The Lease Among Us (2).
By Jim Conley • Sep 23rd, 2007 • Email This Post to a Friend •
Print This Post
• Email this author
Archie’s taken a look at the ground lease proposal between the Brookline Selectmen and Children’s Hospital and calls it a “doozy.” His analysis runs below:
Jim,
I have read through the ground lease and it’s a DOOZY! Over the past 50 plus years I have reviewed and negotiated a fair number of commercial real estate leases, mostly for tenants. This one is unique.
You may recall that the Web$ter Street hotel ground lease was once touted as the model to be used for the B-2 parcel. But that is clearly not the case. With the hotel parcel, the Town had long owned and used the site for public parking, whereas with the B-2 parcel the Town is to become owner presumably for token consideration (the usual $1.00 and other valuable consideration) for the primary purpose of avoiding ownership by a non-profit that might under MA statutes be entitled to a – horror of horrors – property tax exemption.
It seems that this was part of the arrangement with the private owner of the B-2 parcel in obtaining an upzoning of the block in which the B-2 parcel is located, with actions by Town Meeting, the Board of Selectmen (BOS) and the MA Legislature (for leasing authority). The private owner planned to develop a Level 2 lab on the parcel and the zoning change by Town Meeting accomplished this. As this was happening, there was concern that the private owner might just sell the developed facility to a non-profit that might be entitled to a property tax exemption. Complicated documents were executed between the Town and the private owner to accommodate the arrangement whereby the private owner would sell the parcel to the Town which would then lease it back to the private owner, now as tenant, to then develop the Level 2 lab.
The private owner decided to cash in on the site and negotiated with Children’s Hospital. This required the Town to now deal with Children’s, so that the original agreement between the private owner and the Town was supplemented and requiring negotiation of aTri-Party and Escrow Agreement bringing Children’s into the picture, as there had to be addressed an environmental situation associated with the site complicating the proposed transactions. (Even more documents seem to be involved, particularly with respect to certain easements, etc, involved with adjoining parcels in the B-2 block.)
So basically the deal represented by the lease is aimed at keeping the development on the B-2 parcel non-exempt from property taxes. That appears to be the primary, and perhaps sole, reason for the Town “purchasing” the parcel. This is despite the Massachusetts policy of providing property tax exemption for certain charitable non-profits. Perhaps the deed of the parcel to the Town may set forth some additional consideration involved with the purchase. An arrangement such as this might be considered against public policy and thus not enforceable.
At some future point Children’s or a successor non-profit may take the position that the ground lease is not a lease but rather a freehold interest. (If it walks like a duck, quacks like a duck and looks like a duck, then perhaps it is a duck.) If this works, the technique might be adopted by other MA municipalities being starved by tax exempt non-profits.
With that background, my preliminary comments on the ground lease are set forth below, which you may share with visitors to your Blog (which may include Selectmen), to consider as the BOS addresses the matter at its Tuesday, September 25th meeting.
1. The opening paragraph names the Town as a party “… acting by and through its Board of Selectmen, without personal liability for any of the members thereof ….” A similar personal disclaimer appears in the last paragraph of Section One concerning zoning changes/relief the Tenant (Children’s) might seek. Do these disclaimers suggest that otherwise members of the BOS could be personally liable? Are such disclaimers now common on legal documents committing the Town as a party? It seems our Selectmen are gun-shy, lacking the confidence of competence.
2. The second paragraph of Section Four reads:
“Upon execution of this Lease, the Town shall proceed with diligent efforts to receive authorization to (a) extend the Term for another 95 years or (b) sell the Property to the Tenant in accordance with the provisions of this Section Four.”
So this means that promptly after the execution of the lease, the Town, via the Selectmen and Town Meeting, is to diligently proceed to extend the lease term by providing Children’s with an option for an additional 95 year term. What if Town Meeting balks? Or the Massachusetts Legislature refuses to authorize the additional option term? After all, Town Meeting and the Legislature are independent of the BOS, and are not parties to the lease. Might Children then take the position that it then has the right to purchase the property for $1.00, and as a non-profit owner claim property tax exemption? (By such a sale, the Town would be recouping its investment in purchasing the parcel from the private owner.)
3. The second paragraph of Section Six proscribes the use of a Biosafety Level lab “in excess of Level 2 as defined by the U.S…..” Since the Town has no control over definitional changes by federal authorities, shouldn’t this proscription be tied-into the “current” definition?
4. The last paragraph of Section Seven dealing with rent provides for additional rent of $500,000 per annum if Children’s fails to commence construction within a certain time period. If Children’s does so fail, then this additional rent of $500,000 will be due each remaining year of the term of the lease whether or not the construction is commenced or even completed. But let’s say that Children’s commences construction on time. There is no provision requiring Children’s to complete construction by any particular date, with or without some reasonableness or diligence standard. Keep in mind that the property taxes – excuse me, rent – on the property would not be adding much to the Town’s coffers until construction of the project is completed or substantially completed. So technically, Children’s could avoid the fixed additional rent of $500,000 per annum by commencing construction – a spade in the ground? – on time and then taking its time to complete. In any event, Children’s entity as tenant is a limited liability company with who knows what assets to pay the Town the rent (taxes).
5. Section Nineteen addresses defaults. Paragraph F. provides for interest on “monetary default” at prime plus 1%. To the extent that such “monetary default” relates to the rent in the nature of property taxes, shouldn’t the interest rate on such default be the same as for property owners who default on their tax payments? Some property owners would like the benefit of prime plus 1% and perhaps defer their tax payments.
6. Section Twenty-Two has the heading “Bankruptcy” but is noted as “Intentionally Omitted.” It is a rare true lease that does not address bankruptcy. Why isn’t it addressed here? It isn’t unheard of for Boston area hospitals to have serious financial problems. Perhaps a cynic might suggest a “Sanity Clause” even if a non-believer.
