Medical Office · Due Diligence Checklist
Medical Office Due Diligence Checklist
Medical office due diligence checklist for institutional buyers: Stark law lease compliance, above-standard TI, reimbursement risk audits. Free template.
Why the due diligence checklist looks different for medical office
Medical office leases sit inside a federal regulatory framework that no other commercial asset class touches: Stark law and the Anti-Kickback Statute require rent to be at fair market value and commercially reasonable when the tenant is a referring physician group. That means pulling a contemporaneous FMV lease study, not comparing rent to a market comp set and stopping there.
Tenant improvements in medical office run far above general office standards because of plumbing, imaging shielding, and specialized equipment infrastructure: $150-$350/SF versus $50-$90/SF for general office. That TI is often not fully amortizable to a replacement tenant, so the building's suitability for backfill needs underwriting alongside the current tenant's credit.
Medical office tenant health is driven by reimbursement rates from Medicare, Medicaid, and commercial payors rather than general business performance, so a physician group's revenue can decline even as patient volume grows. Assessing renewal risk means reading payor mix and reimbursement trend alongside the tenant's top-line revenue.
The medical office-specific checklist
- 1
Confirm title is clean
Verify: title commitment, policy exceptions, recorded liens
- 2
Reconcile rent roll to executed leases
Verify: rent, expiration, deposit, and options match each lease 1:1
- 3
Tie rent roll to T-12 general ledger
Verify: three months of GL tie to within 1% of rent roll totals
- 4
Review property condition assessment (PCA)
Verify: deferred maintenance budgeted and reflected in the pro forma
- 5
Review Phase I environmental report
Verify: no REC, no HREC, no CREC without remediation plan
- 6
Review zoning and entitlements
Verify: current use is a permitted use; no pending rezoning
- 7
Confirm tax status
Verify: tax bills paid current, no special assessments pending
- 8
Audit operating expenses
Verify: three-year trend; flag any single-line change >10% YoY
- 9
Obtain or commission a fair market value (FMV) lease study for any physician-tenant lease
Verify: rent per square foot falls within the FMV study's range and hasn't been adjusted for referral volume, any correlation between rent terms and referral patterns is a Stark law red flag
- 10
Verify hospital affiliation and system agreements referenced in tenant leases
Verify: affiliation status is current and contractually documented, not just marketing language; confirm any admitting privileges or system-employment terms tied to the lease
- 11
Audit unamortized above-standard TI balance against remaining lease term
Verify: TI amortization schedule per tenant; flag any tenant with unamortized TI exceeding 24 months of remaining base rent if term is under 5 years
- 12
Pull payor mix and reimbursement trend for each physician-group tenant
Verify: Medicare/Medicaid vs. commercial payor percentage and any recent reimbursement rate cuts affecting that specialty; flag any tenant with Medicare/Medicaid exposure above 60%
- 13
Confirm certificate of need (CON) status for any tenant requiring one
Verify: CON is current, transferable, and not tied to a specific physician or entity that could lapse at ownership change
- 14
Review build-to-suit terms and plumbing/shielding infrastructure documentation
Verify: as-built specs match the lease's specialized infrastructure requirements (imaging shielding, medical gas lines, plumbing density); confirm any landlord warranty or maintenance obligation for that infrastructure
Metrics that matter for medical office
| Metric | Target | Calculation |
|---|---|---|
| TI amortization coverage | >100% | remaining base rent over lease term / unamortized above-standard TI balance |
| Reimbursement exposure | <60% Medicare/Medicaid for any single tenant | Medicare + Medicaid revenue / total tenant revenue, by specialty |
| FMV lease compliance margin | within FMV study range, no referral correlation | in-place rent per SF / FMV study's midpoint rent per SF |
| WALT (yrs) | >7 | weighted avg remaining lease term |
| Hospital affiliation | on-campus or affiliated | qualitative |
| Renewal probability | >85% | historical renewal rate × credit quality adjustment |
Red flags unique to medical office
-
Rent terms correlate with a tenant's referral volume to an affiliated hospital
this is the exact fact pattern Stark law and the Anti-Kickback Statute prohibit, a lease structured this way exposes both tenant and landlord to civil penalties and can void the lease's enforceability
-
Unamortized above-standard TI exceeding the remaining lease term's base rent
