Legislature(2003 - 2004)

04/16/2004 03:40 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 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."                                                                                 
Number 0890                                                                                                                     
VERN  JONES,  Chief  Procurement  Officer,  Division  of  General                                                               
Services,  Department of  Administration, reminded  the committee                                                               
that at  the last hearing Representative  Rokeberg mentioned some                                                               
concerns, which  have been addressed  [in the  proposed committee                                                               
substitute  (CS)].   The first  concern was  the vague  nature of                                                               
establishing  a market  rate for  which  to base  a reduction  in                                                               
rent.  The  aforementioned concern is addressed on  page 1, lines                                                               
10-12, which read:  "The market rental value  must be established                                                               
by a  real estate broker's opinion  of the rental value  or by an                                                               
appraisal  of the  rental value."    With regard  to the  section                                                               
addressing  the extension  of contracts  for  goods or  services,                                                               
that  section has  been  removed  [in the  proposed  CS] and  its                                                               
title.     Therefore,  the  proposed   CS  deals   strictly  with                                                               
extensions of real estate or office space leases.                                                                               
Number 0815                                                                                                                     
REPRESENTATIVE  ROKEBERG moved  to  adopt CSHB  545, Version  23-                                                               
LSGH2150\D, Bannister,  4/15/04, as the working  document.  There                                                               
being no objection, Version D was before the committee.                                                                         
REPRESENTATIVE  ROKEBERG   noted  that  [Version  D]   no  longer                                                               
includes  the  "brother-in-law  section".   He  also  noted  that                                                               
Version D  references the court system  on page 1, line  7, which                                                               
the  drafter  indicated  may  be a  separation  of  powers  issue                                                               
[because] the legislature has granted  to the judicial branch the                                                               
ability to  have its own  procurement code.   He related  that he                                                               
has  checked with  the  judicial branch,  which  has related  its                                                               
support of  this legislation and  lack of concern with  regard to                                                               
the possible separation of powers issue.                                                                                        
REPRESENTATIVE ROKEBERG  said he has only  one remaining concern,                                                               
which is the [cost savings] of  5 percent below the market rental                                                               
value of  the real property.   The aforementioned is  the trigger                                                               
of  the  statute.   Representative  Rokeberg  recalled  that  the                                                               
original  statute  allows  an  extension  [when  there  are  cost                                                               
savings  of]  10   percent  and  [the  lessor]   agrees  to  make                                                               
modifications to comply with the  Americans with Disabilities Act                                                               
of 1990  (ADA) or  [when there  are cost  savings of]  15 percent                                                               
below the  current rate in the  lease without ADA.   He explained                                                               
that   the   change   [encompassed   in   Version   D]   reflects                                                               
fundamentally higher  market values  and the prevailing  rates at                                                               
the time,  and therefore has  universal applicability.   By going                                                               
to the 5 percent  at a higher barrier, it seems  that it would be                                                               
appropriate to  have a 10  percent [barrier] in order  to prevent                                                               
potential mischief.                                                                                                             
CHAIR ANDERSON passed the gavel to Vice Chair Gatto.                                                                            
MR.  JONES  agreed,  but  noted   that  leases  that  aren't  ADA                                                               
compliant would be  an exception.  Therefore,  it would generally                                                               
be [a cost  savings of] 15 percent, which he  viewed as too high.                                                               
He opined  the importance of the  rate being tied to  a reduction                                                               
of the market value rather than  the existing rates paid.  It was                                                               
thought  that 5  percent is  reasonable.   "But  that in  itself,                                                               
isn't as critical as tying it to the market rate," he stated.                                                                   
REPRESENTATIVE ROKEBERG  agreed.  He  posed a situation,  what he                                                               
indicated to  be a typical  situation, in  which there is  a $.02                                                               
per square  foot rental  rate.   In such  a situation,  5 percent                                                               
would  only be  $.10 per  square foot.   Representative  Rokeberg                                                               
asked if  Mr. Jones felt  that 10  percent along with  the market                                                               
rate barrier would be workable.                                                                                                 
MR.  JONES responded  that 10  percent would  be better  than the                                                               
current statute.                                                                                                                
REPRESENTATIVE  ROKEBERG pointed  out that  this would  allow the                                                               
department to move forward with  a sole source type contract, and                                                               
he  expressed   the  need   to  avoid   the  appearance   of  any                                                               
noncompetitive type of acquisition or continuation of lease.                                                                    
MR.  JONES  said  that  10 percent  seems  fully  reasonable  and                                                               
Number 0465                                                                                                                     
REPRESENTATIVE  ROKEBERG  moved  that  the  committee  adopt  the                                                               
following amendment:                                                                                                            
     Page 1, line 9;                                                                                                            
          Delete "five"                                                                                                         
          Insert "ten"                                                                                                          
REPRESENTATIVE   CRAWFORD  objected   for  discussion   purposes.                                                               
Representative Crawford said  that if the market  continues as it                                                               
is, it would seem to make  sense.  However, if the market becomes                                                               
"over  built" and  demand falls  to the  level of  the 1980s,  he                                                               
questioned what would  happen with a 10-year lease.   He asked if                                                               
in  such a  situation,  any negotiation  could  happen [when  the                                                               
market changes].                                                                                                                
REPRESENTATIVE   ROKEBERG  pointed   out  that   the  legislation                                                               
specifies "up to ten years", and  therefore one could have a one-                                                               
year lease and this would still work.  He explained:                                                                            
     What we're  doing here  is going  away from  looking at                                                                    
     the  ...  baseline  number, currently  is  the  current                                                                    
     lease  value.   What  we're doing  is  changing to  the                                                                    
