Legislature(2003 - 2004)
04/16/2004 03:40 PM L&C
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HB 545-STATE REAL PROPERTY LEASE EXTENSIONS CHAIR ANDERSON 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." Number 0890 VERN JONES, Chief Procurement Officer, Division of General Services, Department of Administration, reminded the committee that at the last hearing Representative Rokeberg mentioned some concerns, which have been addressed [in the proposed committee substitute (CS)]. The first concern was the vague nature of establishing a market rate for which to base a reduction in rent. The aforementioned concern is addressed on page 1, lines 10-12, which read: "The market rental value must be established by a real estate broker's opinion of the rental value or by an appraisal of the rental value." With regard to the section addressing the extension of contracts for goods or services, that section has been removed [in the proposed CS] and its title. Therefore, the proposed CS deals strictly with extensions of real estate or office space leases. Number 0815 REPRESENTATIVE ROKEBERG moved to adopt CSHB 545, Version 23- LSGH2150\D, Bannister, 4/15/04, as the working document. There being no objection, Version D was before the committee. REPRESENTATIVE ROKEBERG noted that [Version D] no longer includes the "brother-in-law section". He also noted that Version D references the court system on page 1, line 7, which the drafter indicated may be a separation of powers issue [because] the legislature has granted to the judicial branch the ability to have its own procurement code. He related that he has checked with the judicial branch, which has related its support of this legislation and lack of concern with regard to the possible separation of powers issue. REPRESENTATIVE ROKEBERG said he has only one remaining concern, which is the [cost savings] of 5 percent below the market rental value of the real property. The aforementioned is the trigger of the statute. Representative Rokeberg recalled that the original statute allows an extension [when there are cost savings of] 10 percent and [the lessor] agrees to make modifications to comply with the Americans with Disabilities Act of 1990 (ADA) or [when there are cost savings of] 15 percent below the current rate in the lease without ADA. He explained that the change [encompassed in Version D] reflects fundamentally higher market values and the prevailing rates at the time, and therefore has universal applicability. By going to the 5 percent at a higher barrier, it seems that it would be appropriate to have a 10 percent [barrier] in order to prevent potential mischief. CHAIR ANDERSON passed the gavel to Vice Chair Gatto. MR. JONES agreed, but noted that leases that aren't ADA compliant would be an exception. Therefore, it would generally be [a cost savings of] 15 percent, which he viewed as too high. He opined the importance of the rate being tied to a reduction of the market value rather than the existing rates paid. It was thought that 5 percent is reasonable. "But that in itself, isn't as critical as tying it to the market rate," he stated. REPRESENTATIVE ROKEBERG agreed. He posed a situation, what he indicated to be a typical situation, in which there is a $.02 per square foot rental rate. In such a situation, 5 percent would only be $.10 per square foot. Representative Rokeberg asked if Mr. Jones felt that 10 percent along with the market rate barrier would be workable. MR. JONES responded that 10 percent would be better than the current statute. REPRESENTATIVE ROKEBERG pointed out that this would allow the department to move forward with a sole source type contract, and he expressed the need to avoid the appearance of any noncompetitive type of acquisition or continuation of lease. MR. JONES said that 10 percent seems fully reasonable and achievable. Number 0465 REPRESENTATIVE ROKEBERG moved that the committee adopt the following amendment: Page 1, line 9; Delete "five" Insert "ten" REPRESENTATIVE CRAWFORD objected for discussion purposes. Representative Crawford said that if the market continues as it is, it would seem to make sense. However, if the market becomes "over built" and demand falls to the level of the 1980s, he questioned what would happen with a 10-year lease. He asked if in such a situation, any negotiation could happen [when the market changes]. REPRESENTATIVE ROKEBERG pointed out that the legislation specifies "up to ten years", and therefore one could have a one- year lease and this would still work. He explained: What we're doing here is going away from looking at the ... baseline number, currently is the current lease value. What we're doing is changing to the market value. So, that would allow you to go into the market .... For example, ... if you were renting space for $1.00 a foot and the market was now $2.00 a foot, under the current statute you couldn't stay there because the guy couldn't afford to lower your rent. That means you have to go out and rebid it so ... you know you're going to end up paying the $2.00 and you couldn't extend where you were, even for $1.10 because of the current statute. This would allow you to renew it at anywhere below that market rate, at least 10 percent below it and stay where you're at so that you could gain the savings. So it's a much better standard. REPRESENTATIVE ROKEBERG, in further response to Representative Crawford, related that in a down market the differential would be "squeezed" because the prevailing rate would be declining. However, the percentage wouldn't go down with it. He opined that typically in commercial real estate quotations of valuations will occur rather than specifics. "It's actually going to require the department to get a specific, single quote now," he stated. "I think you need to have enough of a distinction to grant you the sole source capability ...," he opined. Number 0229 REPRESENTATIVE CRAWFORD removed his objection. [The conceptual amendment was treated as adopted.] VICE CHAIR GATTO asked if the "real estate broker's opinion of the rental value" and "an appraisal of the rental value" are considered of equal value. REPRESENTATIVE ROKEBERG, speaking as a real estate broker, replied yes, and added that real estate brokers are a lot cheaper. In a major commercial building, to obtain a full appraisal could be extremely expensive and not necessarily appropriate. "Having a broker's opinion of value ... would be more consistent with testing and providing a defensible prevailing market rate for the purposes of the statute," he said. REPRESENTATIVE LYNN, as an associate broker, agreed with Representative Rokeberg. VICE CHAIR GATTO surmised that although the language [on page 1, lines 10-12] allows either, it seems there will be a conflict later regarding who will insist on the more expensive appraisal. REPRESENTATIVE ROKEBERG remarked that with a 30,000 square foot facility with a five- to ten-year deal, it might warrant an appraisal due to the scope and dollar amount of the project. The intention of the CS, he opined, is to provide the department flexibility to call for a broker's opinion versus an appraisal depending upon the scope of the project. VICE CHAIR GATTO surmised that whether the market goes up or down, the existing value will be relied upon when there is a lease extension. REPRESENTATIVE ROKEBERG replied yes and likened it to the price of oil going up and down. TAPE 04-44, SIDE A VICE CHAIR GATTO further surmised that whether [the market] goes up or down, the ability to extend the lease is based on the existing value. He asked if this legislation guarantees the right to extend the lease. REPRESENTATIVE ROKEBERG explained that the legislation allows the Department of Administration to enter into negotiations and an agreement for a lease extension with existing premises if a bargain can be made below the prevailing market rate. In further response to Vice Chair Gatto, Representative Rokeberg confirmed that he would like [the bargain] to be at least 10 percent [below the prevailing market rate] otherwise it would need to go out to market. He noted that there is a danger with sole sourcing, and therefore the incentive needs to be sufficient enough to avoid it. VICE CHAIR GATTO recalled from a prior hearing that moving expenses, rewiring, equipment replacement, and down time are all significant issues [to consider] for a lease extension. Number 0142 REPRESENTATIVE ROKEBERG related that under the current procurement provisions, unless the standard is met, [a lease extension] would have to go out to bid. MR. JONES informed the committee that he just received a call from the director of Libraries informing him that the facility [lease] in Anchorage is due to expire. The current cost of $1.25 is being offered under an extension while the prevailing market rate is around $2.00 not to mention the costs encountered in a move. Number 0199 REPRESENTATIVE DAHLSTROM moved to report CSHB 545, Version GH2150\D, Bannister, 4/15/04, as amended, out of committee with individual recommendations and the accompanying fiscal notes. There being no objection, CSHB 545(L&C) was reported from the House Labor and Commerce Standing Committee.