Sharing your space: Things to consider when looking for an office mate

Economic pressures are prompting many physicians to sublease underutilized office space. A good match can help reduce overhead and help grow a practice.

By — Posted Feb. 1, 2010

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Alice Fuisz, MD, an internist in Washington, D.C., has space for rent. One physician recently left the Washington Internists Group, where she is a managing partner. With the economy tight, getting someone to sublease part of the group's 5,000- square-foot office for a few hours or days each week may be the quickest way to keep a cap on expenses until a new member is on board.

"It helps to cover the costs," said Dr. Fuisz. "Subleasing has many benefits to our practice."

Physicians sharing space with physicians or other health care professionals is not a new concept. But those in the medical office real estate business say interest in subleasing is growing. The transition to electronic medical records is leaving empty rooms where paper charts were once stored. Also, declining reimbursements and recessionary pressures are leading physicians to seek ways to reduce fixed costs.

"I've seen more physicians looking to keep their overhead down and looking to sublet their space out or looking to sublet space from other physicians," said Paul Wexler, president of Corcoran Wexler Healthcare Properties in New York. "It makes a lot of sense for people on both sides of the transaction."

This means physicians increasingly are taking in the professional equivalent of a roommate. And like with a roommate, the best match will be someone whose activities mesh with your own.

"You want someone who will be complementary to the practice," said Tim Rorick, senior managing director of FirstService Williams Commercial Real Estate in Stamford, Conn. "An orthopedic surgeon could rent space to a physical therapist, but you don't want a pain-management physician right next to a pediatrician."

Expansion potential

There is potential for conflict when the renter serves a patient population that has different needs and behaves in different ways. But when that population meshes with your own, the arrangement can not only provide a financial boost to the practice, but also can make it easier for patients to access recommended care. For instance, Dr. Fuisz rents space to a podiatrist and a cardiologist, and offers her patients the option of being referred to these physicians. "It's really very convenient for patients," she said.

Such arrangements should not run afoul of various state and federal anti-kickback statutes as long as the rent paid is comparable to that for similar spaces in the area, and there is a written, signed lease lasting at least a year, experts said.

Physicians are allowed to charge a subtenant for both the cost of the actual office space and use of the common areas, but the size of the space and the time allotted need to be fixed. For example, an arrangement that allows a physician to use an office every Wednesday for eight hours, paying the same rent no matter how many patients are seen, is generally considered legal. One in which the hours vary widely or the rent is well above or below the cost of similar spaces would not.

"There are a lot of compliance issues you have to be aware of when you have a referral relationship," said David Biehl, a partner/director in the law firm Garfunkel Wild in Great Neck, N.Y., who has advised physicians on these types of deals. "The most important issue is that the cost of the space has to be at fair-market value. You cannot underpay. You cannot overpay."

Physicians who refer patients to subtenants are not required to offer information about the arrangement. But because of regulations governing referrals, it may be prudent. "It's good practice to avoid the appearance of impropriety," Biehl said.

Referrals are one way that leasing a portion of another physician's office space can offer the potential to expand the patient population. Cross-coverage is another.

Ari Weitzner, MD, an ophthalmologist in New York, had his own office for several years. Because his surgery schedule meant he wasn't in the office every day, he looked for another ophthalmologist to share his space.

During his search, he found other physicians in the same situation and decided to be the renter instead. He now subleases space in Manhattan and Brooklyn several days a week. He shares receptionists but has his own office manager. He also sees patients of his physician-landlords when they are not available.

"It really reduces your overhead," said Dr. Weitzner. "And sharing space with someone in your specialty increases your patient load."

Getting down to logistics

Experts say the first step for physicians looking to sublease space is to read the original lease agreement and determine if this is allowed. Some contracts prohibit the practice; most require that the property owner or manager be informed.

There also may be limitations on who may sublease the space. A hospital that owns a medical office building, for example, may spell out the type of health care professionals it will allow.

"Physicians really have to be very knowledgeable about what their current lease says," said Donna F. Jarmusz, senior vice president of the health care real estate developer Alter+Care in Skokie, Ill.

The next step is to determine the structure of the subtenant arrangement. Will the subtenant have access to a specific room 24 hours a day, seven days a week? Or will use be limited to predetermined hours and days?

