Another tax-giveaway goes to a local developer

March 28, 2013

I write about cities and states doing all kinds of unsound things with their money, but I am shocked as I watch my own very small community get bamboozled by a local developer. Here is the story from our exceptional local paper The Observer:

The developer of a three-story addition to Northern Dutchess Hospital in Rhinebeck is seeking to make the expansion tax-exempt for its first seven years.

Developer Jeff Kane of Kirchhoff Medical Properties explained during a public workshop with village officials Feb. 13 that his company will lease part of the hospital campus from HealthQuest, which owns the hospital, while building the 75,000-square-foot, $30 million addition.

Once completed, Kirchoff plans to lease the second and third floors back to the hospital and lease the first floor to individual medical groups.

Because the hospital itself is structured as non-profit (it provides a minimal amount of charity care) the portion that it leases from a private developer would be tax-exempt. The remaining floor of the building would be retained as a taxable property, but the developer wants a payment (a PILOT) in lieu of taxes for it.

PILOTS are almost always used by non-profit schools and hospitals – “Eds and Meds” – to support the towns or cities where they are located. This deal is structured very much like one that I wrote about last April in Syracuse, New York where a developer bought a small strip of land from Syracuse University, built a $20 million new building and retained the lease revenues for the book store. The upside for the developer: $1,920,000 in PILOTs instead of property taxes of $11,294,000 for the term of the 30-year lease.

The Rhinebeck hospital deal is much smaller, but it involves the same “non-profit shell game”. It’s unclear if the developer, Kirchhoff Medical Properties, requires a PILOT to do the deal, and the village of Rhinebeck has not provided any analysis to the public for moving forward. What is clear is that Kirchhoff and the parent of Northern Dutchess Hospital, Health-Quest, have a very close financial relationship. In 2011 Health-Quest paid Kirchhoff $29 million as an independent contractor.


The whole situation is far too convoluted for the average taxpayer to follow, and who wants to stand in the way of the hospital anyway? But a very informed citizen, the former chair of the board of Health-Quest and Rhinebeck resident John C. VanWormer,wrote to the local papers:

The request by Kirchoff Medical Properties, HealthQuest Inc, and its affiliate, Northern Dutchess Hospital, for a PILOT, a payment-in-lieu-of-taxes, for seven years for the construction of a medical building on the campus of Northern Dutchess Hospital should not be approved by town, village, and school district officials. The granting of a PILOT is nothing more than a not-too-veiled taxpayer subsidy to a for-profit business.

Proponents of this project and the PILOT request will suggest that the grant of a PILOT will reap economic benefits to the community and without it, the building will not be constructed. In my opinion, this building will be constructed with or without the PILOT.

The real issue that needs to be addressed is the greater return on investment the developer and hospital will receive as a result of the PILOT. It is admirable that the developer is ‘gifting’ the building back to the hospital over 35 years, but what tax benefits will accrue to Kirchoff by putting the title to the property in a family trust initially and subsequently over the terms of the lease to the hospital. Do they really need additional real estate tax benefits while the rest of the community sees their property taxes rising every year? Officials should also consider the need for a PILOT program for benefit of the hospital. While the hospital is a not-for-profit, this does not mean that they don’t earn profit, just that they do not pay income taxes on it.

Lastly, officials should inquire with hospital representatives if the hospital currently leases or has plans to lease, rent or provide space to other for-profit medical practices or doctors who are now occupying or may occupy space on the campus. Is the hospital currently enjoying not paying taxes on that portion of their building or campus?

I wrote last year about some Illinois counties considering stripping the tax-exemption from non-profit hospitals that did not provide charity care. The hospitals made a quick run to the Capitol in Springfield and got some protection in state law, but the description of the Illinois hospital sounded a lot like my local hospital: a non-profit shell full of for-profit medical practices. From the original Champaign County, IL review:

Provena Covenant Medical Center allows outside, for-profit entities to use the facilities to generate personal and/or corporate profit. There are multiple outside physicians’ groups and service providers who use the hospital to serve patients. These physicians’ groups are for-profit entities that practice in the hospital and then bill patients for work done in what is claimed as a tax-exempt property. Some of those physicians’ groups that are using this property to derive a profit are as follows:

  • An outside firm provides emergency-room doctors
  • An outside group provides neonatology and pediatric doctors
  • Cardiac Surgery Associates
  • All internal pharmacy management is provided by Cardinal Health
  • MedCenter Labs provides lab testing and diagnostic imaging
  • RehabCare Group Inc
  • Sodexho Marriot
  • Neural-Surgeons and Cardiac Surgeons

Amid warnings of my own property taxes going up are schemes like this that are skirting the payment of property taxes. This kind of foolishness seems to be viral: from Syracuse to Rhinebeck and on and on. Property tax collections have yet to recover to pre-recession levels. A small part of that may lay in deals like this.

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