Master Agreement Gives Clinic Public Assets

by Brian Essi

On December 21, 2015, City Council voted 7-0 to approve the so-called Master Agreement (MA) to close and dissolve Lakewood Hospital. Lakewood Hospital had been recently valued at more than $120 million.  [Subsidium Slide # 71 8/20/14] Under agreements existing immediately prior to approval of the new Master Agreement, if Lakewood Hospital closed and dissolved, the City of Lakewood would have received the entire value of Lakewood Hospital, i.e. property and money worth nearly $120M.  [1996 Lease 12.2, 14.1 and LHA Articles of Incorporation] Instead, under the Master Agreement, the Cleveland Clinic (CCF) will receive money and property valued at $80M, the City will receive less than $23M and a new health and wellness foundation jointly controlled by CCF and the City will receive about $16.5M.  The City did not conduct any public bidding or advertising of its Lakewood Hospital rights and properties.

Here is What the City Receives under the Master Agreement. 

The City will receive total cash and property valued at less than $23M:

1. $ 8M Net Present Value (NPV) for a medical building on Columbia Road in Westlake. [MA 5.4 and Exhibit H]

3. $ 2.7M estimated sales price for 2.7 acres of land at the southwest corner of Belle and Detroit sold to CCF. [MA 5.1 and Exhibit G]
4. $ 5.7M estimated sales price for 5.7 acres of land and gutted Hospital buildings located on the east side of Belle Ave. to be sold to private developer. Note: this estimate is likely high because (a) it is not discounted to NPV to take into account that the City will not have possession of this site until at least June, 2018; (b) the land will be impaired by a restrictive covenant limiting use of the property as a hospital or medical facility by any Health Care System Provider; and (c) CCF has the right to lease parking spaces on this land.  [MA 5.3]  Further, Councilman Tom Bullock said it could take 3 to 5 years to develop or sell the site, i.e. the building has questionable marketability for uses other than a hospital or medical facility and is encumbered by CCF’s parking rights. 

5. $ 6.2M NPV as a partial payment for demolition and tear down of the Hospital buildings on the east side of Belle Ave. [MA 3.3(c)]

6.  The Curtis Block building and residential homes near the hospital—the value of these properties is included in the estimate for the 5.7 acres above.  [MA 5.6]

The City may also receive a maximum of $2,887,500 in rent instalments beginning March 1, 2016 and ending June 30, 2018, but this rent is in exchange for LHA’s continued occupancy, use and control of the hospital building for an emergency room (ER) through at least June, 2018.  It is not a payment for City’s equity in Lakewood Hospital assets. [MA 5.5]

Here is what the LHA Trustees and CCF employees working at Lakewood Hospital Receive.

LHA Trustees and CCF employees receive a full release and waiver of liability [MA 9.4] and will be indemnified, defended and insured against their past and future conduct through a payment of $2.5M by LHA to CCF for an insurance policy. [MA 9.12] 

Here is what the new Health and Wellness Foundation Receives.

A new health and wellness foundation will be created, but will not be fully funded by LHA until June 2026 at the earliest—the total value of LHA’s funding of the new foundation is worth $16.5M NPV. [MA 6.1 and Article IV]  This amount could be reduced depending upon LHA future operating losses. [MA 6.1(c)]  Although the agreement states that “LHA” and the City will name the initial board and develop the yet undefined rules of governance of this new foundation [MA 4.1], the effect of the agreements are that as of December 21, 2015 CCF has full legal authority to vote in new trustees as it pleases. The practical effect is that CCF and the City will name the initial board and develop its rules of governance. 

In addition, CCF will make 16 annual payments of $500K to the new foundation starting in mid-2018 and ending in mid-2034. These payments have a NPV of less than $4M----CCF will have the practical right to control the use of this money. 

So although supporters of the Master Agreement claim the new foundation is worth $32M, the portion that the City has only shared control of is worth only $16.5M. CCF will have significant influence and control over the entire new foundation.

Here is What the Clinic Receives under the Master Agreement.

