Why Appraiser-Prepared Fair Market Value Carries More Weight In Healthcare Leasing

Healthcare organizations must comply with federal regulations such as the Stark Law and the Anti-Kickback Statute (Stark/AKS), particularly in real estate leasing arrangements involving healthcare providers.

Noncompliance can lead to significant financial penalties, potential criminal liability, and even exclusion from participation in Medicare and Medicaid programs.

When healthcare entities lease space to referral sources—such as physicians, specialists, or other health systems—the lease terms must reflect Fair Market Value (FMV) and be commercially reasonable to meet Stark/AKS requirements. An FMV analysis determines the rental rate a property would command in an open and competitive market, while also assessing key lease terms such as duration, tenant improvement allowances, rent concessions, and other relevant provisions.

FMV analyses are typically prepared by one of two professionals: a real estate broker or a real estate appraiser.

BROKER: Typically, a broker will issue a Broker’s Price Opinion (BPO) or a Broker’s Opinion of Value (BOV). The broker will usually offer these reports at no cost or a low cost as a service to an existing client; however, the analysis put into these reports is usually commensurate with the fee charged. Many brokers will use data from various data providers, such as CoStar, Crexi, MLS and their own database. However, most brokers are not calling to verify the accuracy of the data from third party providers, and they are usually not adjusting the comparables based on the attributes of the subject. In many cases, data is pulled from third-party sources and incorporated into a report with limited verification or adjustment. The resulting value range may or may not accurately reflect the fair market value of the subject. Often, a BPO is used as a supporting document to demonstrate that an effort was made to identify fair market value, rather than as a fully substantiated valuation opinion.

APPRAISER: An appraiser will either issue an Appraisal or a Fair Market Value/Fair Market Rent (FMR) analysis. These reports will contain sales and/or lease comparables that have been verified for accuracy and will contain an analysis to properly adjust the comps based on the subject’s attributes, usually resulting in a more accurate value indication. Additionally, these reports will be USPAP compliant, adding an additional layer of quality control, competency, and credibility.

An appraiser’s report is typically more robust and contains more data and analysis than a BPO/BOV. Further, the appraiser is a disinterested third party who has no conflict of interest in providing unbiased FMV.

RISK TOLERLANCE: The choice of which type of report to obtain ultimately comes down to the client’s risk tolerance. A BPO/BOV may provide enough data to satisfy the client’s requirements to comply with Stark/AKS. However, if the client is audited, or if the leases come into question, the BPO/BOV may not have enough data or analysis to support the conclusions. Alternatively, having a report prepared by an Appraiser may be more defensible, as they are prepared with a more thorough, well-supported methodology. Given the steep consequences associated with a Stark/AKS violation, obtaining an FMV report from an appraiser could prevent costly penalties.

UPDATING VALUES: In most cases, our clients have elected to receive annual updates on their valuations. Depending on the market in which the asset is located, updating more often (half year or quarterly) may be needed, if the local market is very dynamic. Conversely, if the asset is in a stagnant market, updating on a longer cycle may be sufficient. Ultimately, the client’s risk tolerance and market volatility will dictate the update schedule, but in most cases, an annual update should suffice.

Compliance with Stark Law and the Anti-Kickback Statue is not optional. Non-compliance carries significant financial and operational consequences, making defensible FMV support a critical component of healthcare real estate decision-making. While a BPO/BOV may give general guidance as to the FMV of your healthcare asset, it may also lack sufficient data and analysis to fully support the conclusions. An FMV report from a qualified healthcare appraiser will contain confirmed data that is thoroughly analyzed and adjusted to provide a value that can be relied upon when making healthcare real estate decisions.

Source: GlobeSt