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Questions over North Shore-LIJ trustee, $300M lease(Newsday (Melville, NY) (KRT) Via Thomson Dialog NewsEdge) Jan. 28--The North Shore-Long Island Jewish Health System is paying about $300 million to lease a major facility from its own vice chairman's real estate partnership, leading some to question how Long Island's biggest nonprofit handles potential conflicts of interest on its board. William Mack, a longtime executive committee member of the health system and one of its leading donors, is a general partner of a private-equity real estate fund that owns the former Lockheed-Martin defense plant just across the street from Long Island Jewish Medical Center in New Hyde Park. That plant and its 94 acres, then called i-park Lake Success, were bought for $20.5 million in 2000, in a deal led by Mack's son Richard. Now the Macks' partnership is leasing a third of the plant to the health system for $300 million in base rent over 25 years. When leases at i-park came under review, Mack disclosed his role as founding senior partner of Apollo Real Estate Advisors, the fund manager behind the deal, and recused himself from the process. The building, now housing a complex of outpatient programs the health system calls the Center for Advanced Medicine, has won praise for its creative design and sensitivity to patient needs, and compliments from the local business community for its innovative recycling of the World War II-era defense plant. The center includes diagnostic imaging and a urology institute as well as the Monter Cancer Center, a spacious oasis for patients undergoing chemotherapy that opened in 2006. Mack said his partnership has plowed huge sums into renovating a property that had sat unsold for five years. "I think it would have been worse of me to say, 'Don't deal with them [the health system] and meet ... the needs of the community,'" Mack said. Questions about dual role But Mack's dual role as one of the health system's most powerful stewards and its biggest landlord has prompted continuing concerns by some current and former health system officials about the propriety of the deal and the integrity of the health system's governance. North Shore is not a government agency, where a deal such as this one would be strictly prohibited as a conflict of interest. Public nonprofits enjoy more latitude, in recognition of the important role business leaders often play in funding and guiding their work. Nevertheless, nonprofit trustees are bound by law to put their charity's business interests ahead of their own, and North Shore policy forbids insiders from using confidential information for their own benefit. Mack, viewed by his peers as one of the country's shrewdest real estate investors, was chairman of Long Island Jewish Medical Center from 1987 to 1991. He and his fellow trustees took no interest in the plant during the five or six years he recalls it being on the market during the 1990s. But three years after his fund bought it, the health system took out a major lease and soon selected it over several alternative locations as the home for a new, 475,702- square-foot outpatient hub. What the laws say "It may not be illegal, but it smells bad," said Pablo Eisenberg, a senior fellow at Georgetown University's Center for Public & Nonprofit Leadership. Although federal tax law strictly bars private foundations from doing business with their insiders, public nonprofits such as hospitals face no such restrictions, said Eisenberg, who has advocated for such limits in congressional testimony. "There was a tradition in nonprofits that board members served for nothing, and they were prohibited from self-dealing. Now ... [doing business with board members] is increasingly popular." Former Goldman Sachs vice chairman Roy Zuckerberg, who led the real estate search as North Shore's chairman from 2000 to 2004, can't understand why anyone would give the deal a second look. "We need more space," he said. "I see this as a pretty simple issue." The i-park site was selected by a tenant representative through an "arm's-length" process, the health system reported in its tax returns, and the lease terms were found reasonable by an independent appraiser. Generally, spokesman Terry Lynam said, the health system goes out of its way to avoid conflicts of interest with its board members. But the health system is governed by a board of 130 of Long Island's most prominent and wealthiest citizens. Many preside over companies that sell the kinds of goods and services a hospital might want, and North Shore will deliver about $4.6 billion in health care this year -- a budget almost as big as Nassau and Suffolk counties combined. Nevertheless, nonprofit experts said several aspects of the mammoth deal should raise eyebrows. For one thing, the matter was never brought to North Shore-LIJ's board of trustees, though an attorney general's written opinion says state law requires nonprofits to do so for land deals. Instead, the lease was reviewed by the board's executive committee, which wasn't given copies of two reports on which its deci sion was based, relying instead on a short memo and one-page summary of the lease terms. North Shore has declined to release the reports, saying they contain confidential business information; it contends the attorney general's opinion doesn't apply to a nonprofit such as North Shore. Business connections Mack was one of several people who had business relationships with those involved in the deal: Zuckerberg, who led the health system's real estate review, has ties to Mack through an unrelated business: He sits on the executive committee of the $2.3-billion Mack-Cali Realty Corp., a real estate investment trust chaired by Mack, and owns 33,500 shares of its common stock. Newmark & Co. (now called Newmark Knight Frank), hired to keep Apollo at arm's length as North Shore's tenant representative, has done periodic business with that company, and Brian Waterman, one of its two