The Clinic is obligated to pay a total of only $10.7 million to the City and will receive the following:

  1. The state of the art medical office building and surgery facility located at 850 Columbia Road, Westlake. [MA 5.4]
  2. 2.7 acres of cleared land located at the southwest corner of Belle and Detroit. LHA will pay an estimated $3.6M to tear down the existing hospital parking garage and the Lakewood West Medical building to prepare the land for CCF’s Family Health Center (FHC).  [MA 5.1, 3.3(b)]
  3. $2.5 million in LHA cash to help CCF build a parking garage on the 2.7 acres of land given to CCF. [MA 3.3(b) and 2.2(a)]
  4. All of Lakewood Hospital’s valuable bed licenses, medical equipment, furniture, fixtures and everything else of value located in the current hospital building. [MA 3.3(d)]
  5. A covenant not to compete in favor of CCF that will prevent the Hospital building and land from being used by any Hospital System Provider as any medical facility or service including a hospital. In other words, the value of the gutted hospital building and land returned to the City will be greatly decreased and likely torn down because it is designed for use as a hospital and medical facility. [MA 5.3]
  6. The right to lease parking spaces from the City on the hospital land on the east side of Belle owned by the City.
  7. A full release of liability for its “decanting” and other damage that CCF caused to the Lakewood Hospital, i.e. CCF gets to keep all that it has taken from the hospital prior to December 21, 2015.[MA 9.4 and 3.4]
  8. Continued control and influence of the new Health and Wellness Foundation and how that money is spent.  [MA 4.2]
  9. Control of $3M in donor restricted assets on LHA’s balance sheet. [MA 3.3(d)(6)] On December 22, 2015 CCF amended the LHA Articles of Incorporation so that CCF can receive this money too if the donor restrictions are reformed. 
  10. A “Dissolution Distribution” of all remaining LHA cash, accounts receivable and other property after payment of “wind-down expenses.”  [MA 3.3(d)]

Based upon LHA’s most recently available financial statement, CCF will have at its disposal more than $27M of LHA’s cash and liquid investments to be used for the "wind-down" even after payments to the City and the new foundation described above. In spite of this fact, the Master Agreement states that there is a “significant assumption of risk” by CCF to pay for "wind-down expenses" that might exceed the $27M or LHA’s “Net Asset Value.” [MA 3.1(a) and 3.3(a)] The agreement does not specify any compensation for most of the rights and property to be given to CCF other than this perceived “assumption of risk.”   [MA 3.1(a)]  There has been no public disclosure or record of the estimated wind-down expenses that CCF is alleged to be at “risk” of assuming. 

LHA’s experts estimate that there will be a $38M NPV benefit to CCF from the admissions at Lakewood --which are likely to move to CCF’s facilities-- in the first 3 years alone, as a result of closing Lakewood Hospital. [Subsidium Slide #70 8/20/14]

LHA’s operating losses for the first 9 months of 2015 were only $4.5M.  [9/30/15 LHA financial statement]  The Master Agreement calls for all of Lakewood Hospital’s inpatient operations (except the ER) to be wound down and closed by March 1, 2016—just two months of potential losses.  [MA Article III and 6.1(c)] Consequently, it appears that there is no evidence or circumstance of any financial risk to CCF that would necessitate payment of any “wind down expenses."  In fact, experts estimate that CCF may receive more than $20M of LHA cash upon dissolution. This would mean that CCF is paying nothing for substantial and valuable equipment, property, licenses and non-competition covenant rights and may receive $20M in cash on top of those free valuables.

The terms of the Master Agreement and other agreements attached to it are such that CCF and LHA (now fully controlled by CCF) will not be obligated to account for how the balance of the LHA money is spent in the “wind-down.”  [MA 5.5, Exhibit I] Nor will there be an accounting of how much of LHA’s cash is ultimately distributed to CCF. It should be noted that throughout the hospital debate, CCF refused to disclose how it allocated over $20M of annual administrative charges to Lakewood Hospital claiming its allocation formula was “confidential and proprietary.”

In summary, the City would otherwise have received nearly $120M in value under the 1996 agreements if the hospital closed and dissolved, but will likely receive less than $23M under the Master Agreement. CCF will likely receive cash and property valued at $80M in exchange for an estimated payment of only $10.7M. The nearly $70M windfall to CCF could finance building CCF’s $34M proposed FHC in Lakewood with $36M left over.

Read More on Lakewood Health Care
Volume 12, Issue 2, Posted 6:23 PM, 01.05.2016