Owners: Legislature not off the hook for costs after ruling

  • After an Anchorage Superior Court judge ruled the Legislature’s lease at its new office building invalid, the owners are asserting that doesn’t get the state off the hook from its financial obligations in commissioning the renovation. Photo/Elwood Brehmer/AJOC

An attorney for the owners of the Anchorage Legislative Information Office building contends a judge’s ruling invalidating the Legislature’s lease of the building does not absolve the governing body of its responsibility to pay for the political hot mess.

In a five-page letter dated March 27, Easter Sunday, to Legislative Affairs Agency attorneys obtained by the Journal, Donald McClintock, attorney for the building owner group 716 West Fourth Avenue LLC, wrote that a cancellation of the $3.3 million per year lease based on the court’s ruling would expose the Legislature to a substantial portion 716’s damages.

716 West Fourth Avenue is the Downtown Anchorage address of the LIO building. The owner group includes longtime Anchorage real estate developers Mark Pfeffer and Bob Acree.

The Legislative Affairs Agency handles business matters for the Legislature.

McClintock’s letter asserts that 716 gathered $37 million through financing and equity in 2013 to fund the build-to-suit project and that several banks extended credit based on the promise the Legislature would hold up its end of the 10-year lease.

“It would be a clarion call to the entire financial community — and a serious blow to the public interest — if the state could cancel a lease (even under the guise of a court’s ruling) for its own failed procurement process, and walk away after the other side had fully performed,” McClintock wrote. “716, at a minimum, would be entitled to be made whole through an award of its reliance damages.”

He added that 716 believes the Superior Court ruling “is wrong on many levels” and intends to point out its deficiencies in a motion to reconsider.

Written much like a court brief, McClintock’s letter cited multiple cases in which the State of Alaska and local governments were held liable for damages to private contractors after government was found to have violated procurement statute.

Judge Patrick McKay ruled the lease invalid March 24 because he determined it to not be an extension of an existing lease, and therefore the arrangement negotiated by former Legislative Council chair Rep. Mike Hawker, R-Anchorage, violated state procurement guidelines.

The Legislature moved into the building on the 10-year lease after it was completed in late 2014.

Anchorage attorney and owner of the adjacent Alaska Building Jim Gottstein filed suit against 716, the project development group, and the Legislative Affairs Agency March 31, 2015, contending the lease was not an extension of a former agreement because it was for renting a new building.

Gottstein also argued the lease further violated state statute because the $281,000 per month rent for the 64,000 gross square-foot building with underground parking exceeds a requirement for state rents agreed to through a lease extension to be at least 10 percent below market rate.

The rental rate did not need examining, according to McKay’s order, because the lease was improperly secured. The Legislature has paid rent for the building through May 31.

Aftermath

The Legislative Council, now chaired by Kodiak Republican Sen. Gary Stevens, has gotten heavy pressure from the public and many legislators to cut ties with the LIO because of the high lease rate at a time when the state is faced with a roughly $4 billion budget deficit.

Stevens has said he believes the state simply can’t afford the lease, citing a “subject to appropriation” clause in the contract that could presumably void the agreement with little or no recourse for the owners if the Legislature decides not to fund rent payments.

Other members of the council have repeatedly expressed similar sentiment, but have also said they worry about the message moving out of the building would send to the business community about the trustworthiness of the State of Alaska.

At a Dec. 19 meeting, the council unanimously recommended the full Legislature not fund the lease in the 2017 fiscal year state operating budget unless a solution to stay in the LIO that is cost-competitive, on a per square-foot basis, could be found.

716 spokeswoman Amy Slinker noted in a prepared statement March 29 that several appraisals valued the building project at more than $44 million and that multiple lenders approved the appraisals and based credit on them.

“We are continuing good faith negotiations with the Legislature and are hopeful a deal that benefits all parties can be agreed upon soon,” Slinker wrote.

She also confirmed that Pfeffer met with Stevens March 28 and will attend a March 31 Legislative Council meeting in executive session to discuss the LIO.

Prior to McKay’s ruling, Pfeffer indicated an intent to sue the Legislature if it walked away from its lease at the LIO.