principals handling the i-park talks, has listed Apollo among his leading clients. Though Mack recused himself from the matter, his son Richard, an Apollo managing partner, signed the preliminary lease term sheet for i-park in November 2004, records show. The health system said Zuckerberg's ties to William Mack through Mack-Cali are irrelevant. Waterman said he won "a very good deal for the hospital." Richard Mack said he was "barely involved" in the lease talks, which he described as lengthy and contentious. Manhattan attorney William Josephson, who headed the state Charities Bureau under then-Attorney General Eliot Spitzer, said the i-park lease deserves careful review because of its size alone. But, he said, it also calls to mind the state's 2000 lawsuit that toppled Port Authority chief Robert Boyle, the chairman of a Westchester hospital board who steered a development deal to attorney Albert Pirro in exchange for a secret partnership stake. Boyle, who had learned of property suitable for doctors' offices the hospital wanted to build, tipped Pirro to it, instead of his own board. Pirro bought the property; Boyle arranged for the hospital to lease it, pay to renovate the building and finally buy it. He received a $292,000 share of profits. Mack never concealed his role, as Boyle did, an omission that led to a civil fraud charge against the latter. But otherwise, "the facts of this transaction raise the same issues," Josephson said. "Under state law, trustees owe their charities a duty of loyalty. If a trustee has a business opportunity, he must offer it to the charity and not make an extraordinary profit in the process." Mack cites service to LIJ Mack said there was no missed business opportunity for Long Island Jewish, and he made clear he is affronted that any question might be raised about his loyalty to the health system. He said he and his son between them hold just 1 percent of the $1-billion Apollo fund that owns the i-park property. (That stake includes a general partnership interest, Apollo said, that gives the Macks control of the asset and entitles them to a potentially much larger revenue stream from the fund's growth and from management fees that Apollo declined to quantify.) "My family has worked for this institution for 50 years," Mack said of Long Island Jewish, where the Phyllis and William Mack Emergency Center was dedicated just last summer. "The level of the service and the level of the philanthropy pales by thousands any possible financial advantage we could gain." Mack rejected any suggestion that the hospital might have struck the same $20.5-million deal Apollo did, instead of the $300-million one the health system has now. "You have to understand there was no requirement from Long Island Jewish or need [in the mid-1990s]," Mack said, recalling no space shortage during the five or six years he knew it was on the market. Zuckerberg remembers it differently. "Good hospitals kind of always have space problems," he said, and Long Island Jewish "was always full." But the old defense plant "was much more space than we needed ... and second of all, it was a mess. ... I think it needed a real estate entity that has experience dealing with issues like this." Mack said buying the defense plant "was never presented as a need, desire or option" by the health system's executives, and portrayed his role as essentially passive. "I was not in a position of management or authority, nor did I necessarily get involved in running an operation where I am a trustee," he said. But the idea of buying the land did come up, others say. "It was considered undesirable property," said a former senior health system official who asked not to be named because he did not want to antagonize Mack. "Discussions occurred at strategic planning sessions of the board and meetings of the board itself, but ... it was never really a serious discussion. Long Island Jewish was very much into capital preservation." Lynam said the health system was preoccupied with its own merger for most of the late 1990s and had planned to meet its outpatient space needs by building a new facility on the North Shore campus in Manhasset until it became clear that that would be prohibitively expensive. Richard Mack said Apollo entered the i-park deal only after the property was under contract with National RE/Sources, a Connecticut company that specializes in brownfield redevelopment and was shopping it with various money backers. Their plan was to turn the building into a home for telecom and Internet companies -- hence the name. "I said, I like this property, this is a very good price, despite the issues I like your business plan," Richard Mack said. "I grew up several miles from this plant, I know it, I have friends whose parents worked here. I think this is a great location and this is a great opportunity." Apollo took a 90 percent stake and later bought out its partner. But their business plan fizzled almost immediately with the dot-com crash. They wooed Canon USA, but it was uninterested in occupying a single-story industrial building, he said. The hunt for tenants was proving slower than expected, i-park acknowledged in news stories. The space was about half full in 2005, including two spaces leased by the health system, when the much larger lease was signed. Millions spent to renovate The Macks said they have spent "several hundred million dollars" renovating the i-park property, which they have since rechristened as 1111 Marcus Ave. In previous news accounts and its Web site, i-park variously estimated its spending from $30 million to $100 million. Whatever the sum, the lease became a marketing tool six months after its signing, when i-park's owners put the parcel up for sale, which news reports valued at $350 million on the basis of the millions in guaranteed annual revenue from its leases. Apollo later decided not to sell. North Shore-LIJ declined to say what it paid in rent this year, but records obtained from the state Health Department under the Freedom