The need for development: should you own and develop your own building, or find a reliable private sector development partner to develop a building that you can lease?

Reading the NHS Sustainability and Transformation Plan for Coventry and Warwickshire published recently, I was impressed by the bold opening statement of the vision for the local health and care economy: “To work together to deliver high quality care which supports our communities to live well, stay independent and enjoy life”.

Of course this is exactly what I want for my young children and aging parents and I know that NHS staff work long and hard to make this happen, but then I saw an article in the national press where a Freedom of Information request showed that, in just over 200 Council areas across Britain, private care providers in half those areas had cancelled contracts with the relevant Council due to affordability issues and Surrey County Council almost held a referendum to gain a mandate for a 15% council tax rise. So back to the Sustainability and Transformation Plan – how is it going to be achieved in the face of financial stress? The Plan indicates: proactive care of the population, reduction in the unit cost of healthcare provision, improving efficiency through collective productivity opportunities, develop sustainable infrastructure for buildings and IT, and create a Primary Care and General Practice model which is appropriate for the needs of the community.

This article focusses on one particular strand of the Plan – implementing a primary care development workstream to focus on developing GP services giving patients better and extended access to GPs, and providing health services in the community, not just in hospital.

Translating that into local property development, the organisations need premises. Increasingly we are seeing different categories of healthcare service providers working in close proximity. Doctors, dentists and district nurses are joining up with pharmacies, physiotherapists and patients to make financially sustainable community health buildings – and when that ticks the political and planning boxes of local councils by acting as a catalyst for regenerating deprived areas, then it helps everyone.

Early decisions

One critical early decision is whether to act as a partnership or incorporate new company in the ownership and development of the premises. This may depend on a number of factors including, who else is involved in the development and ownership of the premises and the risks associated with the development. The partnership route can either be an unlimited liability partnership route or a limited lability partnership (LLP). Acting as an unlimited liability partnership means that all partners are personally liable for losses. The LLP can provide the partners’ with limited liability similar to a company whilst preserving some of the benefits associated with the unlimited liability partnership. Alternatively a new limited company can be created to act as the property owning vehicle. The advantage of having a limited company is that it can be used ring fence the risk of the development and ownership of the premises. If any claims arise in connection with the development or ownership of the premises, such claims would be made against the company which has a separate legal entity. However, if it is a new company or LLP with no assets and the development requires third party funding, or where the premises will be leased by the practice.it is likely that lenders and landlords will demand personal guarantees from shareholders of the company and LLP as well as other security. Such guarantees or security would create the personal liability that the company or LLP vehicle was seeking to avoid. The strong covenant strength of the practices NHS contracts should hopefully provide a basis on which to resist the giving of onerous personal guarantees or other security.

Another key decision is whether you want to buy, own and develop your own building, or find a reliable private sector development partner who will develop a building that you can lease. For practices that want to “do it themselves”, there is the personal satisfaction of delivering a physical and psychological benefit to the community that is not held by a private landlord which just wants to maximise income with no loyalty to the local area. Other factors that may influence this decision are whether you already own the premises that you are in, the land values and availability of new sites where you are, whether the practice is in a deprived area or rural area, the difficulty the practice has in recruiting new joiners and of course key stakeholder attitude to investment. There is a noticeable trend towards the NHS favouring GPs as tenants rather than owners. This may limit you wishing to own and develop your own building. The NHS preference is partly due to lack of in-house experience to effectively assist GPs leaving the NHS to prefer the third party developer route.

Suppliers

If you have managed to secure funding to own and develop your own building, beware though of the difficulties of developing yourself. Assuming you can find the land at a suitable price and you obtain planning, you then have to decide what you want in sufficient detail to run a competitive tender for a builder. In order to get accurate like for like prices, your project manager / surveyor will want a minimum level of detail to go out to the building contractor market. What you don’t want are tender returns full of assumptions, qualifications, provisional prices and designs that don’t meet the operational needs of the practice.

Once you have chosen a builder, then your own project manager / surveyor will advise you on issues such as programme control, cost control, quality control and change control. If you have selected a “design and build” route, then a significant proportion of the risk will sit with the builder but you will pay a premium for that. So you would be asking the builder to take responsibility for such issues as ground conditions, accessibility, document anomalies and discrepancies and in some cases, turnkey handover with pre start technical commissioning so you can walk in and start treating patients.

