04/23/2004 02:12 PM House JUD

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.