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Rental of Office Space Exception

The Stark law and 42 CFR 411.357(a) provide an exception for compensation arrangements involving payments for office space made by a lessee to a lessor.  This exception is available for compensation arrangements in which the physician (or immediate family member) directly establishes a space-rental arrangement with a third party -- either as a tenant or lessor.

This exception would also apply when a solo-practice physician establishes such a relationship through his/her practice or wholly owned legal entity, or where a physician stands in the shoes of his/her physician organization for purposes of the office space lease arrangement.

Under this exception, the rental or lease agreement for office space must meet the requirements set forth below:
  • A written agreement is signed by the parties and specifies the leased premises;
  • A term of the agreement is for at least one year. If the agreement is terminated within the term, with or without cause, the parties may not enter into a new agreement during the first year of the original term;
  • The space rented may not exceed that which is reasonable and necessary for the legitimate business purposes of the tenant, and the space must be used exclusively by the tenant who does not share it with any person or entity related to the tenant. The final rule does allow tenants to make payments for the use of common areas (e.g., centralized reception areas) if the lease payments do not exceed the lessee's pro rata share of expenses for the space, provided that the rental amount paid for common areas is based on fair market value and is not an inflated price;
  • The rental charges over the term of the agreement must be set in advance and be consistent with fair market value;
  • The rental charges over the term of the arrangement are not be determined in a manner that takes into account the volume or value of any referrals or other business generated between the parties;
  • The agreement would be commercially reasonable even if no referrals were made between the lessee and the lessor; and
  • The rule allows for a holdover month-to-month rental for up to six months immediately following an agreement of at least one year. Such a holdover tenancy must, however, meet the requirements of the exception and the holdover rental arrangement must be on the same terms and conditions of the immediately preceding agreement.

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