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Andy Dow and Allan Katz

During the past couple of decades healthcare real estate has evolved into a major real estate asset class separate and distinct from the traditional real estate asset classes. Because of the unique nature of these facilities, many standard lease provisions create distinctive challenges when applied in a medical lease context. In addition, medical uses often produce eccentric issues not found in standard office or retail leases.

Many standard lease provisions require additional scrutiny where a medical use is involved. For example, since patients visiting medical facilities are more likely than the general public to have special needs relating to accessibility, the parties should pay special attention to the compliance with laws and accessibility provisions of the lease. In addition, HIPAA and other federal and state laws regulating confidentiality of medical records and personal health data may necessitate modifications to some typical clauses in standard office leases, such as provisions allowing landlord unfettered access to the premises.

Medical tenants also frequently utilize materials and generate waste (such as immunotherapy and chemotherapy agents, biological specimens and the like), which require appropriate disposal to comply with applicable federal and state environmental and waste disposal laws. Therefore, an absolute prohibition from the utilization of such materials is not appropriate, but the lease should clearly specify rules governing the use of such materials and which party is responsible for their disposal.

Medical tenants often have higher utility usage than standard office tenants because many medical tenants have sinks in each examining room and operate x-ray, MRI and other equipment that utilize more electricity than standard office equipment. Landlords should retain flexibility in the lease to separately meter the premises in order to charge tenants equitably if there are significant variations in utility usage among the tenant base. From the tenant's perspective, a provision that limits electrical consumption to a certain number of watts per square foot or to that of a typical tenant may not be sufficient.

Tenants under medical office leases are often more sensitive to assignment and subletting rights than tenants in other types of leases. For example, in the case of a lease involving a physician group, the lease should adequately address the tenant's ability to admit new partners into the practice from time to time, as well as accommodating retiring physicians exiting the practice.

In addition to viewing traditional lease provisions from a different perspective, medical uses often produce unique issues not found in standard office or retail leases. This can be especially true when the building is located on a hospital campus. For example, the naming rights of buildings on hospital campuses (together with related building signage) can be a significant source of revenue for the hospital, especially to nonprofit hospitals. Therefore, it is important for the landlord and tenant to adequately address these rights.

In addition, while many of the prohibited uses found in a medical lease are similar to those found in standard office leases, medical office buildings affiliated with a particular hospital may prohibit uses that the hospital deems inappropriate given its particular mission. For example, many not-for-profit hospital systems are created by faith-based organizations carrying a faith-based mission. These hospitals may impose restrictions upon tenants relating to elective abortion services, stem cell harvesting from fetal tissue or other practices that violate their faith-based mission.

Because the goal of a hospital system for medical office buildings on its campus is for them to support and create synergies with the hospital, the hospital system may also want to limit the leasing of space in buildings on its campus to only those physicians and physician practices that have staff privileges at the hospital. This is a matter of convenience for both the hospital and the physician and additionally prevents competitors from occupying space in the hospital campus. Likewise, the hospital may require that any tenant of a building on the hospital campus be a medical-related tenant.

Similar to exclusive rights in retail leases, tenants under medical leases sometimes seek to be the exclusive physician in a medical office building providing their particular expertise to patients. Generally, landlords are also sensitive to the tenant mix on a hospital campus, because their success in marketing the building to tenants will be enhanced if more specialties of medical practice are represented, which should enhance patient referrals among the tenants.

As the population continues to age, medical real estate will continue its growth trend as a major force in commercial real estate. To be successful, developers and owners will need to understand how medical real estate differs from traditional real estate product types and the considerations that are important to those in the medical field. Given the anticipated growth in the sector for the foreseeable future, real estate practitioners would be well served in making an investment of time and resources in understanding the medical real estate market.

— Andy Dow and Allan Katz are shareholders in Winstead's Real Estate Development and Investments practice.

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