Supervisors Recommend Subordination to Let HealthRight 360 Close on New Mission Street Clinic; Budget Risks Noted

The Budget and Finance Committee on Feb. 10 recommended forwarding a resolution that would subordinate two existing city seismic-and-safety loans so HealthRight 360 can close on an $8.5 million nonprofit finance fund construction loan for a new headquarters and clinic at 1563 Mission Street.

Don Lusty of the Mayor's Office of Housing and Community Development said the subordination is needed to secure financing that would allow construction to proceed. "If not approved, completion of HR 360's new headquarters and clinic may not be feasible," he said, adding that without the transaction HR360 might be forced to continue renting space.

Department of Public Health deputy Colleen Chavla described HR360 as "a significant provider of safety net health services in San Francisco," noting DPH currently contracts with the nonprofit for about $45 million a year and that the organization serves roughly 20,000 San Franciscans annually. Chavla said DPH and MOHCD have agreed on stepped-up financial oversight and an on-site DPH presence at the new facility.

DPH Director Barbara Garcia told supervisors the department sought a modest on-site lease to help stabilize HR360's operations. "One of the reasons we want a footprint in there was there was concern from the mayor's office of housing that to ensure their stability and financial stability," she said. The city has a letter of intent to lease about 2,000 square feet at the Mission Street building on an initial five-year term with an option to extend.

HealthRight 360 executives said the project is fully financed by a mix of nonprofit lenders and a single commercial lender; they emphasized the new debt service is lower than current rent and that the transaction will convert rental costs into mortgage debt. "This project is 100% financed," the representative said. The organization also said it expects to raise capital in a $15 million campaign that would help repay bridge financing.

Budget Analyst Harvey Rose told the committee MOHCD could not independently validate HR360's financial projections and noted the appraised repayment plan leaves a significant balance due after the seven-year bridge period. Rose wrote that, based on staff calculations, HealthRight 360 would repay about $3.68 million of the $8.5 million loan over seven years, leaving an estimated $4.82 million balance that would have to be refinanced or paid off.

Supervisors pressed officials on the potential city exposure if HR360 cannot refinance. Chair Mark Farrell framed the issue as a wider policy question: "Are we lending and supporting organizations that become too big to fail?" He and others said they supported HR360 programmatically but wanted legislative or policy changes to reduce the chance the city repeatedly steps in to preserve services.

MOHCD and DPH said they will require quarterly financial reporting, corrective-action plans if problems arise, and closer cross-departmental review of older borrowers. Officials also said the city views the properties in question as stewarded affordable-assets and would seek to preserve public use if lenders called loans.

The committee took public comment (none) and the motion to send the resolution to the full Board carried without objection.

Next steps: The item is scheduled to go before the full Board of Supervisors on Feb. 24 for final action.