CITY OF VIRGINIA, MINNESOTA

AFFILIATION AND LEASE AGREEMENT

WITH

ESSENTIA HEALTH

July 10 Draft

SUMMARY OF KEY TERMS

PARTIES: /
  • City of Virginia (“City” or “Lessor”)
  • St. Mary’s Duluth Clinic Health System, doing business as Essentia Health East (“EH”)
  • Essentia Health – Virginia (“EH-VA”)
  • EH and EH-VA are collectively “Tenant”

NATURE OF AFFILIATION AND LEASE TRANSACTION: /
  • Lease of City hospital and nursing home facilities(“Medical Center”), along with transfer of most Medical Center liabilities, to EH and EH-VA (liability for intentional acts, insured liabilities and liabilities for undisclosed legal proceedings and borrowingsexcluded). (§§2, 3, 5)

TERM OF LEASE: /
  • Initial Term – 20 years (§17.1)
  • Renewal Term – 25 terms, upon 1 year prior notice of renewal to City (§17.2)

RENT: /
  • Debt service on bonds, essentially. (§18)

KEY EH/EH-VA DUTIES /
  • VRMC employees to be employed by EH/EH-VA at current rates of pay and on substantially similar dental, life, LTD, flex ben and PTO terms, with health insurance as similar as possible to current VRMC program as is permitted to a 501(c)(3). EH retirement plan to be available to employees. Benefits as of 1/1/14 for non-union employees to be identical to those for other employees of EH. (§7.1, Exhibit G)
  • Collective bargaining agreements to be honored; unions to be recognized; good faith bargaining to take place on several items. (§7.1, Exhibit G)
  • $7,000,000 contributed in capital to EH-VA by EH at closing to fund Medical Center projects. (§7.3)
  • Leased assets to be used only for local, charitable and health care purposes. (§8)
  • EH/EH-VA may not transfer rights under Lease to third party. (§17.4)
  • No dissolution or merger of EH-VA permitted. (§17.4)
  • If not provided at inception of the Lease, by between the 5th and 6th anniversary of the lease, primary care services must be provided in the Medical Center or in an adjacent building and surgical and obstetrical services must be provided 24/7/365. (§17.4)
  • Between the 5th and 6thanniversary of the term of the Lease, the combined payroll for the Medical Center and for the EH-VA clinic must be $7,000,000 greater than at inception of the Lease. (§17.4)
  • EH and EH-VA must request the City to issue revenue bonds in an amount not less than $10,000,000 within the first 5 years of the Lease and in an additional amount of $15,000,000 within the second 5 years of the Lease. (§17.4)
  • EH and EH-VA must maintain appropriate insurance for the operation of the Medical Center and the real property. (§21.1)

CITY RESPONSIBILITIES: /
  • City must be willing and able to issue $10,000,000 and $15,000,000 of revenue bonds at the times identified above. To the extent that these issues affect the City’s ability to issue bank qualified debt, a compensatory payment will be made by EH and EH-VA to the City. (§17.3)
  • City may not sell the Medical Center or the property associated with the Lease during the term of the Lease. (§24)

TERMINATING EVENTS: /
  • Tenant Termination Rights
  • Nonrenewal (§17.2)
  • Tenant termination on City failure to issue revenue bonds; however, this termination cannot take place before the outstanding general obligation bonds are paid off. (§17.3)
  • Upon Tenant exercise of option to purchase (see below).
  • Lessor Termination Events
  • If the Tenant assigns rights under the Lease to a third party. (§17.4)
  • If the Tenant dissolves EH-VA. (§17.4)
  • If the Tenant merges EH-VA. (§17.4)
  • If the Tenant sells all or substantially all of the assets of the Medical Center or EH-VA. (§17.4)
  • If the primary care, surgical and obstetrical covenants that must be satisfied between the 5th and 6th year of the term of the Lease are not performed. (§17.4)
  • If the payroll covenant required to be reached between the 5th and 6th year of the lease is not performed. (§17.4)
  • If the Tenant does not request issuance of the revenue bonds. (§17.4)
  • If more than 75% of the facility is destroyed in a casualty situation or if insurance proceeds to rebuild do not permit rebuilding within a stated timeframe. (§28.2)
  • Condemnation of the property. (§29)
  • Termination Rights of Each Party
  • If Lease becomes illegal. (§17.7)
  • Lessor or Tenant breach of the terms of the Lease.

DISPOSITION OF MEDICAL CENTER ON TERMINATION IN THE ABSENCE OF PURCHASE OPTION EXERCISE: /
  • The leased assets would be transferred back to the City, including, should the City so desire, EH-VA and its assets and liabilities, exclusive of certain EH-VA clinic assets and liabilities, along with any unspent portion of the $7,000,000 capital contribution made by EH on closing on the Lease. On termination, a calculation of the Net Asset Value (“NAV”) of the Medical Center (essentially working capital, adjusted to reflect otherwise not included amounts due to and from Essentia), will be compared to NAV at inception of the Lease. If NAV is less at termination than it was at inception, EH would make an additional payment of money equal to the difference to the City. If NAV is more at termination than at inception, the surplus or overage is provided to the City without additional payment. On termination, Essentia will promise to provide 12 months worth of transition services at its costs up to a value of $250,000, with additional transition services to be paid for by the City at Essentia’s costs. (§17.5, §17.6)

DISPOSITION ON EXERCISE OF PURCHASE OPTION: /
  • Subject to compliance with the City Charter, EH would have the right to purchase the Medical Center if the City were unwilling or unable to issue the revenue bonds and upon expiration of the initial term of the lease for a purchase price equal to the greater of outstanding long term debt or the fair market value of the Medical Center. (§25)

MISCELLANEOUS PROVISIONS: /
  • Special Indemnity. EH-VA will indemnify the City against any liabilities associated with pre-lease operations of the Medical Center. (§5)
  • Escrow. $500,000 of VRMC cash will be retained by the City as an escrow out of which to reimburse Essentia for errors in City representations and warranties contained in the Lease. Upon expiration of the period of survival for the representation of warranties (6 months), any balance in the escrow, along with interest, will be transferred to EH-VA. (§16.2)
  • Periodic Commission Meetings. Tenant will meet with Commission at least annually, furnishing financial information, operational reports and reports on compliance with service and payroll covenants. (§33)
  • Dispute Resolution. Negotiation and mediation will be the techniques used to resolve disputes, with unresolved disputes subject to judicial resolution, with the exception of disputes about the fair market value of the Medical Center upon exercise of the purchase option by Essentia. Such a dispute would be subject to arbitration. (§25.2)
  • Effective Date. Day after Closing, targeted for 60 days after signing. (§1.1, 14)

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