Sale and Leaseback: golden opportunity or the ruin of the NHS?

Tom Mason MRICS writes:

Pulse recently ran an interesting article about the healthcare developer Assura, ‘GP Partners offload premises as property firm expands practice portfolio by 20%’ (7th June 2016). Assura, a sale and leaseback specialist, has increased its portfolio from 265 properties to 321 in the last financial year showing 21% growth.

The article was an interesting one and put forward the differing arguments for and against for the various models of ownership that are often seen in the healthcare sector.

Needless to say, the article prompted many comments from GPs and NHS managers, some arguing that property is the best investment you can possibly make whilst others see sale and leaseback as a viable solution to the problems facing general practice as a whole.

So, who is right here?! And what’s the truth of the situation?

Horses for courses…

The first thing to say is that different models suit different practices, dependent on their individual circumstances. As always, there are pro’s and con’s to both owning your own premises and occupying a leased building. Here are a few of the immediate pro’s and con’s:

Pro’s Con’s
Freehold · Capital growth over the long term· Autonomy· Property costs are covered by Notional Rent payments· Flexibility over repairs and maintenance· Ability to add value (eg extending or adding a pharmacy) · Issues when a partner wants to retire· Complicated process to sell· Buy-in issues· Still a requirement to continually invest in your premises to ensure remains fit for purpose

 

Leasehold · No premises buy-in issues· Flexibility – names on the lease can easily be changed within the same practice · No capital growth as no investment in the property· Service charge costs and requirements under the lease to repair and maintain· Rent review process makes it possible that the practice might need to top up the rent but in our experience, landlords are not forcing the issue

· Issue of the last GP remaining on the lease being unable to retire

The changing face of general practice

Although owning your own premises has historically been considered the norm by GPs, the face of general practice is changing. New entrants are joining the profession saddled with debts and increasingly looking for a portfolio career rather than a job for life. Newer GPs are struggling to find the funds to take on a share of the premises and, for many, the risks of buying in are outweighing potential benefits further down the line. As premises get bigger and there is a need to generate additional income from add-on services such as pharmacies, then the values of premises get larger too. Consequently, in some cases, the buy-in amount is eye wateringly large.

Sale and leaseback deals do avoid the financial pressures of buying-in and, although partners will need to put their name to a lease, there is no lump sum investment required.

What do you do when you want to retire?

Many GPs have considered their investment in their premises to be part of their pension pot but, with the issues highlighted above, many are now struggling to find someone to buy their share and consequently find it hard to actually realise their equity.

Even if there is someone keen to take on ownership, it can be a costly, time-consuming and complicated process starting with agreeing the property valuation in the first place.

It is possible for a property owning partner to retire but retain a share of the ownership of the property. The property owning partners could hold the property as a separate entity and then put a lease in place to the practice. This would still effectively still be a sale and leaseback just in a different form; the practice would still end up leasing from an entity that is legally not part of the practice.

NHS England – the Head Lease question

One of the comments below the article made the suggestion that requiring NHS England to take a head lease would solve the problem i.e. NHS England would sit between the landlord and the tenant to take on the risk of the lease so if the practice folded for some reason, NHS England would need to find another practice to take on the lease. This is highly unlikely as NHS England has no remit to start to enter into contracts of this nature, even if it is the body responsible for reimbursing the associated costs.

In a sense, NHS Property Services was set up to hold the majority of NHS property assets including leasehold properties, but the reality is that NHS Property Services is very reluctant or even resistant to taking on the risk even if it would be the quickest and easiest way of resolving a deadlock. In the vast majority of cases, the lease is between the landlord of the property and the practice as tenant.

If you are thinking of entering into a sale and leaseback, it is worth noting that NHS England will need to be involved in any decision making process as it will need to sign off on the agreement and will want to ensure that the terms of the lease, rent etc are appropriate.

Any discussions between parties should ensure that the terms within the lease are designed with Primary Healthcare premises in mind, particularly in respect of rent, rent reviews and service charge. These are the areas that need an attention to detail from the outset to ensure that the practice is protected from unforeseen charges from Day One.

If you need advice on your particular circumstances, please feel free to give me a call on 01604 799010.

 

About Tom

Tom advises a range of clients on a day-to-day basis both in the commercial and healthcare property sectors. He specialises in rent reviews, dispute resolution and surgery valuations, with a particular specialism in pharmacy rental values. He's currently advising Local Medical Committees on how NHS changes will affect practices occupying NHS owned premises. When he's not at work, he's kept very busy by his three small boys!
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