HOUSE BILL NO. 161 "An Act relating to the Alaska Mental Health Trust Authority Subport Office Building; authorizing the issuance of certificates of participation for construction of the building and authorizing the use of up to $25,000,000 from the mental health trust fund for construction of the building; approving leases of all or part of the building by the Department of Administration; and providing for an effective date." REPRESENTATIVE CATHY MUNOZ, SPONSOR, spoke in support of HB 161 and introduced several people who could answer questions regarding the legislation. 5:14:18 PM Representative Munoz informed the committee that HB 161 was introduced on behalf of the Alaska Mental Health Trust Authority (AMHTA) so that the trust could develop a piece of property in the subport area in downtown Juneau. She explained that the plan calls for the construction of an office building that will house approximately 500 state employees. Representative Munoz added that a primary mission of AMHTA is to develop land that it holds throughout the state. For many years, the trust has viewed the subport property as a top development priority. She pointed to a critical need in Juneau for office space; two of the state facilities are aging and face immediate renovation costs of approximately $8.5 million. In addition, both facilities will need to be replaced in the future. The Department of Fish and Game (DFG) building in Douglas is nearly 50 years old, and the Department of Public Safety (DPS) building downtown is about 40 years old. The DPS building was constructed in 1970; the intent was to use it for ten years. A lease on the third facility, the Department of Labor (DOL) building, is due to expire soon. The state will need to find replacement space for approximately 300 DOL employees. 5:16:10 PM Representative Munoz listed four key points regarding the legislation: · Over the life of the lease, the state will save approximately $13 million. · The trust is allowed to develop a key land holding, which will provide a stable and dependable revenue stream for beneficiaries of the trust. · As land owner, the trust provides the land and half the construction costs, or approximately $22.7 million. · The state, in partnership with the trust, is able to meet a critical space need for around 525 state employees, and agrees to bond an equal amount of approximately $22.7 million, with the lease payments as security on the bonds. Representative Munoz emphasized that timing is crucial. In order for the project to work, enabling legislation must happen in the current session, as the DOL lease expires in 1012. 5:17:47 PM Representative Foster opined that the bill was the best he'd ever heard. Representative Crawford agreed and asked if the legislation would be under the state's prevailing wage law. Representative Munoz did not know but offered to find the answer. Vice-Chair Thomas asked who owns the building being vacated. Representative Munoz answered that the state of Alaska owns the DPS facility on Willoughby Avenue and the DFG building in Douglas. The DOL facility is owned privately by a family who lives outside of Alaska. Vice-Chair Thomas wondered what the Department of Administration planned for the two state-owned facilities. Representative Munoz replied that the buildings would probably be torn down and the property sold for mixed development such as housing. Vice-Chair Thomas queried if the proposal included funds to tear the buildings down. Representative Munoz responded that the legislation does not provide for demolition costs. Vice-Chair Thomas hoped there was a plan. He had seen school districts burdened with old buildings after erecting new ones. Representative Munoz explained that the state planned to take the DPS facility down and put in additional parking for the area. There was also discussion about using the facilities for things such as record storage. 5:21:36 PM Representative Austerman wondered if parking space would be lost in the downtown area with the new construction. Representative Munoz replied that the facility would require on-site parking to meet the planning and zoning needs of the space. She assured him that the needs could be met on-site. In addition, the city is constructing a parking garage at Main Street and Egan Drive; this garage is not associated with the proposed project. Co-Chair Stoltze queried possible parking variances. Representative Munoz replied that the project has not gone through a permitting process yet, but she understood that there would be enough on-site parking. 5:24:04 PM JEFF JESSEE, CHIEF EXECUTIVE OFFICER, ALASKA MENTAL HEALTH TRUST AUTHORITY (via teleconference), testified that when the Department of Administration approached the trust about the possibility of constructing the office building, the trust saw a unique opportunity to develop its resources. The land office has relied on more tradition methods of land management such as leases and sales of property. The project would offer the trust the option of being a developer. The trustees considered and decided the project was an excellent investment for the trust. The $22.7 million that AMHTA would invest in the building would return around 7.5 percent, which is comparable to the return on the trust's permanent fund over time. In the current economic environment, being able to guarantee the return over a 30-year period would help secure the endowment of the trust. During the 30 years, the payout would be offset and after the 30 years, the entire lease would go to the trust, making it an excellent investment. The state has the advantage of seeing its lease payments ultimately return to the non-profits that serve trust beneficiaries in furtherance of the mental health plan of the state. The mental health needs are expected to increase, so the additional revenue will be good. 5:28:59 PM Representative Fairclough asked for further information regarding the benefit to the state of using the $22.7 million general fund. Mr. Jesse understood that the $22.7 million will come from certificates of participation; the state will not be fronting general funds. Private investors will put up the capital. Through the lease payments, the certificates of participation will be paid off over a 20- year period of time. 5:30:12 PM Representative Crawford suggested that the design not include a flat roof, which does not make sense in Juneau. Vice-Chair Thomas queried the acreage of the land and who owns it. Representative Munoz replied that the trust owns the land. HARRY NOAH, EXECUTIVE DIRECTOR, ALASKA MENTAL HEALTH TRUST LAND OFFICE (via teleconference), recollected the size as approximately four acres. Vice-Chair Thomas asked the property value of the land. Mr. Noah replied that comparable appraisals in the area had been made, but he did not have the data. He offered to get the numbers. Vice-Chair Thomas asked why the parking area had the best view. Mr. Noah answered that the subport area is extremely valuable land. Initially, the intent was to take (through the trust land replacement program) the land where the DPS building stands and build the parking garage. However, the cost of the parking garage was $20 million. The project could not offset the high number with lease payments. The trust has reluctantly decided to use the area where the old subport building was as surface parking until there is some economic reason to change. Then the parking garage would be constructed and the area where the old subport building was would be developed. He called the measure an interim one. The trust has no specific use currently for the land. When a good one comes along, the trust intends to build a parking garage and further develop the area that will be used for surface parking. 