I hope you keep your post up front on your Blog at least through next Tuesday for additional comments, by me and others, that might be considered as the BOS considers the matter. Now, is this a lease or a duck?
Archie Mazmanian
Jim Conley is publisher of On Brookline.
Email this author | All posts by Jim Conley
It’s good to have Archie’s comments on the lease and also that Jim has a link to the lease. I’m not a lawyer. But I note that the Town Counsel’s office has been working on this since 2004 and probably has it right.
I am not carrying water for tax-exempt non-profits. I am well aware of their contributions to our society. But such tax-exempt status, especially in conjunction with zoning’s Dover Amendment, can serve to harm a community, fiscally and otherwise, and the many of us who are required to pay full freight. There are serious issues with tax-exempt non-profits in Brookline, as well as adjoining Boston, Cambridge and Newton and other Greater Boston communities.
The Urban Institute has an extensive article on tax-exempt non-profits at:
http://www.urban.org/books/PropTax/intro.cfm
describing a 2002 publication titled “Property-Tax Exemption for Charities, Mapping the Battlefield,” edited by Evelyn Brody, laying out the serious issues to be addressed.
These issues should be addressed head-on, and not by cute, gimmicky, back-door approaches, such as the current sale/leaseback arrangement for the B-2 parcel. The Town’s approach is short-term, even assuming that it turns out to be successful. Back room deals between a municipality and a tax-exempt non-profit must be examined in bright sunlight. Keep in mind that the fiscal and political clout of some tax-exempt non-profits can be comparable to large for-profit corporations.
So how much sunlight will shine at the Selectmen’s meeting tomorrow evening on this matter? Will there be a formal (written!) legal opinion, whether by Town Counsel or its outhouse counsel, blessing the legalities of the various documents for these complex transactions? If not, why not? After all, these are not normal, every day transactions entered into by a municipality. While John Bassett is not an attorney (he has told me this numerous times), even he might understand the importance of such a legal opinion; presumably (hopefully?) the three attorneys on the Board of Selectmen will. If there is, or will be, such a legal opinion, I would be interested in reading it and shining some light on it. Since John puts his faith in Town Counsel’s office, does this suggest he may not have read the lease or doesn’t understand it? As I recall, John was most active in bringing about the Level 2 lab zoning change for this parcel, perhaps accounting for his faith.
I wonder if the Selectmen (especially the three who are attorneys) will have read the several documents the Board is to consider at tomorrow evening’s meeting BEFORE the meeting rather than rely upon a brief run down by Town Counsel or outhouse counsel. If the Board votes to execute these documents, can we take this as a representation by each of the signing Selectmen that he/she read and understood them?
I wish I shared John’s faith in Town Counsel Jennifer Dopazo. This is a complex transaction involving a complex piece of property. Under the circumstances, the Town would be well served to have a thorough review of this contract - in the full light of day.
After reading Archie’s
“As I recall, John was most active in bringing about the Level 2 lab zoning change for this parcel, perhaps accounting for his faith.”
I have no faith in his memory and accuracy. He has it 180 degrees wrong. I was most active in opposing the zoning change.
Still, I will read with interest
http://www.urban.org/books/PropTax/intro.cfm
If we must have such a big building at 2/4 Brookline Place the Town should at least get the equivalent of tax revenue while not being financially responsible for any environmental clean up.
I was aware that John Bassett voted against the zoning change but after it went through, John, being the longtime loyal insider that he is, offered his support because of the revenues that the Town thought would flow. John kept his feet in both camps to maintain his role as protective of neighborhood interest and seeing the “big picture” of insiders who follow EDAB’s lead. (Wasn’t Sperber John’s campaign manager when he ran for Selectman several years ago?)
By all means, getting as much tax revenues for “such a big building” is always appropriate but do the ends justify the means when a convoluted process is utilized to thwart MA policy regarding tax-exempt non-profits? Maybe John enjoys loopholes. But loopholes don’t always work. As for the environmental clean up, did the Town create the problem? If not, the Town should not be financially responsible for the clean up; but the convoluted transactions brought the Town into the picture by way of token ownership.
And John, I’ll test my memory with yours anytime. Do you remember the long chat we had when you were at my home during your campaign?
Archie’s distortion of my position on 2 Brookline Place is not perhaps very important. Few care what I did then. But it does suggest that he’s either lost his mind or for some reason wants to attack me. Starting in June, 2003 I was on the Project Review Team and from the beginning worked first to get more neighborhood people on the PRT and then consistently to get a smaller building. I wrote letters and spoke against the zoning amendments at many meetings, including both Town Meetings and was one of the speakers designated both times by the Brookline Village Coalition which opposed the amendments. I never supported the zoning amendments before or after they passed. This is really nuts.
Bob Sperber was one of my campaign co-chairs when I ran for Selectman in 2002, more than a year before the PRT started. He was a great Superintendent of Schools, is still a friend, and I was glad to have his support. We still disagree on the 2BP zoning amendments.
Archie evidently doesn’t believe it’s possible for friends to disagree. We did have a friendly conversation when I ran, which I don’t remember. Archie and I evidently still agree that the zoning amendments were a mistake. We seem to agree about little else.
A March 20, 2007 MA Appellate Tax Board decision holds that a limited liability company (LLC) that is controlled by a charity is not eligible for the MA property tax exemption since the statute requires that property be owned by a trust or incorporated, and the LLC is an uninccorporated organization, thus not eligible. The cases involved may be on appeal.
John and Archie -
Seems to me that you’ve both made your points in relation to how you feel about one another.