HOUSE FINANCE COMMITTEE April 18, 1997 2:04 P.M. TAPE HFC 97-106, Side 1, #000 - end. TAPE HFC 97-106, Side 2, #000 - end. TAPE HFC 97-107, Side 1, #000 - end. TAPE HFC 97-107, Side 2, #000 - #241. CALL TO ORDER Co-Chair Therriault called the House Finance Committee meeting to order at 2:04 p.m. PRESENT Co-Chair Hanley Representative Kelly Co-Chair Therriault Representative Kohring Representative Davies Representative Martin Representative Davis Representative Moses Representative Grussendorf Representative Mulder Representative Foster was absent from the meeting. ALSO PRESENT Representative Norman Rokeberg; Representative Jeannette James; Forrest Browne, Department of Revenue; Dugan Petty, Director, Division of General Services, Department of Administration; Ken Kincaid, Kincaid And Riely Real Estate Appraisers & Consultants; Richard Thaler, Attorney, Williams, Kastner, and Gibbs; John Reising, Frontier Building, Anchorage; Randy Welker, Legislative Auditor, Legislative Audit Division; Bob Parks, Frontier Building, Anchorage, Benny Jackson, Department of Administration. SUMMARY HB 236 "An Act giving notice of and approving a lease-purchase agreement by the Department of Administration for an office building in Anchorage; relating to the financing of the lease-purchase agreement; and providing for an effective date." HB 236 was held in Committee for further consideration. HOUSE BILL NO. 236 "An Act giving notice of and approving a lease-purchase agreement by the Department of Administration for an office building in Anchorage; relating to the financing of the lease-purchase agreement; and providing for an effective date." DUGAN PETTY, DIRECTOR, DIVISION OF GENERAL SERVICES, DEPARTMENT OF ADMINISTRATION testified in support of HB 236. He observed that the State has entered into a purchase agreement with the Equitable Life Insurance Association for the purchase of the Bank of America Building in Anchorage. The agreement is subject to legislative approval. He asserted that the purchase will save the State money. The Department of Administration's cost benefit review demonstrates that the purchase will save the State $44 million dollars, net present value, over 25 years. The purchase would lock-in a rental rate of $1.12 to $1.51 dollars throughout the 25 year period. After 25 years, the State would only pay operating and maintenance costs. He observed that the Department has been under pressure to bring down rental costs. In FY 94, the Department was successful in negotiating more than $19 million dollars in savings from 39 leases, including leases at the Frontier Building. He noted that the main lease at the Frontier Building was reduced from $3.28 dollars a square foot to $2.15 dollars a square foot. This lease was extended to the year 2000. He emphasized that the leasing budget is still under downward pressure. He pointed out that the Frontier Building lease is one of the biggest and most costly. It occupies 135,000 square feet. The Department of Natural Resources occupies 100,000 square feet in the Frontier Building. The current lease cost in the Frontier Building is $2.169 dollars per square foot. The State has approximately 40 lease agreements representing 770,000 square feet of office space in Anchorage. The average per square foot cost for commercial property in Anchorage is $1.56 dollars. Without the Frontier Building the average lease would be $1.38 per square foot. Mr. Petty noted that negotiations for the purchase of the Frontier Building failed. In December 1995, the Division sent a letter to all the lessors requesting suggestions to reduce the State's operating costs. As a result of this letter, Mr. Glenn Scott contacted the State with a proposal for the State to buy the Bank of America Building in Anchorage. RICHARD THALER, ATTORNEY, WILLIAMS, KASTNER AND GIBBS, ANCHORAGE observed that he represented the State in respect to the Frontier Building and the Bank of America negotiations. He gave a brief history of his work experience in commercial real estate law. He reviewed the Frontier Building purchase negotiations. The State offered to buy the building for $46 million dollars, subject to appraisal. The offer was rejected and negotiations were terminated by the Frontier Building representatives. The appraisal was completed at $31 million dollars. Mr. Thaler discussed the Bank of America Building purchase negotiations. Negotiations began in September, 1996. The parties reached agreement on a purchase price of $25.950 million dollars. The purchase includes the building, underground parking garage and more than two blocks of downtown land that has been improved as paved and stripped surface parking lots. He asserted that the purchase price is good. The purchase costs $103.06 hundred dollars per square foot for the building. The two blocks of downtown land were not included in the value. He emphasized that the