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28 June 2011

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We want to move to better premises but the PCT says it can’t afford this. What should we do?

Question in full:

Our premises are poor quality and the primary care trust (PCT) reimburses us accordingly – we want to move to better premises but the PCT says it would not be able to afford to give us better premises! How do we break this cycle, which puts a break on our ability to innovate and traps our patients in a less-than-ideal surgery?

A: This is a recurring concern affecting many medical centres. It is estimated that perhaps 60% are in ‘non-compliant’ premises, which means the working environment is compromised impacting both on the care providers and their patients. In the present economic climate, the rate of development of new premises, large extensions and refurbishments has slowed significantly, coming to a standstill in some parts of the country.

Over the past two to three years, this has largely been due to PCT budget constraints and rigorous enforcement of ‘value for money’ criteria. Couple this with restricted availability of debt finance for both doctors and specialist investors/developers, and the result is a classic ‘double whammy’.

The recent announcement of the abolition of PCTs has led to a hiatus on decisions. We have also seen examples of PCTs setting a ceiling rental level, which in practice means that a new build scheme is unviable and unfundable through debt financing. On top of all this, the Department of Health issued a directive earlier this year stating that all proposals for new developments, unless already legally committed, were to be referred to strategic health authorities for approval.

Again, this has resulted in some schemes, which all parties including the PCT thought were going ahead, now being stalled. It is not only frustrating from a practice’s point of view, but also for the PCT, who would be supportive of a relocation but simply do not have the cash.

So is there a way around this? The simple answer is ‘yes’, but only in certain circumstances. Until such time as the replacement structure for the PCTs is announced and further funding becomes available, the opportunities are limited.

However, on the plus side, debt finance is the cheapest it has been for many years. While difficult to source, some funders are prepared to ‘lend long’ and do not require full amortisation of the debt over the period of the loan. This can mean that the reimbursable rent is sufficient on a long-term fixed-rate basis to enable the development to go ahead. However, the likelihood is that equity will be required from the GPs – but this can take the form of land if you are in a fortunate enough position that the new premises can be developed on your existing site.

There are also a number of niche investor/developers specialising in the primary care market that work closely with GPs to provide new premises, often bringing together a number of practices within an area into a single building with a range of other services such as pharmacy, dentist, opticians, etc. This is the most economic way forward as there are economies of scale and efficiencies in the building design whereby ancillary accommodation, such as meeting and training rooms and those used on an occasional basis, can be shared.

Furthermore, where the PCT have set a ceiling rent based on affordability, the developer/investor may be able to take a commercial view on the basis that they are able to secure a more competitive build cost and funding rate as a corporate entity than would be available to an individual GP 
However, the investor also needs to borrow money to develop and the reimbursable rent has to be at a level that makes the development economic and provides sufficient profit.

Occasionally, they may negotiate a lower rent at commencement, with geared increases over the first three years until the first review, so as to enable the development to proceed, as the longer-term investment benefits outweigh a short-term reduction in rent. It must be emphasised that this is the exception to the rule.

Other solutions may be for the PCT to make a capital contribution in lieu of a lower rent or possibly to provide the land on a freehold or leasehold basis, which, again, lowers the overall cost of development and would be reflected in the level of rent reimbursement.

In summary, therefore, it is increasingly difficult to progress new builds and major extensions in the current economic climate, and each proposal needs to be considered on its own merits. This emphasises the importance of a strong business case and a supportive dialogue with the PCT, and potentially working in partnership with specialist developers and investors may well help to unlock opportunities that at first seemed lost.