Council Votes 7-0 (Supernaw Motion) For Community Hospital Lease That Lets LLC Terminate For Any Reason, Requires LB Taxpayers To Pay $1-2 Mil Annually (Up To $25 Mil Over 15 Yrs) Likely Taken From Measure A Sales Tax AND -- In Outcome City Mgm't Calls "Likely" -- Lets LLC End Lease Early Requiring LB Taxpayers To Reimburse LLC For LLC's Costs Incurred And Enabling LLC Or Other Buyer To Buy Community Hospital For Health Care Purposes Other Than Acute Care Hospital.
If LBREPORT.com didn't tell you, who would?
No one in LBREPORT.com's ownership, reporting or editorial decision-making has ties to development interests, advocacy groups or other special interests; or is seeking or receiving benefits of City development-related decisions; or holds a City Hall appointive position; or has contributed sums to political campaigns for Long Beach incumbents or challengers. LBREPORT.com isn't part of an out of town corporate cluster and no one its ownership, editorial or publishing decisionmaking has been part of the governing board of any City government body or other entity on whose policies we report.
LBREPORT.com is reader and advertiser supported. Support independent news in LB similar to the way people support NPR and PBS stations. We're not non-profit so it's not tax deductible but $49.95 (less than an annual dollar a week) helps keep us online.
(Oct. 16, 2019, 10:10 a.m.) -- In an Oct. 15 City Council vote with a number of taxpayer-impacting details and potential outcomes first publicly revealed only days before the vote, Councilmembers voted 7-0 (motion by Supernaw, seconded by Price, Richardson absent, 1st dist. vacant) to approve a lease enabling a for-profit entity, the "Molina/Wu/Network" LLC (now called "MWN Community Hospital LLC") to begin operating a smaller version of Community Hospital on seismically-challenged City-owned land.
In an agendizing memo first made public at the end of the business day Friday Oct. 11, LB city management revealed -- in an outcome it called "likely" -- that the LLC (or the city) can terminate the proposed lease years before its recited 45 year (plus two 10 year options) term, giving the LLC the opportunity to purchase the property for uses that may not include an acute care hospital (potentially a non-acute health care use) after LB taxpayers had spent the $1-2 million per year (up to $25 million over 15 years) to enable seismic retrofits.
The lease further provides that if the LLC or the City choose to terminate the lease for any reason, the City would have to reimburse the LLC for the LLC's start-up costs plus the LLC's share of any retrofit costs plus the LLC's cumulative net operating loss.
If the City can't pay that multi-million-dollar cumulated sum, the City could sell the Community Hospital property to the LLC or another party which may or may not continue to operate it as an acute care hospital.
City management's memo further acknowledged that the LLC "expressly makes no representation that it can open or operate an acute care hospital. The State's regulatory agencies may identify issues that are insurmountable during the current or future hospital licensing and/or seismic construction planning process. These issues may be outside the Tenant's control or current understanding of the Subject Property."
In addition, city management told the Council: "The true cost of detailed construction plans for the seismic retrofit is not known at this point; therefore, a financial plan to address the seismic retrofit component of the project has not been prepared yet. The $50 million estimate to conduct a seismic retrofit (of which the City would pay half) is a preliminary number based on the conceptual seismic plans prepared by the City's architect and confirmed by the Tenant's consultant. Any unexpected high cost of the retrofit, which is at the Tenant's risk, may cause abandonment of the opening of the Hospital as may any difficulty in the Tenant being able to finance the retrofit costs."
City management's memo stated: "The overall terms of the Lease likely make it financially beneficial for Tenant to terminate the Lease at some point, regardless of whether or not the Hospital is viable."
[Scroll down for further.]
City management's memo acknowledged that the LLC could choose to terminate the lease for any reason (except bankruptcy) with the City (i.e. LB taxpayers) having spent up to $25 million (over the full 15 years) for the seismic retrofit costs [with other costs/offsets detailed below].
City management acknowledged that the proposed lease "provides a financial and property ownership incentive for the Tenant to terminate at some point during the term of the Lease. A mutually agreeable way to eliminate that incentive could not be found while still requiring the Tenant to accept the financial risk of restarting, retrofitting, and ultimately operating an acute care hospital at the Subject Property. The City should expect this outcome, regardless of whether or not the acute care hospital is successful. The acute care hospital may or may not continue to operate after Lease termination, which, would be a decision of the Tenant or future property owner."
Following city staff's presentation and before public testimony, motion-maker Councilman Supernaw said: "I just wanted to say one thing about the concept of risk that's been talked about, and John Keisler mentioned it in his report. I don't know of any real estate transaction that occurs without an element of risk. What I will say about the risk in this deal, is that whatever it ends up being, it pales in comparison to the risk our residents are at for not having an E.R."
