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Healthcare Facility Transactions Pose Unique Issues For Real Estate Practitioners

A version of this article was published in the May 21, 2014 issue of the New Hampshire Bar News.

As healthcare facilities expand beyond their traditional settings in doctors’ offices and on hospital campuses, into shopping malls, lifestyle centers, assisted living facilities and commercial office buildings, developers and landlords frequently are unfamiliar with the special needs of healthcare providers. The lease or purchase of a property for use as a healthcare facility requires careful consideration of unusual facility requirements and complex regulatory issues. Healthcare providers—and their attorneys—must use extra vigilance and caution in constructing such deals. The following is a brief overview of some key industry-specific considerations involved in selling and leasing real estate to healthcare providers.

Facility Requirements: Healthcare providers typically have commercially novel but medically critical requirements, including the following:

• Parking: Consider whether the facility will have designated spaces or shared parking, if additional handicap spaces beyond the minimum legal requirements will be needed, whether there are sufficient spaces for staff and patients and whether physicians will require assigned spaces.
• Medical Waste: Be aware of landlord, municipal, and state restrictions on medical waste storage and disposal (such as New Hampshire’s Env-Sw 904, which regulates infectious waste), and what waste is permitted to enter sanitary sewers or septic systems. In evaluating a lease for commercial space, the landlord’s standard lease will likely need to be modified to provide for proper waste storage and disposal.
• Use Restrictions: Confirm that all proposed uses are permitted, and evaluate their compatibility with the surroundings: for example, would a cardiologist want to lease office space between a tobacco shop and a steakhouse? Potential lessees should also consider whether they want an “exclusive” in their lease, whether they wish to prohibit incompatible uses elsewhere in the facility, and whether other tenants will object to their use.
• Fit-Up: Many provider fit-up requirements are specialty-dependent, reflecting the needs of both the provider and the patient. For a radiology practice, a lead-lined room may be needed. For a pediatric practice, the waiting and exam rooms should be designed with child safety in mind. In the lease context, consider limiting landlord pre-approval rights for fit-up.
• Utility Services: High-voltage electricity, compressed air, reinforced floors for heavy equipment, or special air filters or HVAC circulation patterns may be required. Some medical offices, including those storing refrigerated vaccines or performing certain procedures onsite, may require a generator to ensure uninterrupted electrical service.
• Hours of Operation: Particularly if leasing or purchasing office space in a larger complex, confirm that the current hours of operation—including HVAC operations—match the facility’s hours and needs, whether common areas will be open and parking areas lit and cleared of snow and ice at all times that patients and providers will be on premises, and, if necessary, whether the facility can accommodate 24/7 emergency care.

Regulatory Issues: Among the host of regulatory concerns that must be considered in leasing or purchasing real estate for a healthcare facility, three areas merit particular attention, particularly in the leasing context:

• HIPAA: While not typically the case, for HIPAA purposes a provider’s landlord could be considered a “business associate” (necessitating a business associates agreement) if, for example, a shared reception service provided by the landlord risks potential disclosure of “protected health information” (PHI). Even if the landlord is not a business associate, a provider tenant must implement appropriate safeguards to protect the privacy of patients’ PHI. Such safeguards should include: limiting access to the leased premises, including a locked record room with no unsupervised landlord access; assuring adequate after-hours building security; if janitorial services are provided, restricting janitorial personnel’s access to areas containing PHI; and requiring the landlord waive any right to assert a lien on any medical records or equipment containing PHI, in the event of a lease default.
• ADA: Commercial properties not originally designed as healthcare facilities may need renovation to meet ADA requirements. While it is the provider’s responsibility to comply with the ADA within its premises, the provider should ensure that the rest of the facility (e.g., ramps, hallways, restrooms, parking areas, elevators, etc.) is in compliance as well.
• Stark, Anti-Kickback and False Claims Acts: These laws reflect the federal government’s long-standing concern with economic relationships between individuals and entities making and receiving referrals of patients participating in federal healthcare programs, principally Medicare and Medicaid. Many medical facility leases and some purchases can run afoul these laws. Before entering into any healthcare-related real estate transaction, the parties and their ownership structures should be analyzed, to identify actual or potential referral relationships. The parties should also review and analyze all restrictions, covenants and agreements that will apply to the property and, if the property will be under outside management, identify the manager and its powers. The goal is to avoid any provisions in a lease or analogous arrangement (such as condominium bylaws) conferring economic benefit upon a party that could arguably be deemed inappropriate consideration for referrals. These laws and regulations do include helpful exceptions and safe harbors, permitting certain rental and other arrangements that would otherwise be in violation. In all cases, however, best practice dictates that the deal be negotiated at arm’s length, with fair market value paid, and—in the lease context— the agreement fit within the applicable exceptions and safe harbors, even if no issue is apparent at the outset. However, these precautions may prove insufficient in some circumstances, due to the complex and frequently non-intuitive nature of these rules.

As even this brief overview makes clear, healthcare facility leasing and purchasing is a complicated field at the intersection of real estate and healthcare law. The topics discussed above are just some of the issues that must be considered. Due to the breadth and complexity of the issues involved, all parties involved should seek advice of experienced counsel before entering into a healthcare facility lease or purchase.

Peter F. Imse is a member of Sulloway & Hollis, P.L.L.C., and chairs the firm’s Real Estate, Development & Environmental Group. The assistance of Rosemary B. Guiltinan, Esq. in the preparation of this article is gratefully acknowledged.