Medical Office · Tenant Analysis
Medical Office Tenant Analysis
Commercial tenant analysis for medical office buildings: payer mix exposure, hospital affiliation risk, Stark-compliant rent, and buildout captivity.
Why the tenant analysis looks different for medical office
Medical office tenant health is a function of reimbursement, not retail traffic or office headcount: a practice's cash flow depends on payer mix (commercial vs. Medicare/Medicaid) and CMS rate schedules that can change annually. Tenant analysis models reimbursement exposure explicitly, a variable no other asset class carries.
Hospital affiliation and professional services agreements (PSAs) drive patient referral volume for many MOB tenants, but PSAs are frequently annual or short-term contracts layered on top of a 10+ year lease. A tenant can be creditworthy today and referral-dependent on an agreement that lapses years before the lease does, a mismatch generic tenant analysis doesn't surface.
Specialty medical build-outs (surgical suites, imaging shielding, plumbing for exam rooms) cost three to five times a standard office TI package and are largely unusable by a different practice type. That captivity locks the tenant in, but it also makes a vacancy dramatically more expensive to re-tenant, and Stark Law constrains how the landlord can structure rent to retain them.
The medical office-specific checklist
- 1
Build the tenant roster
Verify: name, category, SF, revenue share, lease term
- 2
Compute concentration
Verify: top tenant, top 3, top 10 share of NOI
- 3
Assess credit quality
Verify: rated tenants, private tenant analysis, guaranty status
- 4
Review sales reporting
Verify: percentage rent terms, reported sales trend, occupancy cost ratio
- 5
Identify rollover risk
Verify: expiration schedule by tenant, option structures
- 6
Pull each tenant practice's payer mix disclosure (commercial vs. Medicare/Medicaid vs. self-pay)
Verify: government payer share above 55% flags reimbursement-rate sensitivity; request trailing 2 years of disclosure if available
- 7
Verify hospital affiliation type and term
Verify: employed physician, PSA-affiliated, or independent with admitting privileges only; confirm PSA renewal term against remaining lease term
- 8
Quantify the specialty build-out and its replacement cost
Verify: $/SF for surgical, imaging, or lab infrastructure; compare to standard office TI ($40–60/SF) to size the re-tenanting cost gap
- 9
Confirm the lease rent was set at fair market value with an independent appraisal on file
Verify: FMV appraisal dated within 12 months of lease execution or renewal, per Stark Law safe harbor requirements
- 10
Check for any rent term that varies with referral or patient volume
Verify: no percentage rent, sliding scale, or below-market concession tied to referrals; each is a Stark/Anti-Kickback violation risk
- 11
Verify certificate of need (CON) status for any tenant service line requiring one
Verify: CON on file and current for the specific service (surgical, imaging, etc.) in CON-regulated states
Metrics that matter for medical office
| Metric | Target | Calculation |
|---|---|---|
| Government payer concentration | <55% of tenant revenue | Medicare + Medicaid billings ÷ total practice revenue, per tenant |
| Build-out replacement cost ratio | flagged above 3x standard office TI | specialty build-out $/SF ÷ standard office TI $/SF |
| PSA-to-lease term coverage | PSA term ≥ remaining lease term, or renewal history ≥ 3 cycles | PSA remaining term ÷ lease remaining term |
| 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
-
Tenant payer mix above 60% Medicare/Medicaid with no rate-cut sensitivity modeled
a CMS reimbursement reduction flows directly to practice margin and can pressure rent coverage faster than a comparable office or retail tenant with diversified revenue
-
PSA term shorter than the remaining lease term with no renewal guarantee
if the hospital affiliation lapses, referral volume can drop sharply, and the practice's ability to sustain rent on a 10+ year lease is no longer supported by the underwriting thesis that justified it
-
Lease rent structured with any component tied to referral or patient volume
this violates Stark Law's fair-market-value requirement for a landlord-physician-hospital relationship and can void the lease's safe-harbor protection, exposing both parties to regulatory penalties
-
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 tenant analysis walkthrough
Eleven physician practices lease 92% of a 68,000 SF medical office building sited adjacent to a regional hospital campus, trading at $42M ($618/SF) with in-place NOI of $2.85M, underwriting to a 6.8% cap.
The tenant analysis centers on the building's largest occupant: an orthopedic surgery group on 18,500 SF, roughly 27% of the building, paying $34/SF for $629,000 in annual rent, about 22% of in-place NOI. The practice's payer mix disclosure shows 61% Medicare/Medicaid billings, above the 55% threshold where a CMS reimbursement rate reduction starts to materially pressure practice cash flow; orthopedic procedures in particular have seen repeated Medicare fee-schedule cuts in recent years.
Behind the payer mix sits the hospital relationship. The practice operates under a professional services agreement (PSA) with the adjacent hospital system that accounts for roughly 40% of its patient referrals. The PSA renews annually and is not coterminous with the practice's 12-year lease, so the referral relationship that supports a significant share of the practice's revenue could lapse well before the lease term ends, with no contractual guarantee of renewal.
That referral risk is compounded by the space itself. The practice's suite includes a surgical build-out (operating rooms, sterilization, imaging shielding) built at roughly $210/SF, or $3,885,000 total, against a standard office TI package that would run $40–60/SF. If the PSA lapses and referral volume drops, the practice's revenue could weaken enough to strain rent coverage; but the specialty build-out also makes the space functionally unmarketable to any tenant outside orthopedics or a similarly surgical specialty, meaning a vacancy would cost close to $3.9M to replicate rather than the $50–80/SF typical of a standard office re-tenanting.
Finally, the lease's rent-setting mechanism checks out: the file includes an FMV appraisal dated within the required window and no percentage-rent or referral-linked rent component, satisfying the Stark Law safe harbor. The exposure is concentration: 22% of building NOI sits behind a payer-mix-sensitive practice whose referral pipeline isn't contractually locked to its lease term, in space that would cost nearly six years of its own rent to replace if the practice leaves.
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Pre-populated Excel template matching this checklist, ready to use on your next deal.
Get the template →Questions about medical office tenant analysis
A medical practice's revenue is set by reimbursement rates, not market pricing power, Medicare and Medicaid pay fixed fee schedules that CMS can adjust annually, and commercial insurers negotiate separately. A tenant with a high government-payer share has less ability to offset a rate cut by raising prices, unlike a retail or office tenant whose revenue isn't set by a third-party payer.
Stark Law requires that rent paid by a physician tenant to a landlord with a hospital or referral relationship be set at fair market value and not vary with the volume or value of referrals. Diligence should confirm an independent FMV appraisal is on file and that no rent component is tied to patient volume, violations can void the lease's protections and expose both parties to regulatory penalties.
Treat it as both a retention factor and a re-tenanting cost. High-cost, specialty-specific build-outs (surgical suites, imaging shielding) make a tenant less likely to relocate for a marginal rent difference, but they also mean a vacancy costs several times a standard office TI package to backfill, and only with a similar specialty practice, narrowing the pool of replacement tenants.
Tenant analysis is the structured review of tenant credit, concentration, sales performance, and rollover risk. It's the difference between underwriting the asset and underwriting the income stream.
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