The Role of Lease Structures in Healthcare Real Estate Valuation

When it comes to healthcare real estate, the lease agreement is just as important as the physical property in determining value. Whether you’re looking at a medical office building, an outpatient clinic, or a specialized healthcare facility, the lease structure directly affects cash flow, investment risk, and overall property valuation.

Why Lease Structure Matters in Healthcare Real Estate

Unlike traditional office or retail properties, healthcare real estate leases tend to be longer-term and highly customized. Medical tenants invest heavily in their spaces—whether it’s expensive imaging equipment, surgical buildouts, or specialty HVAC systems for infection control. Because of this, they prefer stability and long-term agreements, which can be beneficial for landlords and investors.

A well-structured lease can significantly increase a property’s value, while a poorly structured one can create risk. Here are some key factors that influence healthcare real estate appraisals:

1. Lease Type: Who Covers What?

The structure of a lease determines who is responsible for operating costs, maintenance, and property improvements. In healthcare real estate, these are the most common lease types:

• Triple Net (NNN) Leases: The tenant covers property taxes, insurance, and maintenance, making this a low-risk, high-value lease structure for landlords. Healthcare providers in long-term NNN leases are considered strong, stable tenants, which increases property valuation.

• Modified Gross Leases: The landlord may cover some operating costs, but tenants still pay a portion of expenses. These leases offer some flexibility but carry slightly more risk for the property owner.

• Full-Service Gross Leases: The landlord covers all major expenses, meaning higher operating costs and lower net income, which can reduce overall property value.

Appraisers consider which lease type is in place when assessing a property’s long-term financial health. Triple net leases typically lead to higher valuations due to their predictable revenue stream.

2. Lease Term and Renewal Options

Healthcare providers prefer longer lease terms due to the high cost of moving and buildout expenses. Properties with tenants signed to 10- to 20-year leases are seen as low-risk investments, while those with short-term leases (5 years or less) can be more volatile.

Renewal clauses also play a role. A lease with automatic renewal options at fair market rent is more attractive to investors and lenders than one that requires renegotiation every few years.

3. Tenant Strength and Creditworthiness

Not all healthcare tenants are equal when it comes to financial stability. A medical office building leased by a hospital system or a national healthcare provider is generally seen as more valuable than one occupied by a small independent practice.

When appraising a healthcare property, lenders and investors look at:

• The tenant’s financial history and stability

• Whether the lease is corporate-backed or personally guaranteed

• The reimbursement model (Medicare/Medicaid-heavy tenants may have higher risk than private-pay practices)

A strong tenant with a well-structured, long-term lease can significantly increase a property’s value.

4. Buildout Costs and Tenant Improvements

Medical spaces require customized buildouts, from exam rooms and imaging suites to ADA-compliant accessibility upgrades. The question is: who pays for these improvements?

• If the tenant funds the buildout, they’re more likely to stay long-term, reducing turnover risk and increasing property value.

• If the landlord funds the improvements, it could lead to a higher valuation—but only if the lease term is long enough to justify the investment.

Properties with long-term, self-funded tenant improvements typically appraise higher than those requiring frequent owner-funded renovations.

Why Lease Structure is Critical for Appraisals

A healthcare real estate appraisal isn’t just about location and building quality—it’s about the financial strength of the lease agreements in place. Investors and lenders want to see long-term stability, predictable income, and strong tenants before assigning value to a property.

If you own or are considering investing in a healthcare property, understanding the lease structure is key to maximizing value.

Need an appraisal that takes lease structures into account? Reach out today to ensure your valuation reflects the full potential of your asset.