Judge hits both sides in Anchorage LIO suit

A lawsuit challenging the legality of the Anchorage Legislative Information Office lease will continue, but neither side came out of a court ruling unscathed.

Anchorage District Superior Court Judge Patrick McKay wrote in a Jan. 7 order denying a defendants’ motion for summary judgment that the filer of the suit, Anchorage attorney James Gottstein, waited an unreasonably long time to file the suit.

At the same time, McKay found that the Anchorage LIO owners could in a roundabout way benefit from the building lease being voided.

The building is owned by 716 LLC — the Downtown Anchorage LIO address — a real estate partnership in which longtime Anchorage developer Mark Pfeffer is a primary member.

Gottstein filed the suit on March 31, 2015, claiming the 10-year, $281,638 per month lease the Legislative Affairs Agency agreed to is illegal because it is not 10 percent below market value, a requirement for state lease extensions that do not go through a competitive bidding process.

Legislative Affairs and 716 West Fourth Avenue agreed to expand and renovate the old 23,600 square-foot Anchorage LIO in September 2013 and Gottstein became aware of the agreement a month later; however he did not file suit at that time despite expressing concerns over the legality of the agreement, according to court records.

Construction commenced in December 2013 and the new 64,000 square-foot building was finished in January 2015.

Gottstein contends on his office’s website that the lease, which he claims equates to $7.15 per square foot, is well beyond the market rate of about $3 per square foot for Downtown Anchorage office space.

On a total square-foot basis, the monthly lease works out to about $4.40 per square-foot, while the usable square-foot lease rate is higher.

Pfeffer told the Journal in a previous interview that the building was renovated specifically to meet the Legislature’s unique layout and on-site parking requirements and therefore has no equal in the market.

The new Anchorage LIO has been appraised multiple times at $44 million by several banks who financed the construction and the long-term debt. Pfeffer, caught in the middle of what has become a political issue, has offered to sell the building to the Legislature for 716’s financial obligation on the building — about $37 million — or millions less than its appraised value. An appraisal of the LIO conducted by the Alaska Housing Finance Corp. estimated the value at $48.5 million.

McKay’s order notes that Gottstein, president of the adjacent Alaska Building Inc., collected $25,000 in fees and rent from 716 and the contractor before filing the suit.

“The court views Mr. Gottstein’s financial gains as acquiescence and, combined with the 17 months (he) waited to bring the lawsuit, this delay seems ‘unreasonable,’” the judge wrote.

If the lease is found “illegal, null and void,” 716 and Legislative Affairs could renegotiate to a rate 10 percent below market value, which could force Pfeffer and his partners to refinance the building over a longer term and thus incur harm, the order reads.

Additionally, the building’s unique characteristics may not find anyone to lease the full space on similar terms and incur harm that way.

“On the other hand, in the event that the court declares the lease ‘illegal, null and void,’ and the parties are unable to reach a new agreement, 716 will be able to lease the building at a greater rate since it claims the current rate is 10 percent below the market value,” Judge McKay wrote. “Indeed, 716 may even benefit from a finding that the lease is ‘illegal, null and void.’”

In its arguments, Legislative Affairs argued it could be harmed because of the $7.5 million the Legislature contributed to the building improvements. McKay wrote that if the lease is found null and void, “the Alaskan taxpayers will be saving potentially much more than the original $7.5 million. It remains a question of fact whether the LAA would ultimately forfeit the original $7.5 million it spent on improvements since the lease makes no specific mention of such a contingency.”

Impact of LIO move

The messy Anchorage LIO situation has become political, with Anchorage minority Democrats and legislators from outside the city saying the state should break its lease because it cannot afford the building when Alaska is facing a $3.5 billion annual budget deficit.

During a Dec. 19 meeting at the Anchorage LIO, the Legislative Council, which directs the Legislative Affairs Agency, voted to move out of the building unless a lease rate equal to what the Legislature would pay in the state’s nearby Atwood Building can be negotiated.

Breaking the lease would technically be legal because of a “subject to appropriation” clause that voids the lease if the Legislature votes to not fund it.

Pfeffer, some legislators, and state financial experts have warned that walking away from a roughly $26 million remaining obligation would hurt the state’s credit rating at a time when Standard & Poor’s just downgraded Alaska’s debt rating because of its fiscal problems and current lack of a plan to address them.

“716 has acknowledged that the State is in a different fiscal environment now than when the lease was legally signed in 2013. Mindful of this reality, 716 West Fourth Avenue, LLC has indicated its willingness to work with the Alaska Legislature to find a pathway to savings,” spokeswoman Amy Slinker said in a formal statement.

Gabe Petek, Standard & Poor’s primary credit analyst for Alaska, told the Journal Jan. 8 that the state walking away from a subject-to-appropriation lease likely wouldn’t impact rating agencies’ view of Alaska because the action is a way to reduce spending in the larger budget picture.

“In a perverse sort of way it can be a strengthening — (legislators) have the ability when push comes to shove to push things around a little bit. People on the other end of it may not like it, but from the standpoint of the investors and the bondholders it can actually be a protective attribute, I guess,” Petek said. “We’re primarily focused on (the state’s) ability to fund their debt payments in full and on time on their debt that’s out in the public debt markets.”

Elwood Brehmer can be reached at elwood.brehmer@alaskajournal.com.

Updated: 
01/14/2016 - 9:59am

Comments