BG - CCF Pays Only $9.6M for 60% of Hospital Value, Skirts $278M in Liabilities; Deal Costs Taxpayers $400M

This is a storage area for FACTS that have been found during the two year fight with City Hall for Public Documents. These are being posted for reference and historical purposes only. We encourage any conversations about these documents n "Lakewood General Discussion." Here you will find the Highlight the lie, with the document proven the lie.

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BG - CCF Pays Only $9.6M for 60% of Hospital Value, Skirts $278M in Liabilities; Deal Costs Taxpayers $400M

Postby Dan Alaimo » Wed Oct 12, 2016 4:24 pm

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By Brian Essi
(Moderator's note: Lakewood Attorney Brian Essi is meticulously researching the back-room deals that resulted in the closing of Lakewood Hospital. He has written extensively about it for the Lakewood Observer where this article first appeared. He concludes that this is an example of "bad government." Citizens will have their chance to vote on the ordinance which authorized the deal in a referendum on the November ballot. An "against" vote is to nullify the ordinance that passed last December. A "for" vote supports it.
To clarify: The byline at the top of this article defaults to the person who entered the copy. In this case, Brian Essi is the author of the article, while Dan Alaimo entered the story, provided some editing as well as the summary information at the top. - D.A.)


Special note:
Since the original article was first published in the Lakewood Observer, there has been push back from City Hall that the City never sold the hospital. The truth is that city sold everything a hospital would need to operate a full service inpatient hospital, including goodwill, accounts receivable, cash accounts, client base, the bed licenses, all operating and diagnostic equipment, the services lines and programs, etc. The Lakewood Hospital Association also became a wholly owned subsidiary of the Clinic. The only thing the city did not sell that was used in hospital operations was the “mothballed” gutted building that stands mostly empty at the corner of Belle and Detroit. The sale of the hospital also included a non-compete/restrictive covenant keeping any other potential hospital operators out.

Key points:
• The Cleveland Clinic Foundation admits liability to Lakewood of $278 million.
• Clinic records show Clinic will make $11.5 million additional profit each year into the future due to the hospital closure.
• State Auditor Report shows the Clinic paid only $9.6 million in the purchase of 60% of Lakewood Hospital's value.
• In exchange for only $9.6 million, the Clinic received $108 million or 60% of $180 million fair market value of Lakewood Hospital.


Key quotes:
• “The Cleveland Clinic is not required to cover LHA’s operating losses. And neither LHA nor the Cleveland Clinic is obligated to invest significant capital money into the hospital facility-making major improvements at the hospital the city’s responsibility.” – Law Director Kevin Butler
• Butler’s legal opinion was the most important reason cited by City Council when they authorized Butler to negotiate the Master Agreement.
• The Clinic was liable for required capital improvements and all losses at Lakewood Hospital through 2026. - Secret internal planning documents prepared by the Clinic and filed in Court in the pending taxpayer lawsuit on October 5, 2016
• “The closing of Lakewood Hospital would result in a $11.5 million a year windfall” profit to the Clinic’s other hospitals because “CCF hospitals would capture an additional 5,000 inpatient visits per year with a closed Lakewood Hospital.” – Clinic planners
• The documents show that as far back as 2011, the Clinic wanted to avoid its $278 million obligation by closing the hospital and harvesting the “premium payer mix” of Lakewood patients using the proposed family health center (FHC) to refer patients to the Clinic’s other hospitals.



The Master Agreement Costs Taxpayer nearly $400M as CCF pays only $9.6M to purchase 108M worth of Hospital value, and escapes $278M required investment in Lakewood.

In the sale of Lakewood Hospital, CCF paid only $9.6M, and CCF received all of Lakewood Hospital's good will, a covenant not to compete, hospital bed licenses, all financial records, all patient lists, all equipment, all fixtures, and “all of [the Hospital’s] property of every nature and description, and any and all personal property, equipment and fixtures at the Hospital.” (Master Agreement Section 3.3(d).) The only part of the hospital property that CCF did not purchase was the empty gutted hospital building, seven residential properties, and a small community center building.

Clinic records prove the Clinic was Liable for $278 million prior to the Master Agreement

Secret internal planning documents prepared by the Clinic and filed in Court in the pending taxpayer lawsuit on October 5, 2016, prove that the Clinic was liable for required capital improvements and all losses at Lakewood Hospital through 2026. The Clinic’s own documents from 2011 declare the amount of the Clinic’s liability was $278 million beginning in 2017, which would have made Lakewood Hospital a state of the art hospital on par with the Clinic’s other hospitals.

