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Ask the chief compliance officer of any health system to identify the types of arrangements in his or her organization that may not be fully compliant with the applicable healthcare regulations, and he or she will likely point to real estate arrangements. Real estate arrangements face numerous compliance pitfalls, any one of which can trigger a violation under the Stark Law. The compliance pitfalls associated with real estate arrangements can be generally subdivided into two categories: (1) transactional and (2) operational.

Transactional compliance pitfalls stem from the real estate arrangements themselves and the specific structure of the transaction, such as the rent rate under a lease arrangement between a health system and a referring physician not being consistent with fair market value (FMV), as that term is defined under the Stark Law. Operational compliance pitfalls stem from the subsequent administration, or lack thereof, of the real estate arrangements, such as a health system’s failure to collect rent payments from referring physicians or not properly allocating operating expenses to the spaces leased by the referring physicians.

As explained in more detail throughout this paper, some common transactional compliance pitfalls involve rent rates, classifications of leases, tenant improvement allowances, square footage measurements of leased premises, and “off-lease” benefits.  A follow-up paper will address some common operational compliance pitfalls.

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