building is functionally new. After the financing is paid off the State can look forward to a long period of occupancy for the cost of operating the building. Mr. Petty provided members with spreadsheets demonstrating cost assumptions and savings to the State (copy on file). He noted that Mr. Kincaid was hired to provide an independent assessment. KEN KINCAID, KINCAID AND RIELY REAL ESTATE APPRAISERS & CONSULTANTS spoke in support of HB 236. He noted his work history in the Anchorage real estate market. Mr. Kincaid provided members with a summary of observations regarding the purchase of the Bank of America Building (copy on file). He concluded that the property is high quality and has been well maintained. He estimated that the building has a 40 to 50 year minimum remaining life. He stressed that it is well positioned in downtown Anchorage with lots of parking lots in the vicinity. Mr. Kincaid reviewed the State's assumptions. He referred to a graph on page 7 of the report. The graph depicts the cost of continued leasing of the Frontier Building, deconsolidation from the Frontier Building and the purchase of the Bank of America Building. He pointed out that the Bank of America Building is the cheapest alternative. The most expensive option is the continued leasing of the Frontier Building. The second most expensive option is the deconsolidation of rents from the Frontier Building. Deconsolidation would be more expensive initially. The initial purchase cost would be $1 dollar a square foot. The purchase cost would spike to $1.98 dollars a square foot and then quickly drop to $1.12 dollars a square foot. He pointed out that there would be a positive cash flow from private sector tenants in the building. As these tenants are asked to leave or their leases expire the lease cost would climb. As the debt amortization begins the lease cost would drop. Mr. Kincaid pointed out that models are predicated on current rents with a 1.4 percent annual increase. This assumes that what owners receive today, they would receive 25 years from now with a slight increase for expenses. He emphasized that, at today's rent, buildings do not justify their replacement. If there is any up- tick in the market over the next 25 years rents would increase above the model. He stressed that it would not be unreasonable to see rent increases of 10 to 20 percent sometime in the next 25 years. Mr. Kincaid summarized that most of the State's assumptions were conservative. He noted that estimations of expenses were high. He acknowledged that there could be some unanticipated increases in costs. He added $10 dollars a square foot to look at what the result would be of additional unanticipated costs. He concluded that the assumptions in the purchase scenario are not as subject to change as the leasing assumptions. He stressed that increases in the market are less dramatic in a buy scenario than a lease scenario. He observed that this is a good time to purchase. He stressed that the purchase price is favorable with compared to replacement price and other sales. He noted that space in the Arco Building is becoming vacant. He stated that the Arco Building is undergoing asbestos abatement and seismic upgrades. There will be between 110,000 to 150,000 thousand square feet of space available within the next 12 to 14 months. The First National Bank is also vacating their tower in downtown Anchorage in the same time span. He noted that the market impact of the purchase would be mitigated by the additional space. He noted that there would be greater impact if the State does not purchase the building. Mr. Kincaid concluded that a purchase scenario is superior to a leasing scenario for the long-term reduction of operating costs. He observed that it is easier to project ownership costs. He maintained that there is less risk. Mr. Kincaid recounted comments by persons regarding the purchases. He observed that comments were favorable and indicated that the purchase would be a good deal. Mr. Kincaid summarized that the State's assumptions were reasonable and fairly conservative. He concluded that the purchase would secure the long-term operating cost, secure a property that has a long economic life, and provide the State with an area that can provide choices for large tenants. Mr. Petty reiterated that the purchase will save money for the State. Representative Mulder noted that the Bank of America Building is in a newly created special assessment district. Mr. Kincaid thought that the program is voluntary with an initial three year commitment. He noted that the building is committed for a three year period. The appraisal included these costs. Representative Rokeberg noted that the appraisal valued the downtown land at $22 dollars a square foot. Mr. Kincaid stated that a land value of $22 dollars did not appear to be high. Representative Rokeberg observed that the model