This is at odds with Lakewood Law Director Kevin Butler’s September, 2015 legal opinion in which he claimed: “The Cleveland Clinic is not required to cover LHA’s operating losses. And neither LHA nor the Cleveland Clinic is obligated to invest significant capital money into the hospital facility-making major improvements at the hospital the city’s responsibility.” Butler’s legal opinion was the most important reason cited by City Council when they authorized Butler to negotiate the Master Agreement.

Now that's bad government.

The Clinic will make over $11.5 million per year into the future from the Master Agreement

Other internal planning documents from 2011 just filed in Court, show that the Clinic planners “calculated the closing of Lakewood Hospital would result in a $11.5 million a year windfall” profit to the Clinic’s other hospitals because “CCF hospitals would capture an additional 5,000 inpatient visits per year with a closed Lakewood Hospital.” The documents show that as far back as 2011, the Clinic wanted to avoid its $278 million obligation by closing the hospital and harvesting the “premium payer mix” of Lakewood patients using the proposed family health center (FHC) to refer patients to the Clinic’s other hospitals.

On January 14, 2015, CCF’s Brian Donley (second in charge to Toby Cosgrove) referred to the FHC as a “specialty referral center.” Lakewood’s low-pay and self-pay patients would be referred out of Lakewood to Metro Hospital and other non-Clinic hospitals. The Master Agreement gives the Clinic a non-compete, or restrictive covenant (terms are interchangeable), that prohibits its competitors from operating at the former Lakewood Hospital site and assures the Clinic’s dominance in Lakewood as a “referral center.” The non-compete also guarantees that the land will be available to developers, which the court documents and sworn testimony reflect Summers and the Clinic planned since 2011, and earlier.

The State Auditor Report shows the Clinic paid only $9.6 million in the hospital “sale”

Public records released by Finance Director Jenn Pae on September 29, 2016 to support the City of Lakewood Comprehensive Annual Financial Review (CAFR), clearly demonstrate that the Cleveland Clinic paid only $9.6M to the city to purchase 60% of Lakewood Hospital’s $180 million fair market value. The CAFR was prepared by the State Auditor’s office so the $9.6 million number is not subject to debate.

According to the CAFR, which was prepared with the participation of Mayor Summers and his administration: The Master Agreement disposed of “The City-owned Lakewood Hospital" (CAFR, page 47) in a “sale of Lakewood Hospital to the Cleveland Clinic” (CAFR, pages 42 and 44). The full CAFR can be found at https://ohioauditor.gov/auditsearch/Rep ... yahoga.pdf

In his January, 2016 deposition in the taxpayer lawsuit, when Summers (a defendant) was asked why there were no appraisals of hospital assets and why an investment banker was not hired to market the hospital, he testified: "We weren't selling this hospital.” [Summers transcript page 155; line 14.]

In the last issue of the Lakewood Observer, Councilman David Anderson wrote: “...the Lakewood Hospital Association’s net assets were valued at $128 million. The negotiated deal accounts for all of the $128 million.” However, it has been previously established through public records requests that neither the Mayor nor City Council conducted any appraisal of the hospital assets and Mr. Anderson’s $128 million number is the net “book value” of the assets and not a fair market value of the assets.

The Fair Market Value of Lakewood Hospital was $180 million

Nevertheless, now that it has been established that a “sale of Lakewood Hospital to the Clinic” took place, and that the Clinic paid only $9.6 million, the question remains:

What was the value of hospital assets sold to the Clinic for the $9.6 million the Clinic paid?

Investment bankers and hospital valuation experts generally agree that that the fair market value (FMV) for the sale of a hospital, is about 75% of annual “net revenues.” The logic behind this valuation approach is that the purchaser is paying for the revenue stream from existing patient lists as part of a going concern. Using this valuation method would produce a $180 million FMV when Lakewood’s $87 million liquid investment portfolio is included. This valuation is supported by the reported by the comparable sale price of St. John’s Hospital in Westlake to University Hospitals in 2015.

The Clinic Received $108 million of the Hospital FMV paying only $9.6 million


The Master Agreement terms and the CAFR together establish that the Clinic received $108 million of hospital FMV in exchange for $9.6 million:
1. $63.4 million — Net Value of the non-compete/restrictive covenant, together with all patient records and patient information, equipment, furniture, fixtures, bed licenses and tangible and intangible property.
2. $30 million — cash portion of the hospitals liquid investments.
3. $1.6 million — value of 1.8 Acres of cleared land on Belle and Detroit.
4. $13 million — FMV of Columbia Road surgical center.

Total Cash, Property and Rights to Clinic: $108 million

Summary of how $180 million hospital value was distributed/sold

So here is the summary of what each party gets from the $180 million city-owned hospital:
1. $22 million returned to the City (12%).
2. $16.5 million (net present value) to new foundation (9%).
3. $33.5 million released to Lakewood Hospital Foundation for private charitable use (19%).
4. $108 million to the Clinic (60%).

