COVER STORY, APRIL 2010

MEDICAL OFFICE SPACE: A LEGAL PERSPECTIVE

Hospitals and MOB owners form a symbiotic partnership.
By Mark Biskamp

Westover Hills in San Antonio.

Acquiring a medical office building on a hospital campus is unique compared to buying a traditional office building. The MOB is often owned by a hospital and intertwined with the property through above-ground walkways, shared parking, utilities, equipment and other systems. These systems create challenges when the ownership is separated. The purchaser usually acquires the medical office building by way of a ground lease from the hospital of the land around and below the building and a deed from the hospital of the improvements in fee.

Buyers must negotiate the traditional aspects of a purchase and sale agreement, while also negotiating a ground lease and other ancillary documents addressing the separation of unified medical facilities. The hospital also will likely house a few operations in the building, so negotiations will be with the hospital as the seller, ground lessor and tenant.  

THE GROUND LEASE

The hospital typically ground leases the property, so that the hospital can maintain a level of control over the building. They also typically require office tenants to be either members of the medical profession or tenants that provide auxiliary or incidental services. The ground lease also will typically prohibit uses that are competitive with the hospital, such as magnetic resonance imaging, computed tomography, nuclear medicine or any procedure requiring anesthesia that must be administered by an anesthesiologist. If the hospital has a particular religious affiliation, the hospital may additionally prohibit uses that violate certain ethical and religious directives. 

The MOB owner will want a requirement that any leasing restrictions must also be uniformly applied by the hospital to all buildings on the hospital campus. The MOB owner will want the restrictions to apply only while the hospital is operating as a full-service hospital, as opposed to a hospital primarily providing specialty services. Medical practices also change over time, and the MOB owner may want a provision that will require modification of the competitive use restriction if the hospital ceases providing such services.

The hospital may want a right of first offer to lease additional space in the MOB as it becomes available. If that is the case, the parameters of the right of first offer need to be negotiated, so that such a right will not hamper the leasing efforts of the MOB owner. Agree on the form of tenant lease that the hospital will execute upon exercise of the right of first offer in advance to limit negotiations to the financial terms of the lease. The ground lessor will want restrictions on the ability of the MOB owner to assign the ground lease and will often require permitted assignees to meet certain qualifications. The MOB owner will want exceptions to allow for financing without the hospital’s consent and may also want exceptions for transfers to affiliates.

RECIPROCAL EASEMENT

The MOB owner and hospital will enter into a reciprocal easement agreement in order to grant the owner insurable easements in other land on the hospital campus to be used in connection with the operation of the building. The agreement will need to allow for parking, vehicular and pedestrian access, construction and support, and utilities. The easements granted will need to be superior to any financing liens on both the hospital campus and the office land, so that a foreclosure of any lien will not terminate the easements. 

The MOB will need sufficient parking in order to meet zoning requirements and in order to allow the MOB owner and its lender to obtain zoning endorsements, where available under title insurance policies. The easement agreement can designate particular parking spaces as exclusive “zoning spaces.” The MOB owner may additionally want certain parking spaces designated for the exclusive use of its tenants. Pedestrian access on a hospital campus often involves walkways that connect various buildings within the campus. When ownership of buildings is separated in a sale transaction, rights to use the walkways must be granted in the agreement or a separate easement. The allocation of responsibility for operation of the walkway will need to be addressed.

The owner will need access to utility lines to provide water, sanitary and storm sewer, gas, electricity, telephone, cable television and fiber optic communications to the building. The parties can allow for the installation of parking facilities and perhaps other future improvements on the above-ground portion of the utility areas, provided that any such improvements do not unreasonably interfere with access to the below-grade portion of the utility areas. The parties may also wish to consider an easement for future utilities necessary for the practice of medicine.

SERVICES AGREEMENTS

Equipment owned by the hospital may be needed services, so the parties may desire to enter into an agreement that provides that the hospital will continue to provide such services to the MOB for a fee. The owner may want to build in a right to terminate the services. The hospital typically has security services for the campus, and the MOB owner may wish to see if the hospital will continue to provide security services to the MOB. If so, the parties will need to enter into a security services agreement outlining the scope of the services and the fees for the same.

NAMING LISCENCE

The MOB owner may want to use the hospital name or trademarks in connection with advertising the MOB; if so, he will need to enter into a licensing arrangement with the hospital. The license granted is typically limited and makes clear that the owner is not an agent or representative of the hospital and cannot bind the hospital in any manner. The ability of the MOB owner to assign such rights to a future purchaser or leasehold mortgagee should also be addressed.

After the acquisition is closed, the owner will be working with the hospital for years to come. It is therefore important for the parties to establish good relations. The owner will need the hospital’s cooperation on financing and other issues and will want the hospital to remain a valued tenant in the MOB. A good relationship between the MOB owner and the hospital will pay dividends to all parties.

Mark S. Biskamp is a shareholder at Munsch, Hardt, Kopf & Harr, P.C.

MOBs are a good investment, but there are unique challenges. 
By Andy Dow and Allan Katz

A Hillcrest MOB in Waco.

The current economic climate has resulted in a flight to safety for many real estate investors.  Since healthcare real estate is generally considered a safe investment because of the stability of the tenant base and the demand for the product, many real estate investors have turned to medical office buildings as a desired asset class. In addition, recognizing that an aging population and advances in medical technology will make healthcare a growth industry during the next few decades, this renewed interest in healthcare real estate seems destined to continue beyond the current economic malaise.

Prior to engaging in development, investment or leasing transactions involving medical office buildings, real estate professionals must understand how healthcare real estate differs from other asset classes. For example, medical office buildings will be subject to different design and construction standards than general office buildings, due to the unique nature of the use.

There also exists a minefield of laws and regulations surrounding medical office building transactions. For example, these transactions often require the analysis of the applicability of federal fraud and abuse laws. Depending upon the participants, either the Stark Law (Federal Physician Self-Referral Law) or the federal Anti-Kickback Law, or both, can be implicated. The Stark Law prohibits physicians from making Medicare or Medicaid referrals to an entity with which they, or an immediate family member, have a financial relationship for certain specified “designated health services.” The Anti-Kickback Law is broader in scope and prohibits the solicitation, receipt or payment of any remuneration in return for leasing any facility for which payment may be made in whole or in part under a federal health care program (e.g., Medicare or Medicaid).

Penalties for the violation of both of these laws can be severe.  Any economic benefit received in a transaction between parties who may have a potential referral relationship can trigger applicability of these laws. A medical facility lease between hospitals and physician groups would come under the purview of the statute. Additionally, any investment by a medical tenant in the landlord venture, in conjunction with the medical office lease, should also be evaluated to determine that it is not a violation of these laws. These laws do contain exceptions, including an exception allowing leasing of office space if it complies with certain requirements.

To be successful in the healthcare real estate market, developers and owners will need to understand the practical considerations and legal and regulatory environment surrounding this product. Owners hoping to enter into the medical office market need help from architects, contractors, attorneys and other real estate professionals who are experienced in the industry to assist in resolving issues unique to healthcare real estate.

Andy Dow and Allan Katz are shareholders in Winstead’s Real Estate Development and Investments practice.

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