Tulare’s potential hospital lease, in depth

There’s no doubt that Measure H will ensure that Tulare Regional Medical Center stays open for up to 30 years. The question to the voters is simple enough — will they approve the lease of the hospital to Adventist Health?

Measure H is simply that question. The legal backing for the arrangement, however, is provided by a long-term lease agreement between the two parties, which spans 80 pages. The full document is available at the end of this article, and the Voice has attempted to summarize the key parts of the lease below.

Attorneys for the Tulare Local Healthcare District (TLHCD) the legal entity that owns the hospital, negotiated the lease agreement and three other contracts with the Roseville-based nonprofit.

Todd Wynkoop, an attorney for the district, has indicated that the most recent version of the lease — dated October 5, 2018 — is still considered a draft, but that no additional changes are anticipated.

If the measure fails, Adventist Health (AH) would exit the premises and the hospital would almost certainly close its doors again. The hospital has already reopened under the management of Adventist Health, and averages 66 emergency department patients a day, with an average midnight census of eight.

If voters approve the lease, the district would have no financial obligations to the hospital beyond specific maintenance and construction costs, crucially including the completion of the stalled tower project and any seismic improvements needed.

The tower would need to be completed 10 years after the lease begins, and seismic improvements would need to be finished by January 1, 2030.

The district would maintain ownership of the hospital and the surrounding buildings, and would be able to continue using them at the end of the lease.

Agreement Term

The lease of the hospital would last up to 30 years, starting when the district’s hospital license is transferred over or December 31, whichever is later.

The first term of the lease would last 66 months. The next four terms would span five years, and the last term would last 54 months; AH could exit the agreement with 270 days notice before the end of each term; the district wouldn’t be able exit the agreement at any point.

That’s to maximize the benefit to the community while limiting the risk to Adventist Health, a Q&A page administered by the nonprofit says.

“The opt-out provision was designed to maximize the opportunity for the community to benefit from AH investment. If the district could terminate the lease every five years, AH would limit its investment to a five-year payback,” the page reads. “The investment required to keep healthcare facilities, equipment and services updated far exceeds that time frame. The “triple net” lease terms require AH to cover routine maintenance and operational costs.”

The district would, however, be able to terminate the lease if AH failed to continue operating Tulare Regional as an acute care hospital.

Adventist Health currently operates other hospitals in California under lease agreements, including agreements with the Sierra Kings Healthcare District for Adventist Health Reedley, and the Tehachapi Valley Healthcare District for Adventist Health Tehachapi Valley.

District’s Finances

Larger questions are looming over the lease arrangement, separate from the hospital itself staying open: will the district be able to get itself on the right financial footing to survive alongside the hospital, and will it be able to raise the funds needed to improve the hospital as required in the contract?

The district, according to the most recent calculations, is contending with $36,155,232 in accounts payable, with $27,853,897 of that accrued before bankruptcy. It is unknown how much of those debts could be slashed in the bankruptcy process, which could see some creditors paid fractions of what they are owed, and others completely unpaid.

Currently, the district receives approximately $1.9m in tax revenues per year, and AH will pay the district $2,335,000 per year to lease the hospital, its surrounding buildings, and clinics. The nonprofit has also loaned the district $10m toward reopening the hospital and certain construction projects that will be offset against rent payments.

The district will also receive rent for multiple properties it owns. Its board recently voted to sell others; it also receives revenue under an arrangement with Evolutions.

But the district won’t receive rent from Adventist Health for the first 18 months of the arrangement: for the first six, the nonprofit won’t pay rent and Tulare won’t have to repay the loan. For the 12 months after, they will offset the entire rent against the balance of the loan.

Adventist will purchase various items from the hospital under a separate contract; the value of those items would be deducted from the loan. Currently, that value has not been determined.

After 18 months, and until the loan is finally repaid, AH would be able to offset up to half of their yearly rent against the loan — in effect, potentially paying as little as $1,167,500 per year; the Q&A page estimates that the loan would be repaid in less than five years.

Noncompete

The likeliest “first thought” for a new revenue stream — operating another healthcare service, such as a clinic or home health service — has been barred by the lease agreement. The district cannot operate any competing service within a defined service area, specifically the ZIP codes 93212, 93274, 93272, 93256, 93219, 93257, 93247, and 93221.