Total: $180 million

Issue 64 on November 8th gives voters the chance to vote for or against the Master Agreement.

Lakewood Voters must judge whether the Master Agreement is a good or bad financial deal for Lakewood; and a good or bad deal for their future healthcare.

The following details and analysis support what I wrote above. It is intended to serve as a guide to simplify the overly complex terms of the Master Agreement that have been mischaracterized and misunderstood by various elected and public officials and others.

I. The 2015 CAFR (and the recently release records) show the city received $9.6 million from CCF for Lakewood Hospital, which includes:

1. $ 6,644,731 sale proceeds Columbia Road property (per CAFR).
2. $1,400,00 promissory note from CCF for sale of Columbia Road (per CAFR).
3. $1,576,000 for sale of Detroit/Belle land sold to CCF (per CAFR).

Total Received from CCF: $9,620,731.

II. The Clinic gets $108 of the $180M FMV of the Hospital (60%).
The Master Agreement read together with the CAFR provides that the Clinic received $108 million of hospital fair market value (FMV) in exchange for $9.6 million. This includes:
1. $63.4 million — Net Value of the non-compete/restrictive covenant blocking all of its competitors from operating at the former hospital site, together with all patient records and patient information as well as a covenant together with equipment, furniture, fixtures bed licenses and tangible and intangible property.
2. $30 million — Cash portion of the hospitals liquid investments (see below).
3. $1.6 million — Value of 1.8 acres of cleared land on west side of Belle and Detroit.
4. $13 million — FMV of Columbia Road surgical center (CCF only paid $8M).

III. Overview of what each party gets from $180M FMV of Lakewood Hospital.
So here is the overview of what each party get from the $180M FMV of the city-owned hospital:
1. $7 million — Demolition payments to City.
2. $5.4 million — Surrender of control of real estate owned by the City.
3. $9.6 million — for Columbia Road and Belle/Detroit Land paid to City (per CAFR).
4. $16.5 million — Net Present Value of payments to a new foundation, largely controlled by CCF.
5. $33.5 million — Returned to Lakewood Hospital Foundation for private use.
6. $108 million — FMV of all assets transferred to CCF for $9.6M payment to city.

IV. According to the CAFR and the Master Agreement the City will receive only $22 million value for the hospital closing.
1. $8 million — Sale proceeds Columbia Road property (per CAFR).
2 $7 million — Demolition payment toward tear down of hospital (from Master Agreement).
3. $1.6 million — For Family Health Center site land sold to CCF (Per CAFR).
6. $1 million — For seven residential properties (per CAFR).
7. $0.7 million — For existing community health center (per CAFR).
8. $3.7 million — Estimated value of hospital site, subject to non-compete and CCF parking lot rights not returned to city until 2018.
Total to be received by City: $22M.

V. Lakewood Hospital had a fair market value of $180M:
1. Industry standards used by Investment Bankers:75% of 2014 net revenues of $124 million equals $93 million, plus investment portfolio of $87 million puts FMV of Lakewood Hospital at $180M.
2. Supporting the $93 million FMV is the 2015 announcement that University Hospitals (UH) had paid $90M for the smaller St. John’s Hospital in Westlake. UH received no liquid investments in that sale.
3. The Clinic will make $11.2 million profit per year — capitalized this supports the $93M valuation.
4. Subsidium — a conflicted expert hired by CCF placed an average FMV $71M Lakewood Hospital plus $87 million investments. $158M FMV.

VI. CCF receives $30M of LHA’s liquid assets.
1. $2.5 million paid to CCF’s Cayman Islands insurance company to protect CCF.
2. $2.5 million paid to CCF to help CCF build parking lot owned by CCF.
3. $3.5 million to CCF for demolition of parking garage and medical building on CCF land.
4. $21.5 million to CCF as cash “dissolution distribution.”

(Note CCF receives the direct benefit of $30 million of cash and an indirect benefit of $16.5 million by controlling the new foundation.
Total cash assets benefiting CCF=$43.1 million
City receives only $7 million from LHA liquid assets.)


VII. Distributions from Hospital’s $87 M in Liquid Assets
1. $7 million - Demolition payments to City.
2. $16.5 million - Net Present Value of payments to the new foundation, largely controlled by CCF.
3. $33.5 million - Returned to Lakewood Hospital Foundation for private use.
4. $30 million balance to CCF

Looking at the deal by the numbers, it's really bad government.


"If you stand for nothing, Burr, what will you fall for?" - Lin-Manuel Miranda channeling Alexander Hamilton in the musical "Hamilton."

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