Councilwoman Suzie Price (who seconded Supernaw's motion) followed: "Thank you Councilman Supernaw. Very well stated."
Public speakers were supportive with one exception: Eastside Voice President/Founder (former 5th dist. Council candidate 2018) Corliss Lee. Ms. Lee was the final public speaker called to the Council podium by Mayor Garcia.
Ms. Lee: I agree that we need an acute care hospital and I understand that everyone is emotionally attached to that location but this business deal, it doesn't get you what you're looking for.
I want to thank staff for being so candid. It's in your paperwork. If you look at this it talks about the risks and what it's going to cost us and if you look at outcome number two on that chart, that should be enough to stop everyone in their tracks. I mean what that says is at any time Mr. Molina can back out of this deal and that we owe him, we need to reimburse him, for all of his investment which is potentially tens of millions of dollars, and the reimbursement amount is limited to and likely offset by the sale of the property so what you get is probably just that you're going to lose this property eventually.
And it even says on this number 2, for several reasons this is a likely outcome. So that's from your charts. It's hard for me to understand we would want to pursue this, to protect his investment Mr. Molina wants an escape clause where he can walk away from it that for any reason and the City has to reimburse him. He can repurchase the property and repurpose it at any time and we give him his investment back. So if he sees a better deal, whether this is a viable hospital or not he can shut it down.
That's not a good deal. How does that get Long Beach an acute care hospital? The risk all seems to be on the City side.
Why don't we build one somewhere else? Why don't we go find someone who knows how to build these?. It states in here he doesn't make any claims to be able to run a hospital or to even know how to do the seismic retrofit. So why choose a location that is fraught with risk?
[quotes from city management memo] "The overall terms of the lease make it financial beneficial for the tenant to terminate the lease at some point regardless of whether or not the hospital is viable." That should be enough to stop you in your tracks. We're going to eventually lose this property. That is the outcome of this deal.
Moments before the Council vote, Mayor Garcia invited John Molina (principal in the MWN LLC) to speak.
Mr. Molina: ...The success of this hospital, and I have no doubt it will be successful, is going to be due to that commitment of everyone in the community to band together to revitalize an asset that is here for everyone's benefit. We didn't get into this to make a lot money. We didn't get into this to make it a land transaction. It was a very difficult negotiation but it was one [that city staff approached] with a goal of making things work. The thing that strikes me in hearing folks talk, both sides talk, both the critics and those that are supportive: what you are doing tonight is entrusting us to manage a city asset, and I take that trust very very seriously, as seriously as you folks, and it is a big obligation on our part and we will not let you down.[applause]
The Council's 7-0 vote followed.
City management has indicated it plans to fund the $25 million in seismic retrofit costs over 15 years from Measure A sales tax revenue with a permanent extension ballot measure in a special March 2020 citywide election; but if voters don't approve the permanent sales tax, city management says the proposed lease would still require the City to pay the seismic retrofit costs but from "offsetting budget reductions absent any other identified solution."
In his weekly emailed "newsletter" prior to the Council meeting, 4th dist. Councilman Daryl Supernaw told constituents that he'd co-agendized a long-term lease item for the Oct. 15 Council meeting but didn't reveal its details.
The proposed lease specifies City retrofit costs of $1 million in per year for the first five years that increase to $2 million a year thereafter, effectively deferring the higher General Fund impact until after the Mayor and Council incumbents in dists. 1, 3, 5, 7 and 9 have had an opportunity to seek third terms (enabled by City Charter Amendment BBB/Nov. 2018.)
Councilman Supernaw himself is up for re-election in March 2020; thus far, no opposing candidates have materialized.
In a related development, LBREPORT.com has learned that Mayor Robert Garcia has quietly re-named the political committee he used (assisted by City Auditor Laura Doud) to campaign for Charter Amendments AAA-DDD (Nov. 2018) to now campaign for the March 2020 Measure A permanent tax ballot measure ("Mayor Garcia Committee to Protect Police & Fire and Repair Infrastructure in Long Beach.")
Campaign finance records show that the largest single contributor in the first half of 2019 to help the Garcia AAA-DDD committee repay a 2018 loan (Nov. 2018) from unused funds in Garcia's 2018 re-election committee was John Molina ($25,000.)
Salient text from city management's Oct. 15, 2019 agendizing memo follows below:
The Lease is a complex transaction and there are three potential outcomes from City Council action that are described in this fiscal impact statement.
The Lease is a vehicle that provides the Tenant an incentive to operate an acute care hospital, and also allows the rest of the Subject Property to be used for any medical purpose. The main incentive for Tenant to enter into the Lease is the use of the Subject Property, reimbursement for up to half the seismic retrofit costs, and the possibility of full reimbursement if the Tenant decides, for any reason, to discontinue operations and terminate the Lease.
