ferrell tsetse: Birmingham Health Care's CEO became its landlord, renting space ...

BIRMINGHAM, Alabama -- Jonathan Dunning's path from being CEO of a pioneering nonprofit health clinic system in Birmingham to being its landlord began in 2008, when he and three other Birmingham Health Care employees bought a building on the city's Southside.

It wasn't just any building. It was Birmingham Health Care's largest asset -- bought by its top employees in a sale approved by members of the board of directors.

Birmingham Health Care board member and treasurer Terry Burney said the board approved the sale of BHC's South Medical Plaza building at 1600 20th St. South. But he said he couldn't recall whether it was disclosed to the board that the buyers were then-current BHC employees in a company run by Dunning called Synergy Real Estate Holdings.

"The board did approve based on what we saw," Burney said. "When we allow attorneys to handle things, we often leave it in their hands . . . . As I recall, it was a win-win thing for all involved."

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For a time in 2008, Dunning was at the helm of BHC as it paid rent to his for-profit company. In 2009, a federal grant from the Health Resources and Services Agency (HRSA) awarded BHC more than $100,000 for construction work in its clinics and paving the parking lot, plus more than $350,000 to buy new equipment for the Synergy-owned building. The grant writer was BHC clinical psychologist Sharon Waltz, one of the part owners of the building. BHC Chief Operating Officer Patricia Osborne, another part owner in the building, oversaw the construction and renovation projects.

HRSA -- Birmingham Health Care's chief source of funds -- has a policy prohibiting conflicts of interest where federal money is at stake -- "such as when the employee, officer, or agent . . . has a financial or other interest in the firm selected for an award." The agency also has a policy requiring explicit justification for "lack of competition when competitive bids or offers are not obtained."

In a written response to questions, a HRSA spokesman pointed out the policies and said all grantees must adhere to them -- but did not comment on whether BHC was in violation.

"At this time, HRSA has not taken enforcement actions related to the sale or lease of the building," wrote spokesman Martin Kramer.

Birmingham Health Care lawyer Ken Dowdy said BHC pays fair market rent to Dunning's company and that the $2.8 million sale was "a substantial profit" to BHC.

But BHC originally bought the building in 2002 for at least $2.6 million. That's the size of the mortgage it took out on the building, known then as the McCollough Facial Surgery Clinic, according to probate records.

Burney, who also is chief administrative analyst for Birmingham Mayor William Bell, said he remembered that the deal allowed the clinic to retire debt, get some cash for operations and "focus on why we started in the beginning -- to deliver health care to the underserved."

Waltz said she remembered the building sale was pitched by Dunning as a good deal for BHC.

She said that, to the best of her recollection, she received a small percentage interest in the company -- 1.5 percent. She said COO Osborne also received 1.5 percent; and CFO Terri Mollica received 5 percent, with the remaining portion going to Dunning and the company.

Dunning, Osborne and Mollica -- all listed along with Waltz on the incorporating papers for the Synergy company -- did not return phone calls or emails seeking comment.

"Most of this was Dunning's decision," Waltz said. "I didn't know very much about the infrastructure of the company (Synergy)."

Waltz said she has sent a letter asking that her share of the company be re-distributed to other owners of the company, but she said she has not heard back.

Real estate

For Dunning, the $2.8 million real estate sale marked the beginning of another avenue of business connected to the health clinic system for the poor and homeless.

Earlier, The Birmingham News reported that Dunning formed for-profit companies in 2006 while CEO of both Birmingham Health Care and Central Alabama Comprehensive Care, a community health center in Tuskegee and that did business with the organizations he was running. From 2007 through 2010, the Birmingham and Tuskegee health centers paid more than $2 million to Dunning's companies for various services such as billing and management, The News reported.

Already CEO and primary private contractor for BHC, Dunning added another title with the 2008 Southside building purchase -- landlord. The next year, after leaving his CEO position, he began expanding that role.

In 2009, he formed another real estate company, bought a building in north Birmingham and began renting more space to Birmingham Health Care for a clinic.

The new company, Synergy Real Estate Holdings II, which lists only Dunning as a member in its incorporation papers, on Dec. 23, 2009, bought for $1.08 million a clinic building that was associated with the old Physician's Medical Center Carraway.

In 2010, Dunning's companies were billing BHC at least $1.2 million in rents and other management and service contracts, according to an independent audit of BHC. That represents more than 10 percent of BHC's revenue of $11.3 million for that year.

The same year, Dunning formed another real estate company, Synergy Real Estate Holdings III, which included Birmingham Health Care as a partner. Synergy III borrowed $839,236 from Citizens Trust to purchase the abandoned New City Church/Urban Missions building at 2030 First Ave. North, according to probate records. Plans for the building included renting more space to Birmingham Health Care, in addition to a restaurant, wine shop and other office space.

The 2030 building is empty and being renovated.

In 2011, Dunning jointly refinanced the South Plaza and the old Carraway property for $5.18 million -- a $1.3 million gain over Dunning's combined purchase prices for those two properties, according to probate records.

Taxes

While it is not unheard of for nonprofits form relationships with, or even create, for-profit companies, the question becomes, how do those arrangements benefit the nonprofit and its mission, and are the arrangements properly disclosed on the Internal Revenue Service Form 990, said Allison Black Cornelius, principal consultant of Blackfish, a consulting firm serving as the int erim management contractor for the Alabama Association of Nonprofits.

The role of Dunning and BHC employees in the $2.8 million purchase of the South Medical Plaza was not reported on BHC's 2009 tax forms. Nor was his role as landlord to BHC's North Birmingham clinic in the old Carraway property.

On the 2008 990 tax form signed by CFO Mollica, the organization was asked whether "a current or former officer, director, trustee or key employee have a direct business relationship with the organization." "No' is the answer on the form.

On the 2009 tax form, signed by Dunning's replacement as CEO, Jimmy Lacey, the same question also was answered "no."

Cornelius said that, in the past five years, the nonprofit sector has seen an increase in the creation of for-profit or taxable subsidiaries for many reasons, including generating income, protecting the nonprofit's tax exempt status or finding untapped sources of funding.

"Nonprofits are allowed to generate surpluses or net revenue, which are the equivalent of profits, as long as they don't distribute them to board members or employees," she said. "If they do, it is known as private inurement. We recommend to nonprofits that the keys to success in creating these kinds of arrangements are public transparency of the structure, a clear relation to the nonprofit's purpose, and most important -- profits generated must benefit no individuals other than clients served through the mission."

Birmingham Health Care was founded in 1985 as Birmingham Health Care for the Homeless, part of a 19-city pilot program funded by private foundation money but that now runs mostly on public money, the majority coming from federal grants.

Board member Burney said the board is looking into some of the issues raised about BHC's con-tracts, real estate and rental arrangements.

"We are going to look back and see what's in the best interest of the organization and see about getting the best bang for our buck . . . all of those things will be reviewed," Burney said. "It's kind of hard to say things were done wrong if you don't have all the details. We have to look at things. (The Birmingham News) did that part, so now it's up to the board to do our part. We are not sitting still.

"At the end of the day our desire is for this whole thing to be resolved, to go away, so we can continue to provide health care services -- because there is a big need for it in the area."

Source: http://blog.al.com/spotnews/2012/08/birmingham_health_cares_ceo_be.html

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