if the tenant vacates, the landlord can't recover the TI investment and the specialized infrastructure may not suit a general office backfill, extending downtime well past typical office re-leasing timelines
-
Physician-group tenant with Medicare/Medicaid reimbursement exposure above 70% and a recent rate cut in that specialty
reimbursement-driven revenue decline can impair a tenant's ability to pay rent even while patient volume holds steady, renewal risk isn't visible in current rent-roll performance
-
Hospital affiliation undocumented
on-campus or affiliated-off-campus positioning materially changes re-leasing risk
-
Tenant improvements underwritten at replacement cost
medical build-outs run $100–$250/SF; pro forma understating this routinely breaks renewal economics
-
No right of first refusal on adjacent suites
constrains tenant growth and increases departure risk at renewal
-
Less than 50% of leases 7+ years remaining
medical-office valuation rests on long WALT; short term risks re-leasing cycle
Example — medical office due diligence checklist walkthrough
A 68,000-square-foot medical office building sits adjacent to a regional hospital campus, trading at $23.8M, roughly $350 per square foot on a 6.0% cap rate against $1.43M of T-12 NOI. The building is 88% leased to six physician groups, the largest an orthopedic practice occupying 22,000 square feet (32% of the building) with admitting privileges at the adjacent hospital. The offering memorandum presents the hospital affiliation as a durable demand driver.
The Stark law review checks the orthopedic group's lease terms against an independent FMV study commissioned for the diligence period. The lease rent of $34/SF falls within the study's $28-$38/SF range, compliant on its face. But the lease also includes a below-market TI allowance clawback waiver that wasn't present in the FMV study's comparable set, and the group's principal physicians are documented as high-volume referral sources to the adjacent hospital system, which also guarantees the lease. Landlord affiliation with the referral destination, plus a non-standard economic term outside the FMV comp set, is a fact pattern that needs outside healthcare-regulatory counsel before closing.
The TI audit raises a different concern. The orthopedic suite was built out three years ago with $310/SF of above-standard TI (imaging shielding for an in-suite X-ray room, reinforced flooring, dedicated plumbing), funded jointly by landlord and tenant, with $1.6M of the landlord's contribution still unamortized against a lease with 6 years remaining. If this tenant doesn't renew, that infrastructure doesn't suit a general office backfill; realistic re-tenanting to another imaging-capable medical user could take 12-18 months, well past the amortization runway.
FMV compliance held, and the TI is a real asset if the tenant renews, so the price held too. What changed was the structure: the buyer required an updated Stark counsel opinion as a closing condition, carried a $1.6M TI-at-risk reserve in the model instead of treating the orthopedic lease as bond-like anchor income, and shifted $400,000 of closing proceeds into a post-close TI escrow.
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Get the template →Questions about medical office due diligence checklist
Stark law prohibits a healthcare provider from referring patients to an entity with which they (or an immediate family member) have a financial relationship, unless an exception applies: and one common exception requires commercial lease terms to be at fair market value, commercially reasonable, and not tied to referral volume. Diligence needs an independent FMV study and Stark-aware counsel review for any physician-tenant lease, not a market rent comp.
Medical suites require plumbing for exam rooms, imaging shielding for X-ray or MRI equipment, medical gas lines, and reinforced flooring for heavy equipment, infrastructure general office space doesn't need. TI budgets of $150-350/SF are common versus $50-90/SF for general office, and that specialized buildout limits which tenants can backfill the space if the current tenant leaves.
A physician group's ability to pay rent depends on payor mix and reimbursement rates from Medicare, Medicaid, and commercial insurers, rates that can be cut by regulation independent of patient volume. Pull the tenant's payor mix and recent reimbursement trend by specialty; a tenant with high Medicare/Medicaid exposure in a specialty facing rate cuts carries renewal risk that isn't visible in current revenue.
30–60 days is typical for institutional commercial assets. Multi-property portfolios run longer.
Typically the acquisitions team quarterbacks, with specialists pulled in for environmental, title, zoning, and legal review.
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