Property sale and leaseback transactions are becoming common place in the healthcare sector where medical practitioners are retiring, where ownership is separated from occupation, or where practices are merging into super practices with other such surgeries.
With interest rates still at an historical low despite the recent rise, investment yields are also low, largely driven by demand, with many property investors seeing commercial property, and in particular healthcare property, as a secure investment - and GPs selling the family silver.
Sale and leasebacks apply to practices where the surgery is a partnership-owned asset in owner occupation. Thus, where ownership is separated from occupation and the freehold of the property can be sold to a property company or private investor who will become the landlord, with the occupying practice remaining in occupation by way of a lease.
There are many issues to be considered in effecting a sale and leaseback transaction, with advice taken from surveyors, solicitors and accountants as to the impact of undertaking such a transaction
The occupational and operational arrangements of the practice need not change, to the extent that patients and staff will not be aware of the changes and these transactions can be handled discretely.
The low yields being paid by investors for property transactions is having a knock-on effect on the values surveyors are reporting when undertaking valuations for partnership purposes. This is good news for the retiring partners, but not so good news for prospective partners being faced with a higher-than-expected ‘buy-in’.
A sale and leaseback transaction will often release capital to pay off retiring partners, as well as, hopefully, leave a surplus. To have the practice continue in occupation as before but now by way of a lease and without a buy-in price can make the partnership more attractive for recruitment.
What are the pros and cons of a sale and leaseback?
The advantages include, removing the property from being a partnership asset and releasing capital to the partners with sale prices being particularly high at the moment due to low interest rates.
A sale and leaseback can also ease the recruitment of prospective partners and remove debt from the partnership and individual partners. In the long term this will make the partnership more flexible and sustainable.
In terms of disadvantages, the obligation to repair can be similar to owning the property and there is an obligation to pay rent.
The practice will have to ensure that the lease rent and rent reimbursement are in parity, save for issue of third-party occupiers, such as a pharmacy. There will also be the liability to pay dilapidations which is the reinstatement of the property at the end of the lease.
For a sale and leaseback to proceed, it is essential to have the approval of NHS England/clinical commissioning group in terms of the proposed lease, with the lease length being commensurate with the age and quality of the premises.
To have the practice continue in occupation as before but now by way of a lease and without a buy-in price can make the partnership more attractive for recruitment
A converted private property-style surgery may command a lease of 10 years with a break option in year five. A purpose-built medical centre will command a lease of 15-20 years in order to generate sufficient capital value to cover the redemption of mortgages and associated penalty costs.
Regarding rent, one hears of Notional Rent, Current Market Rent, and Rent Reimbursement, but what are they?
Notional Rent and Current Market Rent will apply to surgeries that are owner occupied, with Rent Reimbursement being applicable to leased premises. It follows that the practice will switch from the former to the latter when a sale and leaseback transaction has been effected.
The amount of rent reimbursed to a practice can only change if the lease rent has changed first. This means that at rent review, if the rent changes and the practice then applies for rent reimbursement of a higher level of rent, the NHS and District Valuer cannot review the amount of rent reimbursed on its own accord.
Finally, property is generally exempt from VAT unless the owner of the building elects the property to be subject to VAT. If VAT is elected, then the rent charged under the lease will be subject to VAT. If this occurs, then even if the sale and leaseback transaction has been undertaken at the same amount of rent as the previous notional rent, the revenue cost to the clinical commissioning group will now be 20% higher due to VAT.
There are many issues to be considered in effecting a sale and leaseback transaction, with these points needing to be considered further, with advice taken from surveyors, solicitors and accountants as to the impact of undertaking such a transaction.