Medical Office Building and Clinic Appraisals Across California

What is a medical office appraisal, and how is it different from an office appraisal?

A medical building is an office building with more inside it. Exam rooms need plumbing in almost every room. Imaging suites can need shielding and heavier power. Surgery and procedure space may need medical gas, backup power and more mechanical capacity. Parking demand runs higher because patients come and go all day. Tenants are physician groups, dental practices, health systems and outpatient operators, and each has its own credit, lease term and renewal pattern.

That changes the analysis. Market rent for finished medical space is not the same as for general office space next door. Tenant improvements can be expensive and very specific to one practice, and a buyer may or may not pay for them. A building on a hospital campus, or across the street from one, trades differently from a clinic in a strip center. The report explains which of these matter for your property and how the market treats them.

How is a medical office building valued?

The same three approaches as any commercial property, weighted for this one. The income approach starts with every lease: rent, term, options, expense recoveries and who pays for the build-out, then compares the rent to market rent for similar medical space and applies market vacancy, expenses and a capitalization rate supported by the market. Sales of comparable medical office buildings test the result. For newer or proposed buildings, the cost approach measures what it would take to build the space today, less depreciation.

Specialized improvements are tested, not assumed. A surgery suite or imaging room adds value only to the extent a buyer or a new tenant would pay for it. If the space is overbuilt for the market, or would have to be torn out for the next tenant, the report says so. Highest and best use asks whether the building is worth most as medical space, as general office space or as something else. See our highest and best use and feasibility studies.

We appraise the real estate only: the land, the building and the improvements that go with it. Medical equipment, the practice, patient lists and goodwill are business and personal property, and they belong with a business valuation professional. If a sale or buyout includes both, tell us on the first call so the report is scoped to the real estate and says so clearly.

Do California building rules change what a medical building is worth?

They can, because the rules depend on the use. The Department of Health Care Access and Information (HCAI), through its Office of Statewide Hospital Planning and Development, is the building enforcement agency for hospitals and skilled nursing facilities under the Alfred E. Alquist Hospital Facilities Seismic Safety Act of 1983, according to HCAI's code application notice on OSHPD jurisdiction. For licensed clinics, the state writes the building standards (labeled OSHPD 3 in the California Building Code), but review, permits and inspection are typically handled by the local building official.

According to the state Building Standards Commission's guide to Title 24, buildings on hospital properties that are not used for medical purposes, such as office buildings, storage buildings and parking garages, follow the standards for their occupancy and are enforced by the local fire or building official. In practice that means an ordinary medical office building is usually a locally permitted building, while a hospital building is not. Converting general office space to a licensed clinic can bring different standards, which affects the cost and time of a conversion and what a buyer would pay for the space.

Hospital buildings themselves carry state seismic safety requirements. The Legislature's findings in Health and Safety Code Section 130000 trace the Alquist Act to hospital collapses in the 1971 Sylmar earthquake and describe the state's push to retrofit or replace hospital buildings that house inpatients. When a valuation involves a hospital campus, how those requirements affect the buildings is part of the analysis.

General information, not legal advice. Ask your architect, the local building department, HCAI or your attorney how these rules apply to a specific building.

What does fair market value rent mean for a medical office lease?

When a physician, a medical group and a hospital are landlord and tenant, federal and state referral laws care about the rent. The physician self-referral rule's exception for rental of office space, 42 CFR 411.357(a), requires among other things a written lease of at least one year with rent set in advance and consistent with fair market value, not tied to the volume or value of referrals. The federal definition in 42 CFR 411.351 describes fair market value for office space as the value of rental property for general commercial purposes, without adjustment for the extra value a party would place on being close to a source of patient referrals.

The anti-kickback space rental safe harbor, 42 CFR 1001.952(b), uses a similar idea. In California, Business and Professions Code Section 650 prohibits paying for patient referrals, and allows percentage-based arrangements for other services only when the consideration is commensurate with the value of the services or the fair rental value of the premises or equipment.

What we provide is the real estate piece: a supported opinion of market rent for the space, based on leases of comparable medical space, with the terms that drive rent spelled out. Whether a particular arrangement complies with these laws is a legal question for your healthcare attorney, and the report will not answer it.

General information, not legal advice. Talk to your healthcare attorney about any lease between referral sources.

Who orders a medical office appraisal?

Lenders on purchases, refinances, bridge loans and construction loans for medical buildings; see private and hard money lending appraisals, bridge loan appraisals and as-complete appraisals for construction loans. Physicians and dental groups buying their own building or a medical office condo. Investors buying, selling or repositioning medical office. Physician partners in a buyout of a building they own together, or a partition action. Trustees, executors and estate attorneys who need a date-of-death value; see our guide to date of death appraisals in San Luis Obispo and Monterey and the other county guides. Family law attorneys when a physician's building is part of a marital estate; see divorce appraisals. Owners facing a property tax appeal or an eminent domain taking. CPAs who need a supported value or market rent for a tax or reporting question.

Where in California do you appraise medical property?

Everywhere. Medical office tends to cluster near hospital campuses and along the main roads that serve them, in every metro area and in smaller cities that anchor a rural region. We appraise medical buildings in San Diego, Los Angeles, Orange County, the Inland Empire, the Bay Area, Sacramento, Fresno, San Luis Obispo and Monterey and every other California county. See our statewide coverage.

Do you appraise only medical property?

No. Medical is one example. PM Appraisal is a family-owned California appraisal firm with about 40 years of work across the state, and our team appraises every commercial property type: office, retail, industrial and warehouse, multifamily, mixed-use, hotels and motels, gas stations, land, vineyards and agricultural property, care facilities, religious facilities, leasehold interests and special-use property. We write every kind of commercial appraisal: lending, purchase and refinance, construction, date of death, trust, divorce, retrospective, partition, litigation, eminent domain, tax appeal and consulting, in every California county. See all property types and our commercial property appraisal page.

How do I order a medical office appraisal?

Call or text (805) 990-9700. You talk to the appraiser who will inspect the property and write the report, not a coordinator. Have the address, the purpose (loan, purchase, estate, divorce, buyout, rent question, tax), the date of value, the leases and rent roll, recent operating statements and a list of any major build-out ready, and we will scope it on the first call. Rush commercial appraisals in 5 to 7 business days. Standard timing depends on the property and scope.

Talk to your appraiser: (805) 990-9700