Many health care provider landlords are fielding requests from tenants for rent abatement or rent deferral as tenants face the negative economic effects of COVID-19. When those requests come from referral sources, landlords should exercise additional caution. This article explains the regulatory considerations behind the most common approaches to rent relief and provides best practices for documenting such arrangements in a compliant manner.
Rent Relief Options
To date, most landlords have taken one of the following approaches to rent relief:
- Refusal: Unwillingness to waive rent unless the building is closed and the tenant cannot use the space.
- Loan Conversion: If sought prior to default, entering into a promissory note, the principal of which is the amount of rent for some set period (usually one to three months) at a market rate of interest. If sought after a default, converting the past due rent into a loan payable over time at a market rate of interest.
- Rent Deferral: Deferring a portion of the tenant’s rent, either to be repaid later in a lump sum, by increasing subsequent rent payments or by lengthening the term of the lease.
- Rent Reduction: Reducing the tenant’s rent for some period of time without a subsequent repayment obligation.
- Rent Forgiveness: Agreeing to forgive a certain amount of past-due rent so long as the tenant remains current thereafter.
Navigating Anti-Kickback Statute and Stark Law Concerns
The Anti-Kickback Statute (“AKS”) prohibits the knowing and willful payment of remuneration to induce or reward referrals or other business involving items or services payable by federal health care programs. Remuneration under the AKS can include anything of value, including reduced or free rent. Therefore, an arrangement for rent relief will be subject to the AKS. However, while the Office of Inspector General (“OIG”) has agreed, in light of COVID-19, to relax the AKS administrative sanctions for telehealth arrangements, OIG has not indicated that it will ease up on enforcement of the space leasing arrangements during the pandemic. Nonetheless, the AKS does not require strict compliance with every element of the space rental safe harbor, and OIG is unlikely to pursue rent relief arrangements as AKS violations absent a clear intent to defraud.
The Stark Law prohibits a physician from making referrals of items or services payable under federal health care programs to an entity with which the physician or an immediate family member has a financial relationship. The Stark Law exception for the rental of office space requires a term of at least one year, the arrangement to be commercially reasonable absent referrals from one party to the other, and that rental rates be consistent with fair market value. Rent relief could raise potential issues with respect to any of the foregoing requirements.
The Centers for Medicare & Medicaid Services (“CMS”) issued blanket waivers under Section 1135 of the Social Security Act that exempt providers from sanctions for noncompliance with the Stark Law so long as the arrangement was entered into for “COVID-19 Purposes.” One “COVID-19 Purpose” is “Addressing medical practice or business interruption due to the COVID-19 outbreak in the United States in order to maintain the availability of medical care and related services for patients and the community.” While CMS did not describe rent relief as a COVID-19 Purpose, it appears that, in cases where rent relief is being offered to address economic hardship as a result of COVID-19, permitting rent relief may have the effect of maintaining the availability of medical care and related services for patients in the community.
For more information on how the Stark Law waivers apply to real estate arrangements, please review Hall Render’s article on the topic.
Practical Takeaways / Recommendations
- Create a Policy
If a health care provider landlord decides to offer rent relief as a result of the COVID-19 crisis, it should create a policy to outline how and when rent relief will be offered. By creating a policy and sticking to it, health care landlords are in a better position to show that rent relief was offered in a uniform manner, regardless of the volume or value of referrals generated by a tenant. A policy on rent abatement should enumerate: (a) the rent abatement options available; (b) who qualifies to receive rent abatement; (c) when the rent abatement is available; and (d) what must be demonstrated in order to be considered for rent abatement (e.g., economic hardship).
- Assess Fair Market Value and Commercial Reasonableness
Although the blanket waivers stated that the rental amount does not have to be consistent with fair market value if COVID-19 Purposes exist, commercial reasonableness and fair market value rental rates remain the lynchpin of ensuring compliance with the Stark Law and the AKS. To determine what is commercially reasonable and fair market value in the current commercial real estate market, the landlord should consider engaging an appraiser or valuation professional to assess market conditions.
- Document, Document, Document
Health care provider landlords considering providing rent relief to referring tenants should carefully document such arrangements. When the pandemic subsides, the government may begin to assert more scrutiny on arrangements made during this time. Therefore, health care provider landlords should be meticulous in documenting the rationale for rent relief, the specific facts giving rise to any arrangements, any concurrent evidence of fair market value and commercial reasonableness, and memorialize any arrangements in a writing signed by the parties. For higher-risk arrangements, such as those encompassing high dollar amounts or prolific referral sources, consultation with a third-party valuation professional can further mitigate risk by bolstering commercial reasonableness and fair market value documentation.
For more information on this topic, please contact:
- Andrew Dick at (317) 977-1491 or adick@hallrender.com;
- Joel Swider at (317) 429-3638 or jswider@hallrender.com; or
- Your regular Hall Render attorney.
We would like to thank Matt Reed, our law clerk, for his work on this article.
Hall Render blog posts and articles are intended for informational purposes only. For ethical reasons, Hall Render attorneys cannot—outside of an attorney-client relationship—answer specific questions that would be legal advice.