includes full relief from taxation to the municipality of Anchorage. Representative Martin observed that the lease rate includes the cost of taxes. In response to a question by Representative Martin, Mr. Kincaid stated that it is his understanding that it is not necessary to buy out people who are not interested in leaving the building. Mr. Dugan noted that leases could be bought out over time. He demonstrated that leases could go to term. He noted that the State occupies 55,000 thousand square feet. There is 40,000 - 50,000 thousand square feet vacant. Another 13,000 thousand square feet would be available by the time the Department of Natural Resources was ready to occupy. Representative Rokeberg provided members with Amendment 1 (copy on file). Amendment 1 clarifies that the State would be responsible for the payment of the municipal real property taxes on the portion occupied by private sector tenants. Mr. Dugan provided members with a spreadsheet calculating private tenant property tax (copy on file). He stated that it is not clear that the exemption for municipal tax would be completely applicable to the building. Under the amendment, the State would be subject to paying on the lease hold interest held by private tenants. He did not think that the entire building would be subject to the tax. Representative Rokeberg referred to the certificates of participation and how the title rests in relation to municipal taxes. Co-Chair Hanley noted that the State might not obtain the lower interest rates if occupancy by public tenants is not sufficient. Mr. Dugan maintained that the purchase makes sense under any tax scenario. He added that it is possible to condominiumize the building. He noted that a model was based on initial taxable financing with a non-taxable financing after 90 percent occupancy is achieved by the State. Co-Chair Hanley noted that the Department of Administration shows an approximate $3 million dollar savings in FY 98 over current leasing costs. He discussed the Department's spreadsheet. He noted that projects demonstrate a total cost of $90 million dollars and projected savings of $91 million dollars, with a net present value of $44 million dollars. RANDY WELKER, LEGISLATIVE AUDITOR, LEGISLATIVE AUDIT DIVISION discussed the proposed purchase of the Bank of America Building. He summarized concerns regarding the purchase. He noted that revisions in assumptions by the Department of Administration have changed the estimation of savings from $8 - $10 million dollars to $44 million dollars. He stated that the Division estimates that the net present value savings would be $6 million dollars over the life of the financing. The life of the financing is 19 years. The Department of Administration assumptions are over 25 years. He stated that the Department of Administration was overly optimistic in the best case view. He maintained that the cost is likely understated. (Tape Change, HFC 97-106, Side 2) Mr. Welker estimated that the process of moving tenants out and moving state agencies in will be more drawn out than estimated by the Department. Mr. Welker reiterated that short-term savings would be between $6 to $10 million dollars. He stated that some of the initial moving costs will be higher than estimated by the Department. He expressed concern that other financing options were not reviewed. He noted that once debt service is paid off, the only costs will be maintenance and operation of the building. He added that with some capital maintenance, operation and maintenance costs would only be half of the projected lease costs. He emphasized that there are significant savings in the future years. He noted that the Department of Administration included equity build up in their savings number. He noted that the building has a replacement value of over $50 million dollars. The building would be a state asset but would not have direct budgetary impact. He observed that the purchase would provide stability and permanent centralized services. He acknowledged that the municipal tax issue can be a negative factor. He observed that the quality of the space could be a factor in current tenants' decision to extend leases in the building. He added that the State could be in a landlord role for sometime in the future. Mr. Welker discussed calculations by the Division of Legislative Audit that differ from those by the Department of Administration. He noted that $20 million dollars was back out by the Division of Legislative Audit to account for the difference in calculations to 19 instead of 25 years. He observed that the there is a $20 million dollar difference for these six years because the purchase would be beyond debt services. The Division of Legislative Audit included a capital renewal cost of $7,343.3 million dollars for items that would not be covered by normal maintenance and operations. The Department of