SB 156-ALASKA RAILROAD LAND LEASES  2:26:39 PM CHAIR EGAN announced SB 156 to be up for consideration. 2:26:54 PM DANA OWEN, staff to Senate Labor and Commerce Committee, sponsor of SB 156, said they were approached by the Alaska Railroad to amend the statutes to allow them to be able to lease land for more than the current statutory limit of 55 years. He said it is common in the development industry to lease land for 95 years, and that is how long they want. They believe this will result in higher quality development that retains its value for a longer period of time; this benefit will flow through to the State of Alaska and the leaseholders. SB 156 has letters of support from both the Railroad and potential leaseholders; they have received no letters or phone calls in opposition to the bill. 2:28:14 PM TIM SULLIVAN, Manager, External Affairs, Alaska Railroad Corporation (ARRC), said he was happy to answer questions. 2:29:05 PM JIM KUBITZ, Director, Project Planning, Alaska Railroad Corporation (ARRC), also said he would be happy to answer questions. SENATOR MENARD said she is proud of this corporation and asked what would be considered a sizeable investment that wouldn't fit into 55 year lease. MR. KUBITZ replied with a hypothetical: some Anchorage developers could be interested in doing a multi-phased project if they could control some of the land for a longer period of time. If you add a couple of projects together you could get up $20-25 million pretty quickly, and the Railroad would be interested in doing that. A standard ARRC leased is 35 years and with a few 55 year leases. The board has instructed them that to get up to the 95 year lease a project would have to be substantial. SENATOR MENARD asked if leases are typically for 100 years globally. MR. KUBITZ said he hadn't researched that, but Hong Kong was leased for 99 years to Great Britain a long time ago. It's not uncommon for a developer to go in on a long term lease and want to flip the property to another developer who would need certainty that in fact the investment is worth that. Sometimes properties get flipped a couple of times through the life of the project, and investors all want certainty. They have been specifically told that 55 years isn't enough and the longer the better. SENATOR MENARD said she can understand if they are trying to flip the leases. SENATOR PASKVAN asked what additional considerations have been addressed by the ARRC based upon commercial reasonableness in the future, say two or three decades from now. MR. KUBITZ replied that they are all professionals and would look at whether, for instance, a building was built 20 years ago and someone is buying it from a current tenant, but they won't buy it unless they can get at least one and a half times the term of their loan out of it. So, they may come back and say they would like a 35 year lease. They would analyze it and see if it makes sense. The issue would then go to their real estate committee on their board of directors, and the committee would make a recommendation to the board. It's on a case by case basis. He explained that new construction is different; in that case you have a bank that is very anxious to have their collateral protected when they are lending money. The bank would tell the ARRC how long the lease term should be. The real estate committee under the chairmanship of Jon Cook talks about this a lot. Since this is a big extension of their existing lease, they would come up with some definite parameters, which would have to be adjusted and inflation-proofed, as to when they would ever allow a 95 year lease. 2:34:53 PM SENATOR MENARD asked how the IRS depreciates construction costs with a long lease. MR. KUBITZ replied that when people do a development, they put a whole case together and he didn't know the tax ramifications. SENATOR MENARD said she was certain that the IRS has solid rules on this that would make a longer time more advantageous to the bottom line. SENATOR PASKVAN asked if an improvement upon property under a commercial lease is subject to taxation by local governments. MR. KUBITZ answered yes. 2:37:29 PM JON COOK, member, ARRC Board of Directors, said he has also served on the real estate committee. During the day he works for the largest developers in Fairbanks, and this issue is "pretty near and dear" to him. He said it arose out of various contacts with their leaseholders and other outside professionals and developers over the course of the past year. They have had two open houses with tenants in Anchorage and Fairbanks, meetings with ARRC leaseholders Association and meetings with the Leaseholder Advisory Group, and this topic has come up. They have all recommended increasing the lease term to 95 years for all the reasons outlined. He explained that what brought this to the forefront is the tightening of credit markets and underwriting standards since 2008, and that the Railroad wants to make sure its existing and future tenants have access to the lowest cost of capital. Frankly, 55 year leases won't obtain favorable financing on very large projects whether they are existing facilities or new. These 95 year leases requiring substantial amounts of capital, at least north of $10 million at a minimum, would be looked at on a case by case basis. They want to do this to help existing leaseholders who want to know that they can sell or transfer property to family members, to increase the highest and best value of their land and to bring more money into the Railroad and its shareholder, which is the state. It's the way of the future and the way things work in other areas. CHAIR EGAN found no further comments or questions and closed public testimony saying SB 156 would be held.