5:34:37 PM Representative Gara voiced concern about taking $22.7 million from assets that generate income for the trust. He wanted to make sure there would be enough. Mr. Jesse replied that there will be no interruption of cash flow. He explained that at the end of the fiscal year, the trust pays out a percentage of its assets held by the permanent fund. In this case, the $22.7 million will still be in the permanent fund at the end of FY10; payout will be available in FY11. For 2012, the lease payments will begin at the start of the fiscal year, and the lease payments will be available subsequently. Representative Gara asked whether there would be a risk if tenancy did not occur or if construction were delayed. Mr. Jesse responded that no business deal is entirely free from risk; however, there are major incentives to make sure the building is completed on time, including that the state lease on the current facility expires at same time the new building will be completed. He added that even if there were some delay in the commencement of the lease payments, the amount of money involved is $900,000 a year, an amount that he believed trust could plan for and absorb without affecting its goals. 5:38:12 PM Representative Gara stated that he is fine with the risk if the trust is fine with it. Mr. Jesse replied that he is definitely fine with the risk, particularly because at 20 and 30 years out, the investment becomes an excellent deal for future trustees. Co-Chair Hawker queried how the state could rationalize building on expensive Class A real estate. Mr. Jesse replied that the AMHTA intends to provide the state with quality, energy efficient, aesthetically appropriate office space without the health and safety concerns caused by the state's current space. Representative Munoz added that rates at other comparable spaces, such as at the Goldbelt and Sealaska buildings, were comparable. In addition, the renegotiated DOL lease would be considerably more than what is currently being paid. 5:41:07 PM Representative Foster asked what the Department of Administration thought about the provision. VERN JONES, CHIEF PROCUREMENT OFFICER, DEPARTMENT OF ADMINISTRATION, directed attention to the fiscal note and analysis. He reported that DOA thought the proposition was a good deal. He mentioned the DOL building lease that was expiring. If the building does not get built, the department's other option is to put out an RFP the coming summer. The department's analysis shows that over the 30- year life of the lease, the AMHTA option would be $13.5 million less expensive than a lease in the private sector and maintaining the two older buildings that require a great deal of deferred maintenance. He pointed out that the fiscal note was understated; the cost showed for maintaining the old buildings and continuing the lease is probably low. In addition, the capital costs for the Douglas Island building and the DPS building only have the known existing deferred maintenance projects listed. Over the next 30 years, other work would need to be done. Mr. Jones added that DOA analysis calculates the square foot price at about $353. The department thinks the price is a bargain for the quality of space being contemplated. 5:44:24 PM Co-Chair Hawker asked if he was referring to cost to construct or leasehold costs. Mr. Jones responded the number represents a cost per square foot under a lease. He pointed out that the number is a ceiling to negotiate under, not necessarily the price that will be paid for the building. Co-Chair Hawker stated his inclination to support the concept. He referred to arguments by the current owner of one of the buildings that they could do a better job for less money. Mr. Jones replied that he had heard the arguments; departmental analysis does not support them. Co-Chair Hawker wanted to see a direct response to the arguments with the financial analysis. Representative Munoz requested that the committee consider what the state has invested in the facility. Close to $50 million has been invested in the old building. She thought it was important for the state to find space that would allow the department to function better. She reported numerous, well-documented problems. She believed there would be good benefit for all the parties involved. Co-Chair Hawker asserted that the state has to pay for the property. He wanted questions answered. Co-Chair Stoltze wanted numbers from the administration. 5:48:45 PM Representative Kelly was not convinced that the deal was great. He questioned putting state employees in Class A space. The trust could also construct a building and rent it out to doctors and attorneys to make money. Representative Munoz believed the current cost for the DOL building was $2.33 per square foot. She asked if the committee wanted an analysis of comparable space. Representative Kelly wanted a comparison with costs for Class B or C space, which he thought was more appropriate. He referred to criticisms he was hearing about the measure. 5:52:23 PM Representative Foster relayed his experience with office space. He opined that space with good parking can be important for employees. Mr. Jones reiterated that the $3.53 per square foot is a ceiling cost and that the price is still not negotiated. He pointed out that the state is not a typical tenant; it is a high quality but expensive tenant. Technology needs are much higher and more expensive to service than for a typical private tenant. There are higher natural light requirements as well, which drive up the cost of space. He suggested that it is not fair to compare to what might be available at a mall or Class C space. The department projects that the expectations for price in the RFP will be in the $3.80 to $4.00 per square foot range. The department thinks it has good backup to justify those expectations. 5:56:08 PM Co-Chair Stoltze talked about the information needed by the committee. Vice-Chair Thomas wondered if there were letters of support from the municipality. Representative Munoz responded that the City and Borough of Juneau had unanimously passed a resolution of support. 5:58:50 PMRECESSED until 9:00 AM March 28, 2009 9:09:48 AM RECONVENED