HOUSE FINANCE COMMITTEE APRIL 13, 1996 1:25 P.M. TAPE HFC 96 - 118, Side 1, #000 - end. TAPE HFC 96 - 118, Side 2, #000 - end. TAPE HFC 96 - 119, Side 1, #000 - #536. CALL TO ORDER Co-Chair Mark Hanley called the House Finance Committee meeting to order at 1:25 P.M. PRESENT Co-Chair Hanley Representative Martin Co-Chair Foster Representative Mulder Representative Brown Representative Navarre Representative Grussendorf Representative Parnell Representative Kelly Representative Therriault Representative Kohring was not present for the meeting. ALSO PRESENT Representative Norman Rokeberg; Representative Gary Davis; Kurt Parkan, Deputy Commissioner, Department of Transportation and Public Facilities; Elisabeth Hickerson, (Testified via teleconference), Assistant Attorney General, Department of Law, Anchorage; Stephen Cooper, (Testified via teleconference), Attorney, Fairbanks; Charles Cole, (Testified via teleconference), Attorney, Fairbanks; Diane Banth, (Testified via teleconference), Leasing Officer, Department of Transportation and Public Facilities. SUMMARY HB 543 An Act establishing a preference when entering into state airport land leases. HB 543 was HELD in Committee for further consideration. HOUSE BILL 543 "An Act establishing a preference when entering into state airport land leases." Representative Mulder noted a conflict of interest in the proposed legislation. 1 Representative Kelly MOVED to adopt 9-LS1769\0, Bannister, 4/9/96, as the version before the Committee. There being NO OBJECTION, it was so ordered. Representative Kelly MOVED to adopt Amendment #1, 9- LS1769\0.4, Bannister, 4/12/96. Representative Brown OBJECTED requesting an explanation of the effects of the amendment. REPRESENTATIVE NORMAN ROKEBERG stated that Amendment #1 would make adjustments to the bill. He noted that the terms and conditions of the existing leases may be different than new leases offered by the Department of Transportation and Public Facilities (DOTPF). He thought that a lease extension would be better and suggested that it be included as a portion of the bargaining process. Representative Brown suggested that the question be divided. She added that the State's concern should include "broad public interest". Representative Brown MOVED to divide Amendment #1. Lines 1 & 2 of the Amendment would become Amendment #1(a) and Lines 3 through Line 9 would become Amendment #1(b). There being NO OBJECTION, it was divided. Representative Kelly MOVED to adopt Amendment #1(b). There being NO OBJECTION, it was adopted. Representative Rokeberg pointed out a technical change to Line #6, "an" should be replaced with "and". Representative Kelly MOVED to adopt Amendment #1(a). Representative Brown OBJECTED. Co-Chair Foster referenced Amendment #1(b) stating that a master plan has existed for nearly fifteen years. He noted that a "master term" should work with a "master terminal", and at this point does not exist. Representative Brown requested word from the Department regarding new leases and/or an extension of the existing leases. She suggested that lessees receiving the opportunity for extension without competition are being provided a significant benefit and suggested new language address that concern. KURT PARKAN, DEPUTY COMMISSIONER, DEPARTMENT OF TRANSPORTATION AND PUBLIC FACILITIES, agreed that some of the current language should not be carried forward. He requested the Department of Law comment on that concern. ELISABETH HICKERSON, (TESTIFIED VIA TELECONFERENCE), 2 ASSISTANT ATTORNEY GENERAL, DEPARTMENT OF LAW, noted that two issues of concern exist for the Department of Law when providing an extension without competition. * Would that action decrease the Department's ability to be successful on a public purpose argument. * Would the action provide for a material change in the contract. Ms. Hickerson elaborated that if an extension was added to a lease, would that action then provide a material change to an old lease. She suggested that it would be sound legal practice to begin with a new lease. Co-Chair Hanley remarked that the inclusion of "or" in Amendment #1(a) would allow the Department to offer the extension of the lease "or" a new lease. Ms. Hickerson advised that it was the intent of the amendment to allow for an existing lease to be extended up to 55 years. She reiterated that if the concept was an extension of the "old" terms, that would then warrant a material amendment to an extension contract. Co-Chair Hanley questioned Ms. Hickerson's interpretation of the language. He thought that addition of the language would create important flexibility. Representative Brown thought that incorporating that language into the law would not be a sound approach. She advised the legislation should address the problem of making the extensions without competition. REPRESENTATIVE GARY DAVIS questioned the basic intent of the amendment. He asked if it would provide measures to renegotiate an existing lease or would it address a shorter period of time in which an existing lease retires. He remarked that the intent of the amendment was to renegotiate an existing lease. Representative Rokeberg stated that the intention of the language would be to provide DOTPF the needed flexibility. He noted that it was a matter of