How do you kill three birds with one stone? It doesn’t happen often, but in 2016, DTSpade helped two of the city’s most critical organizations to execute a plan that helped one of Atlanta’s most vital hospitals expand its campus, secure more parking and ensure a long term future for a critical community program. In the same transaction, DTSpade helped Fulton County to lower its operating expenses and provide a better delivery of care to its HIV, STD and Hep-B patient populations. And that’s just the beginning of the story…
Our Client’s Challenge
Our Client hospital is known for its Level-1 trauma center and specialty care units. Providing critical services for vulnerable populations of uninsured patients throughout the state, they have a long-standing reputation as a premier safety net hospital for the North Georgia region.
In mid-2015, the hospital had three strategic initiatives regarding real estate:
- Expand the campus footprint,
- Secure additional parking on campus, and
- Find a long-term home for its Behavioral Health Program.
The hospital entered 2015 with a stronger non-profit board structure, management team built to grow, profitability and improving financials. But there were challenges, too:
- Implementation of the Accountable Care Act and Georgia’s rejection of Medicaid expansion meant the hospital would have to plan for a much different future without additional funds in 2015.
- Development and a local university’s growth limited options for expansion on campus while staff and patient populations continued to grow.
- Their national award-winning Behavioral Health program provided care for some of those in the city with the greatest need, but because of the patient population, the program was challenged to establish a foothold in a dense downtown environment. The hospital needed a long term home to continue to grow this program.
Fulton County’s Challenge
Fulton County, established in 1853, is a 528 square mile sovereign jurisdiction in Georgia. It stretches over 70 miles and encompasses nearly a million residents, the majority of Atlanta and ten other cities.
Fulton County began 2015 by appointing Mr. Richard “Dick” Anderson as County Manager. His business-minded approach to governance brought a reexamination of the county’s use of capital and operating expenses, among other initiatives. One problem was the Aldredge Building.
The Aldredge Building is a 76,499sq. ft. building on 1.85 acres with 310 parking spaces at the front door to the hospital. Long a centerpiece of Fulton County Health Services, it provided the community with public records, HIV, STD, Hepatitis B and dental services. Deferred maintenance, functional obsolescence and increasing operating expenses conspired to make the facility untenable going forward. The county had two options: fund significant capital expenses to continue to run a building that no longer met the programmatic needs, or sell the building and find a new facility (with proximity to a hospital and public access) to house the program.
Consensus Building:
By the end of 2015, a plan was created to meet the challenges of each organization’s goals. All that was left was to execute.
First, data brought the two organizations together. Working cooperatively with Fulton County, DTSpade modeled the operating expenses and capital requirements needed if Fulton County were to stay at Aldredge. The analysis revealed that the consolidation of clinical activities into a smaller (contiguous) footprint meant that moving to a new facility would provide a better healthcare delivery system at no additional operating cost. And instead of investing in more capital for renovation, selling the building would result in capital infusion.
By purchasing Aldredge, it would satisfy the hospital’s first two initiatives: expand the campus and lay hold of another 310 parking spaces. Fulton County would sell—if its clinical programs could be supported elsewhere.
Door Number One:
Supporting Fulton County’s program was no easy task. Downtown Atlanta was recovering like other parts of the city, albeit slower. Most of the office buildings are older with the better buildings being institutionally owned. Average square footage for Class A-B properties is at 176,264 and median at 57,480sq ft. That meant that Fulton County would need to find a landlord willing to mix a fairly sick population of clinical patients into a multi-tenant office environment.
Meanwhile, the hospital’s third real estate initiative was in trouble. In 2012, Bryant Cornett had placed their Behavioral Health clinic into two floors of 10 Park Place on a medium-term lease. The building had since struggled through a number of real estate cycles and in April 2015, amidst the hospital negotiating an expansion, the building was put into receivership. New ownership meant a new direction for the building.
As the months ticked by, new management and leasing came into the building. The special servicer was only willing to allow the hospital’s Behavioral Health clinic to expand in the building if they committed to more space than they needed. The hospital had the option to extend their current lease terms but needed a longer term home and room to expand at their own pace—not a short term reprieve. The special servicer felt the debt holders might recoup their investment by converting 10 Park Place to a residential use if they could get the hospital Tenant to leave.
The hospital knew they wanted their Behavioral Health Clinic to stay, but needed Fulton County to lease the extra space required by the special servicer.
Door Number Two:
By December of 2015, it was decided that the hospital would long-term master lease space for its Behavioral Health Program and Fulton County’s programs in exchange for the Aldredge Building. Then discussions broke down. The special servicer was still deciding what it wanted to do. The hospital was clear on its mission and Fulton County knew what it wanted, but not what the market would support. Discussions continued, but slowly.
The Way Forward:
By February of 2016, the structure was set. Fulton would sell and the hospital would pay a market price for Aldredge to expand their hospital campus IF: 1) they could lease the space directly to house their program in the market, 2) with little upfront capital cost, 3) at a market rate and 4) with annual rights to cancel.
The hospital had six months to exercise its right to extend for Behavioral Health at 10 Park Place, and Fulton would help satisfy the larger leasing requirements by moving their Health Services to the building, as well. Everyone, even the special servicer, could see that 10 Park Place was the solution.
Out of Time:
Plans were drawn. The consensus was reached. Agreements were fully negotiated. But in April of 2016, the special servicer pulled out. Assumptions on exit valuations fell short of expectations and the special servicer elected to go straight to the market—a buyer had emerged. 10 Park Place was no longer the answer. A sale would take months to close and Aldredge’s deferred maintenance was on a more aggressive schedule. We had to find another option.
Success:
Two of the hospital’s strategic initiatives required replacement facilities for Fulton County, so DTSpade dug in to find it. Finding a building willing to mix in a strong clinical use with high tenant improvements, and at a fair market rate would prove difficult. But in the search, we uncovered the 10 Park Place buyer. Sometimes, even big towns work like small towns. Retreading a few items, the hospital’s extension, and Fulton County’s lease was back on at 10 Park Place by May of 2016.
Throughout June of 2016, new lease documents with a new Landlord were negotiated. The special servicer agreed to sell the property and the new Landlord/buyer agreed to purchase the property if the hospital and Fulton County executed leases. Timing County Commissioner meetings and submittal dates were paramount. Even after the closing date was set, lending requirements complicated agreements in the 11th hour. Four individual purchasers, three brokers, two governmental agencies, one special servicer (plus a lender) all had to agree on terms for a lease based on the (potential) sale of real property while knowing that all documents would fall apart by July 15.
On Friday, July 1, 2016, the lender funded the transaction and leases were executed. The hospital had the Aldredge property for its expansion, as well as a long-term home to build out its Behavioral Health program. Fulton County had a better, cheaper and newer way to deliver healthcare services to the community. The special servicer’s bondholders were made whole. And the citizens of Atlanta and Fulton County got just a little safer, cleaner and healthier that day.
DTSpade was built to help our communities’ irreplaceable organizations make one decision excellently so we never have to imagine a city without a safety net.