Council approves 25-year recurring hospital building lease with nonprofit MRMC : KZHE News Blog
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Council approves 25-year recurring hospital building lease with nonprofit MRMC

by J.D. Bailey on 08/18/20


After months of planning and negotiating, a building lease agreement between the city of Magnolia and Magnolia Regional Health System Inc., the nonprofit corporation also known as Magnolia Regional Medical Center, has been passed by the Magnolia City Council. The lease ordinance was voted upon Monday at a specially-called city council gathering.

There were technically two items voted on at the meeting: the lease ordinance itself, which passed by a 5-3 council vote, and an emergency clause to immediately enact the lease. That vote passed by a 7-1 margin.

Those voting in favor of the lease ordinance were Alderman Jamie Waller, Kelli Souter, Jeff White, Steve Crowell, and Steve Nipper. Those opposing the lease ordinance were Aldermen Larry Talley, Tia Wesson, and James Jefferson. Wesson was the only “no” vote for the ordinance’s emergency clause.

MRMC has already been approved for 501(c)(3) nonprofit status. The hospital was formerly a city-owned entity. The move to nonprofit status was made to generate an additional $1.2 million in annual hospital revenues, according to Rex Jones, chief operating officer at MRMC.

“That’s what our auditors have estimated,” he said Monday while addressing the council.

The extra funds will be generated through additional federal insurance reimbursement payments that weren’t previously available under MRMC’s government-owned status. The extra monies should greatly increase the financial health of the hospital.

Since the city still owns the hospital’s physical property in Magnolia, and MRMC is now a separate nonprofit corporation, a lease agreement was required between the two parties for MRMC to remain at the same hospital facility it has occupied since 2010.

Some of the terms and provisions in the lease include the following:

  • Initial 25-year lease between the city and the hospital that auto-renews twice, totaling up to 75 years.
  • Lease amount – $1 per year to use the facility
  • $500,000 buffer limit on hospital expenditures -- anything over that must be approved by the city council
  • The city of Magnolia can opt-out of the lease during the term if there is gross mismanagement or misuse of the hospital. This includes MRMC failing to provide certain medical services vital to the community, such as Emergency Room care.
  • MRMC can opt-out of the lease if they desire.

The amount of tax paid the taxpayers to fund for the hospital’s construction bonds and maintenance fund will remain the same.

The hospital was approved for construction in May 2007 via a special election by the citizens of Magnolia. The vote included a 1.125-cent sales and use tax to fund the construction bonds, as well as a 0.25-cent tax used for upkeep and maintenance of the facility. The latter tax funds cannot be used to pay for hospital payroll expenses.

The bond tax will sunset when the building is paid off -- which is on track now for the mid-2030s. The quarter-cent maintenance tax is permanent.

The city of Magnolia held a public hearing Friday, Aug. 14, to address any concerns by citizens over the lease agreement. It was stated at the meeting that a vote on the lease ordinance would likely take place Monday. Attendees at the hearing included five city council members, Mayor Parnell Vann, and MRMC executives and board members.

On Monday, all eight city council members, the mayor, and numerous MRMC executives and board members attended the specially-called meeting. Ahead of the lease vote, discussions were held among the council and MRMC executives for nearly an hour. The topics included some of the same issues talked about at previous meetings, as well as specific lease terms.

Among the dissenting voters, Talley said he did not feel comfortable with the length of the lease.

Jones and MRMC Chief Financial Officer Roxanne Stewart both stated Monday that auditors view the lease as 25 years since it contains opt-out provisions every quarter-century. They also emphasized that the length of the lease is needed to prevent astronomical depreciation figures on MRMC’s annual financials.

Stewart noted that a 25-year lease will add $144,000 per year in depreciation. The hospital is considered to have a “useful life” of 40 years. There are currently 30 years left to pay, but the lease will compound the depreciation by five years. 

 

A 14-year lease, which the mayor was in favor of, would have been even worse, according to the CFO. She calculated that such a term would mean upwards of $722,000 per year in added depreciation.

