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PUBLIC /PRIVATE PARTNERSHIP LETTER AGREEMENT IN PRINCIPLEThis Public/Private Partnership Letter Agreement in Principle (“Letter Agreement”) is entered into as this 17th day of September 2007 by and between the District of Columbia, a municipal corporation (“District”) and Specialty Hospital of Washington – GSE Holdings, LLC, a Delaware limited liability company (“SHW-GSE”) and its wholly-owned subsidiaries Capitol Medical Center, LLC and CMC Realty, LLC (collectively, “SHW-GSE”). RECITALSA. Greater Southeast Community Hospital (“Hospital”) is a 480-bed health care facility located on approximately 17 acres at 1310 Southern Avenue, S.E. in Washington, D.C. that provides primary and preventative care principally to residents living in Wards 6, 7 and 8 in the District. The Hospital is currently owned by Greater Southeast Community Hospital Corporation I and Envision Hospital Corporation. B. Specialty Hospitals of America, LLC (“SHA”) manages, operates and develops long and short-term acute care hospitals and nursing facilities. It owns and operates Specialty Hospital of Washington – Capitol Hill (“SHW-Capitol Hill”) and Specialty Hospital of Washington – Hadley (“SHW-Hadley”), and is the largest provider of long term critical care services in Washington, D.C. C. SHW-GSE has entered into an Asset Purchase Agreement (“APA”) with the current owner of the Hospital dated August 22, 2007 to purchase the Hospital’s land, equipment and facilities by October 31, 2007.. Financial assistance from the District is desired to accomplish the contemplated sale of the Hospital to SHW-GSE. D. The District needs to ensure the continued viability of the Hospital in order to meet the healthcare needs of the residents of Wards 6, 7, and 8. E. Subject to the terms and conditions contained in this Letter Agreement and other documents and agreements contemplated herein, and due authorization by the Council of the District of Columbia (“Council”), the District will enter into a public/private partnership with SHW-GSE to provide financial support to facilitate acquisition of the Hospital and improvements to its physical plant, equipment and operations in consideration for certain agreements, requirements and community benefits described herein. The public/private partnership contemplated by this Letter Agreement is pursuant to Section 101(c)(4) of the Community Access to Health Care Amendment Act of 2006. F. The District shall place equity into a public/private partnership (subject to Council approval), and the partnership shall lend funds to the Hospital as set forth in Sections 1, 2 and 3 hereof. The borrower shall repay funds to the public/private partnership, which will then distribute return of capital to the District. SHA shall provide the District a copy of the executed assignment from the purchaser of the Hospital to SHW-GSE in advance of Closing. “Closing” shall be defined as the time the public/private partnership provides its funding. 10724064.7 TERMS AND CONDITIONS1. Working Capital Investment.1.1 The public/private partnership, using funds invested by the District, shall provide a $20.0 million investment in SHW-GSE (“Working Capital Investment”), which investment shall be repaid as set forth in Section 1.2 below. The Working Capital Investment shall be used to facilitate the operation and integration of the Hospital and other co-located medical facilities on the Hospital site. 1.2 SHW-GSE shall repay the Working Capital Investment in semi-annual installments of $1.0 million over a 10 year period. The outstanding balance may be prepaid at anytime, without penalty. Repayment will be interest free in consideration for the taxes created through increased employment on the Hospital site. Repayment of the Working Capital Investment will be secured by a first lien on the Hospital, and all assets related thereto, but excluding the Hospital land. 1.3 At Closing, the funds shall be provided to an independent escrow agent (“Escrow Agent”), which will immediately disburse the funds to SHW-GSE pursuant to an escrow agreement that will describe the conditions for release of the funds to SHW-GSE. 2. Acquisition Investment.2.1 The public/private partnership, using funds invested by the District, will provide an investment of up to $29.0 million in SHW-GSE (“Acquisition Investment”), which shall be repaid by site-specific taxes as described in Section 2.2 and 2.3 below. The Acquisition Investment will be used for the following:
2.2 Subject to Council approval, the District will (i) provide an exemption from transfer and recordation taxes for the Hospital acquisition; (ii) enter into a payment –in-lieu of taxes (PILOT) agreement, whereby SHW-GSE will agree to make PILOT payments in an amount that equal to the real property taxes that would otherwise be due on the Hospital land, but not current improvements on the site, which improvements shall remain tax-exempt; and (iii) will create a tax increment financing (TIF) district to capture any incremental sales taxes generated on the Hospital site. The PILOT payments and any incremental sales taxes generated on site will go towards repayment of the Acquisition Investment. 2.3 The Acquisition Investment will be repaid, which payments shall be serviced exclusively by site-specific taxes referenced in Section 2.2 above over a 30-year term, and will be secured by a first lien in favor of the District on the Hospital site. All or part of the principal amount of the Acquisition Investment may be paid from time to time without penalty to release all or an equivalent part of the Hospital site from the lien securing the Acquisition Investment. At the request of SHW-GSE and subject to District approval rights, the District agrees to remove its lien from any portion of the Hospital site to be developed for new facilities in order to make such development financeable and subject to ongoing property taxes to enable the repayment of the Acquisition Investment. 