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Premises funding

Q: What is the current advice about when to switch from borrowing costs to notional rent? I think it used to be when notional rent was worth 10 per cent more than borrowing costs. Has that changed?

A: If a practice currently receives borrowing costs, it has the right at any time to transfer to notional rent but, once transferred, it cannot return to borrowing costs.

The problem is that notional rents rise and fall with the market at each tri-annual review, whereas fixed rate borrowing costs will not vary. GPs are therefore often faced with the conundrum of should they transfer to notional rent and risk a future fall.

You are correct that there was a broad rule of thumb whereby people used to say that, if you were going to get an increase of 10 per cent by changing to notional rent, taking the risk was worth it.

Historically, rents on good quality, purpose-built medical centres have continued to increase and one of the larger investors/landlords in primary care published reports at the end of March 2010 noting annual increases in rents across its portfolio had averaged 2.4 per cent.

Whether this trend will continue is of course unknown but, even with the current cutbacks, good quality medical centres are vital for the increased services which GPs are expected to run. So while the increase may slow, I cannot see it stopping or going backwards.

Conversely, if your premises are older or converted and fall short of the NHS requirements in the Premises Costs Directions, the picture may be different. As properties become less compliant, it is reasonable to expect rentals to stop growing and, potentially, fall.

I would be more led by the style and quality of your premises than the old 10 per cent rough guide figure.

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