Legislature(2003 - 2004)

04/14/2004 03:28 PM House L&C

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HB 545-STATE REAL PROPERTY LEASE EXTENSIONS                                                                                   
CHAIR ANDERSON  announced that the  next 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."                                                                                 
Number 0417                                                                                                                     
VERN  JONES,  Chief  Procurement  Officer,  Division  of  General                                                               
Services, Department of  Administration, explained that currently                                                               
the  procurement   code  allows   the  [division]   to  negotiate                                                               
extensions of office space leases for  up to 10 years in exchange                                                               
for  rent  reductions.    This  legislation  would  increase  the                                                               
state's  ability  to  negotiate  such  by  changing  the  current                                                               
required  threshold from  a 10  to 15  percent reduction  off the                                                               
existing lease  rate to  a 5 percent  reduction from  the current                                                               
market rate for the area.   Mr. Jones informed the committee that                                                               
existing   statutory  restrictions   on  the   negotiations  have                                                               
hampered [the  division's] ability to negotiate  lease extensions                                                               
with the  lessors.  "The  increase in  the real estate  market in                                                               
Alaska  combined with  the  way we  structure  our leases,  often                                                               
makes  a   15  percent  reduction  from   existing  rental  rates                                                               
unattainable," he  explained.  Therefore, tying  the reduced rate                                                               
to  a percentage  of  the  current market  is  a more  reasonable                                                               
approach that he  believes will allow the  negotiation of reduced                                                               
rates more  frequently while avoiding  the lengthy  and expensive                                                               
re-procurement process.   Such an  approach will avoid  the costs                                                               
and  disruption of  moving  state offices  and  large numbers  of                                                               
state employees.                                                                                                                
MR. JONES  turned attention  to a  chart, which  illustrated that                                                               
lease  costs  consist  of   several  elements,  including  lessor                                                               
profit, ongoing  lessor costs, and  the upfront  construction and                                                               
tenant  improvement  costs.    He   explained  that  the  upfront                                                               
construction and tenant improvement  costs are generally financed                                                               
and amortized over the initial firm  term period of a lease.  The                                                               
lessor  is  afforded an  opportunity  to  bid a  different  price                                                               
during the  option periods  of a  lease.   Generally, there  is a                                                               
dramatic  decrease in  prices after  the initial  firm period  is                                                               
over.   A  rate below  the  already-reduced option  year cost  is                                                               
often unattainable [to  the division] as opposed  to a percentage                                                               
below  a market  rate, which  many  more lessors  are willing  to                                                               
negotiate.   Mr. Jones said  that the more often  these submarket                                                               
rates can  be negotiated  and avoid  the costs  of re-procurement                                                               
and  moving  expenses  the  more  the state  saves.    Mr.  Jones                                                               
mentioned  that HB  545  would also  allow  extensions for  other                                                               
nonlease contracts.                                                                                                             
Number 0652                                                                                                                     
REPRESENTATIVE ROKEBERG commented that  the changes in the market                                                               
have driven  the need  for some  modification to  this successful                                                               
program.   He inquired as to  the methodology that would  be used                                                               
in order to establish the prevailing market rates.                                                                              
MR.  JONES  answered  that  in the  large  metropolitan  area  of                                                               
Anchorage   there  are   independent  third-party   market  watch                                                               
services available.  However, the  difficulty is in regard to the                                                               
rural  areas  for which  the  bill  isn't  specific.   Mr.  Jones                                                               
related  that  the  intent  is  to develop  as  many  "comps"  as                                                               
available in order to determine what  the market would be in that                                                               
area.  In some cases, [the state]  is the only lessor in an area,                                                               
which means that [the state] may set the market.                                                                                
REPRESENTATIVE  ROKEBERG  pointed  out   that  in  area  such  as                                                               
Anchorage one  can utilize a  broker's opinion of value  (BOV) as                                                               
opposed  to  an   appraisal  done  by  a   licensed  real  estate                                                               
appraiser, which  is the  more costly  of the  two.   However, he                                                               
acknowledged  that  an  appraisal   by  a  licensed  real  estate                                                               
appraiser lessens  the ability for any  mischief.  Representative                                                               
Rokeberg said that he was  concerned with regard to accomplishing                                                               
a  baseline.   A 5  percent reduction  isn't a  large margin,  he                                                               
noted.    The  existing  statute  is clear  because  there  is  a                                                               
baseline of  the existing  rental rate.   However,  he recognized                                                               
that  the market  conditions  in  an up  market  don't allow  for                                                               
"those types  of things  typically" unless  the landlord  has the                                                               
"sunk"  costs   recovered  or  amortized  costs   of  the  tenant                                                               
improvement  allowances.     "Presumably,   there  would   be  an                                                               
incentive of an  existing landlord to bargain for  a reduced rate                                                               
if  he  has  recovered  those  costs.    Is  that  not  the  case                                                               
sometimes," he asked.                                                                                                           
MR. JONES  confirmed that is the  case sometimes.  However,  in a                                                               
market such as the current one  15 percent below an existing rate                                                               
is often impossible  because [the division and  the lessors] feel                                                               
the existing law is too restrictive.                                                                                            
Number 0868                                                                                                                     
REPRESENTATIVE ROKEBERG  informed the committee that  part of the                                                               
reason  for the  aforementioned  is the  Little Davis-Bacon  Act,                                                               
which  requires any  refitting to  be done  under the  prevailing                                                               
wage laws.   Therefore, the  costs to the landlord  are increased                                                               
such that it's above the  prevailing market rate.  Representative                                                               
Rokeberg asked whether the communications  or "CAT 5" type wiring                                                               