Administration included parking revenue of $6,527.9 million dollars. The Department of Administration's estimation for operation and maintenance costs were $5,395.9 million dollars higher than the Division of Legislative Audit's. The Division of Legislative Audit showed a higher tenant income of $433.6 thousand dollars. In addition the Department of Administration's estimations for expiring lease costs were $1,348.3 million dollars lower. The Department of Administration's estimated purchase cost is $90,872 million dollars. The Division of Legislative Audit's total purchase cost is estimated at $118,614.9 million dollars. In response to a question by Representative Davies, Mr. Welker noted that the Department of Administration's calculations were revised to include $38 million dollars for equity buildup. He reiterated that the longer the projection the greater the savings. JOHN REISING, PARTNER, FRONTIER BUILDING testified against HB 236. He stated that the Legislative's Auditor's net present value estimation is appropriate. He maintained that Mr. Kincaid's graph did not reflect the actual net present value. He urged that the appropriate measuring stick be used for legislative decisions. He maintained that uncertainty of risks and probable costs make the purchase unreasonable. He asserted that the Department of Administration's calculations do not include costs of moving the tenants. Mr. Reising observed that current tenants have not been contacted by the Department of Administration. He stated that the Department's calculations do not include the exercise of existing lease options. He maintained that several tenants have delivered notices that they will exercise their options. He noted that these options will affect the availability of space. He maintained that there is a possibility that space will not be available in the Bank of America Building at the time when leases expire in the Frontier Building. Mr. Reising referred to municipal taxation. He maintained that municipal tax payments are not taken into consideration of the benefits of ownership. He noted that real estate tax payments would be dropped by the amendment proposed by Representative Rokeberg. Mr. Reising referred to the Business Improvement District agreement. He did not think that these expensive had been included in the prior operating history. He stressed that the Committee needs to address the municipal tax issue and incorporate the decision in their model. Mr. Reising discussed the difference between taxable and tax exempt financing. He questioned the spread between the taxable rate and the non-taxable rate. He noted that he was quoted a spread of one and one-half percent for Seattle Northwest Securities, a municipal bond dealer. He observed that the Department of Administration includes $211,740 thousand dollars for the cost difference between taxable and tax exempt financing. He disputed the accuracy of this figure. He pointed out that there is an assumption that the conversion will happen within two years. Mr. Reising noted that parking is limited at the Bank of America Building compared to what is available at the Frontier Building. He noted that the State currently has 300 employees in the Bank of America Building. There are 665 employees in the Frontier Building. He asserted that there will be 85 additional employees from other agencies in the Bank of America Building if the purchase occurs. He concluded that there will be an employee count of 1,050. He maintained that there would be a 377 parking space shortage for these employees at the Bank of America Building, without an allowance for visitor parking. He alleged that it costs between $45 and $65 dollars a month for additional parking. He maintained that parking costs would increase the estimate by $200 thousand dollars a year. He observed that tenant parking would reduce availability. He suggested that the State has a contractual obligation to provide free parking to employees. He stressed that if 100 visitor parking spaces were supplied there would be an additional $57 thousand dollar expense. Mr. Reising discussed tenant buy-out costs. He observed that the Department of Administration has $4 million dollars or $20 dollars a square foot for tenant buy-outs. He maintained that some tenant improvement costs run as high as $125 dollars a square foot. He questioned if tenants would accept a $20 dollar a square foot buy- out. He noted that the tenant improvement costs average $42.45 dollars in the Frontier Building. He estimated tenant buy-outs would cost $35 - $55 dollars a square foot. He asserted that tenants have a strong preference for staying in the building as long as they can. He estimated buy-out costs at $14.2 million dollars. Mr. Reising asserted that some costs were understated. He did not think that the State would reach 90 percent occupancy before the bonds expire. He maintained