McClintock wrote that the goal of his letter was “certainly not to give notice, nor does it have any bellicose intent,” but under the circumstances, “Walking away from the lease would require 716 to proceed with a contract claim against the Legislature in order to protect the full economic benefit promised under the lease.”

Attorneys for Legislative Affairs and 716 stressed to McKay in oral arguments March 22 that the Legislative Council repeatedly sought proposals from other parties for suitable Anchorage office space through public requests for information starting in 2007.

When no solution was found, Hawker was given authority by the council to act as the contracting officer for the project and he agreed to rebuild on the existing LIO lot at the time. The $44.5 million project also included purchasing and demolishing the next-door Anchor Pub.

The defendants also claimed that because the steel support structure and foundation of the former, smaller LIO building remained intact during construction, the 10-year lease was an extension of the previous rental agreement and not one for a new building.

House Minority Leader Chris Tuck, D-Anchorage, praised McKay’s ruling in a formal statement, saying he hopes it ends “these kinds of backroom deals.”

The LIO is the home office for 25 Anchorage legislators and is often the de-facto meeting place for hearings when the Legislature is not in session. It substituted as the capitol building last spring when the Republican-led Legislature ignored Gov. Bill Walker’s demand that a special session to resolve budget issues be held in Juneau. Instead, legislators “gaveled out” of the Juneau special session called by Walker and reconvened in Anchorage.

McKay noted in his frankly worded order that the Legislature fronted $7.5 million of tenant improvement costs during project construction, a requirement he believes further pushes the lease beyond the realm of an extension.

“Plain common sense — a principle which jurisprudence should not require to be checked at the courtroom door — mandates a finding that a contract to lease over 2.5 times more newly constructed space for just under five times the current rent with an introductory payment of $7.5 million for leasehold improvements is not a simple lease extension,” McKay wrote. “A court finding that this leasing scheme could be sole-sourced would eviscerate the competitive principles of the state procurement code.”

Legislative Affairs outside counsel Kevin Cuddy argued in a Feb. 26 brief to the court that many of the issues surrounding the case were nonjusticiable — that the court did not have authority to rule on issues such as the Legislative Council’s procurement procedure and whether the new Anchorage LIO was in the best interest of the state because they were political in nature.

However, Cuddy conceded that the court could rule as to whether the lease constituted an extension of the previous agreement or was a standalone contract.

Options with costs

At its meetings in recent months, the council has been reviewing the cost feasibility of purchasing the building or of a potential move to the nearby Atwood Building, which houses state executive branch agencies.

A March 14 report from San Francisco-based Navigant Consulting found that after 20 years of ownership, the inflation-adjusted cost of purchasing the LIO for $37 million with bonds at the current market rate to be nearly on par, on a cost per square-foot basis, with moving to the Atwood.

The $37 million price tag is what Pfeffer has repeatedly said 716 would be willing to sell the building for. According to Pfeffer, it is roughly the amount 716 would need to recoup its investment in the project that cost $44.5 million to complete, minus the $7.5 million state contribution.

Purchasing the LIO for $37 million equates to a 20-year net present value cost of $31.7 million and the 20-year cost to move to the Atwood would be $24.2 million, according to the Navigant analysis; the additional usable space in the LIO closes the per square-foot cost gap to $3.08 per square foot to stay and buy the LIO versus $2.95 to move to the Atwood Building.

The report found $35.6 million to be the sale price at which the LIO, with 42,900 square feet of usable space, would match the $2.95 per square-foot price of moving to the Atwood, which has 34,100 square feet of available space, a fact highlighted by McClintock in his letter to LAA.

Included in the cost of moving to the Atwood is $3.5 million Legislative Affairs expects it would cost to make the available Atwood space suitable for legislative offices.

Extending the now-voided $3.3 million per year lease similarly for 20 years would cost $61.8 million in today’s dollars, which is an even $6 per square-foot, the Navigant analysis concluded.

Moving out of the LIO could also cause the state to lose the $7.5 million investment in the building, which combined with the first year’s rent and operating costs brings the total cost of occupying the building for less than two years to more than $11 million.

Updated: 
03/30/2016 - 3:11pm