Are Medical Tenants Right for Your Space?

In the last few years, the rise in medical office tenants leasing at retail properties or in office buildings has been a good development for many commercial owners. That’s because the pool of prospective tenants for dark space has widened, in some cases cutting down on vacancies. But medical tenants also present some challenges. And owners need to take several factors specific to this alternative type of tenant into account before determining whether such a lease is the right deal for their property. Consider these pros and cons before taking on a medical tenant.

Pro: Confidentiality Shouldn’t Hamper Deal

“Medical leasing is generally desirable because these professional tenants are usually good quality, stable businesses, with offices maintained in good order that are upscale and attractive,” says New Jersey attorney Steve A. Weisfeld.

Owners should be aware that patient records are protected by federal and state privacy laws, which restrict access not only to the records themselves, but also, to some extent, the office areas where records are kept. But don’t let confidentiality concerns tank an otherwise good deal. There aren’t usually special considerations in the lease for confidentiality—unless the owner shares and occupies the same space on a non-exclusive basis, or shares common areas within the office itself where there is day-to-day access to patient records.

And it’s typically not required that the owner sign a confidentiality agreement. “I don’t believe this is necessary, especially where the owner doesn’t have day-to-day access and has entry only for emergencies or for repairs requested by the tenant,” notes Weisfeld. He says that where the owner has day-to-day access or shares space, the lease can have a general acknowledgment by the owner that the tenant maintains information protected by federal law (HIPAA) that the owner is not entitled to access.

Typically, owners aren’t required to sign a business associate contract either. “In most cases this doesn’t apply as the owner isn’t really providing any services other than allowing the tenant to occupy the space. But if the owner is also providing administrative services—for example, if the owner is also a doctor—then a business associate contract would be indicated,” says Weisfeld.

Con: Exclusives May Create More Work

Exclusives often are important to medical tenants, so be prepared to negotiate that point. The purpose of an exclusive is to prevent the owner from renting space to a tenant’s competitor. The exact exclusive depends upon the exact use by the tenant, explains Weisfeld. In a medical tenant scenario, exclusives may be limited to the doctor’s specialty and may also survive termination of the lease because the departing tenant doesn’t want the space handed over to another doctor in the same specialty. “Otherwise, the first tenant’s patients may continue to go to the successor tenant by force of habit or convenience,” he says. So an exclusive might include a covenant of a year or two, although this is not the norm.

The good news for owners is that the exclusive is fairly simple: It’s limited to that medical tenant’s specialty. But you may not want to give exclusives in some cases. For example, it’s difficult to keep track of exclusives, especially if the property is large and includes many medical tenants. If you do give exclusives—of any kind—use an effective system or checklist to keep track of them and check it before negotiating a lease with a new tenant to avoid an overlap that would be a violation.

Pro and Con: CAM Is Complicated, But Tenant Assumes Cost and Risk

Medical tenants present some unusual factors that traditional tenants don’t: medical waste, hazardous materials, and in some cases odors. So if a medical tenant needs disposal services, say, for hazardous materials, or other maintenance services in addition to or instead of what is provided for retail or office tenants, should you include those in CAM costs or assess them separately?

Weisfeld points out that when it comes to waste disposal, you should differentiate between regular and medical waste. “Regular waste disposal can be included in CAM; medical waste disposal is regulated and there are licensed contractors for disposal, so this usually falls to the tenant to arrange separately and at its sole expense. Other hazardous materials that require special handling need to be treated similarly,” he stresses.

CAM issues will also depend to some degree on the specific type of medical tenant. Remember that medical and dental offices that do procedures often require a compressor for drilling and suction. Tenants prefer to place compressors in the basement away from treatment areas for noise and space considerations. But if your basement is in a common area, you may need to negotiate some provisions in the lease regarding access, and protective language for yourself in which the tenant acknowledges that the location of a compressor in a common area is at the tenant’s “risk and sole expense,” Weisfeld notes.

Insider Source

Steve A. Weisfeld, Esq.: Beattie Padovano, LLC, 50 Chestnut Ridge Rd., Ste. 208, Montvale, NJ 07645; www.beattielaw.com.