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Tuesday 27 September 2016
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What is the best option for partners: to own their own premises or to lease the premises?

Q: What is the best option for partners: to own their own premises or to lease the premises?

A: An interesting question and one to which the answer will vary depending upon the needs and aspirations of the partners, both at the present time and taking a longer-term view. Historically, in this country there has been a tendency to want to own property but the recent recession and difficulties in securing debt finance had led many to consider leasing property, generally from specialist investor/developers.

Primary care differentiates itself from other sectors in that, as discussed above, the actual or notional rent is generally reimbursed, which means there is less pressure on the partners financially in terms of their ability to meet either mortgage or rent liabilities. However, where consideration is being given to upgrading, expansion or redevelopment, the positives and negatives of owning and leasing premises become more apparent.

To put ownership into context, the most recent survey was carried out by the British Medical Association (BMA) approximately five years ago and, while somewhat historic, the trends make interesting reading.(1) At that time, some 64% of medical premises were owner occupied and 75% did not consider the property would be suitable for their future needs.

Approximately 75% of medical premises were more than 15 years old and more than 30% of practices did not consider it economical to adapt their premises to meet Disability Discrimination Act requirements.(1) Furthermore, back in 2006, around 25% of owner occupied surgeries had negative equity and this was before the property crash.

Ownership has the advantage of control and independence as well as the ability to benefit from rises in property values. However, with ownership comes liability, such as finding the money when the roof leaks or putting a lift in.

Furthermore, particularly for older converted properties, values are likely to fall as the facilities depreciate, and the cost of upgrading and refurbishment may exceed any uplift in value. The anticipated nest egg for retirement may therefore not be as large as anticipated.

Ownership does mean that the practice has an asset to offer as security to banks to raise capital but a new-build surgery is an expensive and lengthy undertaking and, depending on the size of the practice, could be between £2-5m. For expanding practices or those seeking replacement partners, this level of liability can deter potential partners.

An alternative, which is gaining increasing momentum, is to work with third-party developers who take on the responsibility of delivering a new facility with the practice committing to a lease. For existing premises, investors are prepared to buy on a ‘sale and leaseback’ basis so the partners can release equity and exit property ownership. Leases will generally be 20-25 years, with the rent set in agreement with the DV and linked to the level of reimbursement. In such circumstances, unless the tenant has agreed to a full repairing liability, it is the responsibility of the landlord to resolve any problems with the structure and grounds, allowing the practice to focus on delivering their service rather than management of a property.

Furthermore, if an extension is required or upgrading is necessary, this would generally be undertaken at the cost of the landlord, subject to an adjustment in the rent to reflect the improvements.

Clearly then, there is no clear-cut answer as to which is the best option. This will be dependent upon the needs and aspirations of the partners and whether these are best served by retaining ownership and control or by simplifying their occupational needs through leasing.

Reference
1. British Medical Association Health Policy and Economic Research Unit. Survey of GP practice premises. Report. London: BMA; 2006. Available from: http://www.bma.org.uk/images/SurveyofGPpracticepremisesREPORT_tcm41-2096...