The short answer
A medical office DST owns an outpatient building, usually on or near a hospital campus, leased either to a health system on a long net lease or to many physician groups through a master tenant. A filed medical office REIT 10-K says these buildings depend on the viability of the nearby health system whether or not it is a tenant, that many sit on hospital ground leases restricting who may occupy them, and that re-leasing requires tenant improvement spending. Rev. Rul. 2004-86 bars the trust from raising capital for those build-outs, so the lease term, the reserve and the ground lease decide the outcome.
At a glance
| Campus dependence | Buildings on or adjacent to a campus depend on the health system's viability even if it is not a tenant |
|---|---|
| Lease terms | A filed medical office REIT reports in-place leases averaging 8.3 years, with 4.4 years remaining |
| Single-tenant buildings | Its 102 single-tenant buildings averaged 11.6-year leases, with 5.7 years remaining |
| Fixed escalators | Weighted average annual fixed rent escalators of 2.93%, which the filer warns can lag inflation |
| Tenant retention | Quarterly retention ranged from 77% to 80% in 2025 |
| Ground leases | 168 of its properties sit on ground leases, often limiting occupancy to the hospital's medical staff |
| Leasehold as real estate | A leasehold with 30 years or more to run is like-kind to fee real estate |
| Physician lease rules | The federal self-referral exception requires written leases of at least one year at fair market value set in advance |
The building's income follows the hospital next door, whether or not the hospital pays rent
The Form 10-K of a listed medical office REIT focuses on facilities on or near the campuses of acute care hospitals and states that most of its properties on or adjacent to a campus are largely dependent on the viability of that health system's campus, whether or not the hospital is a tenant. Physicians locate there to be near the operating rooms and referrals.
It lists what moves that viability: the quality and mix of services, competition, payor mix and local demographics. It also notes that tenants are subject to Medicare and Medicaid rules that change year to year, and that site-neutral payment policies have lowered Medicare payments for services in off-campus hospital outpatient departments. On-campus location may gain from that shift; off-campus space may not.
So underwrite the hospital as well as the tenants. Ask for the health system's credit, its market share and its commitment to the campus, then read the client's overview of medical office real estate for the building classes.
Single-tenant and multi-tenant buildings are different products inside a trust
A building leased whole to a health system on a long net lease looks like any net lease DST: one tenant, one rent schedule, one renewal. The REIT reports 102 single-tenant buildings with an average lease term of 11.6 years and 5.7 years remaining.
Multi-tenant buildings turn over more often. Its in-place leases averaged 8.3 years at signing with 4.4 years remaining, and quarterly tenant retention ran from 77% to 80% in 2025. Under Rev. Rul. 2004-86 the trustee may not enter leases with new tenants or renegotiate existing ones except on the tenant's bankruptcy or insolvency, so a building with dozens of physician suites needs a master tenant that signs the suite leases and pays the trust a fixed rent. The risks of that layer are at DST master lease risk.
Rents in this class are usually fixed schedules. The REIT reports weighted average annual fixed escalators of 2.93% and warns that fixed escalators can lag inflation and rising taxes, utilities, insurance and maintenance. None of these figures predicts what any trust will distribute, and distributions can fall or stop.
Build-out costs are the capital a DST cannot raise
Medical suites are expensive to fit out. The same REIT spent $90.2 million on first-generation tenant improvements and $46.9 million on second-generation tenant improvements in 2025, on top of other capital expenditures, to lease and re-lease space.
The ruling allows only minor non-structural modifications and bars the trustee from accepting new contributions of money. When a practice leaves and the next one needs new plumbing, imaging shielding or procedure rooms, the money must come from a reserve funded at closing or from the master tenant. If neither is enough, the space sits empty until the trust sells.
Ask how large the reserve is relative to the leases expiring during the planned hold, and who pays for build-outs under the master lease. The broader limit is set out at DSTs and value-add.
A hospital ground lease can restrict tenants, transfers and the exit
The REIT holds 168 properties on ground leases, with a weighted average remaining term of about 60.6 years including renewal options. It says these leases with hospitals typically limit occupancy to physicians on the affiliated hospital's medical staff, bar tenants from competing with the hospital's services, and may require consent for a sale or assignment or give the hospital a right of first offer or first refusal. It warns that these terms can limit leasing, sale and financing, and that the building reverts to the landowner when the ground lease ends.
For the exchange, a leasehold can qualify. Under Reg. section 1.1031(a)-1(c) a leasehold of a fee with 30 years or more to run is like-kind to real estate. Check the remaining term including options on the day you buy and on the day the trust expects to sell, because the next buyer will run the same test; the details are at 1031 exchange of a leasehold interest.
A hospital's purchase right can also cap the sale price or slow a sale, so read the ground lease, not only its summary.
Federal referral rules keep physician rents fixed and at market, which suits the ruling
Where a hospital or another provider of designated health services leases space to referring physicians, the rental exception in 42 U.S.C. 1395nn(e)(1)(A) requires a signed written lease specifying the premises, a term of at least one year, and rent set in advance at fair market value and not determined by the volume or value of referrals. The REIT lists this self-referral law and the anti-kickback statute among the regulations its tenants must follow.
That pushes medical leases toward fixed rent schedules rather than revenue-based rent, which fits a trust that can only collect and distribute. It also means a tenant's compliance problem can become a vacancy, a risk to raise in diligence alongside the items on the DST offering due diligence checklist.
If you are selling a medical building yourself, see 1031 exchange of a medical office.
Related questions
Is a medical office DST recession resistant?
Patient demand is less tied to the economy than retail spending, but the income still depends on reimbursement rules, the health system's finances and lease rollover. A filed medical office REIT lists Medicare and Medicaid changes, consolidation and site-neutral payments among its risks, and no distribution is assured.
Can a DST own a building on a hospital ground lease?
Yes, if the leasehold has enough remaining term and the ground lease permits the transfer. A leasehold with 30 years or more to run is like-kind to fee real estate, but the hospital's consent and purchase rights still apply.
Who pays to build out a suite for a new doctor?
Not the investors directly, because the trust cannot accept new capital. Build-outs are funded from reserves set at closing or by the master tenant, so the reserve size matters.
Does the hospital have to be a tenant?
No. A filed REIT notes that buildings on or adjacent to a campus depend on the health system's viability whether or not it is a tenant. The hospital's health matters either way.
Why are medical office rents fixed?
Federal self-referral rules require physician leases with designated health service providers to set rent in advance at fair market value, not tied to referrals. Fixed schedules also fit the DST ruling, which leaves the trustee no room to renegotiate.
Sources
Checked against these publications on September 30, 2026. Rules and figures change; confirm the current version with your CPA or attorney before you act. This page is general information, not tax or legal advice.