Healthcare premises ownership: is it right for you?

Amanda Roddy, investment manager at Assura, discusses the growing number of GPs embracing sale and leaseback on their surgeries

Amanda Roddy, investment manager at Assura

With the recruitment crisis in general practice an ever-increasing threat, and GPs approaching retirement in such large numbers; the issue of premises ownership is one that is edging to the forefront and causing growing concern among owner-occupier GPs.

With GPs now preferring more-flexible career paths, and being reluctant or unable to invest significant capital into business premises, a requirement to enter into a lease can be a far-more-attractive proposition for new partners than buying into the building

This emphasis on finding an exit strategy and a more-flexible approach to premises occupation is prompting many GP practices to explore alternatives to property ownership, with the sale and leaseback model being the most-obvious and favoured solution.

The model

Sale and leaseback is quite simply that: a sale of the building and simultaneous lease back to the GP practice, ensuring long-term continued occupation while freeing up equity in the building and providing flexibility for both outgoing and incoming partners.

With GPs now preferring more-flexible career paths, and being reluctant or unable to invest significant capital into business premises, a requirement to enter into a lease can be a far-more-attractive proposition for new partners than buying into the building.

What to look for

While there has been some cynicism and nervousness towards lease arrangements in the past, the number of practices now in leased premises is fast outgrowing the number of owner occupied surgeries.

While there has been some cynicism and nervousness towards lease arrangements in the past, the number of practices now in leased premises is fast outgrowing the number of owner occupied surgeries

The primary healthcare market is now well established, with tried and tested standard leases, offering far greater flexibility and control to tenants than is often perceived. From an investor’s point of view, the longer leases that are typical of the sector, as well as the stability that comes with a GP practice and NHS-funded rent, offer an attractive return on capital.

It is important to take appropriate independent advice and choose a reputable, specialist investor who understands the primary care sector and is an experienced GP landlord.

There are only a handful of specialist investors who offer a sale and leaseback arrangement and who have varying criteria.

More often than not, these sector specialists will also be the most competitive in terms of property value and may offer additional property services, such as an in-house property management function and the financial backing to inject capital for the improvement or redevelopment of surgery buildings.

The advantages of leasing

It is important to remember that relinquishing ownership of the freehold does not mean loss of control over the running of the practice.

The lease creates a legal framework which ensures the practice has continued use and control of the building without landlord intervention, as well as the statutory right to renew the lease at the end of the term.

Contrary to LIFT-type arrangements, practices generally retain full control and responsibility for property maintenance and repairs, although different repairing options are on offer.

It is important to check there is flexibility within the lease to assign. Most standard leases offer freedom to assign to incoming partners as well as other healthcare providers if for any reason the partnership were to dissolve.

With such flexible lease structures, the commercial risk to practices is arguably a great deal less than property ownership, which comes with potentially-onerous mortgages, the threat of negative equity, and depreciating values.

What GPs may lose in valuation growth, they certainly gain by removing the risk of depreciating values and reducing their personal liability.

The cost of leasing

The cost to the practice is usually minimal and often limited to legal fees. It is important to consider outstanding loans and associated break penalties, which can sometimes be prohibitive to a sale.

It is important to remember that relinquishing ownership of the freehold does not mean loss of control over the running of the practice

The majority of costs will be borne by the purchaser, such as surveys and independent valuations. Tax exemptions may well apply, such as SDLT liability. It is vital to take independent tax and accounting advice, as well as professional legal advice when negotiating any lease.

Sale and leaseback transactions are also subject to approval from the relevant NHS body and the district valuer, which serves to provide additional reassurance and advice to the partners entering into the lease.

It is often seen as a favourable arrangement by NHS bodies as it helps to preserve the longevity of the practice and removes the potential for partnership difficulties created by property issues.

Rent reimbursement remains the same, with no additional revenue cost to either the practice or the NHS body.

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