The change in healthcare laws and the resultant explosion in healthcare facilities has led to a surge of medical offices in non-traditional commercial spaces.
While many investors and tenants prefer to house their facility in office or retail properties, acute care clinics, satellite hospital facilities, others are choosing to lease space in the ubiquitous shopping mall.
Increasing vacancies in strip malls and big-box shopping malls benefit both the investors and tenants. Tenants enjoy the increased foot traffic and lower prices offered by shopping malls, while investors are finding that these facilities bring value and new energy to drooping income properties.
However, while there are many advantages to this arrangement, investors should be aware that healthcare tenants bring their own set of challenges to commercial spaces. Failure to address these concerns can be both costly and present real legal dangers.
Below are several areas you should consider when leasing space for healthcare tenants.
Zoning Or Land Use Considerations
Even when there are no restrictive use clauses, a careful examination of federal, state, and local laws is necessary in order to ensure these would not affect leasing space at a shopping center. A law contravening specific uses may be avoided in certain cases with a variance or conditional use permit.
Restrictions
Often, leases from existing tenants – in particular, anchor tenants – limit other tenants from engaging in certain activities. It may detract from their rights to offer a similar service. For example, a large supermarket chain store with a pharmacy may have a clause that forbids other tenants from dispensing medication.
These types of use restrictions aren’t always public record and tenants may not be aware a clause exists. Therefore it’s best to consult with a lawyer, who will be able to determine if the proposed medical tenant would violate the anchor tenant’s lease.
Other restrictions may arise not from the property itself, but from restrictions put on the property. For example, if a shopping mall resides on land that was previously a gas station or a brownfield (a property where a hazardous substance, pollutant, or contaminants are or may be present), then the EPA prohibits the use of the property for medical facilities.
Other restrictive uses may arise due to the patients served by the facility. For example, drug or alcohol treatment centers will most likely be opposed by other tenants and neighbors. However, the increased traffic due to the increased number of patients and medical transportation vehicles might cause objections from other tenants.
And of course, if there are another healthcare tenants, they may object to competing practices.
Regulatory And Licensing Issues
Investors should ensure the lease requires the tenant to comply with all federal and state laws, and request documents that show proof of compliance. Some laws, such as the Stark Law and HIPAA, require cooperation with the investor to ensure compliance.
It behooves the investor to ensure medical facilities have all required licenses and permits.
HIPAA, or the Health Insurance Portability and Accountability Act, was enacted to protect the confidentiality and security of healthcare information and help the healthcare industry control administrative costs. Practically, the law requires that no one other than approved medical staff have access to patients’ medical records.
This can be inadvertently broken when custodial staff possesses keys giving them access to offices where records are stored. The same is true for you as an investor, since you or your property manager also, according to the terms of the lease, must have a key to the property as well.
This can be easily avoided by ensuring records are locked separately or that there is supervision when either the custodial staff or landlord are present.
Stark Law And Anti-Kickback Statute
Both of these laws govern the way landlords may lease commercial space to tenants who are also physicians.
The Stark Law was enacted to prevent doctors from making referrals to health services in which they have a financial interest. The Anti-Kickback statue was put in place to make it a criminal offense to knowingly offer or receive payment in exchange for any goods or services that can be reimbursed by Medicaid or Medicare.
This may seem distant to you as a commercial real estate investor. However, certain lease provisions – such as increasing a tenant’s rent based on the number of patients (percentage rent)- would be violated according to one or both of these laws, resulting in criminal prosecution.
Environmental Liabilities
There are numerous materials that healthcare tenants bring on-site that are subject to environmental regulation. There are radioactive materials, volatile gasses, pharmaceutical substances, many of them controlled, and infectious waste.
It’s required by the tenant to have the space inspected by an environmental specialist, to ensure procedures for hazardous and infectious waste removal are being met. But the landlord and tenant should also agree about the types of materials allowed on the premises.
Tenant Allowances Or Improvements
Shopping mall facilities require extensive renovation in order to accommodate healthcare tenants. These improvements, on top of traditional buildout allowances, can lead to a significant expense for the investor.
Areas outside the facility may also require renovation, for example, greater numbers of handicapped accessible parking, upgraded HVAC systems, automatic sliding doors, and wheelchair accessible elevators. In addition, ownership of these improvements after the lease ends should be specified in the lease.
While some improvements are considered valuable, others – such as the removal of special medical systems or hazardous materials, are likely to be quite expensive. The lease should state clearly which party is responsible for cleanup, and to what extent the property should be returned to its pre-healthcare tenant state.
Regardless of the complications required in installing healthcare tenants, present healthcare trends predict that medical facilities will prove to be a lucrative investment over the next several decades. Thus, the investment required is very likely to pay for itself, and then some, within a relatively short period of time.
