Hospital land to cost more than $20 million
June 18, 2008
By Ed Farrell
State treasurer questions financing decisions
King County Public Hospital District No. 4 is prepared to pay nearly $24 million to purchase 72 acres of land just northeast of the I-90/Hwy 18 interchange in Snoqualmie.
The proposed new home of Snoqualmie Valley Hospital, as well as an extension campus of Bellevue Community College, in terms of land cost alone, will be right at about $331,944 per acre.
The District has negotiated deals with Puget Western, Inc. and Leisure Time Resorts, that will provide adequate land for the new hospital complex as well as satisfy King County’s 4-to-1 Transfer of Development Rights mitigation requirements.
In the Puget Western portion of the deal, the county will obtain 51.17 acres of land currently in five individual parcels. According to county tax records, Puget Western purchased the properties between 1986 and 2004 for a total cost of $1.3 million, or about $28,180 an acre.
The District’s offer for that portion of the land is $11.4 million, or $222,786 per acre, although documents provided by the hospital district state that because 26 acres of the Puget Western property will remain in an undeveloped state, the overall price will likely drop.
For the Leisure Time Resorts portion of the deal, the district is laying out $599,520 for each of the parcel’s 20.85 acres. According to tax records, Leisure Time acquired the land in 1984; the 2008 King County property tax appraisal on the entire parcel was $652,600.
Despite the seemingly high price the district is willing to pay for the property, hospital executive director Rodger McCollum said the district negotiated a good deal.
McCollum also noted that current or past values of the properties were irrelevant, in that the land has remained undeveloped and is currently zoned for rural residential, with a 5-acre minimum lot size.
By applying the concept of “highest and best use” to the property – in this case, a medical complex – it is not uncommon for properties to escalate tremendously in value, McCollum said.
And, he noted, the hospital district just sold the old Snoqualmie Valley Hospital, along with 50 acres of land, to the Snoqualmie Tribe of Indians for $30 million.
“We sold 50 acres for $30 million and are purchasing 72 acres for $23.9 million. No matter how you look at that, it’s a good deal,” McCollum said.
How that deal will be financed, however, has generated some heated dialogue between hospital officials and the office of the Washington State Treasurer.
At a recent meeting, the hospital district approved a consulting contract with Public-Private Development Solutions, to oversee the 63-20 financing for the project.
So named because of the 1963 federal tax code ruling that allows it, 63-20 financing has become a popular avenue for large public works projects throughout the U.S., according to PPDS representative William K. Angle.
According to the contract, PPDS will receive a fee of $400,000 to oversee the deal, as well as expenses of $85-an-hour for work done on the project.
According to the terms of the contract, PPDS’s duties are to assist the district in “evaluating, selecting, negotiating and contracting with a qualified developer” to move forward with the project.
At the same meeting, the district approved a similar resolution with National Development Council, which will set up a non-profit business entity that will issue tax-exempt bonds to pay for the construction.
Under the terms of the deal, the hospital district will lease the new hospital from NDC, with the debt service being paid off by hospital revenues. When the district pays off the debt, the title for the hospital and land will transfer free and clear to the district.
NDC, according to documents provided by the district, has extensive experience in 63-20 financed projects.
Among those projects: The King Street Center in Seattle, a $78 million project that also involved Angle and PPDS; and the Chinook Building, a $100 million complex. Both firms also teamed up for several University of Washington construction projects.
And all of which, according to Treasurer Mike Murphy, cost far more to develop than projects utilizing more traditional open bidding practices.
“If you want to pay too much for a project, pay for it with a 63-20,” Murphy said in a recent telephone interview.
Murphy, who produced a 72-page report critical of the financing involved with the Tumwater Office Building, a 63-20 project built by the state of Washington, said his biggest concerns focus on the high financing costs of such deals.
Because each project must be represented by its own non-profit entity, Murphy said each financing deal is done based upon a company with no marketable assets, which means it will pay higher interest rates.
“And for the privilege, these guys will get paid a very large sum on the front end, and a large payment every single year for the life of the project,” Murphy said.
Allowing non-profit entities to oversee the process also allows for the circumvention of some labor laws that publicly-funded projects must adhere to.
“There’s been a lot of talk about public-private partnerships,” Murphy said, “But in my view, it’s the private side that always gets rich and the public side that always get screwed.”
Angle, however, takes a differing view, and said Murphy, and his report, have come under fire for not providing all the data involved with 63-20 financing.
While Murphy’s assertions of higher financing and up-front money are in most cases true, Angle said 63-20 financed projects have a universal history of coming in under budget and ahead of schedule.
The current trend towards such funding, Angle said, “comes from a good governmental approach.”
The traditional bid process, Angle said, was representative of “a simpler time. And it worked. But it never worked effectively.”
Financing using the 63-20 structure allows for a streamlining of the process, he said, and an overall reduction of costs of as much as 25 percent versus traditional public projects.
“It opens up a better development model,” Angle said.
And unlike traditionally funded projects – those financed by general obligation or revenue bonds, both of which pledge the full credit of the issuing entity – all of the risk of debt is pushed onto the non-profit entity in 63-20 deals.
Under the terms of such financing, should the issuing body fail to make its debt service payments, it could turn to a property tax levy to ensure payment is rendered.
Not so with the 63-20 funding, Angle said.
If the hospital district were to fail to make payments, then the non-profit entity would simply be free to offer the buildings and land to another business use.
“It would be the bond holders who would get stuck, not the residents of the district,” Angle said.
Reporter Ed Farrell can be reached at efarrell@snovalleystar.com or 392-6434.
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