of Information Law show its charges this year included about $12 million in base rent, a surcharge and its 35.53 percent share of this year's $3.6-million property tax bill. As a nonprofit, it would have been exempt from property taxes if it owned the land. Most of the space was provided rent-free for the first two years. After 10 years, the health system can buy its space, now held in a condominium, for either $123 million or $154 million depending on the results of arbitration. It's difficult to evaluate Apollo's claim that North Shore's 25-year lease was a good deal. Its 2007 base rent, which ranged from about $22 to $29 per square foot for office spaces, is lower than the $32 a square foot average the metropolitan-area brokerage firm Greiner-Maltz estimated other Lake Success office space went for last year, or the $38 a square foot North Shore paid for a smaller space in new class-A Granite Buildings on Marcus Avenue. But that base rent doesn't include the expense of adapting the old factory at i-park to be a medical office. So far, the health system has been able to renovate and occupy about a third of its i-park space, or 142,000 square feet, at a cost of about $60 million, Lynam said. "Being a nonprofit organization, we frankly can't afford to build it out all at once," Lynam said. The full space will be occupied within three to five years, officials predict. Officials' concerns Most other current and former health system officials reached by Newsday have declined to speak about the lease deal. But four of them, asking not to be named because they did not want to damage their relationships with the health system or with Mack, expressed discomfort at Mack's being both a senior board member and major landlord, and concern about the decision-making process. A Newsday review of their concerns found: Under New York State law, a majority of the "entire board" of a nonprofit must approve land transactions, Josephson said, pointing to a 1988 attorney general's opinion. But the i-park deal was approved by North Shore's executive committee, and when its full board met a few days later it was given a short summary of the committee's action, a spokesman confirmed. North Shore's counsel, Keith Thompson, said its bylaws and other state laws allow the executive committee to act for the board and that the attorney general's opinion was not germane. Officials could not recall any lease that had been voted on by the entire board. Though health system and Apollo officials emphasized they subjected the deal to extra levels of transparency and review, the executive committee itself received only a two-page memorandum and one-sheet summary, the health system said. Newmark's review, which looked at other available properties, was not provided to them. The health system declined to provide a copy of that review to a reporter, citing confidential business data. Other available space in the neighborhood has included the Granite Buildings at 1991 and 1999 Marcus Ave., and medical offices developed by the We're Group. Three buildings housing Canon USA will soon be vacant when it moves to Melville. The lease negotiated by Newmark was found to be fair by Pearson Realty Services, an independent appraiser. But by the time it brought in those two outside entities, the health system had already signed two leases at i-park totaling 92,065 square feet -- a small Costco's worth of space -- without obtaining an independent opinion, Lynam confirmed. Such opinions are not required but may satisfy the IRS that a self-dealing transaction such as this one has still led to a fair result for the charity, said Bruce Hopkins, who chairs Georgetown University's law seminar for tax-exempt organizations. North Shore's full board, which saw only the minutes of the executive committee's vote on the lease, wasn't told of an admission shared with them and contained in the lease: i-park doesn't have enough parking to accommodate all its tenants' needs. The health system has already torn down one of the buildings it leased there for $10million, in order to create 119 more spaces. It will have to find or build more parking before it can use the last 150,000 square feet it has leased, spokesman Lynam said. The executive committee's minutes also omitted mention of another land deal detailed for the group and laid out in the lease: i-park agreed to seek approval to put up a new building of at least 150,000 square feet on its property, and if it succeeded, the health system agreed to buy the land and development rights. Richard Mack said talks have been ongoing with the Village of Lake Success on that proposal. "Real estate is the area of nonprofit operations for big institutions that is often the most problematic -- because who's on the board of the institutions? Investment bankers. Real estate developers," said Rick Cohen, former head of the National Committee for Responsive Philanthropy who now writes for Nonprofit Quarterly. "I can't tell you that somebody did something incorrectly. But the obvious intersections of these activities raise questions that anybody would want to look at." Richard Mack said he is pained by the thought that the deal on which he worked so hard has led to questions for his father at the health system to which their family has devoted so many years and dollars. "We have a fiduciary obligation to maximize the value for our investors, but the hospital was never part of our plan," he said. "They wanted to lease space. They had multiple levels of consultants, and they ultimately have a lease that is well below market ... "We really try our best to do the right thing every step of the way," he said, but acknowledged it has been an awkward situation. "It would have been a lot better if he wasn't on the board," he said. To see more of Newsday, or to subscribe to the newspaper, go to http://www.newsday.com Copyright (c) 2008, Newsday, Melville, N.Y. Distributed by McClatchy-Tribune Information Services. 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