“By shortening the term of the lease, all of that depreciation has to be accelerated,” said Jones.

Depreciation is a “non-cash item,” according to Stewart, but it affects the appearance of the hospital’s profitability. In turn, poor profitability can affect the hospital’s ability to lease equipment.

Wesson, one of the three “no” votes for the lease ordinance, asked Jones about his own spending limit for purchases at the hospital. The CEO told her that any purchase over $50,000 must be approved by the MRMC Board of Commissioners. The board, though, can only approve matters up to the $500,000 buffer limit. Any purchase over that amount must go to the city council for a vote.

“If you read the lease, everything that we buy or put into the building -- even at the end of 25 years, or we say, ‘we’re walking away, we can’t continue,’ that’s [the city’s],” he said. “Anything that’s added or anything that is purchased, that becomes the property of the city of Magnolia. We deal in some big-ticket items, but my limit is much, much less than [$500,000].”

Vann, who did not have a vote in the lease ordinance, has been vocally opposed to some terms in the lease agreement. He said Monday that he felt a 14-year lease would better protect the citizens and that it could help Magnolia the road with infrastructure.

“That gets [the 1.125-cent] tax off the books and that lets the future city council decide if they want to create a recreation center, a park, or a superhighway,” he said. “The 0.25-cent [maintenance] tax will always be there.”

In response, Waller and White both noted that, no matter what the length of the lease, once the building bonds are paid off, the 1.125-cent sales and use tax will cease.

Among others opposed to the lease ordinance, Wesson said she felt MRMC’s customer service and ER care were not sufficient, stating that she had concern over stories of patients waiting long hours -- up to eight, according to the alderman -- for care.

“It concerns me how the citizens are being treated when they come here for services,” she said.

Jones addressed Wesson’s concerns, saying that he disagreed with her assessment of MRMC’s care. He noted that the hospital is constantly fighting a perception battle and has even made recent changes to its ER physician staff. He said that the facility has some of the highest ratings in the state for customer service and care and that ER wait times are in line with every surrounding facility -- averaging two hours from entrance-to-exit at the hospital.

The CEO did say, though, that there will always be times when waits are longer because, due to the low number of ER visits in the area, there is only one doctor on duty.

“If there’s two things bad going on, the person that comes in with a low-level acuity is going to have to wait a while,” he said. “…It isn’t something that we’re not aware of, and it isn’t something that we’re not working on.”

Waller, who was one of the five “yes” votes to approve the lease, noted that, if the longer the council delays the matter, it costs MRMC an additional $85,000 per month.

“The relatively small items that we’re getting hung up on do not hurt the city in any way, but they could potentially help save the hospital and keep it going, which actually helps the city,” he said. “I think if you look big picture and get past some of these little details and look at the opportunity that we have to help this hospital and to build a relationship with the hospital moving forward, it far outweighs taking the lease from 25 years to 14 years. Anything we can do to give this hospital a chance to survive, I think we strongly need to do that.”

He added: “We’ve got wats to get out of the lease if there’s a real reason. ...I feel this is a fair lease. I feel this what we originally agreed to, and I feel now, at the 11th hour, we’re getting bogged down in the details, that, worst-case scenario, it helps the hospital. That’s a win. That’s a win for the city.”

Crowell was also strongly in favor of the lease ordinance, stating that a worst-case scenario was going to bad for everyone – the city and the hospital.

“Quite frankly, it doesn’t matter if it’s a 14-year lease or a 25-year lease, if doomsday comes, which is kind of what we’ve been leaning towards, everybody’s in trouble. So why would we handcuff them and possibly make it where [the hospital] can’t do what they need to do.”

Jones in his final statements Monday prior to the vote asked if anyone opposed to the deal had another plan that could generate an additional $1.2 million per year for the hospital.

“If we don’t have this lease, then what’s the plan,” he said. “We’ve been operating the way we operating for 80 years and we are where we are now. Here’s an opportunity to move forward and be progressive, to take advantage of something to capture what we can, so that we can move forward with extra money and maybe make a couple hundred thousand dollars a year if we can.”

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