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.
I read this a couple of times and I’m still not sure I completely understand this deal. $257,000 per bed! I think if you already owned the land (like the Fernald Campus land) you could build a modest house for the price of that one bed.
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p>$20.4 Million in bonds, $4.1 million interest-free CEDAC financing, $10 million revolving line of credit and $1.6 million letter of credit = $36.1 million for 55 houses!
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p>I went to the Attorney General’s website and read the financial statement thinking it would help me better understand this deal. It only gave me more questions
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p>1. It appears all of the homes are security for all the various financing arrangements. Looks like more than the just the Bedford home is at risk. If the worst should occur and the Mass company goes under, what happens to the occupants of those homes? What then?
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p>2. What is the state’s obligation under the lease should the Mass company go out of business? Are there provisions for that? If the Mass company go under, is the state off the hook for the payments? I thought the financial statement said that “CIL” (parent) assets are security for the bonds so the parent assets are at risk. Do they have any ability to try to enforce the lease for the payments?
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p>3. The lease payments from DDS are supposed to service the bond debt through maturity. Have this latest round of budget cuts affected the DDS’s ability to pay these lease payments? Are the imaginery savings resulting from the developmental center closures supposed to be the funding for these leases? Is that why they are so intent on closing them?
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p>I was wondering if anyone was aware of any similar financial arrangements in any other agencies or is this type of deal unique to DDS?
Among other problems, these arrangements lack transparency. It is impossible to answer them based on the company’s financial statements, IRS return, and other documents that we’ve been able to locate.
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p>I’d venture that the cost of these 55 homes is far higher than $36 million. That appears to be the price of CIL Realty’s financing. But the cost to the taxpayer is reflected in the lease payments made by DDS. At a conservative average of $1 million per home (the Bedford home will cost DDS $2 million), that comes to $55 million for these homes over 20 years. The cost may well be higher than that. And even that doesn’t take into account DDS’s projection that it plans to develop a total of 268 new beds for residents of the facilities slated for closure.
I forgot about the 268 additional beds. I have no doubt the costs will increase. It always does.
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p>I wonder how CIL Mass is going to continue to develop additional homes. It seems their credit is “stretched” and they were showing a $1M loss on their 07 tax return. How much additional financing or refinancing can they do considering those facts.
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p>You have to wonder why this deal hasn’t caught someones attention and initiated some kind of legislative hearing. If there was ever something that, on its face, seems overpriced and risky, its this deal.
After all, you may want others to read that link – and the relevant rule is, “If you want someone to do something, make it as easy as possible.”
with the AG’s Public Charities Division. The link to search for those records is
http://www.charities.ago.state…
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p>Another place to find IRS forms and other financial information for out-of-state nonprofits is http://www.guidestar.org.
How can an Administration which purports to close down facilities due to the cost (which includes all therapies, medical care, etc)…then go ahead and enter into lease arrangement that is even more than the cost per bed at the facilities, without any of the necessary medical/therapeutic care?
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p>The only thing that’s not hard to understand about this arrangement is that this is a vendor-driven Administration, make no mistake about it. There are vendors running the agencies….and vendors making contracts…in favor of other vendors. Life is good, isn’t it? To all the administration defenders out there, who claimed Mr. Patrick had some “tough decision to make” in this economy…do you really think this is being a good steward of limited resources?
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p>Maybe it’s time to call in the State Auditor, Joe DeNucci? I think his tagline used to be “the cruelest tax of all is waste” or something like that?
Where are our leaders with a long term vision? Like too many schemes the idea of privatizing was troubling from the very beginning. With a financial windfall up front it looks good, but leaves the back end costs for someone else to solve.
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p>As seemed obvious years ago, this is going to cost taxpayers, not save them money and there does not appear to be a corresponding benefit of improved services for the additional cost.
Dave,
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p>One fact that the public must understand is that the cost of the house construction and morgages is not in the Department of Developmental Services budget and will not be mentioned when the Commissioner tell everyone how inexpensive the community services are relative to the cost at an intermediate care facility.
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p>Mav
But I fully agree with you that the Commissioner is not taking this cost into consideration in her claim that the state will save money in closing Fernald and the other state facilities.
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p>The cost of the group homes is part of the DDS budget because DDS is making lease payments on these homes over 20 years. I’m not sure exactly where in the budget the lease payments go; but they may be under the state-operated group home line item.
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p>Among the things that aren’t clear about this deal is what is the relationship between the lease payments and the financing costs for these homes. In other words, is CIL Realty making a “profit” off the deal? That would seem to be the case, given the high cost of the leases to DDS. But the financial documents that CIL has filed lump all of their group home transactions together and provide no information about the cost of each of the homes. This makes a definitive analysis of this deal difficult, if not impossible.
on whether this lease arrangement is considered a “capital lease” or whether it’s a standard lease. A capital lease can be listed on a balance sheet as an asset, therefore, not becoming part of the DDS budget as an expense. It would then fall under a completely different department, as Mav rightly points out. Given that this is a long-term lease…it’s likely to be considered an capital lease.
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p>Now you know why balance sheets are also called BS statements. You can hide all kinds of crap just be classifying it differently. Thank you, Professor Friedman!
But it would seem to me that if DDS is paying an average of $100,000 a year in these lease payments for the Bedford group home alone, they would have to account for it somehow in their budget. Given that they are a state agency, do they even file a balance sheet?
checking this out. I have enough financial accounting in my soul to understand how agencies can reclassify expenses as assets. God only knows what financial statements our agencies use internally vs. externally.
Is it possible to ask the commissioner the specific question, where the lease payments are in the budget–not that I think you would get an answer? We would probably just another copy of the “community first” plan.
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p>Maybe it is time to call Mr. DeNucci.
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