Land deal to create HealthFirst's new clinic raises questions

HealthFirst had planned to raze this building at 496 Southland Drive in Lexington and replace it with a clinic.
HealthFirst had planned to raze this building at 496 Southland Drive in Lexington and replace it with a clinic. Lexington Herald-Leader

Most agree a $11.7 million public health clinic that could help thousands of poor people get medical and dental treatment would be positive for Lexington.

But opinions vary dramatically about benefits of the land deal between developer Ted J. Mims and HealthFirst Bluegrass to locate the clinic at 496 Southland Drive.

The project is the focus of an audit announced Tuesday by Lexington Mayor Jim Gray and state Auditor Adam Edelen. They cited concern over $250,000 in fees and rent that have been paid by HealthFirst for the clinic with few tangible results.

"We are a poor state," Edelen said when announcing the audit. "We can't afford to make dumb decisions."

On the other hand, the board of HealthFirst, after threatening to pull the plug on the clinic plan over other financial woes, voted to move ahead last Thursday, praising the deal.

Board members even gave themselves a standing ovation during their meeting.

The lease between HealthFirst, Mims, and his partner Greg McDonald, mortgage papers and property records show the polarizing deal includes these provisions:

■ Mims is paid $15,000 a month to oversee the yet-to-begin construction which is projected to be completed in mid-2014. With an annual rate of $180,000, that makes him, according to documents filed with the IRS, the highest paid member of the HealthFirst team, edging out Medical Director and pediatrician Dr. Deborah Stanley, who is paid $179,000.

■ It requires HealthFirst to pay Mims and McDonald, who own the land, $25,893 a month to rent empty buildings that will be torn down to make way for a newly constructed clinic.

■ In addition, the lease sets a purchase option for two properties that make up the 3-acre clinic site. One of those parcels, the "Rosemill Properties," contained a wooded and gravel-covered lot and an 11,000-square-foot building. It was purchased in 2012 by Mims for use by HealthFirst at $1,025,000, although the 2012 assessment for tax purposes placed its value at $635,000. That's a purchase price 61 percent above the assessed value. The lease requires HealthFirst to pay an additional 30 percent above Mims' purchase price if the land is ultimately bought by taxpayers.

The adjacent land and building at 496 Southland Drive has a $1.1 million purchase price, 76 percent above the assessed valued for taxes when it was purchased by Mims for use by HealthFirst in 2012.

■ The lease allows Mims and McDonald to keep a chunk of the land bought primarily for parking. The parcel is not described in the lease by a land mass, such as a quarter of an acre. It is described as being big enough to build a 10,000-square-foot building that would, when constructed, be in the middle of the clinic parking lot.

■ According to documents filed with the Kentucky Secretary of State, Mims manages a limited liability company, Commonwealth Realty Group. Commonwealth Realty Group was paid a $30,750 commission by the owner of the sale of the Rosemill properties, according the mortgage settlement agreement.

HealthFirst executive director William North, Mims and HealthFirst board chairman Thomas Lester declined to comment this week on the land deal.

Building committee chairman Tom Burich said the deal was "great" for HealthFirst.

In fact, Burich praised a May 14 report by North called the "Capitol Development Grant Building Case" as "the best report I have ever seen."

North told the HealthFirst board last Thursday that the report had been submitted and approved by the Health Services Resource Administration, the federal agency overseeing the grant. Two pages of the 30-page report deal with the land and lease. It cites an unnamed "commercial real estate expert" declaring the land deal "highly favorable" to HealthFirst.

It does not state the ultimate payout price for the Rosemill parcels, mention that Mims is the property owner and the project manager, or include the state auditor's inquiry.

It also doesn't mention that on Tuesday, HealthFirst voted to see whether key vendors such as architects and engineers would defer payment for as long as six months, until the agency can get on firmer financial footing.

So how did this non-profit, tax-funded agency get to this point?

Ken Silvestri, co-owner of Silvestri-Craig Realtors, is the commercial real estate expert cited in North's report. Silvestri said he didn't know why his name wasn't used in the report. Silvestri, who will be paid a commission for his work with HealthFirst, but declined to say how much, praised the clinic deal last week.

"They did, in fact, negotiate a very favorable lease," Silvestri said.

North's report said the Southland Drive location was the "only available option" for the clinic. That's because, Silvestri said, a Notice of Federal Interest must be attached as a lien to the property to insure the taxpayer dollars invested for the purpose of a health clinic will indeed fund a health clinic and not some other type of business. That Notice of Federal Interest, he said, kept other investors away until Mims came on board.

When he and HealthFirst approached potential investors before Mims, he said, "without exception, we got 'no' and 'absolutely no.'"

Since HealthFirst received the grant as part of the Affordable Care Act in 2010, HRSA reports 97 percent of the money given to other health clinics nationwide has been spent in spite of similar restrictions.

Silvestri said that in larger markets, with a greater number of properties suitable for a clinic, developers might be more willing to take a risk on the lien.

Still, according to the lease, Mims had a 130-day "due diligence" period before he had to file a notice of interest, basically a declaration that the lien was coming when construction begins. That period ended in December 2012. As of May 10, there was no notice filed at the Fayette County Clerk's office.

