[Posted on behalf of The Fernald League for the Retarded, Inc.]
Might the state be bailing out a struggling private developer in signing a lease at a cost of $257,000 per bed to develop a group home for persons with mental retardation?
I wrote here recently that the state signed a lease-purchase agreement to pay CIL Realty of Massachusetts, Inc. more than $2 million over a 20-year period for the single group home, which is equivalent to a cost of $257,000 per bed. It's one of a number of group homes planned or under development to house residents from state facilities that are slated for closure because they are supposedly too expensive to continue to operate.
But the deal under which this particular group home was developed is extremely complex and seems potentially risky to the state.
The deal involves the placement of a lien on the group home, which is located in Bedford, by a New York City bank. The bank provided a $10 million revolving loan agreement and a letter of credit to CIL Realty. The deal also involves the issuance of more than $24 million in bond proceeds to CIL Realty by two Massachusetts-based quasi-public agencies. The bond and loan proceeds are paid back via the lease payments from the Department of Developmental Services (formerly DMR) to CIL Realty.
Here are details of the deal, according to state documents obtained by The Fernald League. If you can't understand it, don't worry, you're not alone:
In January 2007, CIL Realty obtained $20.4 million in bond funds from the quasi-public Massachusetts Health and Educational Facilities Authority, according to CIL Realty's 2007 audited financial statements. The bond proceeds were intended to refinance previous MAHEFA bond issues and to purchase additional properties in Massachusetts and build group homes on them.
MAHEFA's website says the organization helps human service providers and other nonprofits “secure low-cost, tax-exempt financing for important capital projects.” In addition, the quasi-public Community Economic Development Assistance Corporation provided CIL Realty with $4.1 million in interest-free notes, according to the financial statements.
CIL Realty's 2007 IRS tax form states that as of the end of Fiscal Year 2007, the company had built 55 group homes, which house between 1 and 8 people, in Massachusetts. (CIL Realty's 2007 financial statements and tax form are the latest documents available on the company in the Massachusetts Attorney General's Office.)
In order to pay back the bonds, CIL Realty leases the homes to the state DDS, according to the audited financial statements. In 2007, CIL Realty received $1.3 million in lease income from the state. However, the company's expenses that year were $2.4 million, leaving the company with a deficit as of June 2007 of over over $1 million.
In February 2007, HSBC BANK USA, based in New York, placed a lien on the Bedford group home and also provided CIL with a $1.6 million letter of credit under a $10 million revolving loan agreement, according to a filing with the Middlesex South Registry of Deeds. The same document states that the bank issued the letter of credit in order to “enhance the marketability” of the $20.4 million MAHEFA bonds.
Seven months later, in September 2007, the then DMR signed a 20-year lease to occupy the same Bedford residence.
This is a complicated and expensive arrangement. One concern we have with it–besides the high lease cost per bed–is what would happen to the Bedford group home and possibly others with HSBC liens on them if CIL Realty were to go out of business. A land use restriction, filed with the Registry of Deeds, states that CIL Realty declares that the Bedford property will always be used for persons with mental retardation or mental illness. However, the document states that the restrictions will be released if the bank were to foreclose on the property.
In addition, at least some of the state's lease payments are going to CIL Realty's out-of-state parent company. CIL Realty paid more than $130,000 in management fees to its parent company in Connecticut in 2007.
It would be a lot simpler, and we think cheaper, if the state were to issue general obligation bonds and build new group homes on public land, such as the campus of the Fernald Developmental Center.
The cost of the lease-purchase arrangements for the Bedford home and other group homes is the kind of thing that in the old days would have become the subject of a legislative hearing by the Children and Families Committee or the House or Senate Post Audit and Oversight Committees. Unfortunately, that kind of thing doesn't seem to happen anymore on Beacon Hill.