that the tenant improvement costs are underestimated. He asserted that Mr. Kincaid did not do field work to validate cost estimates. He asked what were the tenant improvement costs for occupancy of the Department of Revenue in the Bank of America Building. He suggested that the it cost the Department of Revenue $40 dollars a square foot in tenant improvement costs. He maintained that wiring costs $9.11 dollars a square foot. He noted that the Department of Administration's estimation for wiring is $1.82 a square foot. He observed that the Department of Administration's estimates moving costs at $.88 cents a square foot. He estimated that moving costs would be $3 dollars a square foot. Mr. Reising maintained that the Department of Administration's numbers have been inconsistent. He concluded that it is too expensive to buy the Bank of America Building. He questioned who will pay for cost overruns. He maintained that people are afraid to testify before the House Finance Committee for fear of future retribution by the State. Representative Martin stated that there is no reason for the Committee or State to extract retribution. He noted that Mr. Reising has a vested interest in the issue. He observed that lease negotiations with Frontier Building were difficult. He asked if Mr. Reising would work with the Division of Legislative Audit to determine what the cost to the State would be to stay in the Frontier Building. Mr. Reising stated that he would welcome a long-term lease. He noted that the State has not considered a long-term lease. He stressed that money can be saved by a long-term lease. Representative Rokeberg stated that he has been involved in the project. He noted that he was involved in the development of the Bank of America Building. He is a licensed real estate broker. He is not participating or intends to participate in the market. He maintained that he has no conflict of interest and will not take advantage of the purchase. Representative Rokeberg observed that the building was built to be part of a family trust. He emphasized that it was built to last. He noted that the shell and core cost of constructing the building were $50 million dollars. He stated that tenant improvements in the building cost over $5 million dollars. He asserted that the building has been well maintained. He emphasized that the building is in the best area in terms of seismic stability. He stated that the proposal is an extraordinary opportunity for the State to acquire an asset at an inexpensive price. Representative Rokeberg expressed concern that the move in costs need to addressed buy-out costs with existing tenants. He recommended that the Committee meet in executive session when specifics regarding buy-outs are discussed. He provided members with a letter from Terry Banister, Legislative Counsel, dated 4/18/97 (copy on file). He stressed that the State receives title. He emphasized that the amendment reflects the existing state statute. He stressed that the State has a responsibility to the municipality of Anchorage to pay municipal taxes. He noted that the Special Business Improvement District downtown would cost around $40 thousand dollars a year. He urged that the State participate in this activity. He observed that an addition could be built on top of the underground parking lot and three city lots adjacent to the structure. The foundation work and structural engineering for an addition has already been done. He emphasized that the State would receive two downtown blocks without cost. He noted that the appraisal only includes a $22 dollar per square foot evaluation. (Tape Change, HFC 97-107, Side 1) Representative Rokeberg maintained that lease rates will go up. He noted that the building reached 92 percent of occupancy in its first two years at a rental rate of $1.25 to $1.30 dollars per square foot. He stressed that rents will increase in the nature of the business cycle. He maintained that the Department of Administration's lease cost calculations are conservative. Representative Rokeberg noted that if taxes were exempt for the whole building Anchorage taxpayers would pay an additional $4 dollars for every $100 hundred dollars of taxable property. Representative Rokeberg disputed assertions by Mr. Reising that the Department of Revenue tenant improvements cost $40 dollars a square foot. Co-Chair Therriault referred to parking costs. Mr. Reising stated that the lease at the Frontier Building includes parking. Co-Chair Therriault questioned if the Frontier Building's debt structure would allow a long-term lease reduction. Mr. Reising stressed that their lenders are in a more accommodating frame of mind then they were two years ago. He reiterated that a 25 year lease would be in the interest of both parties. He stated that the existing lenders applied pressure in regards to short-term negotiations. He stressed that a $26 