The term Cost Rent has actually been replaced by ‘Borrowing Costs’ in the Premises Directions issued by the Department of Health in 2004 and 2013, although in reality this form of reimbursement is still most commonly known as Cost Rent by many GP practices.
The nature of Cost Rent reimbursement is that it relates specifically to the amount of borrowing incurred by the GP partners. The significance of this is that it relates to the particular funding arrangements of the GP partners rather than the value of the surgery premises. This means that unlike other forms of rent reimbursement, Cost Rent reimbursement is not transferable with a property asset transfer.
So if you are a GP practice who currently receives the surgery reimbursement via the Cost Rent payment, are there any issues that are unique to the Cost Rent form of the reimbursement that you should be aware of ?
The short answer to this question is yes, so I have detailed below a few matters that such practices should be aware of:-
1. As stated above, Cost Rent reimbursement relates directly to the funding arrangements of the GP contractor. In the event that these repayment obligations reduce over time, the GP contractor should inform NHS England of this change as the level of reimbursement should be amended to reflect this change. Failure to do this may well result in significant costs to the GP practice in the future as NHS England are likely to require backdated repayments relating to previous overpayments.
2. GP practices in receipt of cost rent reimbursement are entitled to change the form of rent reimbursement they receive. Over time, it is likely that the costs of borrowing (and therefore Cost Rent reimbursement) will either stay the same or reduce whilst notional rent reimbursement may well increase.
A prudent practice manager will make a request to NHS England that the notional rent of their surgery premises is reviewed every three years even when they are in receipt of Cost Rent reimbursement. The reason for doing this is to establish whether the notional rent of the surgery has increased to an amount in excess of the Cost Rent reimbursement; if so, the GP practice can choose for their reimbursement rent to be on the basis of the notional rent assessment.
3. GP practices considering a sale and lease back arrangement need to remember that if they are in receipt of Cost Rent reimbursement, this form of reimbursement is not transferable to a third party who may be considering purchasing their surgery.
In this situation, a review of the Current Market Rent of the surgery will be required, as this will be the basis for rent reimbursement following such a transaction. Any prospective investor will reflect the Current Market Rent of the surgery in the amount they are prepared to pay for such a property asset rather than the current Cost Rent reimbursement.
As discussed above, GP practices usually only receive Cost Rent reimbursement when this is at a higher level than notional rent reimbursement. The consequence of this is that for most GP practices receiving a Cost Rent, a sale and lease back proposal is not a particularly attractive option as it will be based on a level of rent reimbursement lower than that currently being received by them.
So, for GP Practices who still receive their rent reimbursement via the Cost Rent (or Borrowing Costs) mechanism, there are issues particular to this form of rent reimbursement that are worth noting. Keeping a note of the above should help to ensure the efficient management of their surgery premises
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Wootten Dean is an established property consultancy led by Bryan Wootten who has over 15 years of experience as a valuer and general practice surveyor. Bryan is an RICS Registered Valuer who deals with a range of property types and has a special interest and focus on the NHS primary care environment.