Legislature(1997 - 1998)
04/30/1998 09:27 AM Senate FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE BILL 210
"An Act relating to the extension of contracts for the
sale and delivery of in-bond merchandise at
international airports."
[SFC-98, Tape 147, Side B]
REPRESENTATIVE NORMAN ROKEBERG, SPONSOR, informed the
committee that his district was the airport district in
Anchorage. He explained that HB 210 would counteract a
problem with a bill passed two years prior, HB 543, the
Airport Leasing bill. The measure had language regarding
duty-free contracts. He referred to a March 19 legal
opinion by legislative counsel included in committee
handouts. The opinion addressed an ambiguity in the statute
passed in HB 543 that had contributed to problems in the
release of the airport regulations. The regulations had
been in the drafting stage for two years, since HB 543 was
passed. The department [Department of Transportation and
Public Facilities (DOT/PF)] had created some 185 pages of
regulations. He wanted the regulations issued and the law
clarified so that business activities could continue in
airports throughout the state.
Representative Rokeberg detailed that Section 1 of HB 210
was a technical correction or explanation of the intent of
HB 543 when it was passed during the previous session. The
section would provide very clearly that the duration of a
new lease under the section could not exceed 55 years
(existing in previous law) and also that the duration of
the extension of a lease could not exceed 55 years.
Representative Rokeberg directed attention to page 2, lines
1 and 2, which indicated that the commissioner would
approve application of a new land lease for an extended
term under the section without offering the land to lease
to another person and without regard to the number of
lessees, prior leases, or lease extensions for the same
land. He noted that the language went on to cover the
airport's basic plan, long-range plan, and the need for a
best-interest finding (BIF) on the part of the state if it
did not to approve a new lease.
Representative Rokeberg explained that the problem occurred
when the existing law was interpreted; another portion of
statute indicated that there was a 55-year maximum period.
The intent of the legislature in HB 543 was to allow for
the extension of an existing leasehold, but also to allow
the existing leaseholder to step out of the lease and enter
into a new one when the old lease expired. He provided the
example of a family in Anchorage who had been at the
Anchorage International Airport since 1953; their lease was
almost 40 years old. Given that there were only around 15
years left on the lease, the necessity to have continuity
required the ability to step out of the old lease and enter
into a new one. The language in HB 210 would allow that by
clarifying the intent of HB 543.
Representative Rokeberg relayed history pertaining to
Section 2. The bill had been brought before the legislature
the previous year and Senator Parnell had indicated that
there could be constitutional concerns about the ability to
extend a contract that had been bid out. In response,
Section 2 had been redrafted to stipulate that a lease
could be extended if provided for in the contract; the
extension would be no longer than the original lease term.
Representative Rokeberg referred to an amendment that would
be offered.
Senator Adams pointed to language on page 1, line 13; he
believed the word "shall" should be changed to "may." He
opined that unless the language was changed, it could be
interpreted that a person with a 55-year lease could
continue on endlessly and there would be no competition. He
thought there might be a combination of land-leases and
wanted language to be specific to each one. He thought it
was a policy question that the committee needed to closely
consider; the issue was the state's ability to compete
after each of the leases was up.
Representative Rokenberg replied that the word "shall" on
page 1, line 13 was the heart of HB 543. He referred to the
problem of the inability or failure of [DOT/PF] to re-offer
to two existing tenants. He pointed out that the section
being questioned did not relate to extending the leases of
duty-free spaces; there was a distinction in statute
between the land and space leases.
Senator Adams questioned whether there was a lease for each
separate airport or land lease. Representative Rokenberg
responded that the policy had to be clarified for new
leases and the technical change was needed to do that.
Representative Rokenberg directed attention to handouts
related to HB 476, a bill in process for which testimony
had been given by the department. The department could live
with the language in Section 1; the language in the "K"
version of the CS was language that came from the
department. The department understood the need to issue the
regulations in order for airports to get on with business.
He added that the department understood that the
legislature's policy (mentioned by Senator Adams) was to
allow leases to be extended and/or new leases entered into
without the leases going back on the market as long as (as
provided in HB 543) they met the BIF of the state and did
not collide with the long-range plan of the particular
airport.
Senator Torgerson questioned the competitive-bid portion of
the bill. He also wondered whether the bill addressed the
ability of a lessee to sub-lease. Representative Rokenberg
replied that there was nothing in the bill related to sub-
letting, though he had recommended that the department
implement a policy that the leases stipulate that a lessee
should not be able to profit from a sub-lease situation and
that in such a situation, the profit would revert to the
state (the landlord).