Payments

Every project has one thing in common – payment – and in our experience, one of the biggest causes of financial disputes is change control – the owner / end user is making decisions as the building work progresses. We have experience of consultants making requests based on sound clinical judgment and experience but not appreciating that moving a bed 30 centimetres near the end of a job changes all heating, lighting, ventilation, medical gas connections and electrical connectivity. It was a small change with a big cost, so explore the options early, brainstorm, consult with stakeholders and think about creating a steering committee that is empowered to make all but the most expensive decisions. In the days of extended opening hours, are you staff and patients safe and secure? Are consultation sessions with staff (and potential tenants) feasible so that you understand and design the building for the operational issues and therefore (if planning to rent space to tenants) maximise the revenue stream?

Perhaps you prefer to partner with a private sector developer who will develop a building that you can lease. If so, you will need to be clear at the outset on what such a lease arrangement means. The arrangement should be clear on what the developer will provide during the development stage, once the development is complete and going forward. Tell them what you want and let them raise the capital and engage the architect and engineer. Signing an agreement to lease allows the doctors and nurses to focus on the caring and hopefully minimise disruption to patients and staff by moving when the new premises are ready. Of course signing a lease means not benefitting from any increase in the capital value of the asset but if you ring-fence a long lease in a newly formed development company, then is that more attractive to young GPs who don’t have to buy into the partnership in the same way? Leasing the premises may take away the concern of encouraging new GPs to the practice and the responsibility and large part of the costs of the initial development. However do be clear what the lease terms will be and negotiate the terms that are fit for purposes for the future needs of the practice. For example, depending on the lease terms, they may be a risk of a possible shortfall on rent review leaving the partners to make up the shortfall, new GPs to the practice may not want to take on the liabilities under the lease which could make difficult for retiring partners.

If you do approach this from a landlord and tenant relationship, don’t forget to give yourself the ability to sublet space to the pharmacy operator or NHS Trust or private physiotherapist or dentist. You will also want the ability to assign the lease and therefore want to ensure that as well as being allowed to assign the lease, the restrictions on use do not prove impossible for you to dispose of the lease to any other party. If possible, you should avoid giving an authorised guarantee agreement. An authorised guarantee agreement would allow the landlord to pursue you for payment of rent and any other monies due under or due to a breach of covenant of the lease even where you are no longer the tenant under the lease. Also negotiate appropriate break clauses, Make sure the rent is no more than the rent reimbursed by the health authority.

CQC

Then there is the issue of obtaining certification for the regulator. The CQC applies the following five key questions: Is the service safe? Is the service effective? Is the service caring? Is the service responsive? Is the service well led? Then the CQC applies “fundamental standards” which, in the case of premises and equipment, demands that facilities are clean, suitable for the intended purpose, and looked after properly. This will include health and safety matters such as employee safeguards, fire safety and means of escape, asbestos or other substance assessment and management, compliance with the Disability Discrimination Act (DDA) and the gas and electricity requirements. Where you have opted for the lease route, you will for example, still be liable under the DDA to make physical adjustments to the premises where adjustments are required. Therefore, if these requirements have not been thought through at the outset of the project and only come to light once you are in occupation, you may have to seek consent from the landlord under the lease in order to make the necessary adjustments.

So the question of repair and maintenance arises. The extent of the obligation for repair and maintenance will depend on whether you own the premises or have opted to lease. Where you have opted to lease, this will also depend on the terms of the lease. In any event, repair and maintenance obligations may be an opportunity to benefit from economies of scale if small practices merge, or large practices join forces with others to deliver a responsive and proactive repair and maintenance framework that allows work to be requested on differing scales of urgency with different incentives for the provider.

Going back to the local Sustainability and Transformation Plan, the group has identified overlap in back office functions such as IT, finance, building management and purchasing. While it is encumbent on NHS buyers to obtain value for money and not pay too much to a service monopoly, the need to work efficiently may justify a review of outsourcing strategy. Is there potential to share knowledge, train and upskill staff ?

There is nothing new in this. In 2011 the Department of Health restated Nye Bevin’s plan for the NHS in seven principles. NHS Core Principle Number 5 says : “The NHS works across organisational boundaries and in partnership with other organisations in the interest of patients, local communities and the wider population” – so let’s get together to make best use of our physical, financial and human assets.