million dollar building is not cheap when it costs $45 or $50 million dollars. He maintained that the State could buy the Frontier Building. He stated that there were no negotiations on a long-term lease. Representative Mulder expressed concern that the State will be in a difficult position if it does not purchase the Bank of America Building and the Frontier Building lease ends. Mr. Reising argued that there would be no difference in lease negotiations. In response to a question by Representative Mulder, Mr. Reising stated that the buildings are comparable in quality and size. The two buildings are within 5,000 feet. The Frontier Building has two and one-half times more parking. He noted that the economic performance of the buildings have been comparable. Co-Chair Therriault pointed out that the Bank of America Building has undergone an economic write-off. He noted that the State's offer of $46 million dollars was not sufficient to make the purchase work. He did not know how a rate structure could be derived with the blessing of the lending institutions. Representative James did not agree with the inclusion of the building equity in the calculations of savings. She expressed concern with the State's participation in the investment business. She expressed concern with the reduction of municipal tax income. She noted that she supports savings to the General Fund. She asked if the owners of the Frontier Building were willing to come forward with a proposal. Mr. Reising stressed that deconsolidation and remaining in the Frontier Building have an equal effect. He stated that he did not have a commitment from his lenders to pledge a rental rate of $1.25 dollars per square foot. He stressed that a long-term rental agreement would result in lower than current rates. Co-Chair Therriault noted that the Bank of America Building was built to a high standard. He observed that there has not been much of a write down for maintenance. Mr. Reising stressed that the Frontier Building was also well built. BOB PARKS, OWNER, FRONTIER BUILDING stated that the Frontier Building owners would be willing to make a offer that should be as good or better as what is on the table. Representative Davies maintained that the space in the Frontier Building is not comparable. He noted that parking at the Frontier Building assumes that an additional building could be built. Mr. Reising observed that the Bank of America Building did not have a municipal ordinance requirement for parking at the time their permit was issued. Co-Chair Hanley observed that Mr. Reising raised several questions. He noted that the purchase would have long-term benefits which would come substantially after the debt is paid off. He posed questions that the Department of Administration or the Division of Legislative Audit need to address. He noted that questions regarding parking amounts, buy-out costs, tax exempt financing, equity build-up, financing, moving costs, discount rate, build- outs, wiring costs and leasing assumptions need to be addressed. He asked for scenarios for flat funding of leasing. Co-Chair Therriault emphasized that there needs to be some discussion with the lenders on what is possible. Mr. Thaler clarified that the existing purchase agreement ends the last legislative day if the agreement is not approved. The agreement was subject to legislative and due diligence approval. The results of the due diligence contingency has been approved. Representative Davies asked that the Administration and Division of Legislative Audit work together on assumptions. Mr. Petty responded to questions raised during the meeting. He emphasized that the Department of Administration has considerable experience in moving agencies around and in performing tenant improvements. He stated that some of the assumptions on tenant improvement numbers have been validated. He observed that tenant improvement is calculated at $17.25 per square foot. He did not expect that the entire floor would have to be built out. He maintained that $16 - $17 dollars a square foot is ample to house state employees. He did not think the State should be doing $40 dollar a square foot improvements. He noted that the Department of Health & Social Services tenant improvements were performed for under $20 dollars a square foot. Mr. Kincaid added that the concept is for less perimeter build-outs. Mr. Petty stressed that it would be inappropriate for the Department of Administration to contact tenants about buy-outs. He observed that there is an offer that has not been consummated. He acknowledged that tenants have contacted the Department. He agreed that tenants have exercised their options. He stressed that he does not want to disadvantage the State by presenting information regarding buy-outs. Mr. Petty agreed that tax payments need to be taken into account. He stated that the Department will take into consideration