Representative Rokenberg continued that it was in the best
interest of the state to allow existing tenants to be able
to renew leases without going out to competitive bid. The
bill would ensure that was implemented in the regulations.
He reported that he had been in communication with lessees;
unfortunately the department was still unable to make the
extensions.
Senator Torgerson asked whether a determination would be
made through the BIF about the new rental rate.
Representative Rokenberg responded that rates were set in
regulation and there was rate differentiation for land
leases; everyone paid the same. For airports, the only
differential was "aviation user" or "non-aviation user." He
thought the state should change its policy and get closer
to fair-market value for the land.
In response to a question by Senator Torgerson,
Representative Rokenberg answered that all airport
regulations were affected for both international and rural
airports, which had two separate sets of regulations.
Co-chair Sharp reported that the advocates had been working
for years to get the issue cleaned up because some of the
small users on the "East Ramp" of the Fairbanks
International Airport had leases that were less than 55
years, short-term leases, or expired leases. Before [HB
543] was passed (which they thought would address the
issue), the department was going to insist that the leases
went to public bid; this meant that anyone else could come
in a get a hangar a lot cheaper and leaseholders would have
to compete against someone who had no investment in the
property. He maintained that that had been one of the main
motivators behind HB 543, but the issue was still not
resolved because of the complexity of the regulations,
especially not being able to allow extensions without
public bid. He thought one of the reasons the prices were
not market driven was that one of the purposes of the land
was to stimulate business and airport activity. It was very
difficult for someone to sell a piece of property on a
lease with four or five years left because no one knew if
the lease could be extended to amortize the cost of
additional improvements.
Representative Rokenberg agreed with the analysis and added
that the original bill also affected major, multi-million
dollar investments in the Anchorage International Airport
air cargo business because of the lack of comfort with the
department's policies. He wanted the policy to be clear and
implemented properly in regulations, which was the purpose
of HB 210. He pointed to three pages of "convoluted"
regulations in the committee packet related to leasing
schedules. He emphasized that the policy articulated by the
legislature [in HB 543] should be re-affirmed and cleared
up [in HB 210] so that the state could conduct its
business.
PAUL BOWERS, DIRECTOR, STATEWIDE AVIATION, DEPARTMENT OF
TRANSPORTATION AND PUBLIC FACILITIES (via teleconference),
testified that the department was not formally opposed to
the bill. However, he had been asked to expound on the
department's viewpoint that the bill would not be good
policy. He listed reasons, explaining that the department
owned and operated some 265 of the 287 public-use airports
in the state and clearly had an interest in fostering and
promoting a strong aviation transportation infrastructure.
Providing the infrastructure cost around $19 million each
year for the rural airport system alone; revenues amounted
to less than half that amount. The difference between the
operating costs and the revenues was made up through
general fund money, which had been cut every year by the
legislature. The only way to make up the difference was
from market-value pricing of land-lease revenues. The
department believed that the perpetual-lease extension that
HB 210 would create would exacerbate the situation.
Mr. Bowers stated that the department agreed that the
lessee should be compensated for improvements; that would
happen under both existing and proposed Title 17
regulations. However, the monetary value of the right to
the underlying property should accrue to the land's owner,
not the lessee, and the revenue gained should be used to
help the state operate its airport infrastructure. From a
public-policy perspective, the department believed that
leasing regulation should foster and promote public airport
aviation infrastructure and not create what would
effectively become "leasehold heirlooms." The bill would
preclude competition from limiting space, which from a
long-term perspective would lock up innovation.
Mr. Bowers emphasized that competition in an open
marketplace was good; without it, many advances would not
exist, including jet engines, pressurized aircraft, and
telecommunications. He argued that perpetual leases were
bad policy; 55 years was a long time in any case, but
especially in aviation. In just the past 50 years, the
industry has progressed from World War II B-24s to BI
Stealth Bombers, DC-3s, and so on. He claimed that the rate
of innovation was exponential and that long-term leases
would effectively preclude economic development.
Co-chair Sharp asked whether all the leases were 55-year
leases. Mr. Bowers answered that HB 543 had stipulated that
the term maximum was 55 years; many of the leases were
shorter than that. Generally, a lease was entered into that
was long enough to capitalize any improvements made. Under
those terms, putting in a hot-dog stand would not warrant a
55-year lease.
