What lease term do medical building buyers want?

No rule sets the term, so the buyer prices what is written: years left, escalators and the guarantor

The primary sources answer what a lease must and must not say, not what a buyer prefers; no statute, regulation or IRS ruling records a preferred term. What can be said is what a buyer is able to rely on: the years of rent the tenant has contracted to pay, how the rent changes, and who stands behind it.

That makes the term question four questions. How many years are firm, as opposed to options the tenant may decline? Does rent step up, and by a fixed rate or an index? Must the tenant send financial statements? Is the tenant a single-office entity, or is there a guaranty from a parent or the owners? Tenant credit analysis for DST investors explains how guaranties and coverage are read, and single-tenant NNN property covers the clauses a buyer abstracts.

The floor is one year where Medicare designated health services are billed

Where the landlord or the tenant furnishes designated health services and referrals run between them, the lease is a financial relationship under 42 U.S.C. 1395nn and must fit an exception. The office-space exception in 42 CFR 411.357(a) requires a signed written lease specifying the premises, a term of at least one year, space no larger than reasonable and used exclusively by the tenant, rent set in advance and consistent with fair market value, and no rent based on referrals, a percentage of revenue from the space, or per-unit charges for referred patients.

Fair market value has its own definition in 42 CFR 411.351: for office space it is the value "of rental property for general commercial purposes," without adjustment for the value either party would attribute to proximity to referrals. A holdover after a compliant lease of at least one year stays within the exception if it is "on the same terms and conditions."

The designated health services list in section 411.351 covers clinical laboratory, imaging, therapy, hospital and similar services, not dental or veterinary care. The rule's definition of physician in 42 U.S.C. 1395x(r) includes dentists for some functions but not veterinarians, so the floor matters mainly in buildings where Medicare-billed services are furnished.

The ceiling is thirty years, and the safe count includes every renewal option

Reg. section 1.1031(a)-1(c) treats an exchange of "a leasehold of a fee with 30 years or more to run for real estate" as like-kind. A lease that long is a real property interest of the same kind as the fee, so a seller who leases back for that long has arguably kept part of what it sold. The regulation does not say how renewal options count, so the safe drafting counts them: a 15-year term with three 5-year options reaches 30; with two it stops at 25. Sale-leaseback then 1031 covers the rest of the leaseback tests.

Section 467 adds a second marker. Section 467(e)(3) gives nonresidential real property a 19-year recovery period, and a lease longer than 75% of that, about 14 years, is a long-term agreement. Its rising rent accrues as written unless a principal purpose of the escalators is avoiding tax.

If a DST sponsor is the buyer, the lease you sign is the lease the trust holds for its life

The facts of Rev. Rul. 2004-86 describe what a trust can hold: a 10-year net lease under which the tenant pays taxes, insurance, maintenance, ordinary repairs and utilities, with rent that is "a fixed amount" adjustable only by a formula based on a fixed rate or an objective index, and "not contingent on" the tenant's gross sales or net profits. The trustee may not renegotiate that lease or sign another tenant except on the tenant's bankruptcy or insolvency. In the ruling, the trust's own life is also 10 years, matching the lease.

Read as a checklist, that means a lease a trust can hold has its escalators written in, needs no landlord work beyond minor non-structural changes, and has no percentage rent. A short lease or one that leaves the landlord to rebuild suites is one the trustee could not manage under those limits. DST master leases covers the structure sponsors use around those limits; the ruling itself does not discuss master leases.

Counting the years on a practice lease: a worked example

Hypothetical, round numbers. A veterinarian keeps the hospital and leases it to the corporate buyer of her practice for $150,000 a year with 2% annual increases, on a 15-year term with two 5-year options and a parent guaranty. Firm term: 15 years; maximum: 25, under the thirty-year line. Total payments exceed $250,000 and rent rises, so it is a section 467 agreement and, at over 14 years, a long-term one; with no tax motive behind the steps, rent accrues as written.

An investor who buys that hospital in year three sees twelve firm years, a guarantor to underwrite, and rent that will reach about $198,000 in year fifteen. Had the lease been five years flat with no guaranty, the same investor would be pricing a possible vacancy two years after buying. The gain is deferred in either case if the sale closes through an intermediary; veterinarians selling the clinic building covers negotiating the guaranty. Test the term, options and escalator against your own figures with your CPA and lease counsel.