In general, the Lease is intended to minimize the financial risk to the Tenant for the acute care hospital by providing the opportunity for potential revenue from the portions of the Subject Property's nonacute care facilities, and from a nearby proton beam facility.
In addition, the Tenant would likely have the ability to purchase the entirety of the Subject Property, subject to a deed restriction for acute or non-acute health care related uses. There is a rent provision for profit sharing, but City income under that provision is not anticipated under normal circumstances. Neither the City or the Tenant are entitled to recover any costs associated with the Subject Property prior to the Effective Date (October 15, 2019) of the lease.
At the direction of the City Council, tremendous effort and resources have been put into eliminating many difficult hurdles and issues preventing the re-opening of the hospital.
Although there are hard costs to the City, as well as significant risks and likely significant additional costs, this is the best Lease that could be negotiated and is the City's best and likely only opportunity to open an acute care hospital on the Subject Property.
The three potential outcomes associated with the Lease: 1) the Lease is approved and continues to term (at least 45 years); 2) the Lease is approved and is terminated at some point; or 3) the Lease is not approved. The table below summarizes the potential costs and likely outcomes under the three identified scenarios.
Summary of Costs and likely Outcomes Under the Three Possible Outcomes
Outcome 1: Lease approved (hospital operates)
Outcome 2: Lease terminated prior to 45 years (either before hospital operates or after)
Outcome 3: Lease not approved
$25 million over 45 years, plus some annual administrative costs that could be $100,000
to $150,000 a year
Up to $25 million, plus some annual administrative costs that could be $100,000 to $150,000 a year, and potentially tens of millions of dollars more for reimbursement of Tenant costs, the reimbursement amount limited to, and likely offset by, the sale of the property.
Note: For several reasons, this is a likely outcome. The acute care hospital mayor may not operate after termination.
$2 million to $2.5 million a year until property can be repurposed or sold.
Note: City Council would have to decide next steps and provide direction to staff
Outcome 1: Lease Approved and Continues
Under this scenario, the Tenant will open and operate an acute care hospital, and fund the
seismic retrofit (with 50% reimbursement from the City) to allow the Hospital to operate into the
future. Under those circumstances, the City will benefit from an ongoing acute care hospital.
The known City cost and impact is as follows:
Seismic retrofit reimbursement to Tenant of up to $1,000,000 a year for the first five years and up to $2,000,000 a year for the next ten years. Maximum cost of $25 million.
City administrative costs of $100,000 to $150,000 a year for monitoring and verifying of
net profits and losses.
Tenant would profit share with the City for first five years for Hospital acute care related
activities, but it is unlikely that the City would receive any significant funds.
Tenant can use the non-acute care portion of the Subject Property for any medical use and can operate this portion of the Subject Property or a proton beam facility without having to share its profits or otherwise provide credit to the City for its net income.
Outcome 2: Lease is approved and subsequently terminated
Under this scenario, which is likely to occur at some point during the Term, the Lease would be terminated at some point in the future by either Tenant or the City. The key reasons for that more likely outcome are:
Although much work has been done to overcome major obstacles, the opening and ongoing operations of an acute care hospital on the Subject Property still have many issues and potential roadblocks, cost being a lead issue. The Tenant expressly makes no representation that it can open or operate an acute care hospital. The State's regulatory agencies may identify issues that are insurmountable during the current or future hospital licensing and/or seismic construction planning process. These issues may be outside the Tenant's control or current understanding of the Subject Property.
The true cost of detailed construction plans for the seismic retrofit is not known at this point; therefore, a financial plan to address the seismic retrofit component of the project has not been prepared yet. The $50 million estimate to conduct a seismic retrofit (of which the City would pay half) is a preliminary number based on the conceptual seismic plans prepared by the City's architect and confirmed by the Tenant's consultant. Any unexpected high cost of the retrofit, which is at the Tenant's risk, may cause abandonment of the opening of the Hospital as may any difficulty in the Tenant being able to finance the retrofit costs.
The overall terms of the Lease likely make it financially beneficial for Tenant to terminate the Lease at some point, regardless of whether or not the Hospital is viable.
The costs and implications to the City if the Lease is terminated by Tenant or by the City, for any reason, except bankruptcy, include:
Seismic retrofit costs paid to date (maximum of $25 million).
Up to several hundred thousand dollars of costs associated with the termination of the Lease and potential sale of the Subject Property.
The following additional costs with a limit equal to either the appraised value or the open market value of the Subject Property:
III Reimbursement for all start-up costs;
III Reimbursement for Tenant share of any retrofit costs; and,
III Reimbursement for any cumulative net operating loss (methodology may result in recoverable costs being high and will include retaining of certain Tenant profits).
Likely sale of the Subject Property by the City either to Tenant or to another third-party to cover the City's obligations to Tenant, or because of Lease requirements. The sale price to Tenant may be the appraised value (less Tenant costs) or the open market sale
price (less Tenant costs), which could be any amount if the Tenant is the high bid in an open market sale.
