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There are many unique obstacles when leasing healthcare properties. The most consistent challenge — and perhaps the most unique to healthcare — is satisfying the many laws and regulations in place when leasing space from certain healthcare providers to other healthcare providers. Specifically, leases of space in hospitals or hospital-owned medical office buildings implicate the Anti-Kickback Statute and Stark Law. These laws place specific limitations on the manner in which certain healthcare providers may lease space to physician tenants.
The Anti-Kickback Statute makes it a crime to intentionally offer or receive payment or anything of value in exchange for referrals for services or goods that are reimbursable by the federal government, primarily Medicare or Medicaid. Stark Law prohibits physicians from making referrals for certain “designated health services,” which includes both inpatient and outpatient services, to entities in which the physician has a financial relationship. These laws significantly ‘up the ante’ because the ramifications of mistakes in healthcare leasing are far more extensive than in typical leasing transactions.
The U.S. Department of Health and Human Services (HHS) adopted certain regulatory leasing safe harbors for both the Anti-Kickback Statute, commonly referred to as the “space rental safe harbor,” and Stark Law, commonly referred to as the “office space rental exception.” They are: (a) the lease agreement must be in writing; (b) the lease agreement must have at least a one-year term; (c) the rental rate is set in advance, is consistent with fair market value, and is not determined in a manner that will change based on the volume or value of referrals flowing between the parties; (e) the lease agreement covers and specifies all of the leased premises; (f) if the lease agreement is intended to provide the physician tenant with access to the leased premises for periodic intervals (instead of on a full-time basis) the lease agreement must specify exactly the schedule of such intervals; (g) the lease agreement would be commercially reasonable even if no referrals were made between the parties; and (h) the leased premises must not exceed that which is reasonably necessary for the legitimate business purposes of the physician tenant and is used exclusively by such physician tenant. There are many variations and modifications with respect to these safe harbor and rental exception parameters.
Fair market value is one of the most important aspects of the foregoing exceptions. HHS has defined “fair market value” as the value in an arm’s length transaction, consistent with the general market value, including charging physician tenants for all of the space that they use, including their pro rata portion of all common areas. “General market value” has been defined as the rate that would result from bona fide bargaining between well-informed parties who are not otherwise in a position to generate business for the other party on the date of the agreement.
For purposes of the office space rental exception, the fair market value for the rental of a medical office building cannot be based solely on the rental rate for other medical office buildings. The rate must be based on the broad category of similar properties used for general commercial purposes. There is no rule of thumb that will suffice in all situations to determine the amount of documentation required to confirm fair market value, so whether a lease rate is consistent with fair market value is a question of fact that must be determined on a case-by-case basis.
However it is established, fair market value should be assessed at the time of the lease agreement. Accordingly, it is critical to document the methodology used to establish fair market value at that time.
This is the first part of a 10-part series on healthcare leasing issues. Other parts will appear monthly throughout 2015.
Brooks Smith is a commercial real estate and finance attorney for Bradley Arant Boult Cummings. He regularly represents healthcare clients in all aspects of commercial real estate development, acquisition, disposition, leasing, and financing. Connect with Smith on LinkedIn or through Bradley Arant Boult Cummings’ website.
Healthcare Leases: Anti-Kickback Statute And Stark Law