The long and byzantine struggle over Sebastopol’s hospital came to an end this week when the Palm Drive Health Care District sold west county’s only hospital to American Advanced Management Group (AAMG) and Sonoma Specialty Hospital (SSH) for $2 million in cash.
Escrow is scheduled to close on Wednesday, Dec. 4.
The settlement was hammered out during five closed-door sessions with the board and between meetings with representatives of the Palm Drive Health Care District (PDHCD) and representatives from AAMG and SSH. Board President Dennis Colthurst was the lead negotiator for the health district, though most of the board members took turns on the negotiating team at one time or another.
At the district’s Nov. 25 board meeting, PDHCD Executive Director Alanna Brogan presented the terms of the sale to the board.
The major takeaway, listed among other points on a handout she gave board members, was this: “This deal clears all debt owed to AAMG/SSH for operations and provides $2,000,000 in cash to the district.”
All of that money will go toward the district’s bankruptcy obligations.
Board members unanimously approved the negotiated terms and authorized Colthurst to sign the final settlement document for the sale of the hospital to AAMG.
In which $4 million becomes $2 million
Voters with long memories might be wondering why the hospital, which has an adjusted appraised value of $5.2 million, sold for only $2 million.
In the run-up to this years’ special election for Measure A, the district led voters to believe that it would be getting $4 million in cash, plus a $1.2 million promissory note. Measure A offered AAMG an exclusive lease-with-an-option-to-buy, and voters approved it by more than 75% of the vote.
How did that $4 million in cash end up as $2 million? That’s what the rest of Brogan’s presentation dealt with.
“A big part of these negotiations was settling how much we owed AAMG and SSH for their time operating the hospital under the management agreement,” she said.
That management agreement, which was signed in August 2018, contained a fateful clause that put the district on the hook for AAMG’s operating losses until AAMG signed the lease for the hospital, which took place in April of this year.
Brogan said the decision to pay off the debt is what turned the district’s earlier estimate of $4 million into $2 million.
“At the time (of the election),we were not considering paying off the debt we owed AAMG/SSH because we had 5 years to pay it. However, in the final settlement agreement, the board decided it would save money on ongoing interest by paying this debt off. So that is done, and we no longer owe AAMG/SSH anything.”
By avoiding paying the 5% interest on their debt to AAMG over five years, the district saved roughly $1 million.
Nailing down just how much the district owed to AAMG was tricky, however.
During negotiations, AAMG claimed that their operating losses as of April 1 of this year were $7,109,465 — a figure almost three times higher than the figure the company reported in mid-April, which was in the $2 million range. As a compromise, the district negotiated the $7 million figure down to $4,455,633, a number that Brogan said was closer to the one that AAMG gave as an estimate in the original management agreement.
District negotiators then began chipping away at that. They successfully negotiated payments of $1,741,000 for furniture, fittings and equipment; $183,333 in rent; $63,500 for half of the cost for the special election; $500,000 from the Sonoma West Medical Center bankruptcy settlement.
At the end of this horse-trading, both sides agreed that AAMG would pay the district $2 million in cash.
The district also retained the $1.2 million promissory note that secures the hospital and urgent care center. If AAMG sells the hospital or converts it to a non-health care use within the next 10 years, it will have to pay the district $1.2 million. If, however, AAMG operates the hospital as a long- or short-term acute care hospital with an urgent care for 10 years, the promissory note will be forgiven in its entirety.
After the meeting, PDHCD board member Richard Power described the complicated negotiations this way:
“I guess you could think of it as a waterbed. Every time you pushed down on one area, everything else would move as a well.”
Board members were relieved to finally have an agreement.
“I’m just glad that we made sure we put all of this in the agreement and didn’t do what they (AAMG) wanted to do, which was to close the real estate and worry about all this later,” board member Randy Coffman said. “Now we have an agreement that we can move forward with, and it’s done.”
“I am impressed with the fact that we actually have come to this point,” board member and longtime hospital defender Gail Thomas said.
Cassandra at the podium
Former PDHCD board member Jim Horn, the district’s resident skeptic, made his objection to the deal plain during public comment. He argued that the closed-door meetings leading up to the sale were inappropriate because many of the items on Brogan’s list weren’t related to real estate negotiations, the only area that is exempt from open meeting laws. He also complained that AAMG’s various estimates lacked documentation and that the final adjusted appraisal price for the property was far too low.
He found the final cash payment of $2 million especially galling.
“That, coincidentally, is exactly what Dr. Singh (the owner of AAMG) offered back in September 2018 — $2 million,” Horn said. “So finally, Doctor Singh seems to have gotten exactly what he wanted back then. I haven’t seen any documentation about why that’s a valid claim and why that’s a valid number.”
Board member Coffman was having none of it.
“We could have, should have, whatever,” he said in response. “This is the best deal to get this done for the district. We have to look at the ultimate good, which is that it completes this. It finishes it.”
Brogan said she’s proud the district fought to hard to keep a hospital in west county.
“Health care services, the hospital and urgent care remain in west county,” she said. “This is a really important point since SSH is the only hospital and urgent care west of 101. With all of the disasters that have occurred affecting west county, it is important that there is a place that residents can receive that level of care. The board is very proud that they were able to retain these services for the community.”
What happens next?
Now that the hospital has been sold, the health care district has two options for its future. Some on the board want to dissolve the district completely and hand the job of collecting the parcel tax over to the county, which would use it to pay the district’s bankruptcy obligations and make ongoing payments on the district’s $28 million debt.
Others want to keep the health district alive as a granting agency to dispense the portion of parcel funds not eaten up by debt or bankruptcy as grants to local community health programs.
Either way, because of the district’s large debt load, landowners in the district (and even those who’ve detached) are destined to keep paying the parcel tax for years to come.