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Beware the impact of the recession on your premises

Practices should watch out for the impact of the recession on their premises, warns accountant Bob Senior

Practices should watch out for the impact of the recession on their premises, warns accountant Bob Senior

GP practices will feel the impact of recession less severely than many business, but they will be affected nonetheless.

For example there will be fewer requests for reports from insurance companies due to the stagnation of the housing market and practice income will be reduced as a result.

Practices should particularly watch out for the impact of the recession on their premises.

Most GP owned surgeries will have had their value based on the guaranteed cost or notional rent income – therefore their the valuation is unlikely to be affected by changes in the broader property market.

But there will be some practices with small surgeries on large plots of land where, until the recession, the redevelopment value of the site has been greater than the value as a GP surgery.

If these practices have used that higher value as the basis of valuation, and if partners have bought in at that level, these partners could now be facing a negative equity situation if they want to leave the practice.

Increasing margins on bank loans

A more pressing issue for some practices is the increasing margins that banks are requiring on loans for surgery premises.

Prior to the credit crunch it was usual for GPs to borrow at 1% over the bank base rate; indeed perhaps rather less than that if the loan was over £1m.

Banks are now seeking to improve margins and are now looking for 2% to 2.5% over bank base rate.

This higher margin may mean that a partner buying into surgery premises now will find his or her share of the cost or notional rent is not enough to cover the interest cost on the loan.

Some GPs may well decline to become property owning partners as a result.

Given the higher margins that banks are now seeking, practices with loans at or below 1% over base should make sure that they do not disturb those loans for the time being.

Practices that are in rented surgeries also face risks from the recession.

This risk relates to the age of the surgery and the length of the lease remaining.

Practices in older surgeries - converted premises perhaps, owned by previous partners, with relatively few years left on the lease - are at risk of the landlord seeking significant amounts of money under the dilapidations clause when the lease comes to an end.

Dilapidations provision

In the past the landlord would often have been planning to sell the surgery for redevelopment at the end of the lease rather than re-letting it.

As a result they would often waive the dilapidations provision.

But selling for redevelopment might not be economically viable in the current economic climate.

Instead the landlord might well be seeking to get the premises brought back to a high standard of repair so they can maximise their rent from a new lease.

Dilapidations charges of between £50,000 and £100,000 at the end of a lease in these circumstances are not unknown.

Sublet space

Dilapidations are unlikely to be an issue for practices in new surgeries with long periods left on their leases. But these practices often face the issue of sublet space.

It has been common in recent years for surgery developers to encourage practices to take on additional space over and above that funded under their NHS contract.

The intention is that the additional space should be used for non NHS work, or perhaps sublet to complimentary providers.

But in a recession, individuals and businesses cut back on non-essential expenditure. Practices find there is less demand for non NHS work, and less income from non NHS funded areas as a result.

Areas of danger

• Negative equity on surgeries

• Increasing margins on bank loans

• Surgery dilapidations charges

• Sublet space

Bob Senior is vice-chair of the Association of Independent Specialist Medical Accountants and director of medical services at Tenon, the UK's third largest medical accountant

The recession could have a big impact on the value of GPs' premises The recession could have a big impact on the value of GPs' premises

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