The Sturgis City Commission provided “forward momentum” Wednesday by voting to approve the development of an agreement between Sturgis Hospital and a potential buyer. The hospital has had extensive negotiations with Asker Corp. and “minimal” discussions with a second, unnamed potential purchaser.

City Manager Andrew Kuk began discussions by providing the history between the city and Sturgis Hospital as it relates to bond payments. In 2004, the City of Sturgis agreed to a lease with the newly-created Sturgis Building Authority for improvements to the hospital and the issuance of bonds to pay for those improvements. The rental payments payable under the lease were security for the bonds issued by the Building Authority to finance improvements to Sturgis Hospital, which at that time was owned by the city.

In 2009, as part of the sale of the hospital by the City of Sturgis to Sturgis Hospital, Inc., the city and hospital entered into a sublease agreement. Under this agreement Sturgis Hospital, Inc. would pay rental payments to the city in the amount of the bond payments, which the city would then transfer to the Sturgis Building Authority to pay the bonds. This sublease was secured by a mortgage and security agreement which pledged certain hospital property and equipment to the city if Sturgis Hospital were to default on the sublease. This sublease was amended in 2014 as part of a refinancing of the bonds. 

“Currently the outstanding debt service owed on the bonds is $8,567,631.25. The bond issuance requires that the hospital operates as a non-profit,” Kuk told commissioners. “Recently Sturgis Hospital indicated they were in financial difficulty and provided notice they would not be in a position to pay the next bond payment due in September. In addition, they indicated they were discussing multiple options for the sale of the hospital with interested third parties.”

Sturgis Hospital has now involved the city in discussions with the third parties regarding the sublease agreement, and how it may be assigned or restructured as part of a sale or bankruptcy agreement with the hospital. Kuk said ultimately the hospital has the final say in negotiating the sale, as discussion of the sublease is only one portion of the negotiations. “What we are talking about is merely the terms on our bonds,” Kuk said, “and, as part of that, facilitating the sale.” 

Kuk said there have been extensive negotiations with one third party, Asker Corp., which he said he could name in open session because he had discussed it with Asker prior to the meeting. He said there have been more “minimal” discussions with a second potential purchaser, but no response has been received after proposals of where the hospital needs to be in regards to bonds were sent. “I’m told they may still present something. I don’t think any action we would take here tonight would prevent us from looking at those proposals and further considering them,” he said. 

“The one proposal we have on the table from Asker Corp. is for a structure whereby the city would receive $1.5 million upfront, more than likely to be structured upon closing with our agreement with the hospital and with Asker Corp.,” Kuk said. “We would receive an additional $1.5 million over five years.”

Kuk said there would be a security lien on the assets of the hospital if Asker Corp. were to default on the terms of the agreement. “This is the counteroffer from Asker Corp. to one of our proposals, and I think it’s very much in the neighborhood of what we are looking at as far as a deal, based on market conditions,” he said. 

Kuk then passed the discussions over to John Elliott of Blue Rose Capital Advisors to provide commissioners with an economic analysis from the city’s perspective of the various potential acquisition transactions. “These analyses are based on the information that was made available to the city and to us at Blue Rose, and they reflect both that information and the current state of negotiations,” Elliott said. 

“There are three basic scenarios. The first is for for-profit acquisition. Scenario two at this stage is a hypothetical, non-profit acquirer. Scenario three would be no transaction at all. That would be where the city would take on the hospital and the equipment, and the Grobhiser Medical Office building, and seek to sell them at an assumed sale date.”

Elliott said the best option would be scenario two — the non-profit acquirer. “We want the least cost to the city,” he said. “We compare these scenarios across each other by showing the net present value. We want to try to pick the smallest negative number possible.” Elliott said among the options (removing the non-profit option) the for-profit acquirer in scenario one would be the next best option for net present value.

According to Elliott, some of the factors going into this analysis were the promises of the buyer in terms of upfront cash and cash flows over time. “These would cover the debt service or potentially decrease any refinancing amount that would have to be carried out,” he said. The other factors going into the analysis were any other ongoing costs to the city over the course of time in terms of expenses. 

Elliott said in his depiction of scenario one, Asker Corp. is offering a $1.5 million payment at the time of sale, and $1.5 million stretched over five years, which would help to cover the debt service costs over that span of time. “Because it is a for-profit buyer, you would have to refinance the existing tax-exempt debt,” he said. “In this case, we would put money aside, the bank would pay the interest for the tax exempt bonds, and then we would refinance the remaining outstanding amounts at the call date. This would have to be done at the time of sale, because the tax exempt debt has to have a tax exempt non-profit basis to it.” He said one of the downsides in the increased cost is there would have to be a taxable issuance at the time of sale for a non-profit acquirer. 

Mayor Jeff Mullins asked Elliott, “If we do get a buyer with a deal or money to make a deal, we’re going to send financial documents to you, correct? Will you be the one analyzing that, as well? And could that change any of this at all?” Elliott said Blue Rose would be happy to do that for the City of Sturgis and formulate a business plan, and said that plan would help the city better assess the risks of that potential buyer as well as their ability to follow through with making payments.

“At this stage you’re interested in the buyer’s promise — for example, $1.5 million in payments over five years,” he said. “We want to know under what circumstances they’re going to be able to actually make that happen. What are the risks associated with those future cash flows, and how might those be impacted if the hospital is run by Asker and they are unable to make those payments.”

Kuk said Blue Rose would not necessarily change the nature of the deal unless they found it was too risky. “But if the hospital chose to sell to them, we would be stuck with that decision?” Mullins asked. City Attorney TJ Reed said, “Theoretically, the hospital can do whatever they want. They are their own entity, and they have the right to make whatever decision they so choose. But there are repercussions based on the current sublease agreement that the city would have remedies for, and we are secure. If they buy without an agreement with us, they would have to assume the sublease if it was sold to a non-profit.”

Moving forward, Kuk read to the commission what the terms of a potential motion would be: “The commission would be authorizing the city manager and city legal counsel to develop an agreement with Sturgis Hospital and Asker Corp. regarding reduction of payments and amounts owed to the City of Sturgis under the current sublease agreement with Sturgis Hospital, Inc. in the amount not less than $3 million and terms of payments extending no more than 60 months and with a lien on assets to secure payment.”

Kuk said the agreement would also be subject to full review of financial information from Asker Corp., which they have indicated they would be providing. “You would then look to have Blue Rose review that financial information to provide further security,” he said. “Lastly, when a final agreement was complete with details on things like the lien of assets and all those elements, it will be brought back for final approval to the city commission.”

Kuk wanted to be clear this was not the city making a final deal on the hospital. “This is our piece of the puzzle,” he said. “Sturgis Hospital, Inc. has a transaction they need to complete with this buyer or another buyer. This is not us locking into an exclusive deal with this buyer or a potential buyer. If Sturgis Hospital has another suitor that comes up we would continue to have discussions with them and look to bring a similar agreement back to you.”

Kuk said the commission making a decision Wednesday would simply indicate the city’s willingness to move forward with these general terms and work out an agreement with this particular buyer. “It just provides some further forward momentum,” Kuk said.

The commission voted unanimously to approve the decision. 

Beca Welty is a staff writer and columnist for Watershed Voice.