The ZIP codes include Corcoran, Tulare, Porterville, Lindsay, and Exeter, according to a map attached to the lease.

Adventist Health also requires a non-compete in its agreements with the Sierra Kings district and the Tehachapi Valley district. Its agreement with the Tehachapi Valley district does carve out an exception for the district, which recently opened a new hospital building, to use its prior building as a skilled nursing facility.

Loan Under Consideration

Tulare’s board is scheduled to meet today for its regular meeting; among the items on the agenda is a loan to bridge the monetary gap from Business Capital, a financing company with offices in San Francisco and Connecticut.

“Budget obligations reveal the need to borrow between $5 million to $8 million to bridge its’ obligations until there is sufficient positive cash flow from Property Tax income, Rentals and Evolutions Income, Sale of certain properties, Bankruptcy recoveries, and Lease income from Adventist Health,” the agenda item reads.

The proposal headed to the board would include an Underwriting and Syndication fee of $25k and a 3% financing fee of the loan amount, which could range between $150,000 and $240,000, depending on the total amount received.

The loan would be secured with approximately $15m in real estate; revenues from Evolutions Fitness and Wellness Center, rentals, and eventual lease payments would be put towards repaying the loan.

“By 2020 the hospital is forecasted to break even, and in 2021 a positive net income is projected,” the Business Capital proposal reads. “After 19 months, the additional funds sourced from the Adventist lease can be used to enable TLHCD to refinance this short term loan with a long term mortgage.”

Dan Heckathorne, the district’s Interim Chief Financial Officer, said that the statements were simply preliminary.

“These are preliminary estimates for which the Board has not had opportunity to come to a conclusion. They will be providing an update after they have had a chance to review,” he said. “This projection will need to be updated as we get closer to developing a bankruptcy plan over the next 2 – 3 months.”

The district’s observers have concerns that a lack of revenue could cause the district to fail in its quest to present a cohesive bankruptcy plan.

“I want the hospital open, fully functioning and I am eager to know Adventist’s plans for it. I just wish I knew before a vote. The District is almost broke, they have $28 million of debt prior to filing bankruptcy, now they have at least $18 million after bankruptcy,” Deanne Martin-Soares, a former board member, said. “When the lease is passed and they become the landlord they are responsible to fix quite a few problems, many the cost is unknown. This must be done within six months per the lease agreement and prior to CMS inspection. Not completing them is not an option, my assumption is that Adventist will need to pay for it and then the debt to Adventist just becomes larger. Are they willing to pay for it?”

“The income to the District from property taxes is around $2 million annually. Rent from Adventist will not start for 18 months. They must successfully show a plan in the bankruptcy court to be approved or the hospital will be liquidated. Now Adventist has the first right to buy it and will be able to do so for the amount the District will owe them. This could happen quickly, not five years out,” she added.

Construction

If the district doesn’t finish construction on the stalled tower project after 10 years from the start of the lease — or achieve seismic compliance by January 1, 2030 — Adventist Health could also exit from the lease arrangement.

The nonprofit’s Q&A page states that officials would prefer a second bond to finish construction.

“AH would love to provide care from a brand-new building, and the community would undoubtedly love to receive care in a new building for which it is already paying property taxes. To do so, the district will need to complete construction. Once construction is complete, AH would enter into a new lease that would reflect the value of the new space.

“The community clearly communicated through the failed bond measure in 2016 that it did not want to pay more for the tower. That rejection was largely due to a lack of confidence in hospital operations. The district and AH are committed to rebuilding that confidence through delivering the quality, compassionate healthcare services the community deserves,” it reads.

Robert Beehler, Adventist Health’s VP for Market Development, Mergers and Acquisitions, told the district’s board in June that Adventist would be open to outside financing if voters rejected a second bond.

Adventist would still be open to alternative financing, but Randy Dodd, Adventist Health’s Vice President of Business Development, stated that any tower financing would be too far down the road to speculate.

Additionally, attached to the latest revision of the lease, dated October 5, is a list of projects to be completed at the hospital; some are due to be completed in six months, and others are as long term as the tower and seismic compliance improvements.

According to Dodd, the hospital wouldn’t be penalized for a failure to complete the other projects on time; the other projects are listed for reference.

Many of the projects have already been completed, he added.