the continuation scenario. Mr. Petty observed that the Department would honor the Business Improvement District. He stated that their operating cost scenario is $200 thousand dollars higher than operating cost estimates by the Legislative Audit Division. He noted that insurance costs are expected to be much lower then their assumptions. He added that the management fee is also high. He expected that the management fee would be lower. He stressed that there would be sufficient funding to pay the Business Improvement District cost. FORREST BROWNE, DEPARTMENT OF REVENUE discussed the difference between taxable and tax exempt financing. He observed that the taxable assumption is 8.217 percent. He thought that the State could do better. The tax exempt estimation is 5.38 percent. The assumption includes a spread of 2.5 percent. He stressed that there would be a cash flow if tenants do not move out to pay the higher debt service. He pointed out that the State only has to make a good faith projection that 92 percent state occupancy will be reached before the end of the bond issuance. At that time, the State would save two and one-half percent a year. He noted that the calculations assume that there would be 100 percent financing. He noted that savings would be much higher with a cash purchase. In response to a question by Co-Chair Therriault, Mr. Browne noted that if sufficient buy-outs were not realized that there could be two financing. Two financing would show a savings between the taxable and tax exempt rates. Mr. Petty acknowledged that the parking in the Frontier Building is covered and that there are more spaces available. He maintained that substantial parking is available at the Bank of America Building. He noted that the State has 159 spaces in the Bank of America Building for the Department of Revenue. The State leases 467 spaces for the portion of the Frontier Building that would be moved. He noted that there are 646 spaces available at the Bank of America Building. He emphasized that employment contracts do not guarantee free parking. The State is under no obligation to provide a parking space for every employee. He stated that parking is available. Mr. Jackson discussed buy-outs. He stated that there are tenants that are willing to leave. He observed that the Department of Natural Resources needs approximately 97,000 square feet. He observed that the State has $3.5 million dollars to purchase 87,000 square feet of buy-out at 40 dollars a square foot. He stressed that the State has flexibility to move a portion of the Department of Natural Resources into another space. He stated that he expected a share of the buy-outs would come from other landlords in the area who want to attract tenants. (Tape Change, HFC 97-107, Side 2) Mr. Petty noted that the no buy-out scenario is the most lucrative. He stated that in a no buy-out scenario the State would continue to lease office space in the Frontier Building. He stated that this was factored into the continuation costs. Mr. Thaler emphasized that it is impossible to predict buy-outs. He pointed out that the first element in any buy-out is alternative space. He stressed that there will be good alternative space in Anchorage. He clarified that the asbestos in the Arco building is being abated. He stressed that the Arco Building is located across the parking lot from the Bank of America Building. Rental space will be available in the Arco Building for $1.75 dollars a square foot with a $15 dollar per square foot tenant improvement. He added that the First National Bank space will also be vacated. He estimated that tenant improvements are well below $125 dollars a square foot. He estimated that 20,000 to 30,000 square feet would need to be bought. He pointed out that if 87,000 feet were bought and all the agencies in the Frontier Building were moved to the Bank of America Building the State would be eligible for tax exempt financing. He noted that some of the leases have expired and some tenants are badly under-utilizing their space. He concluded that if tenants do not leave, tax exempt financing could be taken out on the portion occupied by state agencies through the condominium mechanism. He acknowledged that the cost of a double bond issue would be greater than a single bond issue. Mr. Kincaid reiterated that there would be a variety of choices for tenants. Mr. Petty clarified that Arco Towers will be available for occupancy in October. He estimated that the Department could move into the Bank of America Building at $1 dollar a square foot. In response to a question by Representative Martin, Mr. Petty stated that the effective date would be satisfactory. Mr. Jackson noted that the purchase agreement requires the State to close in 60 days after legislative approval. HB 236 was held in Committee for further consideration. ADJOURNMENT The meeting adjourned at 4:50 p.m.