2008-09-06 / Top News

County Offers Collateral for Hospital Lenders

By Karen Gould

Signing new hospital bond agreements in Ann Arbor August 28 are hospital board chair Ron Mitchell (front, left) and hospital chief financial officer Jason Anderson. Behind them are (from left) are Michael Kirby, Arbor One Financial; Nick Roederer, Morgan, Keegan & Co.; Roselyn Parmenter, Miller, Canfield, Paddock and Stone; Patrick Brown, Nexsen Pruet Adams Kleemeier; Richard Calhoun, Arbor One Financial; James Yoder, USDA Rural Development; Martha Rabaut, Miller, Canfield, Paddock and Stone; James K. Haveman, Haveman Group. Bonds will be sold later this month. Signing new hospital bond agreements in Ann Arbor August 28 are hospital board chair Ron Mitchell (front, left) and hospital chief financial officer Jason Anderson. Behind them are (from left) are Michael Kirby, Arbor One Financial; Nick Roederer, Morgan, Keegan & Co.; Roselyn Parmenter, Miller, Canfield, Paddock and Stone; Patrick Brown, Nexsen Pruet Adams Kleemeier; Richard Calhoun, Arbor One Financial; James Yoder, USDA Rural Development; Martha Rabaut, Miller, Canfield, Paddock and Stone; James K. Haveman, Haveman Group. Bonds will be sold later this month. A last-minute agreement has cleared the way for the new hospital to receive bond funding. The agreement, between Mackinac County and Mackinac Straits Health System, Inc., (MSHS) was signed by county commissioners during a special meeting Tuesday, August 26, and meets a collateral requirement sought by lenders for bonding of the new health facility to be built on North State Street in St. Ignace.

To meet the lender stipulations, MSHS asked that the county consent to allow certain items be offered as collateral to lenders, including the health services agreement, and allowing a mortgage to be placed on the Burdette Street building lease.

The collateral, say lenders, is needed to secure the bond debt being taken on to construct the new hospital building. Without the collateral transfer requested by lender ArborOne Financial of South Carolina, the new hospital likely would not be built.

The collateral would only be used if MSHS defaulted in its debt payments.

Two days after the county meeting, bonding documents were signed by hospital officials and lenders in Ann Arobor Thursday, August 28. The bonds are scheduled to be sold early this month, with construction to follow.

The new hospital is scheduled to be open in 2010.

Along with commissioners, attending Tuesday's meeting were attorneys Richard McNulty of the law firm Cohl, Stoker, Toskey, and McGlinchey of Lansing, who represented the county, and Prentiss "Moie" Brown of Brown and Brown in St. Ignace, who represented the hospital. Also in attendance was Hospital Board Chair Ron Mitchell. The law firm Miller, Canfield, Paddock, and Stone in Ann Arbor, which also represents the hospital, did not attend the meeting.

The 11th-hour request sent legal teams scrambling to iron out an agreement that met lending requirements, while protecting the county's interest. Mr. McNulty worked on agreement details to protect the county's interest, while the law firm Miller, Canfield, Paddock, and Stone in Ann Arbor represented the hospital.

The new hospital is being financed by ArborOne Financial and the U.S. Department of Agriculture (USDA). About $10 million is through USDA direct loans and $26.8 million is in guaranteed USDA Rural Development loans. A portion of the loans are with ArborOne Financial through the Farm Credit Association in South Carolina.

"ArborOne wants a comfort zone," said Mr. Brown. "They're mainly worried about the two years of construction."

The new facility on State Street will not bring in revenue during the construction period, said Mr. Brown, although the current hospital will remain open and has been operating in the black.

ArborOne has required a mortgage be placed on the lease the hospital has with the county on the Burdette Street building.

"The idea that they [MSHS] were mortgaging our property isn't true," said Mr. McNulty. "The key being, it's a mortgage on the lease. It's not a mortgage on the property."

The county owns the property and the building, which it leased to Mackinac Straits Hospital Authority for $1 a year until June of this year, when the lease was assigned to Mackinac Straits Health System.

Under the lease, the health system has the ability to stay in the building as long as it fulfills the requirement of the lease, which includes paying on the $1.3 million bond debt and maintaining the building.

Mortgaging the county's lease requires the consent of the county commission.

ArborOne also wants as collateral the health services agreement.

"The idea that they [lenders] could take our money under the health services agreement, and not provide health services, that's not true, either," said Mr. McNulty.

If the hospital defaulted, ArborOne would be responsible to provide indigent health care for the county, and the county's duty would be to pay ArborOne for the care.

Currently, the county pays the hospital for the care in the amount of a millage that generates about $900,000, which is used to subsidize the Long Term Care Facility. The millage is set to expire in 2009.

For its part, the county required several provisions be added to the agreement that would help protect county interests.

Under the provisions now added to the agreement, if the hospital moves out of the Burdette Street building, the county would have the opportunity to lease the building to someone else. The hospital would release the mortgage and the county would release the hospital from the upkeep of the building. The hospital still would be required to make payments on the $1.3 million bond debt acquired when previous improvements were made on the building for Long Term Care. In a 2002 lease amendment, the hospital committed to paying on the bond debt until it is retired in 2014.

The county also is requiring the hospital sign a recordable lease.

The hospital also does have the right under the lease to continue the lease until 2014, even if it leaves the building vacant, said Mr. McNulty,

Under the lease with the hospital, the building has to be used as a health care facility. The hospital could not bring in another business.

If the hospital moved out of the Burdette Street building, said Mr. McNulty, it is to its benefit to release the mortgage, and let the county use it. The hospital would no longer need to maintain the building or insure it, although MSHS still would be required to pay on the $1.3 million bond debt.

Of the most concern, said Mr. McNulty, was the future of local health care if MSHS defaulted and lenders took over the role.

"Obviously," he said, "the bank's not going to provide the care. They're going to bring someone else in."

A provision in the agreement now gives the county final approval over who will provide heath services. Without the provision, the bank could have received the county's millage funds and then hired the lowest health care bidder or hired a quality provider - the county would have had no way of knowing.

"Is it perfect for us, no" said Mr. McNulty of the provisions. "But I think it gives us enough protection that you [commissioners] can move forward comfortably with the idea that this hospital is something the board wants, yes."

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