requirements have any impact on the space acquisition costs.                                                                    
MR.  JONES acknowledged  that  [the communications  requirements]                                                               
are a substantial  cost.  However, he opined that  it seems to be                                                               
turning into an industry standard.                                                                                              
REPRESENTATIVE   ROKEBERG    highlighted   that    recently   the                                                               
legislature  renewed  its  lease  at  the  Anchorage  Legislative                                                               
Information  Office.   In that  case, the  legislature agreed  to                                                               
capitalize and  pay for the  costs [for refitting].   He recalled                                                               
that  the original  performer  for the  bid  was about  $180,000,                                                               
which, after  going out  to bid, was  lowered to  about $125,000.                                                               
The   aforementioned   was   merely  the   cost   for   rewiring.                                                               
Representative Rokeberg  reiterated his  discomfort with  the way                                                               
in which the prevailing market  rate is established when dynamics                                                               
are  present that  provide the  incumbent landlord  a significant                                                               
MR.  JONES, in  response to  Chair Anderson,  said that  he could                                                               
work on addressing Representative Rokeberg's concerns.                                                                          
REPRESENTATIVE ROKEBERG  turned attention  to Section  1(a)(2) of                                                               
the legislation.   He  questioned why the  [state] would  want to                                                               
extend a contract  for goods or services up to  a maximum of five                                                               
years "if  a minimum cost  savings of at  least 5 percent  can be                                                               
achieved on  the price  of goods or  services established  in the                                                               
contract."   He further questioned  why the  aforementioned would                                                               
be chosen rather than go out in the market and re-bid it.                                                                       
MR. JONES  specified that the  [language in Section  1(a)(2)] was                                                               
included  as  an  additional  tool,   and  he  didn't  anticipate                                                               
widespread use of  it.  Mr. Jones related that  [the division] is                                                               
in the process  of brainstorming with regard  to developing ideas                                                               
to reduce the costs of goods  and services as well as the leases.                                                               
From a procurement  standpoint, the first option is  always to go                                                               
out and  obtain competition  in the market  place.   The approach                                                               
under  discussion would  probably only  be used  when it  is felt                                                               
that the  open market would  result in  higher costs.   Mr. Jones                                                               
said that  since [the  division] doesn't  have experience  in the                                                               
approach  [laid out  in Section  1(a)(2)], he  could only  relate                                                               
that  the ability  to negotiate  leases  will be  used much  more                                                               
often than the ability to negotiate procurement contracts.                                                                      
REPRESENTATIVE ROKEBERG  asked if the typical  contract for goods                                                               
or  services  is five  years  for  procurement of  materials  and                                                               
MR.  JONES said  that  often there  are  long-term contracts  for                                                               
items  such  as copiers  and  fax  machines or  office  supplies.                                                               
However, those are  shorter contracts and less  frequent than are                                                               
the leasing contracts.                                                                                                          
REPRESENTATIVE  ROKEBERG   said  that  he  did   agree  with  the                                                               
department  with  regard  to  the lease  premise.    However,  he                                                               
maintained his concern with the  other option that must show only                                                               
a 5 percent  cost savings because of  the substantial opportunity                                                               
for mischief.                                                                                                                   
MR.  JONES  said  that  it's  not  the  intent  to  do  mischief.                                                               
Furthermore,  5 percent  was utilized  as  a reasonable  starting                                                               
point  and [the  division] isn't  married to  it.   In fact,  the                                                               
contract  for  goods or  services  is  the  lesser part  of  this                                                               
legislation.    If the  committee  is  uncomfortable with  the  5                                                               
percent  in  Section  1(a)(2),  the  [division]  is  amenable  to                                                               
increasing the percentage or removing it altogether.                                                                            
Number 1216                                                                                                                     
REPRESENTATIVE  ROKEBERG, with  regard to  the leasing  contract,                                                               
inquired as to  reallocation costs and other costs  that would be                                                               
incurred.    He  also  asked  if  there  are  any  examples  that                                                               
illustrate the 5 percent may have saved the [department] money.                                                                 
MR. JONES informed the committee  that moving costs are generally                                                               
estimated  at  $1 per  foot.    Tenant improvements  and  upfront                                                               
construction are  generally substantial  for a  large-size lease.                                                               
There  are  also  telephone  relocations  and  CAT-5  cables  are                                                               
expensive.  He said he  could provide the committee with specific                                                               
numbers later.   Furthermore, the  disruption of a  relocation is                                                               
difficult to  quantify.   He noted that  there are  other things,                                                               
such as the changes required  for letterhead, business cards, and                                                               
signage, that generate costs.  With  regard to the 5 percent, Mr.                                                               
Jones reiterated  that it's just  an idea and [the  division] has                                                               
no particular  plans for it.   In  virtually every aspect  of the                                                               
business  in  General Services,  the  division  has attempted  to                                                               
develop ways to cut costs.                                                                                                      
Number 1350                                                                                                                     
REPRESENTATIVE ROKEBERG noted  that HB 545 has  a House Judiciary                                                               
Standing Committee referral.  Although  there are some savings to                                                               
be   had   with  this   legislation,   he   requested  that   the                                                               
administration  develop  a  tighter  definition  with  regard  to                                                               
establishing the  prevailing market rates.   He further requested                                                               
that the  administration review the  concept embodied  in Section                                                               
1(a)(2) in order to develop a better argument for its need.                                                                     
MR.  JONES said  that he  would have  the aforementioned  done by                                                               
CHAIR ANDERSON announced that HB 545 would be held over.                                                                        

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