A significant yet often overlooked component of the valuation process is the short-term use premium. This concept, seen in industries such as hospitality, car/equipment rentals, and flexible office space, reflects the additional value associated with part-time use of an asset. For medical office timeshare arrangements, accounting for this premium can be an important factor when evaluating fair market value and supporting the defensibility of the arrangement.

Understanding short-term use premiums

A short-term use premium compensates landlords for the increased operational complexities and risks associated with leasing space on a part-time basis. Unlike traditional leases that offer long-term stability, timeshare arrangements involve shorter, predefined usage slots, such as specific days of the week or hours of the day. These arrangements require a higher level of administrative oversight, more scheduling management, and can create revenue fluctuations, all of which help explain why a premium may be applied. In industries outside healthcare, short-term premiums are widely accepted. For example:

• Conference rooms: Facilities offering part-time access to meeting rooms charge higher hourly or daily rates compared to long-term office leases.
• Executive office suites: Shared office spaces often command premium rates due to their flexibility and availability of shared resources.
• Rental cars and hotels: Daily or weekly rates are significantly higher than the prorated cost of long-term rentals, reflecting the added convenience and operational turnover involved.

Medical office timeshares have similar economics. The premium may reflect the landlord’s responsibility to coordinate multiple tenants, maintain a high standard of functionality, and assume the financial risks associated with partial utilization of the space.

Factors influencing short-term use premiums

Several factors influence the calculation of short-term use premiums in medical office timeshare arrangements, which is why the appropriate premium may vary based on the specific circumstances of the arrangement.

1. Number of tenant time slots leased

The frequency and regularity of tenant usage directly affect the premium. A tenant leasing one day per week may create a higher operational burden for the landlord than a tenant leasing multiple consecutive days. Irregular time slots may also limit the landlord’s ability to lease the remaining time slots, increasing utilization risk. The premium may reflect this dynamic by compensating the landlord for that added complexity and for the possibility of unleased periods.

2. Landlord utilization risk

The landlord’s exposure to risk is another important driver of short-term premiums. Unlike long-term leases, where revenue is more predictable, timeshare arrangements often leave unleased time slots, representing lost potential income. For example, a landlord may lease Monday, Wednesday, and Friday to one tenant, leaving Tuesday and Thursday vacant. A short-term premium may help account for this inherent risk so the partial lease structure is not priced as though it provides the same stability as a full-time arrangement.

3. Market comparable transactions

Market data and comparable transactions play a vital role in setting any short-term use premium. If similar medical office timeshares in the area command a certain premium over long-term lease rates, this becomes a baseline for negotiations. However, premiums may still vary based on factors such as location, facility quality, and tenant demand. Periodic review of market conditions can help keep rates competitive and defensible from a regulatory standpoint.

Balancing premiums with tenant value

While a short-term premium can compensate landlords for the complexities of timeshare arrangements, it also must balance tenant expectations. Physicians and healthcare providers often pursue these arrangements because they offer cost-effective access to clinical space. If the premium is too aggressive, it could deter potential tenants. Transparent pricing supported by market data and justifiable calculations helps build trust and supports a workable agreement for both sides.

Tenants also benefit from the flexibility and cost-sharing advantages of timeshare arrangements. Paying a short-term premium may still allow a physician or practice to access high-quality facilities without committing to a long-term lease or assuming the full financial burden of a standalone office. By clearly communicating the value proposition of the premium, landlords can foster stronger relationships with tenants and encourage longer-term collaborations.

Thought-provoking questions on setting a premium

Question #1 – Usage of Random Premiums

If a premium is being used, what is the basis for that premium? Is there documentation to support the premium being used? Has the medical office timeshare rate been reviewed recently to help ensure that the rates are defensible if they come under government review?

Healthcare systems use a range of methods to calculate rental rates, from applying no premium at all to significantly higher premiums. While it is not plausible to exclude a premium, it is important that health systems have a clear basis for the short-term use premium.  Documentation and periodic review of market-supported rate premiums can help ensure compliance.

Question #2 – Premium adjustment between a traditional timeshare suite and space sharing an existing physician office

Should a different premium be used based on the structure of the timeshare and the risk involved? Does a traditional timeshare suite carry more risk than a space sharing arrangement? Is this risk reflected in the premiums chosen to derive the rental rates?

A traditional timeshare suite is being set up for the sole purpose of renting space to physicians on a short-term basis and has very high risk of suffering an economic loss if the space does not remain at certain occupancy levels. For this reason, a much higher premium is usually charged.

However, in the case of a physician looking to share some unused space one or two days per week, there is a much lower economic risk. The seller/landlord is already incurring the cost to occupy the space and is trying to “sublease” a portion of the space and share the cost with the tenant. Given the cost sharing nature of this structure, the premium would not be set as high as for the traditional timeshare suite which is fully dedicated to timeshare tenants. 

Question #3 – Premium adjusted for length of stay/usage

Is the premium used the same for all tenants regardless of how many time slots they lease? Should the short-term use premium be adjusted based on frequency of use, consistency of scheduling, or duration of the arrangement?    

A buyer/tenant may be able to negotiate a better rate by committing to more consistent usage of the space. For instance, one physician may want to use the space three full days per week instead of the more typical half day or one full day per week. In that case, the physician is lowering the landlord’s leasing risk, and a reduced premium could be appropriate.

Conclusion: Use premiums should be chosen wisely

The short-term use premium is an important and often underappreciated element of medical office timeshare valuation. It reflects the operational challenges, utilization risks, and market dynamics associated with part-time leasing arrangements. By carefully considering factors such as tenant time slots, landlord risk, and market comparables, landlords can develop rates that are more likely to be fair, defensible, and aligned with industry standards.

Simultaneously, tenants benefit from the flexibility and cost-effectiveness of shared space, reinforcing the mutual advantages of timeshare arrangements. As the healthcare industry continues to evolve, incorporating short-term premiums into timeshare agreements will remain essential for optimizing financial performance, regulatory compliance, and tenant satisfaction.

When outside valuation support is helpful

Because medical office timeshare arrangements can raise regulatory and valuation questions, some organizations choose to engage outside valuation support when setting or reviewing fair market value inclusive of short-term use premiums. That can be especially relevant for arrangements involving referral relationships, more complex lease structures, or terms that may be scrutinized internally by compliance, legal, or finance leaders. A healthcare-focused valuation professional can help assess whether the assumptions used in the rate are grounded in market data and operational realities.

Potential benefits of engaging outside valuation support include:

• Regulatory awareness: Understanding of Stark Law, Anti-Kickback Statute, and related compliance considerations that frequently apply to physician space-sharing and timeshare arrangements
• Healthcare-specific valuation expertise: Use of established valuation approaches tailored to medical office use and healthcare transaction structures
• Operational insight: Evaluation of factors unique to timeshare arrangements, such as scheduling inefficiencies, downtime risk, administrative burden, and fragmented space utilization
• Market-informed analysis: Review of healthcare market benchmarks and comparable medical office transactions to help support fair market value conclusions
• Defensible documentation: Preparation of well-supported valuation reports that can assist with internal governance, compliance review, and potential regulatory or third-party scrutiny
• Broader market understanding: Firms that work across multiple systems, specialties, and regions may bring added context, benchmarks, and comparative data that help organizations assess whether a proposed rate is within a supportable range. Used appropriately, these capabilities can help organizations ensure that timeshare premiums reflect legitimate economic and operational considerations and are better supported from a valuation and compliance standpoint.