UPMC's sometimes controversial appetite for real estate
September 23, 2012 8:00 AM
Few examples of UPMC's history of buying high and selling low are more striking than its purchase of the Ford Motor Co. building in Bloomfield. In 2006, UPMC, which wanted to turn the building into a research center, bought the property for $10 million, even though Allegheny County estimated it was worth half that as late as 2002.
By Sean D. Hamill and Jonathan D. Silver / Pittsburgh Post-Gazette
First of a four-part series: This week, the Pittsburgh Post-Gazette will provide an in-depth look at UPMC's real estate portfolio.
Starting in 1982 in a single building that it didn't own, UPMC over 30 years has acquired and expanded most of the major hospitals in the region, built or purchased a network of 13 senior communities and hundreds of cancer treatment centers, rehabilitation and outpatient clinics and doctors' offices.
The result is that UPMC is now Allegheny County's single largest private property owner in terms of the value of that property -- bigger than PNC, bigger than Giant Eagle, bigger than U.S. Steel -- with 656 acres worth $1.6 billion based on the 2002 assessment, 86 percent of it exempt from taxes, according to a six-month review by the Pittsburgh Post-Gazette. No other charitable organization comes close, with the University of Pittsburgh a distant second with $1 billion in property.
UPMC now owns 8 percent of Allegheny County's $16.67 billion of tax-exempt land. As a purely public charity, it avoids paying a combined $42 million in property taxes in Allegheny County to municipalities, schools and the county.
But whether all of UPMC's 196 tax-exempt parcels are entitled to those exemptions is unclear. County leaders have failed to review the status of its tax-exempt properties every three years -- as required by a 2007 county law -- and their records are in such disarray they couldn't locate two-thirds of the applications for tax exemption on UPMC's parcels requested by the Post-Gazette.
PG graphic: UPMC property names (Click image for larger version)
UPMC's acquisitions have raised questions from public officials, as well as taxpayers: Does UPMC deserve exemptions on all those properties? What does having so much tax-exempt land do to the revenue streams of local governments? Should a charitable healthcare organization own the most valuable collection of private property in Allegheny County and have the financial might to buy almost any piece of land it wants at any price? And most important: Is this good for health care in our region?
State Sen. Don White, R-Indiana, chairman of the Senate's Banking and Insurance Committee, answers this way: "I don't think this is healthy, not for Pittsburgh and not for patients. It certainly doesn't do anything for the costs of health care."
Given its size and mass of tax-exempt property, state Sen. Wayne Fontana, D-Brookline, believes UPMC needs to contribute more to local governments. "The reality is it's not going to put them out of business," he said. "If you have $1.6 billion of property in Allegheny County, my goodness, and you're making $500 million of profit, and you're [paying] large salaries, it's hard to imagine you can't pay something towards it on a consistent basis."
UPMC sees it differently. The amount of UPMC's real estate transactions is but a small percentage of the health system's revenues, or charity care, or investments in equipment and facilities, and other spending, UPMC spokesman Paul Wood wrote in an email response to questions from the Post-Gazette.
"UPMC's mission is to provide the community with superb health care while at the same time driving the local economy, which the record clearly indicates we've done, and will continue to do, exceedingly well," he wrote.
Yet how UPMC acquired all of its land reveals an aspect of the character of the healthcare organization that is not dissimilar to the image UPMC CEO Jeffrey Romoff has long fostered of himself and his company: aggressive, quick to react and, above all, driven by competition.
Unlike many of its predecessor independent hospitals -- such as Mercy, Montefiore and Passavant -- which, for decades, methodically bought land when it came up for sale at or near market rates adjacent to their campuses, UPMC employs a very different strategy.
UPMC moves quickly when it targets specific parcels of land, whether they are on the market or not, a strategy more akin to, say drugstores, which regularly demand corner locations on busy intersections and move fast to head off competitors.
Armed with annual profits in the hundreds of millions -- and no shareholders to pay dividends to -- UPMC turns the ideal buy-low, sell-high strategy on its head. According to the Post-Gazette review, it almost always buys high to ensure that it gets the property it wants. And, if it changes its mind about a location it had previously bought, it quickly unloads the property, almost always at a loss.
Part of the reason it loses money on sales is that it pays prices that developers, real estate professionals and sometimes the sellers themselves concede were well over market rate.
Other local nonprofit institutions like Carnegie Mellon and Duquesne universities have developed a similar reputation for paying premium prices for land adjacent to their campuses -- though none of them have land holdings as large or spread out as UPMC.
In addition, UPMC has developed a reputation of paying so much more than market value that it drives up the expectations of other sellers in neighborhoods it targets, according to real estate experts and local officials.