     market value.  So, that would  allow you to go into the                                                                    
     market  ....   For  example, ...  if  you were  renting                                                                    
     space for $1.00  a foot and the market was  now $2.00 a                                                                    
     foot,  under  the  current statute  you  couldn't  stay                                                                    
     there  because the  guy couldn't  afford to  lower your                                                                    
     rent.   That means you have  to go out and  rebid it so                                                                    
     ... you  know you're going  to end up paying  the $2.00                                                                    
     and you couldn't extend where  you were, even for $1.10                                                                    
     because of the  current statute.  This  would allow you                                                                    
     to  renew it  at anywhere  below that  market rate,  at                                                                    
     least 10 percent  below it and stay where  you're at so                                                                    
     that  you could  gain  the  savings.   So  it's a  much                                                                    
     better standard.                                                                                                           
REPRESENTATIVE  ROKEBERG, in  further response  to Representative                                                               
Crawford, related  that in a  down market the  differential would                                                               
be  "squeezed" because  the prevailing  rate would  be declining.                                                               
However,  the percentage  wouldn't go  down with  it.   He opined                                                               
that   typically  in   commercial  real   estate  quotations   of                                                               
valuations  will occur  rather  than specifics.   "It's  actually                                                               
going to require  the department to get a  specific, single quote                                                               
now,"  he  stated.   "I  think  you  need  to  have enough  of  a                                                               
distinction  to grant  you the  sole source  capability ...,"  he                                                               
Number 0229                                                                                                                     
REPRESENTATIVE CRAWFORD  removed his objection.   [The conceptual                                                               
amendment was treated as adopted.]                                                                                              
VICE CHAIR  GATTO asked if  the "real estate broker's  opinion of                                                               
the  rental value"  and "an  appraisal of  the rental  value" are                                                               
considered of equal value.                                                                                                      
REPRESENTATIVE  ROKEBERG,  speaking  as  a  real  estate  broker,                                                               
replied  yes,  and added  that  real  estate  brokers are  a  lot                                                               
cheaper.   In  a  major  commercial building,  to  obtain a  full                                                               
appraisal  could  be  extremely  expensive  and  not  necessarily                                                               
appropriate.   "Having a broker's  opinion of value ...  would be                                                               
more  consistent   with  testing   and  providing   a  defensible                                                               
prevailing  market rate  for  the purposes  of  the statute,"  he                                                               
REPRESENTATIVE  LYNN,   as  an  associate  broker,   agreed  with                                                               
Representative Rokeberg.                                                                                                        
VICE CHAIR GATTO surmised that  although the language [on page 1,                                                               
lines 10-12]  allows either,  it seems there  will be  a conflict                                                               
later regarding who will insist on the more expensive appraisal.                                                                
REPRESENTATIVE ROKEBERG  remarked that with a  30,000 square foot                                                               
facility  with a  five- to  ten-year  deal, it  might warrant  an                                                               
appraisal  due to  the scope  and dollar  amount of  the project.                                                               
The intention of the CS, he  opined, is to provide the department                                                               
flexibility to  call for a  broker's opinion versus  an appraisal                                                               
depending upon the scope of the project.                                                                                        
VICE  CHAIR GATTO  surmised that  whether the  market goes  up or                                                               
down, the  existing value  will be  relied upon  when there  is a                                                               
lease extension.                                                                                                                
REPRESENTATIVE ROKEBERG replied  yes and likened it  to the price                                                               
of oil going up and down.                                                                                                       
TAPE 04-44, SIDE A                                                                                                            
VICE CHAIR GATTO further surmised  that whether [the market] goes                                                               
up  or down,  the ability  to extend  the lease  is based  on the                                                               
existing  value.   He asked  if this  legislation guarantees  the                                                               
right to extend the lease.                                                                                                      
REPRESENTATIVE  ROKEBERG explained  that  the legislation  allows                                                               
the Department  of Administration to enter  into negotiations and                                                               
an agreement  for a lease  extension with existing premises  if a                                                               
bargain  can  be made  below  the  prevailing  market rate.    In                                                               
further  response to  Vice Chair  Gatto, Representative  Rokeberg                                                               
confirmed that  he would  like [the  bargain] to  be at  least 10                                                               
percent  [below the  prevailing market  rate] otherwise  it would                                                               
need to go out  to market.  He noted that there  is a danger with                                                               
sole  sourcing,   and  therefore   the  incentive  needs   to  be                                                               
sufficient enough to avoid it.                                                                                                  
VICE  CHAIR  GATTO recalled  from  a  prior hearing  that  moving                                                               
expenses, rewiring, equipment replacement,  and down time are all                                                               
significant issues [to consider] for a lease extension.                                                                         
Number 0142                                                                                                                     
REPRESENTATIVE   ROKEBERG   related   that  under   the   current                                                               
procurement  provisions, unless  the  standard is  met, [a  lease                                                               
extension] would have to go out to bid.                                                                                         
MR. JONES  informed the  committee that he  just received  a call                                                               
from the  director of Libraries  informing him that  the facility                                                               
[lease]  in Anchorage  is due  to expire.   The  current cost  of                                                               
$1.25 is  being offered under  an extension while  the prevailing                                                               
market rate is around $2.00  not to mention the costs encountered                                                               
in a move.                                                                                                                      
Number 0199                                                                                                                     
REPRESENTATIVE  DAHLSTROM  moved  to  report  CSHB  545,  Version                                                               
GH2150\D, Bannister,  4/15/04, as amended, out  of committee with                                                               
individual  recommendations and  the  accompanying fiscal  notes.                                                               
There being  no objection,  CSHB 545(L&C)  was reported  from the                                                               
House Labor and Commerce Standing Committee.                                                                                    

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