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Leases and Other Legal Agreements to Share Space

Welcome! This article is part of a Medscape Physician Business Academy course, . Visit the Course Page to take the full course and receive a certificate.

Office Space Cost Is a Major Outlay

When considering leasing space for a medical office, the first things to decide are how much space you will need and how much of the typical week that space will be occupied. A new physician just starting out will need much less space than a physician who has been in practice for 30 years. A surgeon who practices alone will have much different needs from a group of four family practitioners; likewise, a group of hospital-based physicians will have much different needs from an orthopedic specialty group providing physical therapy.

Because needs for number of exam rooms, space for files, space for support staff, and equipment vary, it is important to work with a qualified medical space planner, when possible, so that costly mistakes can be eliminated before you begin. It isn't always just a matter of square footage, but also of patient flow and usable space. Sometimes a space with less square footage can be more usable than a larger space.

It isn't always just a matter of square footage, but also of patient flow and usable space.

Once you know how much space you will need, the next critical issue is the location of the office. The golden rule of real estate is that the three most important things about a parcel of real estate are location, location, location—and finding the right office space is no exception. It is important to consider the convenience of the office to the hospital or to other key locations where the physician will be based. The location also needs to be convenient to patients, and entry and exit from the area ideally should not be congested.

Once a few possibilities are found, each alternative should be imagined when the office is full—to determine whether there is enough parking, access to the space is easy for patients who might have physical disabilities, and the environment is inviting.

The physician's specialty and the number and types of patients needed for the practice to be successful are important factors in choosing office location. A neuro-ophthalmologist will probably have trouble if he or she sets up in a town of only 15,000 people. Similarly, it will not do to set up a pediatric practice in an area that lacks young families. A demographic assessment can be helpful and is not difficult to obtain, especially if there is a commercial partner in the practice start-up.

Selecting the Space

While evaluating the alternative locations for all of the items above, this is also the time to discuss with the landlord the initial terms of a lease. Things to consider are:

  • Term: Will the landlord let you in slightly early to get set up? When the lease officially begins plus the term is the minimum period for which you are liable for the rent.

  • Base rent, including any automatic increases.

  • Rent abatement period, if possible—as an incentive to get you into the space, will the landlord agree to give you 1-12 months free?

  • Build-out allowance: How much will the landlord cover of any construction costs you incur to get the space to the configuration you require?

  • Build-out financing: Will the landlord pay for the entire build-out and charge any excess to your rent over the initial lease term?

  • Base rent: Is the lease gross or net—that is, what is included in the rent, and what is subject to cost increases?

  • Will the lease require a personal guarantee?

  • Exclusivity clause: Will the landlord agree not to lease space in the property to a physician in a similar specialty?

  • What are the renewal options? Are they automatic?

  • Are there restrictions on your subleasing the space?

  • Do you have required proof of insurance, and does the coverage need to include specific things, have the landlord as an included beneficiary, or be at a specific level?

  • Are there things you will be prohibited from doing?

  • Does the landlord have any occupancy clearance necessary from local government oversight, and is the space is properly zoned for medical use?

  • What signs are you able to put up, and who is responsible for the maintenance of the signs if they are part of a larger sign?

  • What is your security deposit, and under what conditions do you forfeit the deposit?

  • Can you sublease the space and move out?

  • Can you sublease the space to other providers who join you in practice?

  • Can you review the paid bills that substantiate any escalations you are required to pay?

This list is not exhaustive; however, it will get the key items up for discussion. Compare the terms for each location you are considering, and determine the best overall lease terms in each category. Then select the location that is most suitable, and negotiate the best terms possible from that landlord. If the terms you negotiate are significantly less favorable than those at another location, consider whether the terms of the lease offset the perceived benefits of the first-choice location.

There are other elements to a lease that physicians may not be aware could become a problem. For example, the lease may omit stating that the building does not provide heat and air conditioning on Saturdays. The physician may not learn that until after the lease is signed; if you were planning on having Saturday office hours, this is a huge problem.

There are elements to a lease that physicians may not be aware could become a problem.

The Actual Lease

Once you have reached an agreement with the potential future landlord, request a written lease within a defined period. If the landlord cannot comply with a written lease in a reasonable amount of time, look for another option.

Once you have the lease in hand, give it to your key advisors to review. This includes your attorney, to review for legal issues you need to consider or practice issues you might not recognize; your accountant or financial advisor, to see whether the lease, with all the inclusions, will fit within your budget or forecast; and finally, your insurance advisor, to see whether there are any issues in obtaining the insurance that the lease requires you to carry. Make sure you understand all of the issues and objections that your advisors point out. It is wise to have an attorney or one of your other professional advisors to negotiate the issue with the landlord.

One issue that has created problems for physicians is the completion of the "build-out." Sometimes, the lease requires that the physician, as tenant, use the landlord's contractors to build out the space to make it suitable for a physician's office. Generally, this situation is not best for the physician, because the physician has no control over the contractors; instead, the landlord is paying the contractors. The contractors may build out according to the landlord's wishes rather than the physician's wishes. In addition, the physician does not have control over the expenses, and will most likely receive a bill that is much higher than expected. It's recommended to have an architect or medical office planner design the build-out for the physician.

If you are hiring your own contractors, the completion date and penalties are important. If you can't use your space because it has not been completed on time, you'll be losing money.

Sharing Space

If you are considering sharing space with another physician, either as a tenant or landlord, there are a host of other issues to consider. The most important of these is the impact of the antikickback statutes on any sublease with any entity that you would make referrals to or receive referrals from for services paid by any federal healthcare program (Medicare).

For example, if you lease a portion of your office to a physician to whom you normally refer patients for physical therapy, you would need to make sure the lease is covered by the safe harbor exclusions. These "safe harbors" are areas where the government acknowledges that the agreements are within the appropriate guidelines. This is a complex area, and every agreement needs to be reviewed by a healthcare specialty attorney. Examples of "safe harbors" are that the agreements are priced at fair market value, the aggregate rental is set in advance, the term of the lease is for not less than 1 year, and the aggregate space rented does not exceed that which is reasonably necessary to accomplish the business purpose of the rental.

Other issues to consider are use of equipment, sharing of staff, and joint billing arrangements. In addition, if the practice appears to the public as a joint practice, it is possible that employee benefits, such as retirement plans, must be compatible.

Office-sharing arrangements can be good business decisions; however, they must be entered into with advice from the practice's team of consultants, including a healthcare attorney, an accountant or practice consultant, and an insurance consultant.

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Welcome! This article is part of a Medscape Physician Business Academy course, . Visit the Course Page to take the full course and receive a certificate.


Judith N. Aburmishan, CPA, MBA, CHBC

| Disclosures | January 01, 2016

Authors and Disclosures


Judith N. Aburmishan, CPA, MBA, CHBC

Director, FGMK, LLC, Bannockburn, Illinois

Disclosure: Judith N. Aburmishan, MBA, CPA, CHBC, has disclosed no relevant financial relationships.