2.4 As soon as practically possible after receiving Council approvals, the District will deposit with the Escrow Agent funds sufficient to pay any deposits required, fund necessary professional expenses to complete due diligence and close the acquisition. The balance of the Acquisition Investment will be deposited with the Escrow Agent so as to be available at Closing pursuant to an escrow agreement that will describe the conditions for the release or partial release of funds to SHW-GSE. 3. Capital Equipment and Physical Plant Investment.3.1 The public/private partnership, using funds invested by the District, will provide an investment in amount up to $30.0 million (“Capital Investment”) to SHW-GSE for auditable actual costs incurred on equipment, initial capital investment and renovations to the physical plant at the Hospital site. The terms and conditions of the Capital Investment shall be set forth more fully in an agreement (“Public/Private Partnership Agreement”), which shall be subject to Council approval. SHW-GSE and the District shall agree on the list of items to be paid from the Capital Investment prior to Closing and funding of the Capital Investment. 3.2 The Public/Private Partnership Agreement shall provide that the District shall receive a 50% share of profits (defined as “net cash proceeds” assuming an all-cash deal) from any sale of the Hospital by SHW-GSE. 3.3 SHW-GSE acknowledges that the Capital Investment will be tied to performance measures that will be set forth in the Public/Private Partnership Agreement. The Hospital shall be required to maintain Joint Commission (formerly the Joint Commission on Accreditation of Healthcare Organizations (JCAHO)) accreditation. Failure to meet performance measures will result in financial penalties, which shall be set forth in the Public/Private Partnership Agreement. 3.4 At Closing, all portions of the Capital Investment not previously forwarded pursuant to Section 2.4 will be provided to the Escrow Agent pursuant to an escrow agreement that will describe the conditions for the release or partial release of funds to SHW-GSE. 3.5 SHW-GSE will face financial penalties unless meeting certain accreditation and performance measures based on Joint Commission standards. These requirements will be in effect for 10 years after the agreement is signed regardless of hospital ownership:
3.6 To ensure that equipment will be used as intended, a Uniform Commercial Code Financing Statement Form will be filed for any equipment purchased with the Capital Equipment and Physical Plant Investment proceeds. 4. Management. In consideration for its interest in the public/private partnership, SHW-GSE will contribute the operational expertise required to manage and operate the Hospital. 5. Limitation on District Liability. The District shall not assume any of SHW-GSE’s liabilities in connection with the acquisition, ownership, management or operation of the Hospital. SHW-GSE shall have no ability to legally bind the District. Pursuant to the terms of this Letter Agreement, it is the expectation of the parties that the public/private partnership, using funds invested by the District, will provide an investment of funds. The District’s investment and obligations are limited to those outlined in this Letter Agreement. 6. Timing, Council Approval and Appropriations. The parties shall use good faith efforts to complete the Public/Private Partnership Agreement by September 30, 2007. It will be a common goal of both parties to submit the Public/Private Partnership Agreement and associated legislation to Council by October 1, 2007. The District shall use good faith efforts to budget, appropriate and otherwise authorize its financial commitments set forth in this Letter Agreement. 4 7. OB/GYN Facilities. SHW-GSE shall maintain an obstetrics/gynecology facility at the Hospital provided that the District and SHW-GSE agree to negotiate in good faith to reach mutually acceptable terms for maintaining the obstetrics/gynecology facility at the Hospital. 8. Restrictions on Transfer.8.1 As a condition of providing financial support for the Hospital as set forth herein, the District requires that a capable and professional team own and operate the Hospital. In the Public/Private Partnership Agreement, SHW-GSE shall agree to ownership restrictions on the Hospital for a minimum of 10 years. During that period, SHW-GSE will own the Hospital or the District will have approval rights over (i) any sale of the Hospital , or (ii) any transfer of ownership from SHW-GSE. 8.2. District shall reserve the right to approve any transfer of the Hospital, even to affiliates of SHW-GSE, which approval shall not be unreasonably withheld. 9. Hospital Management.9.1 A Hospital management agreement (“Management Agreement”) shall be in place before the District will execute the Public/Private Partnership Agreement. The District shall have the right to approve the Management Agreement, which approval shall not be unreasonably withheld, conditioned or delayed. The initial term of the Management Agreement shall not be less than 3 years. 9.2 SHW-GSE acknowledges and agrees that certain company officials and staff are essential to the operation and turnaround of the Hospital. SHW-GSE agrees that the personnel (“Key Personnel”), identified on a schedule to be attached to the Public/Private Partnership Agreement, shall be dedicated to the management and operation of the Hospital for the approximate time set forth on the schedule. 10. Acute Care Hospital Requirements. SHW-GSE agrees to maintain at a minimum a hospital with at least 150 short term acute care beds, OB/GYN services (subject to Section 7 above), and a 24 hour, 7 days a week emergency department. SHW-GSE agrees that it will work with DOH to satisfy all necessary District and Federal regulations. 11. Limitation on Financial Assistance. SHW-GSE agrees to limit its requests for Hospital operating subsidies to the District to the assistance outlined in this Letter Agreement. SHW-GSE agrees to maintain and extend current District public service contracts at the Hospital. Proposed changes to the contracts will be reasonably agreed to by both the District and SHW-GSE prior to the execution of the Public/Private Partnership Agreement. 