Can Medical Arts Complexes Give New Life to Shuttered Hospitals?

Andrew Kitchenman | December 17, 2012 | Health Care
Bill would award developers generous incentives to help offset the cost of capital investments

When hospitals close it’s often a devastating blow to the municipalities where they’re located, leading to the loss of significant tax revenue and jobs.

A bill working its way through the Legislature, however, could go a long way toward softening at blow, providing state incentives to redevelop former hospitals as “medical arts complexes,” where doctors and other healthcare providers could rent or buy space. The bill was approved by the Assembly Appropriations Committee on December 13.

Assemblyman Jerry Green (D-Middlesex, Somerset and Union), the sponsor of A-3043 said that it would benefit sites like Plainfield’s Muhlenberg Regional Medical Center, which was closed in 2008. (JFK Medical Center now operates a satellite emergency department and some outpatient services at the site.)

The bill would allow redevelopers to recoup their entire capital investment through corporation business tax credits, which would be paid over 10 years. It would apply to former hospitals and other healthcare facilities that have lost their state certificate of need — a document required to open or close facilities based on an state assessment of how the change would affect the availability of healthcare.

The renovated sites would not be allowed to deliver acute-care services.

Officials with the developer Community Healthcare Associates of Bloomfield worked with Green on the bill. The company has its eye on Capital Health System’s Mercer Campus in Trenton and the Hospital Center of Orange for potential renovation. It has already bought Barnert Hospital in Paterson and Kessler Memorial Hospital in Hammonton, with the intention of resurrecting them as medical arts complexes.

Michael C. Nudo, a managing partner at CHA, said earlier in the year without incentives it would be prohibitively expensive to renovate Muhlenberg, noting that the facility has $17 million in debt and would require another $20 million to $25 million to be redeveloped.

“The numbers just don’t work,” Nudo said.

He added that another advantage of offering tax credits is that hospitals that are planning to close would also be able to plan for the future.

To be eligible for the credit, the developer must demonstrate to the state that the new complex won’t interfere with the delivery of acute care at nearby hospitals. In addition, at least half of the renovated building must be used for healthcare; the tenants must employ at least 100 people; and the developer must spend at least $10 million on the project. Developers would be required to apply for the credits within five years of the bill being enacted.

E. Stephen Kirby, another CHA managing partner, said former hospital buildings frequently need extensive repairs before they can be used again.

“We just think it’s the only way you’re going to get some of these buildings back” open and on the tax rolls, Kirby said in June, when the bill was first introduced.
Kirby added that hospital owners often do not make capital investments in their buildings in the years before they close.

“When hospitals close, they usually have been closing for a very long time,” Kirby continued. “It takes about 10 years for a hospital to die. They don’t die gracefully.”

Hospitals “do not prompt capital investment into the buildings, as they’re sliding toward closure, so the [heating, ventilation and air conditioning] systems die, the mechanics, the roof, the windows — they leak, they all leak. It’s all the same, if you travel around New Jersey, you’ll see these hospitals,” Kirby said.

Kirby added that hospitals’ wide corridors and aging boilers make them difficult to renovate. His company has firsthand experience with this at Patterson’s Barnert. While the company has invested $20 million to renovate the building as a medical arts campus, it hasn’t been profitable, Kirby said.

“Things are going well from everyone’s perspective but ours,” Kirby said of the Barnert redevelopment.

“We’re just now adding up all of the money it’s going to take us,” to renovate the Hammonton building, Kirby said. “It always costs a lot more to rehabilitate a hospital. They don’t lend themselves to offices, the way they’re configured.”

JFK’s plans to convert Muhlenberg into an apartment and retail development has sparked an outcry among Plainfield residents. Green, whose district includes Plainfield, said he would instead like to see a healthcare-oriented reuse of the site. If another use is needed to supplement a healthcare use, Green said he would like it to be housing for military veterans.

The New Jersey Hospital Association also supported the bill.

Two committees have approved the Assembly version of the bill, while the Senate version has been referred to the Senate Economic Growth Committee.

A previous effort to provide incentives didn’t pass before the end of the last legislative session, lawmakers are again gearing up to promote the effort, which they said is needed to promote stalled redevelopment.