interest that the Department be allowed to have the choice. He added, if the tenant intended to extent their lease term as opposed to creating a new lease, this would be a bargaining point between the State and the tenant. STEPHEN COOPER, (TESTIFIED VIA TELECONFERENCE), ATTORNEY, FAIRBANKS, commented that the proposed language could be useful in order to readjust a minor matter as to the length of the term. He remarked that if the Department assumed 3 that the extension of the lease was a material alteration to the existing lease, they would need to issue a public notice in order to make the alteration. He pointed out that DOTPF has misinterpreted the regulations in the past. There is no language stating that to issue a public notice, an invitation for public bid must be included. If the Department thought that there was a material alteration in the terms of the lease, they could issue a public notice to recover that. He advised that option would allow the needed flexibility. Ms. Hickerson responded that if the Committee intend that an extension be allowed without competition for only minor adjustments for short periods of time, that language should be clearly defined in the legislation. Co-Chair Hanley inquired if it was up to the Department to decide if a new lease would be offered or if there would be an extension to the old lease. Mr. Parkan maintained that DOTPF would appreciate incorporating the suggested flexibility. He added, the Department of Law would not have a legally defensible position if there was only an extension of the existing terms. Co-Chair Hanley elaborated that "some" future Department or "some" future attorney general may not understand the leasing law and grant an illegal extension. In response to Representative Rokeberg, Representative Brown commented that this legislation should not address the commercial real estate world. This is the "world of public land management" and the obligation that public land managers have as specified under the constitution. She emphasized the main contention being that a material term of a contract can not be changed. Representative Kelly asked if there was a term which could quantify the extension for a short time. Ms. Hickerson suggested placing a time limit and extension on an existing lease for six months would then add definition. She suggested that there were two issues at hand; the legal concern and the directive issue for the Department's extension. Co-Chair Hanley recommended adding the notation "Under any circumstances which are legal". A roll call was taken on the MOTION to adopt Amendment IN FAVOR: Martin, Mulder, Parnell, Therriault, Kelly, Hanley, Foster. OPPOSED: Brown, Grussendorf. Representatives Navarre and Kohring were not present for the 4 vote. The MOTION PASSED (7-2). Representative Kelly MOVED to adopt Amendment #2. Representative Brown OBJECTED. Representative Rokeberg explained that the amendment was based on suggestions from the Airmen's and Air Carriers Association. These suggestions would include issues put forward by DOTPF to cover the circumstances when the reversionary interest of the lease improvements are addressed. The amendment was drafted with the intention of granting the right to an existing lessee to have and retain the title of property of purchase and then allowing them to sell that improvement. The amendment would also provide the Department reversionary interest in cases of abandonment of the lease by a tenant. Amendment #2 was intended to clarify the rights of the lessee and to provide for the rights of the Department. Representative Rokeberg added, the reason for drafting the legislation resulted from DOT&PF issuing a standard lease form and then not bargaining in "good faith" with the tenants. It is the intention of the amendment to guarantee that "good faith" bargaining and negotiations are carried out. (Tape Change, HFC 96-118, Side 2). Co-Chair Hanley asked if the language of the amendment was better than the language in the version of the legislation before the Committee. Mr. Parkan acknowledged that it was better, but not ideal. Mr. Parkan questioned the situation in which an improvement belonged to one party and the land to a different party. He asked if there would then be two land-lords. He recommended that the language specify that the improvements to the land went with the lease. Representative Rokeberg stated that the title would remain with the tenant who would then be the one responsible to bargain with the new lessee. He stressed that the State should not be in the position of bargaining for the improvements made to the land. Representative Brown understood the intent of the amendment, although, suggested that the language did not accomplish the intent. She maintained that the language was ambiguous. Representative Brown asked if the existing leases provide for entitlement to maintain improvements which are constructed. If leases exist which do not provide that, would it then be considered a material change. Mr. Parkan responded that the language would not change existing leases. Representative Brown understood that the language would 5 apply to existing leases. Mr. Parkan stated that the Department could not change the language of each existing lease. When the old lease is