For instance, Dr. Weitzner is only in his offices when the other physician is not. The cardiologist and the podiatrist at Dr. Fuisz's practice occupy the same office at different times.

Those looking to rent space also need to consider what other services will be provided. What equipment will subtenants be allowed to use? Will staff be shared? Dr. Fuisz's staff greets patients for the cardiologist and the podiatrist, but the subtenants handle their own appointment schedules and billing.

"You want to be very clear about what is included," Dr. Fuisz said.

There's also the important question of the type of health care practitioners who will work well together. For example, Dr. Weitzner prefers to share an office with others in his specialty. "I need such specialized equipment."

Dr. Fuisz is looking for health care professionals who could serve her patient population, such as a dermatologist or another internist. She would also like to share space with a psychiatrist so patients could access mental health care without the possible stigma attached to a dedicated facility, but she is not convinced her office is quiet enough to be suitable.

A pediatrician, on the other hand, would not be a good fit, she said. Her patients would see little benefit, and might not appreciate children in the waiting room. "We're sort of adult-centric."

The waiting room issue raises another consideration. Can the space accommodate additional patients that a new professional may bring in?

After those questions have been tackled, the search for office mates can be conducted through professional networking or advertising in local medical society newsletters. Realtors who specialize in medical space should be able to help. Dr. Weitzner also launched a for-profit Web site called in October 2007 to facilitate matches.

Check out your match

Once a connection has been made, due diligence is important. Both parties should check references and ask about professional reputations.

If one party does not pay rent, everyone involved can be left in a difficult situation. It can require legal action to oust a subtenant who does not pay rent. And a subtenant who has paid rent can be evicted along with a landlord who has not.

Most physicians who sublease their space charge a one-month deposit and collect rent from their tenants monthly.

More common than payment issues, however, is subtenants spreading throughout the office.

"We call that 'scope creep' or 'space creep.' It's like water that spreads into the space available," said Bill Lichwalla, president and CEO of real estate consultants Plante Moran CRESA, based in Detroit. One solution may be increasing the rent as more space is being used. "It's so important to have really good expectations memorialized in a sublease agreement."

Subleases should not be written for a longer span than the original lease covers. In addition to spelling out what the rent includes, the sublease should also outline how the contract can be terminated. Most involved in these arrangements suggest a one- to four-month notice that allows for a fairly easy exit.

"My feeling is: If I'm not happy or the other doctor is not happy, we do not need to do this." said Charles Bier, MD, a solo internist in Washington, D.C., who is looking for fellow internists to share his 3,000 square-foot space and replace a subtenant who left.

Dr. Bier is also considering the possibility that subleasing can be a first step to a more involved financial relationship. He'd like to find someone younger with whom to partner and then take over his practice when he retires.

Some of the physicians who have responded to Dr. Fuisz's ad have the potential to become partners in the practice, and finding a new one is her eventual goal.

"If the right physician were to come along, my preference would be for them to join the practice," said Dr. Bier. "That would be great, but, to start out, they will simply be subletting."

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Looking to rent out space?

  • Read your original lease to determine whether subleasing or sharing space is allowed.
  • Decide what parts of your office you want to lease and for what periods of the day or week.
  • Publicize your need for a subtenant through professional networking, medical society publications or various Web sites.
  • Find a physician or other health care professional who could benefit your patient population.
  • Have a written sublease agreement that lasts at least a year.
  • Charge fair-market rent.
  • Determine what additional services will be provided.
  • Spell out how the contract can be terminated if necessary.
  • Check a potential subtenant's references.
  • Inform patients referred to a subtenant of the nature of the relationship.

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Looking for space to rent?

  • Look for an office through professional networking, medical society publications or various Web sites.
  • Find a space that will be available for the hours you need.
  • Pick a location that will allow you to expand the patient population you can serve.
  • Assess whether your practice will fit in with the one already in the space.
  • Sign a written agreement that lasts at least a year.
  • Ask what additional technology or administrative services will be provided.
  • Ensure the contract can be terminated easily if necessary.
  • Check a potential sublandlord's references.
  • Call the building landlord to ensure that the physician subleasing space to you is up to date on his or her payments.

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