protect themselves accordingly- even with respect to their real estate interests.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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