Windfall for Some Partners Leaves Other Partners Footing the Bill
I hate to admit it, but I am old enough to clearly remember The Steve Miller Band singing “Take the Money and Run”. I just didn’t know that it described the physician-partners who walk away from a debt obligation and leave the repayment for the rest of their partners or, worse, those that may be future partners.
The stage is set whenever a group of partners agrees to an above-market lease rate or a higher escalator or a longer term so that a REIT or some other buyer will pay a higher purchase price. The premise is simple. The buyer pays an increased purchase price in return for a more robust cash flow. However, such an arrangement can have very serious practical, ethical and even legal implications for two groups that are a mainstay of the practice’s sustainability; the partners that remain through the term of the new lease while other partners exit early and new partners who were not a part of the original sale.
Partners Remaining for the Full Term – The problem occurs when one or more of the selling members leave the practice (tenant) prior to the maturity of the lease. Let’s remember that the retiring member received a premium payment in exchange for the payment of a premium cash flow over the term of the lease. However, when the member leaves the practice prior to the lease term expiring, that member is no longer repaying his or her portion of the inflated cash flow that is still due. That partner or partners that do leave prior to the lease term have just ducked out from paying their portion of the tab that is due on the premium received and left that to be paid by those remaining in the practice.
That means the remaining partners’ original benefit from the incremental sales value will be mitigated or eliminated by the portion of the premium they now pay (through the practice) on behalf of the partner(s) that “took the money and ran”. It is likely that the increased rent will cost the remaining partners more than the premium they received in the first place.
New Partners to the Practice – Beyond the issue of the original partners is the valid concern of new partners who may question why the practice is paying an above-market rent. Moreover, some attorneys feel strongly that the practice is obligated to disclose the over-market rent when recruiting a new physician with the expectation of a partnership. An astute doctor contemplating partnership will see that his or her income would be diminished by that rental premium that had been monetized earlier by the preceding partners.
Although there are methods of re-equalizing the benefits and obligations attached to an above-market sale/leaseback, the best thing that a group can do is to recognize that whatever premium they receive will be paid back with interest to the purchaser over the course of the lease and to make sure that the sale/leaseback occurs at true market rates. If that’s not possible, talk to your attorney about claw-back provisions for those retiring prior to the lease term to avoid unfair outcomes.
For more information, email Sirena Madden at firstname.lastname@example.org.
By Greg Warren, Managing Partner