"I would say UPMC has a lot of influence over the commercial real estate market," said Mark Anderson, vice president of Pennsylvania Commercial Real Estate in Pittsburgh.
Case in point: In 2006, UPMC targeted the former Ford Motor Co. building on Baum Boulevard in Bloomfield. UPMC wanted to turn the building, located not far from UPMC's Hillman Cancer Center, into a research center. But the building's owner since 1969, the late Murray Reidbord, had it rented out and did not want to sell.
So Mr. Reidbord put an exorbitant price tag on the property of $10 million -- many times the $487,500 he paid for it in 1969 -- daring UPMC to buy it.
UPMC didn't blink.
The $10 million sale, said Pittsburgh Councilman Bill Peduto, who represents East End neighborhoods, had a chilling effect on the local real estate market because potential sellers wanted to hold out for more money from the healthcare giant.
In another example, UPMC paid $10 million in 1991 for 2 acres under the former Syria Mosque in Oakland -- a price that may have been the highest ever paid per acre in the city at the time, said Greg Hand, a developer who orchestrated the deal.
The purchase led to the demolition of the cherished concert hall and a battle over historic preservation. Plans were to build two office towers on it, but there were delays. So it would "temporarily" be used as a parking lot.
Twenty-one years later, it's still a parking lot -- and tax exempt.
Of course, buying property for more than the previous owner paid is not unusual in the Pittsburgh region, which has had a steadily improving real estate market for two decades.
But regularly selling it at a loss is less common. UPMC lost money or broke even in 20 of 27 transactions in which it sold land that it had purchased -- not land that a predecessor hospital had bought. In 11 of those 20 cases, it sold the property for $1 to Allegheny County, the city of Pittsburgh, community groups or senior homes. The losses range from a couple thousand dollars to millions.
In one well-known case, UPMC lost more than half of what it paid for an old church across the street from Allegheny General Hospital.
UPMC bought the church from Joseph Maroon, a prominent neurosurgeon and concussion expert, in 1999 at the same time it lured him from his post at AGH.
Dr. Maroon paid $70,000 in 1986 for the century-old brick church on Parkhurst Street, but sold it for $974,000 to UPMC in 1999. UPMC sold it to a community church group in 2004 for $410,000 -- at a loss of $564,000.
UPMC's staunchest critics cite its land-buying strategy as typical of the way it conducts much of its business: seven-figure executive salaries; multimillion-dollar advertising budgets; and the lease of some of the most expensive office space in the region in the U.S. Steel Tower for its central administration.
"At this point the only difference between a nonprofit health insurer or hospital and for-profits is [nonprofits] don't have to share their profits with shareholders," said Titus North, executive director of Citizen Power, a Downtown-based healthcare advocacy group.
Mr. Hand, former vice president of development and construction for National Development Corp., which worked with UPMC on developments in the 1990s, says, "What might look like a bad real estate deal to us, in the whole scheme of things, real estate is a small percentage of their business."
That explanation doesn't make sense to Gerard Anderson, director of Johns Hopkins University's Center for Hospital Finance and Management.
"Why would they lose money [after selling] a land acquisition? They try to maximize their MRI revenue and their hospital activities. Why wouldn't they maximize their revenue on land? I don't understand it," Mr. Anderson said.
From UPMC's point of view, the strategy it has used to acquire property over the past 30 years, has been a small but necessary part of all the good it has done for the region.
While refusing to discuss specific transactions or to make UPMC's senior executives available for interviews, UPMC spokesman Mr. Wood wrote in an email: "It's important to understand the re-emergence of Western Pennsylvania's economy has been driven by the not-for-profit sector. It's not just a coincidence this has happened, but rather a wise use of tax policy to foster economic growth.
"State, county and local governments often provide significant tax breaks and subsidies to for-profit businesses that offer to relocate their businesses or threaten [to] move their businesses. But, at a fraction of the tax cost, the region's not-for-profit 'Meds and Eds' sector has created and is sustaining tens of thousands of good jobs and billions of dollars of economic activity."
UPMC cites the $565 million in charity care and other community benefits it provides to the region, plus the $100 million pledge over 10 years to The Pittsburgh Promise. The Promise provides eligible graduates of Pittsburgh Public Schools up to a $10,000 a year in scholarships to colleges and trade schools in Pennsylvania.
Still, government leaders question whether it's a good thing that the region's biggest employer and largest private landholder is a charitable healthcare organization that has taken millions in property off the tax rolls.
"That's a very, very dangerous trend for local government if things remain the way they are," said Allegheny County Controller Chelsa Wagner, who released a study earlier this year looking into all of the county's tax-exempt properties. "The fact that UPMC has so many properties really requires us in government to look at the fact that this is a very different environment now."