Co-chair Sharp asked whether the regulations being
developed over the past two years would allow for the
current value of improvements on a particular lease to be
returned to the leaseholder who was losing the lease if it
went to public bid and someone else got it, or whether the
value go to the state. Mr. Bowers answered that there was a
transition provision in the proposed regulations (Title
17).
Co-chair Sharp clarified that anything over-and-above the
lease amount of the re-bid lease with improvements would go
back to the original lease owner. He wanted to get away
from the state confiscating improvements because of an
expired lease. Mr. Bowers answered that there were clearly
provisions in existing and proposed regulations that would
enable compensation; there was no way the state would take
over the property unless it was absolutely abandoned by the
leaseholder.
Co-chair Sharp described a possible scenario in which a
present occupant of a lease with $2 million worth of
improvements wanted to continue with the lease and had to
go to a public bid. He asked whether the lease-holder would
basically get $2 million worth of "free chips" on the bid
and would only be bidding against the actual lease amount.
Mr. Bowers replied in the affirmative.
Co-chair Sharp asked whether the described scenario
represented a change from the previous proposal three years
prior. Mr. Bowers responded that Title 17 regulations had
gone through a dramatic metamorphosis and had been through
the public process.
Senator Adams queried language. He wanted to find a piece
of legislation that would be more acceptable to Alaskans.
He reiterated his earlier question regarding language on
page 1, line 13 related to the 55 years for each land lease
and changing the word "shall" to "may" (resulting in: "the
commissioner may approve the application"). The department
would then have a chance to review the leases so that other
Alaskans could compete fairly after capitalizing their
present leases. Mr. Bowers responded that the department
agreed with Senator Adams' proposed language and thought
changing "shall" to "may" would be the best policy. He
thought that reviewing exceptions to the limitations would
make more sense than automatically extending every lease;
there would be a public-review process for exceptions. He
suggested making the lease extension one-time rather than
perpetual if the proposed language was not acceptable.
Senator Adams emphasized that airport leases in particular
in rural Alaska could take a long time to get approval,
which made it difficult for a small air carrier to expand.
He was not sure the issue could be dealt with in HB 210.
JOHN STEINER, ATTORNEY GENERAL OFFICE, DEPARTMENT OF LAW
(via teleconference), agreed that on the surface, the idea
may be to extend the right to preferential leases in
perpetuity to the extent that the extension or reputed
lease could re-occur regardless of how many there had been
before. He stated that the Department of Law (DOL) had
noted, however, that there were also two pre-conditions to
an extension, noted in subsections (1) and (2) on page 2 of
the CS (lines 3 and 5), indicating that the lessee must be
found in compliance with the terms of the lease and the
continuation of the leasehold must be consistent with
written airport operation policies and the state's BIF. He
emphasized that the two subsections contained critical
pieces of language, which would not entirely resolve
concerns by DOL related to general constitutional policy,
but went far towards doing so. The shell under the certain
situation was somewhat limited to the extent that the
findings had to be found before the shell kicked in;
however, were the language to be changed to "may" as
suggested by Senator Adams, the following concerns would be
resolved:
1. The state constitution, in Article IX, Section 6,
forbids the transfer of public property, except for
public purpose. The concern was that a nearly
automatic extension without a review for public
purpose or the possibility of competition could
essentially be a transfer of fee without a public
purpose finding.
2. Concerns related to Article VIII, Section 2 of the
state constitution, which stipulates that land in the
public hands must be used to the maximum extent of the
people not to the maximum extent of a particular
private leaseholder.
3. Article VIII, Section 10 requires that land owned by
the public be offered or disposed with leases that
include safeguards of the public interest, which are
found for example in the land-leasing statutes in
Title 38.05.102.073, allowing (similar to Senator
Adams' suggestion) for the possibility of a
preferential extension in the public's interest but
not a mandatory extension and limited with an
extensive public process to determine whether in fact
an extension would be in the public interest.