terminated, the legislation would apply only to the new lease as would the "options of competition". It would not change existing leases. Ms. Hickerson commented that the lease would be protective in application. She agreed with Mr. Parkan's interpretation. Ms. Hickerson voiced legal concern regarding the intent. She asked if it was the intent to offer ownership of the improvements to exist separately from the lease. Representative Rokeberg advised it was. Ms. Hickerson stated the effect would be to have a non- resident tenant having title to the improvement and being the landlord of the improvements, while at the same time having the State being landlords of the land lease. Ms. Hickerson recommended adding "hazard to property" to Page 2, Line 17. Representative Kelly asked what a "hazard" to a property would be other than health and safety. Ms. Hickerson suggested a situation could exist with asbestos in a building. Committee members agreed that would be a hazard to the "public" and that language already exists in the bill. Mr. Cooper commented on Representative Brown's suggestion on Line 5 of Amendment #2, "by any successor who purchases them, or by any lawful successor or assignee of the lessee". He stated that language would be applicable to the title of improvement. The language would not relate to whoever becomes the tenant of the lease holder. It would only be applicable to the ownership of the improvements. Mr. Parkan pointed out that Representative Rokeberg had stated that it would be possible to have an "improvement landlord" and a "property landlord". Mr. Parkan maintained that would be confusing and cumbersome. Co-Chair Hanley asked if at this time, all the lease hold improvements are owned by the same people that lease the land. DIANE BANTH, (TESTIFIED VIA TELECONFERENCE), LEASING OFFICER, DEPARTMENT OF TRANSPORTATION AND PUBLIC FACILITIES, ANCHORAGE, responded that at the Anchorage International Airport, all the property improvements are owned by the same entities who are leasing the land. Co-Chair Hanley asked if that was a requirement of the leases. Ms. Banth stated that it was. There have been no contrary situations which have come forward to date, although, a situation now exists in which the new successful bidder for a lease will be negotiating with the existing tenant. The negotiation must take place within a specified period of time and the 6 successful bidder will continue to move forward even without the successful resolution of the tenant. She acknowledged that it was very difficult to have the owner of the property different from the tenant. Co-Chair Hanley pointed out that the amendment would leave the same process in place. Representative Rokeberg stated that the language of the amendment was intended to protect the rights of the owner of the improvements. If the new tenant cannot make a "deal" with the old tenant, the old tenant has the right to take the building to another location. Representative Parnell questioned how the amendment would address the concern of protecting the "old tenant". He asked how it would impact prospective lessees. Representative Brown reiterated that the language was ambiguous when addressing existing leases. The terms of the existing contract will be changed through the legislation. She suggested that the language should be clarified, specifying that it will only apply to prospective leases. Representative Parnell asked if there was a provision in existing leases which make them subject to changes in State statute. Co-Chair Hanley said that language would not apply to current leases. Representative Rokeberg agreed that Amendment #2 should specify more clearly that language. Representative Kelly recommended making changes to Amendment Co-Chair Hanley questioned if the Legislature could legally change in statute the language of the leases. Representative Brown pointed out that the Legislature is always making changes to the terms and provisions within contracts. Ms. Hickerson advised that would be considered a material amendment to the contracts. The issue being if the change was for the benefit of a private or a public purpose. Whenever a provision becomes retroactive, it can then be argued unjust on the basis of material change. In response to Co-Chair Hanley, Mr. Cooper stated that he agreed that under the federal constitution, the State can not impair the obligation of the contract. He recommended that it should be left flexible and to delete language "entered into under this section". He thought that change would provide the terms of the existing lease to either be governed by this or not. Mr Cooper added that there exists many leases carried in a hold-over status. Representative Brown suggested language be adopted which would include: "Unless an existing lease provided otherwise the title to lease hold improvements". She considered that removing "entered into" would not adequately address the 7 concern. (Tape Change, HFC 96-119, Side 1). Representative Brown recommended additional language: "These two subsections apply to leases that expire after the effective day of this act". Representative Rokeberg agreed that language would work and that it was the intent of the amendment. Representative Brown asked Mr. Parkan if this language would