Important note: The following recommendation was approved by the Board of Supervisors on Sept. 22, 2015:

To:              Honorable Board of Supervisors

From:          Louise Rogers, Chief, San Mateo County Health System; Stephen Kaplan, Director, Behavioral Health and Recovery Services; William Lowell, Director of Housing

Subject:      Long-term Property-related Loans to Providers of Substance Use Treatment Services

Recommendation:

A)     Recommendation to direct staff to increase funding to the $1,000,000 emergency fund by $4,000,000, previously approved by your Board on August 4, 2015 to resolve threats to the continued operation of currently contracted providers of residential substance use treatment; and

B)     Adopt a resolution authorizing an Appropriation Transfer Request accepting unanticipated revenue and increasing the FY 2015-16 Recommended Budget for the Department of Housing, by increasing Taxes/Measure A funding in the amount of $4,000,000, increasing Other Charges by $4,000,000, designating 1% of those funds for administrative expenses, and providing up to $50,000 in funding for a consultant to assist with the evaluation of agency requests; and

C)     Adopt a resolution authorizing an Appropriation Transfer Request to move the $1,000,000 approved on August 4, 2015 from Behavioral Health and Recovery Services’ FY 2015-16 Recommended Budget to the Department of Housing’s FY 2015-16 Recommended Budget, and designating 1% of those funds for administrative expenses.

Background:

Substance use treatment providers in San Mateo County are under increasing financial stress due to decreasing revenues and increasing operating costs. Some providers that own their own properties are struggling to make their mortgage payments and contemplating selling in order to relieve financial pressures. Soaring real estate values are increasing the pressure on owners to sell their properties.

However, prospects are good for future increases in funding for residential treatment under the Medi-Cal program that received Federal approval on August 13, 2015. Unfortunately, the earliest relief to providers would come in January 2016, which may be too late for those in the most severe financial condition.

In August 2015, as an emergency measure for the most distressed providers, your Board approved the creation of a $1 million fund, with authority to disburse this emergency fund delegated to the County Manager or his designee. This fund is to be used for properties owned or leased by providers at imminent risk of being lost and/or unavailable to provide residential substance use treatment. Funding is conditioned upon the continued use of the property as a residential substance use treatment facility and any secured interests as determined by County staff.

Discussion:

Our analysis indicated that the providers have at least $5 million of existing mortgage loan obligations, and that a fund of that amount could secure the vulnerable properties and support the overall financial viability of providers. (This $5 million estimate is inclusive of the $1 million in emergency funding already allocated.)

In order to administer such a fund and evaluate provider funding requests, the County has developed the initial parameters for a lending program. A consultant would review the viability of each applicant provider, their mortgage relief or leasehold-related needs, their capacity to provide for the continued property management needs of their facilities, and the availability of other resources or programs that could assist those providers in their efforts to continue to meet their clients’ needs. This process would allow the  County to: systematically evaluate long-term solutions to the providers' mortgage debt  or lease situations; protect the County from potentially unwise capital investments;  assist providers in planning for the future facility needs of their organizations; and help assure continued access to rehab beds into the future. Consultant recommendations may include strategies for transferring ownership of buildings to non-profit property management companies, renegotiating long-term facility leases, partnerships with other organizations that would strengthen service provision, and/or the use of additional funding sources that could benefit both the provider and the County.

In the event that mortgage loans are paid off by the County through the substitution of soft debt for the existing mortgage loan, County loan terms would be 3% simple interest, deferred and accrued for 30 years, with the loans and interest forgiven at the end of the loan term if the facility has continued to operate as a residential substance use  treatment facility for the full term. Various additional terms would be included to protect the County’s investment (e.g., the provider would have the ability to transfer ownership  to another nonprofit provider if it cannot continue to successfully operate the facility). If the property is sold for a use other than for use as a residential substance use treatment facility, repayment of the County loan in full would be required. Further, if the property is offered for sale, the County would have the right of first refusal to purchase the facility.

Housing would develop loan agreements between the County and the provider for execution; a Deed of Trust and Promissory Note will be required for each loan.

Performance Measures:

The agreement contributes to the Shared Vision 2015 outcome of a Healthy Community by providing individuals and families in San Mateo County with residential substance  use treatment beds to support recovery. It is anticipated that 100% of the current capacity for residential substance use treatment beds is retained.

Measure	FY 2015-16 Estimated	FY 2016-17 Projected
Percent of residential substance use treatment beds retained	100% of current capacity retained	100% of current capacity retained

Fiscal Impact:

These Appropriation Transfer Requests will increase the Housing FY 2015-16 Adopted Budget by a total of $5,000,000 to make funding available to providers as needed. These appropriations are funded by Measure A sales tax proceeds.

Imporant note: This is a copy of the official report -- item 4 on the Boards agenda.