A recently published appellate case upholds a 50-year ground lease and related agreements between the Peninsula Health Care District (“District”) and the Mills-Peninsula Health Services (“MPHS”), which will allow the construction of a new hospital that complies with California’s stricter seismic standards. (See Peninsula Guardians, Inc. v. Peninsula Health Care District (2008) 168 Cal.App.4th 75.)

Plaintiff Peninsula Guardians, Inc. sued the District and MPHS alleging that a 50-year ground lease between the District and MPHS violated Health and Safety Code section 32126, and that the District had made illegal campaign expenditures in the course of obtaining voter approval of the arrangement. Health and Safety Code section 32126 limits the leasing authority of public health care districts, and states that “[n]o lease for the operation of an entire hospital shall run for a term in excess of 30 years.” Peninsula Guardians claimed that the 50-year ground lease violated that provision.

The trial court held that the District and MPHS did not violate the Health and Safety Code. “First, the express terms of the Ground Lease demonstrate that it is not a lease for the operation or maintenance of a hospital.” Instead, it is a ground lease that specifically excludes improvements, which improvements are owned by MPHS until the end of the ground lease term. “Second, the Definitive Agreements demonstrate that the Ground Lease does not involve a hospital ‘acquired or constructed’ by the District.” Peninsula Guardians had advanced an argument that the statutory lease restriction also applied to hospitals acquired or constructed by the District, but the appellate court noted that the agreements actually stated that “MPHS, not the District, ‘will design and build’ a new general acute care hospital on roughly 21 acres of land leased from the District.”

The appellate court affirmed the trial court’s ruling which dismissed the Health and Safety Code claims against the District and MPHS from the case. Other issues regarding campaign expenditures were remanded to the trial court for further consideration.

History of District’s Relationship with MPHS

In 1985, the District and MPHS each owned an acute care hospital serving residents of the San Francisco Bay Area Peninsula region. To improve service and efficiencies they agreed to merge the operation of the two hospitals, with the District leasing its existing hospital to MPHS from 1985 through 2015, at which time ownership would revert to the District.

Like most entities operating hospitals within the State of California, California’s adoption of stricter seismic standards for acute care hospitals required a re-evaluation of their arrangement. This was particularly the case when those parties determined that it made more sense to build a new hospital than retrofit the existing facility. The statutes addressing the stricter seismic standards can be found here.

A series of complex agreements were reached to allow MPHS to demolish the existing hospital and return the site to the District and to design, finance and build a new hospital, all at no cost to the District. The District would provide a 50-year ground lease of the District’s land to MPHS, that could be extended for an additional twenty-five year period. The District would receive rent of $1.5 million per year, adjusted every three years for inflation. The District imposed limitations on MPHS’ use of the property, although MPHS held ownership to the new hospital facility and associated improvements. Upon expiration of the ground lease the hospital automatically would become the property of the District, with certain compensation for “Post-Term Assets” specified in the ground lease.

The District sought approval of the voters in the Summer of 2006, and the voters accepted the proposed new agreement. Construction started soon thereafter, and is still ongoing. In fact, you can monitor the current state of construction of the new Mills-Peninsula Health Services Hospital by viewing the images posted here.  If you would like to see a fast forward view of how this construction proceeded over time based on construction site photos apparently taken every day during construction, click on the “Time Lapse” button at the top center of the screen. It is worth a look!

Statutory Seismic Standards

As is discussed in various other publications, California’s new stricter seismic standards have forced parties involved in health care in California to take drastic measures. These measures often times require restructuring of existing arrangements that did not take these new standards into account. While complex, the ultimate arrangement that the District and MPHS were able to enter into ultimately passed judicial muster. Nonetheless, the statutory seismic standards create ongoing challenges for health care facilities in California, many of which continue to struggle with finding the best approach to compliance.