What is Stark Law FMV and why does it matter for medical office underwriting?

Stark Law and anti-kickback rules require that rent between hospitals or health systems and referring physicians reflect documented fair market value, not an inflated rate tied to referral volume. A medical office model needs FMV documentation on file for hospital-affiliated leases, not just a market comp, because non-compliant rent creates real regulatory and lease-unwind risk.

Why is TI more expensive in medical office than general office?

Medical tenants require above-standard build-out (medical gas lines, lead or radiation shielding for imaging, backup power, specialized plumbing) that general office space doesn't need. Institutional medical office TI commonly runs 40–80% above general office TI, and the model should reserve for that premium explicitly.

How does tenant credit work differently in medical office underwriting?

Beyond the corporate guarantor, a physician group's rent-paying ability depends on its payor mix and reimbursement rates from insurers and government programs. A credit screen limited to guarantor strength can miss declining practice economics driven by reimbursement pressure, payor concentration should be evaluated as a separate diligence input.

What is a certificate of need and why does it matter for underwriting expansion space?

A certificate of need (CON) is state approval required in many markets before certain healthcare facilities or services can expand. Underwriting any embedded expansion square footage in a medical office model requires confirming CON status first, space that can't legally be built out as medical use isn't worth the same as space that can.

What is a real estate underwriting model?

A structured spreadsheet that projects a property's cash flow, financing, and returns under explicit assumptions — the basis for every institutional acquisition decision.

Medical Office · Underwriting Model

Medical Office Underwriting Model

How to build a medical office underwriting model: hospital-affiliation premium, Stark-compliant FMV rent, above-standard TI, and long build-to-suit terms.

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Why the underwriting model looks different for medical office

Rent in a medical office model gets justified against Stark Law and anti-kickback fair market value (FMV) documentation, not market comps alone; hospital-affiliated leases that deviate from documented FMV create regulatory exposure a generic office rent comp doesn't capture.

Above-standard tenant improvements (medical gas lines, imaging shielding, backup power) run well above general office TI, and the model reserves for that premium explicitly rather than applying a blended office TI/SF assumption.

Tenant credit in medical office is reimbursement-driven: a physician group's revenue depends on payor mix and reimbursement rates, not just corporate guarantor strength, so the credit screen looks past the lease guarantee to the underlying practice economics.

The medical office-specific checklist

1

Build the rent roll

Verify: unit- or tenant-level detail with rent, term, recoveries
2

Project market rent growth

Verify: submarket-specific; avoid flat nationals assumption
3

Model recoveries explicitly

Verify: CAM, tax, insurance broken out, not blended
4

Run sensitivity on exit cap

Verify: ±75 bps and stress the downside
5

Build debt sizing

Verify: LTV and DSCR constraints both checked
6

Compute leveraged IRR and equity multiple

Verify: cash flow to equity, not enterprise
7

Confirm on-campus vs. off-campus status and hospital affiliation terms

Verify: affiliation and any lease-back arrangement documented against the health system agreement
8

Verify lease rent against Stark Law / anti-kickback FMV documentation

Verify: FMV appraisal or documentation on file, not just broker market comps
9

Model above-standard TI at a $/SF premium over general office

Verify: medical gas, imaging shielding, and backup power costs itemized separately from base TI allowance
10

Reserve for long build-to-suit lease rollover risk on a WALT-weighted basis

Verify: reserve reflects actual lease expiration schedule, not a blended general-office WALT assumption
11

Screen tenant reimbursement and payor-mix health as a credit input

Verify: payor concentration and reimbursement trend reviewed alongside corporate guarantor strength
12

Confirm certificate-of-need status for any embedded expansion space

Verify: CON approval or exemption confirmed before underwriting expansion square footage

Metrics that matter for medical office

Metric	Target	Calculation
Hospital-affiliation rent premium	>8% vs. off-campus comps	(on-campus rent − off-campus comp rent) / off-campus comp rent
Payor concentration exposure	<35% of tenant revenue from top 3 payors	tenant revenue tied to top-3 payors / total tenant revenue (diligence-sourced)
TI/build-to-suit reserve coverage	100% of modeled above-standard TI	annual reserve / (RSF rolling × $/SF above-standard TI)
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 modeled at market comps without Stark/FMV documentation on file

hospital-affiliated leases priced above documented fair market value create regulatory risk that can force a rent reset or lease unwind, a comp-based rent assumption alone doesn't screen for this
TI reserve set at general-office $/SF despite medical-grade build-out requirements

medical gas, imaging shielding, and backup power routinely push medical office TI 40–80% above general office, an undersized reserve understates the real cost of re-tenanting
Tenant credit modeled on corporate guarantor alone, ignoring reimbursement exposure

a physician group's ability to pay rent depends on payor mix and reimbursement rates, a strong guarantor on paper can still face declining practice economics that a lease-only credit screen misses
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 underwriting model walkthrough

The subject is a 92,000 SF medical office building on a hospital campus adjacent to a 350-bed health system, 94% leased with an 8.4-year WALT, priced at $50.0M, $543/SF. The rent roll splits between a 38,000 SF hospital-affiliated anchor at $30.00/SF NNN and 48,480 SF of independent physician groups at $34.75/SF NNN, producing gross potential rent of $2,824,680. Before this rent is underwritten, it has to be checked against Stark Law and anti-kickback FMV documentation; an on-campus hospital-affiliated lease priced above documented fair market value creates regulatory exposure a market comp alone won't flag.

NNN reimbursements at $8.75/SF across 86,480 occupied SF add $756,700, bringing effective gross income to $3,581,380. Non-reimbursable retained costs are a 3% management fee ($107,441) and a capex reserve for above-standard building systems (medical gas, imaging shielding, backup power) at $0.85/SF ($78,200), well above a general-office reserve. Year 1 NOI is $3,395,739, a 6.79% going-in cap rate.

TI runs well above office norms: above-standard build-out for medical tenants averages $85/SF versus roughly $45/SF for general office, amortized against the long build-to-suit lease terms typical of this asset class. Those long terms are also part of why the 8.4-year WALT holds up. A separate reserve of $0.95/SF/year ($87,400) is carried below NOI for rollover TI, sized to the medical-grade premium rather than a blended office assumption.

Debt sizes at a 1.35x DSCR floor (higher than general office, reflecting reimbursement and regulatory risk on tenant health), implying $40.6M of proceeds, but 60% LTV caps the loan at $30.0M, so LTV binds. At exit after a 7-year hold with 2.75% annual NNN rent growth, Year 1 NOI carries to roughly $4,103,700 by Year 8; the exit cap is set 20 bps above entry at 6.99% to price the regulatory and reimbursement risk conservatively, producing a terminal value near $58.7M. The on-campus rent premium, roughly 8% over off-campus comps per the underwriting benchmark, survives only as long as the hospital affiliation and the FMV documentation behind it hold up.