How should health systems decide whether to own or lease ambulatory facilities for maximum capital efficiency?

Use a structured, data-driven framework that compares after-tax NPV, balance-sheet impact, and strategic flexibility; lease when preserving capital and speed-to-market produce higher risk-adjusted value, and own when long-term control, low cost of capital, and site durability outweigh the opportunity cost.

Why it matters

Ambulatory growth is essential, but capital is scarce. The own-versus-lease choice determines how much balance sheet capacity you preserve for clinical systems, digital infrastructure, and core hospital upgrades—and it shapes your bond rating trajectory.

Ownership can lower long-run occupancy cost and maximize control; leasing can accelerate market entry, transfer residual risk, and keep cash free for higher-return clinical initiatives. Under ASC 842, leases appear on the balance sheet, but structure still influences leverage, liquidity, and rating agency views on risk.

How it works

Start with a six-part decision framework: define the use case and time horizon, quantify total cost of occupancy, run a financial comparison, score strategic factors, apply decision rules, and optimize the deal structure.

Define the clinical program and market horizon. If a site’s value depends on durable referral patterns, protective CON barriers, or long-term ambulatory throughput (10–15 years), it may favor ownership; if the catchment is evolving or competitive dynamics are uncertain, flexibility favors leasing.

Quantify total cost of occupancy for both paths. For leasing, include base rent, operating expenses, real estate taxes, escalators, tenant improvement (TI) allowances, and end-of-term restoration. For owning, include land, shell, TI, equipment-related buildout, maintenance, capital refresh, utilities, and property taxes (accounting for exemptions where applicable), plus an estimate of residual value.

Run an after-tax NPV (or pre-tax for tax-exempt) at your weighted average cost of capital (WACC), and model rating metrics: debt-to-capitalization, days cash on hand, and MADS coverage. Incorporate ASC 842 lease capitalization, and perform sensitivity tests on volume, rent escalators, inflation, and exit value to see which option is more resilient to downside scenarios.

Score strategic factors that aren’t fully captured in cash flows: site permanence, proximity to acute hubs, physician alignment, market access, patient convenience, competitor responses, and regulatory risk. Assign weights so a modest cost premium can be justified for superior control, adjacency, or brand presence.

Apply decision rules: lease when the expected ROI on redeploying saved capital into clinical priorities exceeds the lease “spread” and when flexibility has clear option value; own when the site is mission-critical, special-purpose, or has high certainty of multi-decade use and your cost of capital undercuts developer yields. Then optimize structure—consider build-to-suit with purchase options, ground leases for land control, sale-leaseback for non-core assets, and clauses for expansion, contraction, and relocation.

Use simple patterns to speed choices: lease for urgent care and primary care in test markets or evolving trade areas; own or use ground leases for flagship MOBs, ASCs, imaging hubs, and teaching sites with durable demand and integration value. Revisit decisions periodically as service lines, payer mixes, or competitor footprints shift.

Key takeaways

There is no single “right” answer; maximum capital efficiency comes from comparing risk-adjusted economics and strategic control across time. What you choose should align with care models, market moves, and capital priorities—not habit or convenience.

Rating agencies focus on leverage, liquidity, and predictability more than ownership form. Well-structured leases can protect metrics; poorly structured ownership can strain them—and vice versa.

Negotiating options (renewals, expansions, termination rights, and purchase options) creates real option value. These rights often matter as much as today’s cap rate or rental rate.

Recycling capital via sale-leaseback can fund growth when assets are non-core, stable, and easily substitutable. Guardrails on term, escalators, and use provisions preserve long-run flexibility.

Actionable Takeaway: Build a standardized own-versus-lease model that calculates total occupancy cost, NPV at WACC, and rating metric impacts, layered with a weighted strategic scorecard; run it for every ambulatory project and bake option rights into leases to preserve flexibility.

1. How does ASC 842 change the own-versus-lease decision?

ASC 842 puts most leases on the balance sheet, making their obligations more debt-like in financial statements, but it does not eliminate structural differences. Rating agencies still evaluate lease terms, escalators, and renewal risk differently from fixed-rate debt and owned assets. Your decision should still weigh NPV, flexibility, and operational control—now with clearer visibility into how lease commitments affect leverage and coverage. In practice, ASC 842 increases the importance of negotiating options and downside protections in leases.

2. When is a sale-leaseback a smart move for a health system?

Sale-leasebacks work best for non-core, stabilized assets where the proceeds can be redeployed into higher-return clinical or digital projects. They can also accelerate deleveraging or fund ambulatory growth without new debt, provided the lease term, escalators, and covenants protect long-term affordability. Avoid sale-leasebacks on mission-critical, highly specialized facilities unless you secure strong purchase options and operational control rights. Always test the transaction’s effect on rating metrics and compare it to tax-exempt financing alternatives.

3. What discount rate should we use, and should the model be after-tax?

Use your system’s WACC that reflects the mix of tax-exempt debt, taxable debt, and any equity-like capital, adjusted for project risk. For not-for-profits, model pre-tax operating cash flows and a discount rate consistent with your capital structure; for taxable entities, use after-tax cash flows and an after-tax WACC. The key is consistency: match the tax treatment of cash flows to the discount rate. Always run sensitivities around WACC, inflation, and residual values to capture risk bands.

4. How should physician alignment factor into own-versus-lease?

Physician alignment can tilt decisions because co-location, governance, and shared economics influence volume capture and care coordination. If alignment is evolving, leasing can provide flexibility to scale up or pivot; if relationships are durable and strategic, owning may cement long-term integration. Structure matters: consider compliant JV arrangements, fair-market-value leases, and shared TI funding to align incentives while meeting Stark and Anti-Kickback rules. The goal is to support access, throughput, and quality without locking into rigid footprints too early.

5. What lease protections should executives insist on?

Seek renewal options with clear pricing guardrails, expansion and contraction rights, and relocation or early-termination provisions tied to regulatory or reimbursement change. Add purchase options or rights of first offer/refusal to preserve strategic control, plus robust TI allowances and control over design standards to protect clinical workflows. Tighten use, exclusivity, assignment, and sublease clauses to safeguard patient access and brand. Finally, include remedies for landlord default and clear casualty/condemnation language to avoid service disruption.