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30 November 2011
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Question in full:
We have been approached by a local pharmacist seeking to relocate to our practice who has offered to contribute to a proportion of the costs of construction but has not offered to pay any rent or services contribution other than utility bills. Is this a good idea for the practice to pursue?
There are advantages and synergies to having an onsite pharmacy that benefits patients, as they do not need to make a further trip to a pharmacy elsewhere in the town. It is also a potential source of additional income to the practice.
As the pharmacy is already local to you, I would not expect that they would encounter problems in securing consent to relocate into new premises. However, there is always the risk of objection from other pharmacists in the locality, who may seek to prevent this if they felt it would place them at a disadvantage and impact on their own businesses.
The main issue here is that the pharmacist does not appear to be offering you any rent despite only proposing to contribute in part to the build costs. This could be quite a substantial outlay for you, depending on the size of the unit, which for a mid-sized practice would typically be in the order of 70m2-100m2.
Therefore build costs could be perhaps £150,000 and potentially higher, depending on ground conditions, design fees, etc. This would be for a shell finish as the pharmacy will typically fit themselves out internally in line with their shop branding.
If you occupy the medical centre as a tenant to a landlord, you would need their consent to any works and the procedure for this will be set out within the lease.
However, it is usual in these instances for the landlord to take on the matter and negotiate directly with the pharmacy, who would at their own cost secure planning and undertake the development in return for a lease to the pharmacy operator.
If this is solely an extension to the existing building, then the matter is relatively straightforward, although there could be some disruption to the practice and temporary loss of parking, etc, during the construction process, which you should discuss with the landlord.
If, however, the intention were to convert existing medical space, perhaps close to the entrance, the landlord would negotiate with you regarding this and look to replace the lost floor space through an extension elsewhere within the building or carry out some upgrading works to compensate. The District Valuer will also get involved if there is a potential change to the reimbursable floor space.
On the other hand, if you own the medical practice you have two main options. (I am discounting a land sale to the pharmacy, as this could compromise you in the future when you come to sell the property. Also, this would require the consent of your bank as it would impact on their security.)
The first option would be to negotiate a lease to the pharmacy operator, subject to them undertaking the full cost of construction, in return for which they would look for a rent holiday of potentially 10-15 years to compensate. This has the advantage to you of not having to contribute to capital costs while enhancing the overall service to your patients, but without the benefit of any additional income.
The alternative would be for the partners to secure funding through their bank to develop the pharmacy themselves and then to enter into a lease with the operator.
You need to be satisfied that the licence to relocate would be available and, prior to commencing any work, the pharmacy operator enters into a legally binding agreement to lease. Your property advisers can talk you through this. As above, any arrangement may require the prior agreement of your bank and the involvement of the District Valuer.
Typical agreements for a pharmacy would be a 20-year lease with the tenant responsible for repairs and insurance – either directly or through a service charge. The rent would be set by reference to comparables and the size of the patient list, with reviews typically on a three-year pattern linked to retail price index (RPI). This approach would generate an income stream to the practice and the resulting investment value would generally exceed that of the construction cost and therefore enhance any equity in the freehold.
With regard to the pharmacy operator’s offer to contribute to utility bills only, I would suggest this is rejected as it would be inequitable to the practice to be responsible for a proportion of insurance and repairs, unless you were receiving an appropriate rent. The pharmacy should contribute a fair and proportional amount to structural repairs, insurance, shared areas and car park, etc.
So, in conclusion, the provision of an onsite pharmacy should be viewed as a positive opportunity, but make sure that you maximise value to the practice both in terms of equity and rent, but also make sure not to prejudice your own rent reimbursement levels.