Are You Looking to Develop Your GP Surgery? Useful Tips to Consider

Drivers for Development  

Many GP practices occupy premises which are not fit for purpose. The NHS Estates and Technology Transformation Fund (ETTF) has enabled some projects to proceed and once some details have been ironed out, will soon enable a number of new projects to go ahead. Funding is typically by way of a grant for a percentage of the total development costs with Notional Rent funding for the balance.

Notional rent is abated for up to 15 years in respect of the proportion of the building funded by a development grant and the building must be used for NHS purposes for 15 years.

Getting Started

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 and 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.

Procurement Options

There are two main options. Do it yourself (DIY) or get a third party developer to do it for you (3PD).

DIY

The practice will borrow money, buy some land, apply for planning permission, employ a building contractor and get building.

The practice is in control of the process - but it means taking on the development risk and the burden of all upfront costs.

The upside is the potential for development profit and the possibility of rental income (and sometimes large premiums) from any third parties.

There are risks - and the financial commitment and personal liabilities may prove unattractive.

Company or Partnership?

The practice may develop through the partnership structure or set up a GP-owned development company. There are arguments for both and each practice should weigh up which structure is right for them, having had the benefit of both tax and legal advice.

The Partnership Agreement or Shareholders Agreement if a company is used - must be brought up to date and include appropriate terms suitable for a new development and ongoing ownership.

A funder will also insist on the personal liability of the individual partners, who are the ones entitled to the Notional Rent. 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 which can be used to avoid personal liability.

Tax is a major factor in the decision making process and specialist advice should be taken.

Third Party Development

The Investor will procure the development and the partners will be required to sign up to a lease, typically of 25 years.

Exposure to upfront costs and project management is limited and the development and funding risk is carried by the developer. Ongoing exposure is limited by linking the lease rent payable to the level of rent reimbursed by the NHS. The lease terms should still be robustly negotiated as there will be liabilities for, amongst other things, repair.

The partners will be required to sign a long lease with personal liability - 21/25 years and usually without break clauses.

The partners will not (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.

Which Development Route?

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.

A property development is often the most high value and complex (non-clinical) project a GP will be involved in during his or her career. The potential pitfalls are many and the importance of an experienced professional team to provide guidance throughout and help manage risk cannot be over emphasised.

For more information, please contact Ben Willis in our Commercial Property team on 0117 314 5394.

This article first appeared in Management in Practice No.41, Summer 2015.