Here is how the deal evolved.

■ On May 17, 2012, Mims and McDonald bought land and a two-story building out of foreclosure at 496 Southland Drive for $625,000. The location was announced May 29 at a HealthFirst Board meeting. Silvestri praised the site as having proper zoning and plenty of parking.

■ The Rosemill Properties — three parcels in foreclosure adjacent to 496 Southland — were consolidated into one parcel by seller Charles H. Moore. The plat was filed with the Fayette County Clerk's office on June 15, 2012. On the combined lot was a one-story retail building, a gravel lot and another, undeveloped wooded lot. The gravel and wooded lot were used on the final site plan for parking.

■ The lease between HealthFirst, Mims and McDonald was signed on June 21, 2012. It required the purchase of the "Rosemill Properties" by Mims for use by HealthFirst. North's May 14 report said a limit was set for the purchase price. The lease agreement does not set a limit. It did specify that HealthFirst would pay 30 percent more than the purchase price, plus other "reasonable direct cost" if they opted to purchase after four years of the lease.

■ On June 25, 2012, Mims and his partner bought the Rosemill Properties for $1,025,000, although it was valued by the property assessor at $635,000. A map included in the lease shows the bulk of the land was to be used for parking. Silvestri said $1,025,000 is a fair market price for the land, although he didn't say why the cost was so much greater than the assessed value.

Fayette County Property Valuation Administrator David O'Neill said properties can be more profitable when bundled. That does not appear to be the case with the purchase of the "Rosemill Properties." Roughly two-thirds of the land was vacant and had not been well-maintained, and the 11,000-square-foot building on the lot also had maintenance issues, O'Neill said. Those problems were accurately reflected in the assessed value of $635,000, he said.

Of the difference between the assessed value and the purchase price, O'Neill said, "I don't know why those dollar amounts don't more closely correspond."

In his report to the federal government, HealthFirst executive director North explained that HealthFirst had to finalize the lease or risk losing the Rosemill Properties because they were to be sold at auction.

It's unclear how competitive the auction was. Two-thirds of the property had been vacant for years and the whole parcel was in foreclosure. According the Fayette County Master Commissioner's office, two auctions had been scheduled in 2011 but were called off.

The property appears to be have been sold at a private auction. The mortgage settlement agreement for the Rosemill Properties shows a $30,750 real estate commission payment to Chuck Collins auction in Nicholasville. A phone message and an email to Collins from the Herald-Leader were not returned. Silvestri said he wasn't involved in the auction and didn't know how many other bidders were.

■ In the lease, Mims and McDonald retain a chunk of land for a "developer's lot" destined to be a 10,000 square-foot building. According to a map included in the leases, the developer's lot would be in the middle of the clinic parking lot.

The developer's lot is not reflected in the site plan approved by the board created by the Lexington engineering firm, Strand Associates. Mike Woolum, vice president of Strand, said his company was not involved with what he referred to as a "small remnant parcel." The contract with Strand defines the project as just under a total of 3 acres.

Helen Morrison served as a neighborhood representative on an advisory board which worked with HealthFirst, Mims and Strand to develop the site plan.

The developer's lot "was never mentioned," she said. "One of the other members of the advisory board noticed that a portion of the lot wasn't being included in the design and inquired about it. We were told that lot wouldn't be needed for the clinic and would probably be leased to another entity."

Silvestri said it was his understanding that the developer's lot and subsequent building would allow shared parking that would be beneficial to HealthFirst and Mims. The lease also requires HealthFirst to pay a yet undetermined cross easement fee to help with the maintenance of the shared lot.

When it was pointed out that a map included with the lease puts the developer's lot squarely in HealthFirst's eventual parking lot, actually eliminating a significant number of parking spaces, Silvestri said things may have changed since he was involved in the deal last summer.

The auditor's report of HealthFirst Bluegrass should be finished in three to four weeks. Meanwhile, Mims presented HealthFirst with a revised construction schedule last week. Originally, the clinic had a construction date of October 2013. Now, demolition is schedule for late June, and the clinic will not be open to serve patients until at least the summer of 2014.

Parking at a premium

When HealthFirst Bluegrass announced the clinic space on 496 Southland Drive, well-known Lexington real estate broker Ken Silvestri praised the $625,000 property as having proper zoning and plenty of parking. The property had 58 parking spaces, according to a map included in the property lease.

Three weeks later, developer Ted J. Mims bought a second adjacent parcel on behalf of HealthFirst, this time for $1,025,000. Two thirds of the parcel was empty and would be used for parking, according to the map and finalized site plan for the project. Both lots combined, according to the lease map, had a total of 248 parking spaces.

In October 2012, HealthFirst officials decided to switch from renovation of the building to construction of a new building. The final site plan with a new building, created by the Lexington engineering firm Strand Associates, left the clinic with 166 parking spaces, four less than required by statue in Fayette County.

Also, Mims and his partner retain a "developer's lot" big enough to build a 10,000-square-foot building. About 40 spaces will disappear when it is built.

After spending $1,025,000, mostly for parking, the net gain is roughly 68 spaces.

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