The Pacific Medical Center deal is good for the community, says the mayor. It may be an even better deal for the developer. Wright Runstad


Hill of a deal

Developer Wright Runstad gets the city's PacMed tower at a rock-bottom price.

The Pacific Medical Center deal is good for the community, says the mayor. It may be an even better deal for the developer. Wright Runstad & Co. will be commercially leasing the nearly vacant public hospital on Beacon Hill at a rock-bottom $8-per-square-foot cost that actually nets out to $4 a square foot the first 10 years, according to a confidential "executive summary" prepared for PacMed by a real estate accounting firm and sent to the mayor. Wright Runstad will in turn sublease the 185,000 square feet of remodeled public hospital space for at least $25 a square foot to online bookseller for corporate and business offices, two downtown commercial real estate sources estimate. That could more than triple Wright Runstad's return and help quickly pay off costs of its announced $25 million hospital renovation, which officials have cited as justification for the low lease costs. The confidential summary also indicates that, after subtracting the scheduled clinic remodel payments, Wright Runstad's true separate costs for the renovation will more likely be around $20 million.

It's a good deal that gets better: The private developer may also be subleasing more than just the tower to commercial tenants. According to the confidential summary, dated April 15 and recently obtained from the mayor's office through a public-records request, Wright Runstad would also "lease the development rights" around the 65-year-old hospital. "Current terms are for a 99-year lease on the tower and a separate 99-year lease on the additional development rights." A city official familiar with the deal says Wright Runstad could turn the art deco hospital and handsome hilltop site into a full-blown business park.

Should we get ready for that big, blinking neon high over Dearborn Street? Wright Runstad won't say what its plans are or discuss the lease. A PacMed spokesperson says that when a lease is signed it will be publicly released. PacMed's board last week sealed the deal to lease out floors 1-12 of the main building and tower of the facility, built in the 1930s and renovated 10 years ago; almost $40 million in taxpayer funds had been put into the building and hospital operations in recent years. Privatizing the facility is expected to provide an income stream for PacMed to run its community clinics, which PacMed and the mayor say will help sustain medical care for the poor. The board and the mayor did not support an alternative plan to maintain the medical center's historic health-care mission by turning the hospital into a home for the elderly and care facility for Alzheimer patients, and contend the $8-per-square-foot lease was the best deal around.

What the confidential PacMed summary shows, however, is that for the first decade about half, or $756,000, of the $1.5 million annual leasing fee will be used to pay the $4.6 million costs of new PacMed equipment and a remodeled clinic at the site. The remainder, $743,000, is earmarked as actual lease income. That leaves Wright Runstad paying just $4.02 a square foot. In 2008, when the clinic renovation costs are amortized, the square-foot price then rises to $8.35.

PacMed officials have used only the $8 figure to describe the lease. And even that is being reviewed by the state auditor and some City Council members who doubt it is a fair-market rate (downtown leases vary from $12 to more than $40 a square foot). PacMed claims the lease will generate the $1.5 million a year it has dedicated to support services for underinsured patients. But with clinic remodeling funds coming off the top of the lease payments, only half that amount will initially be available to aid the needy.

The mayor's office has unwaveringly supported the deal as best for the public. Documents and interviews indicate Mayor Paul Schell has been getting a persuasive earful from PacMed supporters with their hands in the pot.

The powerful lobby includes officials at Wright Runstad, headed by H. John Runstad, a Schell friend, supporter, and campaign donor, and Gerry Johnson of Preston Gates & Ellis, PacMed's legal representative. Johnson and PacMed CEO John Howell provided the mayor with a series of talking points—a list of anticipated questions and answers to convince federal officials to approve commercial use of the public facility (which the government later did). Johnson, also a longtime friend and supporter of Schell, sent the April 16 talking-points memo to Schell and Deputy Mayor Tom Byers, who is handling the lease deal for the mayor (and who formerly was a PacMed adviser and worked with PacMed CEO Howell at Cedar River Associates, a private health-care consulting firm). The three-page memo, bearing a Preston Gates letterhead, recaps the hospital's history—a onetime US Public Health Hospital transferred in 1981 to the city, which chartered a Public Development Agency (PDA) to run it with a community council overseeing. PacMed later moved to a regional clinic-only system and occupies a small portion of the hospital now. The memo then outlines points Johnson and Howell suggested the mayor make to federal officials, such as pointing out that "efforts to improve and market the building, including the $10 million deco-style addition on the north facade, have been notably unsuccessful. Finding a compensatory health-care-related use has been particularly daunting."

At that time, however, a proposal by a nursing-home developer called Beacon Pointe Healthcare was still on the table. Beacon would have taken over floors 3-11 for a senior residential program and specialized Alzheimer's care. Beacon officials say PacMed had already agreed to their deal when Johnson and Runstad stepped in with the idea, offering more money and undercutting the health-care project. (PacMed says the nursing-home plan lacked proper financing, which Beacon disputes; Beacon is now suing PacMed for breach of contract.)

In their talking points, Howell and Johnson urged Schell to emphasize that PacMed would continue to own the property (even though to some observers a 99-year-lease is as good as a sale). Among the "points to stress" they gave to Schell were: PacMed is "financially stressed and needs to maximize return," and that "the asset is worse than useless," referring to the old hospital building ("maintenance alone is a substantial drain on PacMed resources"). They also employed the power of suggestion. "As Mayor," they wrote swami-like, "you are responsible for overseeing the City's PDAs, including PacMed. You are comfortable recommending approval of the non-health-care- related use because it would help advance PacMed's mission much more than continuing to saddle it with an empty, unproductive structure. You will ensure that it continues to fulfill its community mission."

Howell also supplied the mayor's office with a five-page background memo of frequently asked questions—with answers—favoring the deal. Byers, too, wrote an undated note to an aide stating, "We need to develop a written statement about PacMed ASAP," and suggested the aide draw it up in part from a letter that Howell—his former business associate—had written to Dennis Braddock, a critic of the deal. Howell sent the mayor's office a copy of the letter, in which Howell claimed PacMed was "being public and forthright with our plans."

But most of this was being played out behind the scenes, with the mayor's office relying at least partly on Howell, Johnson, and others for its official responses. The strategy seems to have work. In an August 6 letter to Health and Human Services Secretary Donna Shalala seeking federal approval of the lease, Schell sounded some of those PacMed-orchestrated themes: "To continue its community mission, PacMed must make the best possible use of its assets.... PacMed is valuable and irreplaceable... the community benefits are large." A week later, Shalala said OK.

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