12. Site Usage. SHW-GSE agrees to limit its Hospital site usage to medical, medical-related, pharmaceutical, ancillary retail uses and other uses approved by the District, such approval not to be unreasonably withheld. 13. Agreements for First Source Hiring; LSDBE Contracting and Equity Participation; and Green Building. As a condition of financial assistance provided by the District, the District requires that recipients comply with local requirements regarding hiring, small and local business contracting and equity participation and sustainable building design and construction as set forth below. 13.1 SHW-GSE agrees to enter into a First Source Hiring Agreement (“First Source Agreement”) with the Department of Employment Services, agreeing to use best efforts to meet the goal that at least 51% of new hires at the Hospital will be District residents. 13.2 SHW-GSE agrees to enter into a Certified Business Enterprise (CBE) Participation Agreement (“CBE Participation Agreement’) with the Department of Small and Local Business Development, agreeing to use best efforts to meet the goal that at least 35% of eligible contracting dollars will be spent on CBE firms and, on new real estate development projects on the Hospital site, at least 20% equity participation for CBEs. 13.3 On new real estate development projects constructed on the Hospital site, SHWGSE agrees to abide with the requirements of the Green Building Act of 2006, ensuring that new construction projects receiving financial assistance from the District achieve green building certification. 14. Other Community Benefits. It is agreed as a condition for maintaining tax-exempt property status for the Hospital, SHW-GSE shall maintain a DOH-approved Community Benefits Plan, submitted annually. This requirement shall take effect on January 1, 2011. The components of the community benefits plan must include activities such as:
15. Reporting and Auditing Requirements.15.1 SHW-GSE will provide District with quarterly reports on expenditures related to investments set forth in this Letter Agreement. 15.2 SHW-GSE will provide annual audited financials to the District. Such audited financials will be provided within 15 days of completion of such audit report. 15.3 The District shall have the right, at its own expense, to audit the financials of the Hospital on an annual basis. 15.4 The District shall reserve for itself and its representatives the right to enter the Hospital site for inspections. 15.5 The District shall have the right, at its own expense, to utilize a construction manager or other consultant to review the work completed on the Hospital site. 16. DOH Oversight. SHW-GSE shall ensure that the Hospital shall maintain Joint Commission accreditation. SHW-GSE will remain in substantial compliance with applicable regulatory and inspection requirements, or promptly shall correct any cited noncompliance, including, but not limited to those of the District, the Joint Commission and CMS. Pursuant to Section 3.3 and 3.5 above, a portion of the Capital Investment will be tied to financial, operational, and clinical performance measures to be agreed upon by the District and SHW-GSE. Failure to meet performance measures will result in financial penalties, which shall be set forth in the Public/Private Partnership Agreement. 17. SNF Beds. The District agrees to work jointly with SHW-GSE to expedite the review for the license for up to 200 skilled nursing facility (SNF) beds. The District will expedite the Certificate of Need process and move expeditiously, but cannot guarantee the results of such process. 18. LTACH Beds. The District agrees to pursue transfer or new licensing of long term acute care hospital (LTACH) licenses required for the Hospital. It is District’s understanding at this time that the Federal Government does not allow an entity to provide acute care services and also provide long term acute care services in the same facility. 18.[sic] SNF Rates. The District and SHW-GSE agree to negotiate in good faith on Medicaid rates for skilled nursing facility patients at the Hospital site. 19. Certificate of Need Fees. The District agrees to cap Certificate of Need fees allowing for one payment of $300,000 to cover the Certificate of Need process contemplated hereby subject to the approval by the Council of a corresponding amendment to the applicable statute. 20. Cardiac / Dialysis Services. The District agrees to work jointly with SHW-GSE to expedite the review for the license for reactivation of existing cardiac cath lab services and outpatient dialysis services at the Hospital. The District agrees to expedite the Certificate of Need process and move expeditiously, but cannot guarantee results prior to going through the review process. 21. Radiology Services. The District agrees to work in partnership with SHW-GSE to expedite the review for the license to upgrade radiology services. District agrees to expedite the Certificate of Need process and move expeditiously, but cannot guarantee results prior to going through the review process. 22. Non-Binding Effect. This Letter Agreement sets forth the parties understandings of the terms and conditions pursuant to which the District and SHW-GSE would enter into a public/private partnership to support the important mission of the Hospital; however, it is not a binding contact obligating either party to undertake specific actions. Legally binding documentation required to implement such a public/private partnership must be made in conformance with applicable District law, including authorization by the Council where appropriate, and appropriation of required funds pursuant to applicable law. 23. Amendment. The terms of this Letter Agreement shall not be amended except by written agreement signed by both parties. IN WITNESS WHEREOF, the parties have executed this Letter Agreement as of the date first written above. DISTRICT OF COLUMBIA SPECIALTY HOSPITAL OF WASHINGTON – GSE HOLDINGS, LLC |
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