The acute care hospital mayor may not continue to operate after Lease termination.
The City's liability is limited by the appraised value of the Subject Property or the proceeds from its sale. The sale value under the lease termination provisions (land use restriction for medical purposes) may be between $40 million and $90 million, depending on whether the seismic retrofit has been completed. Almost certainly the City would sell the Subject Property to cover costs to reimburse Tenant under the terms and conditions of the Lease. In such a situation, the cost to the City would be a maximum of up to $25 million for the seismic retrofit plus the loss of the Subject Property, and additional hard costs of potentially several hundred thousand dollars related to settlement of the Lease termination.
The Lease provides a financial and property ownership incentive for the Tenant to terminate at some point during the term of the Lease. A mutually agreeable way to eliminate that incentive could not be found while still requiring the Tenant to accept the financial risk of restarting, retrofitting, and ultimately operating an acute care hospital at the Subject Property. The City should expect this outcome, regardless of whether or not the acute care hospital is successful. The acute care hospital mayor may not continue to operate after Lease termination, which, would be a decision of the Tenant or future property owner.
Outcome 3: City or Tenant does not approve Lease
If the City does not approve the Lease with Tenant, there are significant cost ramifications for a period of time. As estimated by the Economic Development Department, the City's holding costs for the Subject Property are approximately $2.3 million a year. The City would also be liable to the Tenant for reimbursement of start-up costs up to $1 million. Based on its targeted request for proposal process and subsequent due diligence process in 2018, the Economic Development Department believes the Tenant is likely the only remaining opportunity for an acute care hospital at Subject Property. If the Lease is not approved and a revised Lease cannot be negotiated with Tenant, the City would likely hold the Subject Property for some time until some other use is identified, or the Subject Property is sold. If the Subject Property is sold, the City may net as much as several tens of millions of dollars that could be used for general purposes.
From where would the money come for this?
Funding Sources for City Costs
The funding sources for the City costs associated with the proposed Lease are likely as follows:
Annual Seismic Retrofit Payment: established by the Lease up to $25 million over 15 years with up to $1 million payment for first five years, and an annual payment up to $2 million for another ten years, will be funded from structural General Fund budget by offsetting budget reductions, absent any other identified solution. The City Council has already taken action to allow the $25 million to be an eligible public safety use under Measure A, with voters having the opportunity to decide on a potential extension of Measure A in March 2020.
Annual Administration: estimated $100,000 to $150,000 for the administration of the Lease, review of annual reports, and financial audits as needed will be funded from same source as the seismic retrofit.
Lease Termination Payment: estimated up to $91 million, which reflects the appraised value of the Subject Property if seismic retrofit is completed and the acute care hospital facility successfully completes the State permitting process. The payment is likely much less if termination occurs early when these costs are likely low, the City would likely put the Subject Property up for sale and not have much out of pocket cost for the non-seismic costs.
If the Lease is executed and the acute care hospital becomes fully operational, there is expected to be property tax revenue (County Assessor estimates not available at this time), and potentially over 250 local jobs associated with this recommendation. Additional use of the Subject Property for alternative medical services may also create property tax and local jobs, sales tax to the City, and other indirect economic benefits for local suppliers.
Consider approving the Lease, consistent with the City Council direction, to attempt to provide an acute care hospital at the Subject Property.
Councilman Supernaw, joined by Councilmembers Mungo and Price, joined in scheduling the item for "short notice" Council action on Oct, 15 instead of giving the taxpayers the usual eight-days notice. The agendizing memo includes a "statement of urgency":
Approval of the proposed Lease on October 15, 2019 has been determined to be a necessary
condition for the Tenant to meet State hospital licensing requirements. To maintain continuous licensing of the hospital in a suspended status, the Tenant has agreed to complete its State inspection of the hospital by the end of October 2019. Additionally, the Tenant has established a two-week timeframe for hiring and training of hospital staff prior to State inspection, and it must obtain City approval of the Lease before proceeding with the substantial investment necessary to hire staffing and purchase equipment required for State inspection. As such, approval of the proposed Lease by October 15, 2019 is necessary to enable Tenant to meet
its obligations thereunder.
Help keep our independent news going and growing in Long Beach. No one in LBREPORT.com's ownership, reporting or editorial decision-making has ties to development interests or other special interests seeking or receiving benefits of City Council development-related decisions; or holds a City Hall appointive position; or has contributed sums to political campaigns for Long Beach incumbents or challengers. No one in our ownership, reporting or editorial decision-making has been part of the governing board of any City government body or other entity on whose policies we report. LBREPORT.com is reader and advertiser supported. You can help keep really independent news in LB similar to the way people support NPR and PBS stations. We're not non-profit so it's not tax deductible but $49.95 (less than an annual dollar a week) helps keep us online.