Legislature(2003 - 2004)
04/23/2004 02:12 PM House JUD
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HB 545 - STATE LEASE AND CONTRACT EXTENSIONS Number 1750 CHAIR McGUIRE announced that the final order of business would be HOUSE BILL NO. 545, "An Act relating to the extension under the State Procurement Code of terms for leases for real estate and certain terms for certain state contracts for goods and services; and providing for an effective date." [Before the committee was CSHB 545(L&C).] Number 1765 VERN JONES, Chief Procurement Officer, Division of General Services, Department of Administration (DOA), said that the state's procurement code currently allows the state to negotiate extensions of real estate leases for up to 10 years in exchange for rent reductions. House Bill 545 would increase the state's ability to negotiate lease extensions by changing the requirement threshold from a 10-15 percent reduction in existing lease rates to a 10 percent reduction in the current market rate. Existing statutory restrictions on these negotiations have hampered the state's ability to negotiate lease extensions, he opined, and relayed that the increase in the real estate market in Alaska combined with the way the state structures its leases often makes it so that a 10-15 percent reduction in existing lease rates is unattainable. MR. JONES posited that tying the reduced rates to a percentage below the current market is a more reasonable approach, adding, "we believe [it] will allow us to negotiate successfully more often, and the more frequently we're able to do that, the more we can avoid the lengthy, costly re-procurement process, not to mention the cost and disruption of moving large numbers of state offices and state employees as well as the disruption to the public." Referring to a chart, he said that a substantial part of lease costs are for tenant improvements and upfront construction. These costs are typically financed and amortized by lessors over the initial term of a lease, and oftentimes the lessor will offer the state dramatically lower priced lease rates for renewal periods. MR. JONES said that in those cases, at the end of initial lease periods, there is already a reduced rate, and so attempting to negotiate an additional 15 percent reduction as is required by current law is often unachievable. He added that the DOA feels that this bill would remedy that situation, would change that requirement from a 10-15 percent reduction of the already reduced rate to a 10 percent reduction of market rate, and market rate, as defined in CSHB 545(L&C), would be established either by an assessment of value or a real estate appraisal of rental value. MR. JONES, in response to a question, said that CSHB 545(L&C) now contains a definition of market rate, stipulates a minimum cost savings of 10 percent, and only applies to office space or real estate leases. Number 1932 CHAIR McGUIRE, after ascertaining that no one else wished to testify, close public testimony on HB 545. REPRESENTATIVE GARA remarked: The bill is fine. It just seems to me, whenever you get in the procurement code, you end up having to write down rules of logic instead of letting people just exercise logic. And so the rule of logic we've come up with is, if the state thinks that they'd actually just save money by not moving, that's not good enough unless they would save 10 percent. Is that the way the bill reads? I mean, [do] you actually have to save 10 percent or else you have to move? MR. JONES replied, "You would need to achieve a rental rate of at least 10 percent below market value if you want to avoid moving." If the bill passes, the state could negotiate a rental rate that would be a guaranteed 10 percent below market value and the state could avoid costly moving expenses. If the bill doesn't pass, the state would have to pay moving expenses plus possibly have to pay market rate at a new location. He opined that passage of the bill is a tool that will make the state more efficient and allow it to reduce costs. REPRESENTATIVE GARA offered his belief that even if the state can't achieve the minimum cost savings of 10 percent below market value, it could still save something by not having to move and go through the whole request for proposals (RFP) process; therefore, perhaps the state should not limit itself to a 10 percent minimum. MR. JONES, in response, relayed that he agrees with Representative Gara's point, adding, "If I could, I'd use my discretion in every matter, but in the last committee it was decided that ... 5 percent really wasn't enough to avoid the open competitive process that would otherwise be there, so ... it was increased to 10 percent." He noted that moving costs are typically around "$1 a foot" and are not included in calculating the minimum cost savings. Number 2059 REPRESENTATIVE SAMUELS moved to report CSHB 545(L&C) out of committee with individual recommendations and the accompanying zero fiscal note. There being no objection, CSHB 545(L&C) was reported from the House Judiciary Standing Committee.