Allegheny County Executive Rich Fitzgerald has his own views.
"UPMC provides a lot of jobs, a lot of investment," he said. "I've watched what they've done in Lawrenceville, Bloomfield and Oakland, helping revitalize neighborhoods. But [the impact] is a mixed bag, I guess. It's an open question."
The $1.6 billion figure for UPMC's land holdings in Allegheny County is about $300 million more than prior studies have calculated for the holdings, including Ms. Wagner's report. The Post-Gazette's figures are higher, in part, because they include the $71.4 million value of UPMC St. Margaret hospital (which is on land UPMC leases from the city of Pittsburgh. However, UPMC pays the taxes for the taxable portion of the land). The other, larger reason is that other studies have not tracked down all 46 different names under which UPMC owns land, including such obscure names as Coolock Enterprises, Keystone Development and Pittsburgh NMR.
UPMC also owns at least $140 million in property in five other Pennsylvania counties where it has acquired or merged with other hospitals, most recently buying Hamot Medical Center in Erie.
(The Post-Gazette used 2002 assessment figures for this series because UPMC has challenged a quarter of its 2013 assessment values, and the county is still correcting more than 30,000 errors, some which affect UPMC properties. When using the county's 2013 reassessment values, however, UPMC's land holdings would jump to $2.5 billion, of which 80 percent are tax-exempt.)
Several people who have worked with UPMC said deals in which it quickly bought up land and paid high prices for targeted areas are no different than, say, how PNC quickly bought up half a block Downtown for $20 million to build its new headquarters.
But Nicholas Cafardi, dean emeritus and professor at Duquesne University's Law School and an expert on charity law, said that misses the point.
"That argument makes a lot of sense for [PNC]. But that argument doesn't make a lot of sense if that nonprofit pays a lot for land to turn it into tax-exempt parking lots. How is this affecting our tax flow? How's that affecting development?" he asked.
Of UPMC's 353 parcels of land in Allegheny County, almost a quarter of them are officially listed as "vacant" by the county, awaiting development, while another 12 percent are, like the Syria Mosque site and multiple parcels in the East End and Uptown, used as parking lots.
Having so much vacant or potentially developable land sitting on its ledgers makes UPMC rare among the country's academic health centers that it so often compares itself to, said Mr. Anderson of Johns Hopkins.
"Some do hold land in their core communities because they know they want to expand. But hanging on to disparate parcels is unusual," he said. "I don't think you'd find academic medical centers are buying things for expansion and just holding them like that."
One lingering question that defies a clear answer is how much of UPMC's exempt property actually deserves a tax break.
Earlier this year, the Pennsylvania Supreme Court issued what many charity experts viewed as a landmark ruling that raised the bar for what constitutes a "purely public charity."
For the past 15 years, many believe the standard was Act 55, a 1997 state law that, depending on your view, either lowered the bar, allowing almost any charity to qualify for tax exemption, or simply clarified what the standard was.
But the Supreme Court in April said Act 55 was not the standard. Instead, it said that standard was its own 1985 ruling, commonly known as the HUP test, short for Hospital Utilization Project.
That test set five criteria for an organization to be deemed a purely public charity, criteria supporters thought was tougher than Act 55 and opponents derided as too vague.
If the HUP test is the law of the land, some charity experts believe it brings into question whether large, rich corporations like UPMC are charitable generally and whether their property is being used for the charitable standards set forth in the HUP test.
Like many charities, UPMC owns many properties -- some office buildings, some garages -- that are "prorated," meaning they have both taxable and exempt portions.
But prior to Act 55, the state allowed proration of only properties containing concert halls, said Mr. Cafardi, the Duquesne dean emeritus.
"The HUP test says you have to be a purely public charity," he said. "Doesn't 'purely' mean 99.9 percent pure? That could be a very serious issue. The smallest non-charitable use could make the entire parcel taxable."
In addition, after decades of poor record-keeping, Allegheny County can't say why most of UPMC's 196 exempt parcels have the exemptions the county granted.
Five years ago, Allegheny County Council approved an administrative code requiring the county's chief assessment officer to review each of the county's approximately 26,000 tax-exempt properties every three years to determine if the property still should be exempt. But it's never been implemented.
Mr. Fitzgerald, then county council president, supported the legislation, and vows now to push forward with the law. "My intent is to try to get everybody who should be paying taxes to pay taxes."
Ultimately, he said, he wants the county to challenge UPMC and other charities to prove they deserve their tax breaks.
"My desire would be to be aggressive in that regard," he said.
"It's something we as representatives of all the other taxpayers should provide."