Jefferson Healthcare commissioners agreed June 20 to authorize Chief Executive Officer Mike Glenn to cinch a deal to pay Jim McCarron $7,480,000 for a two-story building the hospital has been leasing for two clinics.

The building, at 915 Sheridan St., is across the street from the Port Townsend hospital and has been the source of discussion since 2007.

Commissioner Jill Buhler recused herself from voting on the deal because she and her husband, John, have been friends with McCarron for decades and had entered into a business partnership in a commercial building in Port Townsend with McCarron. She said that was subsequently dissolved by the building's sale. Buhler said she wanted to avoid any “hint of impropriety.”

Minus Buhler, the board voted 4-0 to purchase the building.

Commission chair Marc Mauney said the hospital district would be hard pressed to build a medical space for the same price as McCarron was offering to sell the building for today. The hospital commission voted to buy the building in 2007 for $5 million, but backed out of the deal. McCarron then finished out the basement, and the hospital signed a lease in 2009.

Appraisal price

Glenn was asked to respond to why the district would be willing to pay $7.4 million now for a building assessed by Jefferson County at about $2 million.

Glenn acknowledged that the appraisal done by Clarke, White & Veenstra of Edmonds was different than the county assessor’s evaluation, which is typically lower than a sales price. Glenn said the company had used both an income-based approach to its appraisal as well as recent sales.

Glenn said the assessed value of the property has “nothing to do” with the hospital’s business decision.

Both Glenn and Chief Financial Officer Hilary Whittington, who crunched the numbers of the proposal and did what she called an extensive due diligence on the proposal, recommended the hospital buy McCarron's building.

Whittington said the hospital would realize a cash savings of more than $197,000 over the course of the 15-year deal buying the property instead of leasing it. The hospital still has eight years to go on its lease.

After the building is paid off in 2027, the annual cash savings would be more than $735,000 per year, assuming the existing leases and forecasted maintenance expense.

There are other financial incentives for the hospital to purchase the building, Glenn said.

“In addition to being located across from the hospital, 915 Sheridan qualifies as a rural health clinic,” he said. “Rural health clinic status allows Jefferson Healthcare to receive cost-based reimbursement for services provided in the clinic. Because of this, Jefferson Healthcare can continue to meet the growing primary care needs of our community,” Glenn said.

The hospital currently is paying $8,311 a month to lease 3,700 square feet for Jefferson Healthcare Primary Care and $22,474 a month to lease 9,750 square feet of the building for Jefferson Medical and Pediatrics.

The top floor of the building the hospital plans on buying

is leased to the state Department of Social and Health Services (DSHS) and the Olympic Area Agency on Aging (O3A). DSHS’s lease expires in 2015.

The deal gives McCarron $850,000 up front in cash and McCarron will carry a 15-year note for the balance. McCarron gets 5.175 percent interest on the note.

The hospital could not prepay for at least 10 years.

Glenn also indicated June 20 that the Madrona Hill Offices at 2500 W. Sims Way, which was purchased in 2011 for $2.4 million, according to Westerman, was included in the Clarke, White & Veenstra sales comparisons. Glenn told the Leader June 19 that there were no sales comparisons in Jefferson County in that. Glenn said in an email query June 21 that he misspoke and that he the Madrona sale had been included in the appraisal but then couldn’t confirm it while going through the 90-page document on June 19.

“We will be paying less out of pocket, and in 15 years we will own it free and clear,” Glenn said of the proposed deal. “There is no question this decision makes sound financial sense.”

This story will be updated for our June 27 print and e-edition.