4. The Federal Aviation Administration (FAA) had grant
assurances which airports had to follow as part and
parcel of receiving federal assistance in certain
capital improvements. Among the grant assurances were
some requiring that the land of the airport be
available under terms which had no unjust
discrimination to all types, kinds, and classes of
aeronautical use. There was concern that preferential
extensions could wind up foreclosing certain kinds of
uses. There was also a grant assurance requiring that
no exclusive right of use to the airport by anyone
providing aeronautical services be allowed. Similarly,
at rural airports where there could be limited land on
the airport that would be suitable for aeronautical
use, if it happened to be locked up, there could be a
problem under that grant assurance. The statement of
interest finding in the statute could resolve that;
nevertheless, in a perpetual-type situation, there was
the risk of running closer to the constitutional
limits and the FAA line.
5. The FAA grant assurances say that a sponsor (the state
of Alaska) may not take or permit any action which
would operate to deprive that sponsor of the rights
and powers necessary to perform the assurances; in
other words, to make sure there are no exclusive
rights and no unjust discrimination.
Mr. Steiner continued that the effort to clarify that the
preference right was without limit rather than limited was
somewhat troubling as a constitutional legal policy
judgment, although it did appear that the conditional
clauses in the existing legislation could actually save it
from a finding of unconstitutionality. For that reason, DOL
had not expressly come out and suggested rejection as a
matter of constitutional law, but wanted to apprise the
committee of the troubling nature of skating somewhat close
to some of the constitutional lines in the FAA grant
assurances.
Mr. Steiner noted that a difference would be made between
public and private land-leasing. In a private land-lease
situation, a private owner may (but need not) give a
preference to an existing lessee or existing tenant with or
without improvements on the property. Under the Alaska
Constitution, a public land-owner in Alaska typically would
not give a preference. House Bill 210 (as well as HB 543)
tended to suggest that the state was even more limited in
its public options than a private land-owner would be, and
should follow an exclusive-rights model rather than a more
competitive model. He reiterated that the state's BIF would
protect it from ultimate unconstitutionality.
Co-chair Sharp asked whether the wording of the proposed CS
would limit the state's ability to raise the lease fees at
the time of renewal or extension. Mr. Steiner replied that
the language did not appear to have any limitation on
raising the actual per-square-foot lease fee.
Co-chair Sharp asked whether the option would be available
to the state to at least get the lease fees up to whatever
the current value was at the time of any renewal or
extension. Mr. Steiner answered that it would be possible
under HB 210 to the extent that the department was able to
identify the fair-market value; the distinction would be
that a competitive offering might discover that a
particular property actually had a higher market value
because of its specific location. He referred to an earlier
question about the transfer of a building on a state
airport lease and whether the state or the owner of the
building would get the advantage. He asserted that the idea
was that the owner of the improvements would be paid the
value of the improvements in the situation. The difficulty
was distinguishing the premium for the building from the
premium for the real estate; it appeared very difficult to
separate the two such that the state would get any
advantage from the premium for the real estate. In the
existing situation, it would be very hard to break out the
premium for the real estate if there was a assignment or a
sublease, especially if it were improved and were done
through a sublease of a building rather than just the land
or through an assignment of the lease, in which the
building and the land went together. He stated that it
would be nearly impossible to break out the premium of the
real estate.
Co-chair Sharp asked whether he had reviewed the proposed
amendment. Mr. Steiner replied that he had the proposed
amendment to the second section.
Senator Adams read the language in Section 2: "An extension
under this subsection may not extend a contract for an
additional period longer than the original term of a
contract, except for the holdover for the convenience of
the department." He pointed to a new subsection with the
language: "if the contractor makes a substantial investment
in leasehold improvements subsequent to the award of a
contract under this section, the commissioner may modify
any contract provisions that would increase the contract's
payment because of an increase in contract income due to
leasehold improvements." He wondered whether the language
[in the amendment] was in the state's best interest or in
the leaseholder's best interest. He asked whether there
were legal issues in regards to the way the amendment was
drafted.
Co-chair Sharp asked whether Mr. Steiner had the "K.1"
version of Amendment 2. Mr. Steiner replied that he did
not. He stated that in the first portion of the amendment,
he had the language (except for a holdover at the
convenience of the department). He had a prior version of
the subsection (h) proposal; he did not have the specific
language read by Senator Adams.
Co-chair Sharp stated that the bill would be heard the next
day after sending the amendments to DOL.
Mr. Rokeberg commented that the debate had been about HB
543. He believed the bill had been passed because of the
"complete distemper" among the aviation community and the
legislature with the policies and implementation of the
department; he did not think any further discretion was
warranted.
HB 210 was HEARD and HELD by the committee for further
consideration.
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