PRIVATE FINANCE:

With the passing of the Health Act, the creation of primary care trusts moves ever closer. But the government's drive for a primary care- based NHS needs to be matched by modern primary care premises to replace out-of-date accommodation.

The government has recognised this with recent Department of Health guidance.1 This confirms the aim to bring all sub-standard premises into line with standards in the statement of fees and allowances (the 'Red Book') and to improve 1,000 GP premises nationally over the next three years.

So who are the principal players in a primary care development? The most straightforward schemes may involve a single GP practice leasing new, purpose-built premises from a developer. But the most complex schemes can involve community trusts providing physiotherapy, counselling and a base for health visitors, district nurses and midwives; acute trusts providing consultant-led services in the community; as well as dentists, optometrists, pharmacists and many other primary care providers.

Private finance is the key to successful primary care developments. But new obligations on HAs introduced in March this year (see box, page 16) could make it harder to get privately funded schemes off the ground.

Technically the government's private finance initiative relates to the provision of services - the provision of accommodation being ancillary to services - while in primary care developments, such services as are provided (maintenance of common parts, reception facilities, heating and lighting etc) are viewed as incidental to providing the asset.

In its capital investment strategy, the government indicates that it is exploring 'PFI-type solutions' in primary care. One idea is to 'batch' schemes together so there is a large enough element of facilities management to make private investment cost-effective. Further developments are awaited.

Meanwhile, primary care developments have, to date, tended to be based on traditional leasehold structures with the provision of services dealt with through standard service-charge provisions.

The figures on page 16 show two types of leasehold structures. The first is a basic scheme where newly built premises are occupied by a trust and a GP practice. The developer retains responsibility for repairing the structure of the building and maintaining any common parts, but charges back the cost to the tenants through a service charge. The second is a scheme where a trust takes a headlease of the whole building and grants underleases to a number of other primary care providers. This may be because the scheme has been trust-led and the trust intends to occupy most of the space. Or it may be because the developer does not want to be responsible for managing the building.

More complicated schemes usually require additional documentation (see box, page 16).

Capital funding

For a traditional lease structure scheme to be financially viable for a developer, the capital value of the completed development must normally be equal to or higher than the construction costs plus the developer's profit. The capital value is directly related to the rental levels payable and the number of years the leases are to run for.

Rental levels are normally set at current market rents. This is because GPs' rents are reimbursed by the health authority in accordance with the terms of the Red Book.

The reimbursable rent is set by the district valuer and is subject to a maximum of the open market rent with adjustments. GPs are normally reluctant to pay extra over the reimbursable rents from their own pockets. DoH policy is that a trust should not normally pay more than an open-market rent as assessed by the district valuer.

Where current market rents give rise to a shortfall in the capital value to the developer and GPs are not agreeable to paying additional rents, there are two main options.

The first is to build a cheaper building. This may not always be possible without breaching minimum accommodation standards or failing to achieve the desired service gains.

The second is to explore other sources of additional funding. In London, the flexibilities of the London Initiative Zone enabled HAs to make capital payments to developers to make schemes affordable. But since March 1999 these have not been available. However, other grant funding may be available from other sources such as the single regeneration budget or the Lottery. On larger projects, it may be possible to use part of the development site for housing or business to subsidise the healthcare part of the scheme (see box, page 16.)

Where grant funds are made available, these will normally impose conditions to ensure the premises are used for their intended purpose. If not, the grant will have to be repaid.

Leasing conditions

Developers will normally want to grant as long a lease as possible so that the guaranteed rental stream will enhance the project's capital value. In contrast, occupiers want break options to give them flexibility, should their circumstances change. In practice, developers normally win this argument, otherwise the scheme would not be financially viable.

Particularly in the absence of break rights, occupants should ensure they have as much freedom as possible to assign their obligations under their leases to third parties. In any event, all leases of primary care developments should be assignable to primary care trusts as and when they are created.

The government has indicated that PFI assets in secondary-care hospital schemes will be returned to the public sector after 30 years. Under traditional primary-care leasehold structures, however, the developer will own the asset at the end of the lease term.

Reimbursement

GPs will normally insist that the rent payable at the start of a new development is no higher than the reimbursable amount.

The GP's lease also needs to address what happens when the rent is reviewed, typically at three or five-year intervals. Here interests may conflict. Commercial landlords always insist rents can go up on review but not down. But GPs will insist the rent is never higher than the reimbursable rent approved by the district valuer - and this can go up or down.

To overcome this some primary-care developers have devised specialised rent review clauses with their funders to meet GPs' concerns by restricting any rent review to the reimbursable rent. They also give developers the chance to require GPs to appeal any decision of the district valuer pursuant to the Red Book.

Liability for service charge is often a cause of concern for GPs, who are responsible for the costs of internal repairs, but the costs of external and structural repairs and insurance are to be reimbursed to them. Rather than providing for a 100 per cent refund, the Red Book requires district valuers to add a fixed sum to the rent to cover liability for external repairs and insurance - typically 7 per cent of the rent.

This means that some years GPs will receive more than they pay to the landlord for service charge, but in others the reverse will be the case. In practice, some developers may assume these risks (and possible benefits) from the GPs by charging a rent inclusive of the reimbursable liabilities.

VAT recovery

The developer will charge VAT on the rents payable to occupiers. This is so the developer can recover VAT charged to it in connection with the scheme - for example, on construction costs. Since the Red Book enables recovery of VAT on rents this will not be a problem for GPs. But whether or not the trust will be able to recover VAT will depend on the particular circumstances and structure of the scheme. Trusts should seek expert VAT advice as early as possible.

Change of rules

A circular published in March this year imposes new obligations on HAs to carry out value-for-money assessments in relation to new practice premises in consultation with the district valuer.2 In addition, HAs must now prepare a plan for the overall provision of general medical services in consultation with the local medical committee and any other interested parties, and any new premise must be consistent with this. Finally, the size of new practice premises is expressly limited to specified gross internal areas.

The full effect of these changes has yet to be felt. But it will not make it any easier for schemes to be financially viable for developers, while still acceptable for rent reimbursement.

REFERENCES

1 Department of Health. Capital Investment Strategy for the Department of Health. May 1999.

2 NHS Executive. Health Service Circular 1999/071.

Mark Calverley is a partner at Capsticks, which specialises inprimary care developments.