provide a material concession of valuable property which the State otherwise would receive title to and sell to someone else. Mr. Parkan thought the recommended language attempted to achieve what is currently existing. Each lease does address the improvements, although not as clearly as recommended. Representative Rokeberg understood that the current language would provide the commissioner complete discretion. The intent of the legislation would be to overcome the discretion as a matter of law. Co-Chair Hanley noted that when the original leases were signed, it was understood that when improvements or buildings were made to the leases, the property then belonged to that person. Representative Kelly noted that the constitution states that person deserves just compensation. He thought that the constitution would take precedence over the lease. In response to Co-Chair Hanley, Ms. Hickerson stated that language would not be a constitutional "taking". Constitutional "taking" refers to situations where the person has a right, beyond the time in which the State comes to take. Mr. Cooper commented that the parties could bargain for whatever they want. The problem is whether the Legislature should pass a statute saying that no one should get a lease unless they agree to that condition. What would then occur, would be relinquishing the constitutional right to that compensation. The issue is whether the Legislature should impose upon the public, the precondition that they have to give up their constitutional rights for compensation for improvements if the State so decides. Representative Brown asked where in the bill, that language was mentioned. Mr. Cooper replied that language was not included in the current version before the Committee. CHARLES COLE, (TESTIFIED VIA TELECONFERENCE), ATTORNEY, FAIRBANKS, advised that in the legislation supported by the State, Subsection (f) contains a provision which clarifies that the "land lessee owns title permit to the improvements that the lessee constructed or purchased during the term of 8 the lease", unless the lease expressively states that the State is the owner of the improvements. [Copy on file]. He noted that the State has indicated their support of that language and thought it was applicable to existing leases. Representative Brown agreed that language was a more straightforward approach. Mr. Parkan referenced the attachment, pointing out that the underlined language was the language agreed upon by the Department of Transportation and Public Facilities and the Department of Law. Representative Brown asked if the underlined language was in existing law. Co-Chair Hanley advised that was "new" language. Mr. Cooper commented that he had referred to Subsection (g) in the State's proposal. There is in existence at this time, a written airport operations policy, stating that the airport retains the option of whether to decide if a person must remove the improvements off the land or to allow the person to sell them. The "so-called" right is illusory. The lessee has the right if the "State wishes to let him have the right". Presently, this is the mode of operation. Mr. Cole interjected that he disagreed with Mr. Cooper. He noted it would need to be in condition with: "Written airport operational policy". That language was included by the State. Co-Chair Hanley stated that if that was a written operational policy, it would then be totally in favor of the State, and there would not need to be negotiations. Mr. Parkan responded that it was not the intent of the Department to assume total control. What the operational policy refers to mostly is not the lease terms but rather operating of the premises and the airport. Ms. Hickerson added if the provision was passed, it would have the effect of repealing the operation of law and any inconsistent regulations. Airport operational policy only intends what the airport has to do in order to respond to directives given by the Federal Aviation Association (FAA). Statute currently prohibits duplicating or adopting inconsistent regulations of federal directives. The written operational policy is intended to address federal directives. Co-Chair Hanley asked why the exception was needed. Ms. Hickerson replied that the proposed legislation does not effect the law of condemnation and the need to condemn a building because of airport expansion and airport needs. Co-Chair Hanley asked why the State needed the option indicating that they could sell the improvements to a succeeding lessee on the same land. He asked what would 9 occur without that language. Ms. Hickerson stated that it would not affect the State's ability to offer the new lease. She referenced Section (c) of the State's proposed language, addressing that concern. She emphasized that it is important that the continued presence should comply with the federally approved plan, standards, and requirements. Representative Brown maintained that the Department's proposal addresses problems which the Committee struggled with in Amendment #2. Discussion followed regarding the language of the bill. Co-Chair Hanley recommended that the bill be further discussed in subcommittee. HB 543 was HELD in Committee for further discussion. ADJOURNMENT The meeting adjourned at 3:25 P.M. 10