Taking charge of a building development is a difficult task. Here, we look at the different options practices can follow to regenerate a surgery
I am fortunate enough to be registered with an excellent GP practice in a new, purpose built surgery. Not everyone is so lucky.
Drivers for development
A large percentage of GP practices (some say as high as 50%) occupy premises that are not ‘fit for purpose,’ the exact number varies, depending on who you are talking to.
Very few new GP surgeries have been built in the last few years as the NHS plays ‘twister’ with the 2013 reforms – but there are signs that things are changing. New developments are starting to come through and talk of a new surgery is back on the agenda at partner meetings.
While overall NHS funding remains an issue, money for new development is starting to appear. The NHS Capital Infrastructure Fund has enabled a number of ‘oven-ready’ projects to start making progress, but the key ingredient to green lighting a new project remains NHS-backed notional rent.
Without NHS support via notional rent there is little hope that a scheme will reach the start line. This article looks at the different options by which a surgery development scheme can be procured.
The development of GP surgeries is complex and many different factors need to come together before the whole thing can proceed. Imagine trying to put an octopus in a string bag. Legs keep falling through the holes – and pulling together a GP surgery development can sometimes feel like this. It can take real perseverance and years of hard work to get a scheme safely to the stage of breaking ground.
Because of the entitlement of GPs to notional rent from the NHS, banks are prepared (almost uniquely) to lend to GP practices 100% of development finance on favourable terms. Their appetite to lend to GPs remains strong.
Likewise, developers/investors are keen to sign GPs up on long (21-25 years) NHS-backed leases and carry out developments for them. These schemes create valuable investments and with the very limited number of new developments over the last few years, available “stock” is limited. Yields are currently low, with evidence of some high premium values being paid. The appetite to create new investment stock also remains strong.
There are two main options open to the majority of GP practices.
The first is to do it yourself (DIY) and the second is to get a “third party” developer to do it for you and grant a lease back to the practice.
This is like building an extension on your home – but a lot more complicated. The developing GP practice will borrow money, buy some land, instruct an architect to draw up plans, apply for planning permission, employ a building contractor, and then get building.
With DIY, the practice is in control of the process and can call the shots – but it means taking on the development risk (the possibility of something going wrong) and the burden of all upfront costs, which can be substantial. Notional rent, (the means by which the funding is paid back), won’t start to flow until the building is finished and practice has moved in.
The upside of development risk is the potential for development profit and the possibility of rental income (and sometimes large premiums) from any third parties.
The hope would be that there will be capital appreciation over time, which should prove attractive to current and future partners who wish to share in these benefits.
If things don’t go as hoped, there is the risk of negative equity and for some, the long-term financial commitment and personal liabilities may prove unattractive and an active hindrance to succession planning. Development also takes up a lot of management time.
This can all be managed and the risks minimised. The trick here is to ensure that the right team of advisors are appointed at the right time and that their roles are fully understood and properly documented.
Company or partnership?
The practice must also decide whether to develop through the partnership structure or set up a GP owned development company. There are arguments for and against both and each practice should be given the opportunity to weigh up which structure is right for them and their own culture and circumstances, having had the benefit of both tax and legal advice.
It is important that the partnership agreement – and the shareholders agreement if a company is used – are brought up to date and include appropriate terms suitable for a new development and ongoing ownership. Things can change quickly and unexpectedly.
Whichever route is chosen the funder will also insist on the personal liability of the individual partners, who are after all the ones entitled to the notional rent. This is straightforward when lending to a partnership, but where a company is used, the bank will want personal guarantees and a properly drawn lease equal to the term of the loan (typically 21/25 years). Because of this, a company is not a route that can be used to avoid personal liability, whether for a loan or for the obligations under a lease.
Tax is very often a major factor in the decision making process. While the tax tail should not be allowed to wag the transaction ‘dog’, tax planning for any property transaction and a full consideration of capital gains tax, VAT, and stamp duty land tax liabilities and possible capital allowances (where appropriate) can save significant sums of money and should certainly be taken into account when considering which is the appropriate structure.
Third party development
Working with an independent developer/investor is attractive to many practices. The partners will be required to sign a contract before the development commences and once complete, will sign a lease, typically of 20-25 years.
There are advantages. Exposure to upfront costs is largely limited to professional fees and often these will be met by the developer and/or the NHS. The development and funding risk is carried by the developer. Most of the heavy lifting and time commitment falls to the developer and ongoing repair costs for the building are usually limited to internal repairs only.
Some developers are keen to stress the desire to work in partnership with the practice and to remain as a benevolent landlord long term. There may also be scope to include existing premises and any negative equity they carry in the deal with the developer.
Exposure is limited by linking the lease rent payable to the level of rent reimbursed by the NHS.
The benefits come at a price. The partners will be required to sign a long lease with personal liability – 21/25 years and usually without break clauses. There will be little control once the initial design is chosen. While the contract will set out detailed development obligations on the developer, when things don’t go as hoped, it can prove difficult (and expensive) to enforce these obligations.
The lease terms should be robustly negotiated. Of equal importance is a comprehensive and detailed agreement of the scope and quality of the building design to ensure the best building possible is obtained for the money available.
The partners won’t (usually) have any interest in the capital value of the property and the developer will benefit from the development profit and any premiums paid by other occupiers.
Long-term lease liabilities may be unattractive to possible successor partners and leases are by their nature restrictive, reducing the flexibility to change things.
So which is the right way to go? It depends on many factors and no scheme is the same.
It is important for the partnership to have the conversation (both within the partnership and with other practices who have already developed), understand the commercial feasibility of the project, the business case and the financial implications, so that they can make an informed decision on what is right for them. In my experience, there is something of a journey to go on to fully understand and get comfortable with the issues involved.
It may be an emotional decision, with some partnerships preferring to be owners rather than tenant – but the choice may be out of your hands if the target site is controlled by someone else.
The way in which existing premises are held may also be a factor and influence the decision.
Once a decision is made – and buy in from all partners is crucial – it is important to appoint a strong internal project leader and give them the time and support to deliver what is required.
A property development is often the highest value and most complex, non-clinical, project a GP will be involved in during his or her career. The potential pitfalls are many and varied and the importance of an experienced professional team to provide guidance throughout cannot be over emphasised.
Ben Willis is a partner at law firm Veale Wasbrough Vizards LLP.