SENATE STATE AFFAIRS COMMITTEE April 29, 1999 3:30 p.m. MEMBERS PRESENT Senator Jerry Ward, Chairman Senator Lyda Green Senator Gary Wilken Senator Randy Phillips Senator Kim Elton MEMBERS ABSENT None COMMITTEE CALENDAR CS FOR HOUSE JOINT RESOLUTION NO. 27(STA) Relating to the maritime boundary between Alaska and the former Union of Soviet Socialist Republics. -MOVED CSHJR 27(STA) OUT OF COMMITTEE HOUSE JOINT RESOLUTION NO. 34 Relating to the federal estate and gift taxes. -MOVED HJR 34 OUT OF COMMITTEE CS FOR HOUSE BILL NO. 189(FIN) "An Act authorizing the Alaska Housing Finance Corporation to acquire the building that it occupies for an amount that does not exceed $6,650,000; and providing for an effective date." -MOVED CSHB 189(FIN) OUT OF COMMITTEE PREVIOUS SENATE COMMITTEE ACTION HJR 27 - No previous Senate action. HJR 34 - No previous Senate action. HB 189 - No previous Senate action. WITNESS REGISTER Representative John Cowdery Alaska State Capitol Juneau, AK 99801-1182 POSITION STATEMENT: Sponsor of HJR 27 and HJR 34 John Bittney, Legislative Liaison Alaska Housing Finance Corporation 4300 Boniface Parkway Anchorage, AK 99501 POSITION STATEMENT: Testified in favor of HB 189 Michael Buller Alaska Housing Finance Corporation 4300 Boniface Parkway Anchorage, AK 99501 POSITION STATEMENT: Testified in favor of HB 189 Dan Reynolds Schwamm and Frampton 540 L Street Anchorage, AK POSITION STATEMENT: Answered questions regarding HB 189 Mike Price Alaska Housing Finance Corporation 4300 Boniface Parkway Anchorage, AK 99501 POSITION STATEMENT: Answered questions regarding HB 189 ACTION NARRATIVE TAPE 99-13, SIDE A Number 001 CHAIRMAN WARD called the Senate State Affairs Committee to order at 3:39 p.m. Present were Senators Green, Phillips and Ward. The first order of business to come before the committee was HJR 27. HJR 27-ALASKA/RUSSIA MARITIME BOUNDARY REPRESENTATIVE JOHN COGHILL, sponsor of HJR 27, explained the measure is an attempt to resolve a maritime boundary discrepancy between Russia and the United States in the Chukchi Sea. The current boundary was never ratified and contains loopholes. HJR 27 requests the establishment of a boundary and that the State of Alaska be at the table during negotiations. HJR 27 will be sent to members of Congress, the Governor, the President, and the Secretary of the Department of the Interior. SENATOR GREEN referred to lines 6 through 10 on page 3, and questioned whether HJR 27 requests that the 40,000 square miles of ocean not be given to the Russian government. REPRESENTATIVE COGHILL said that is correct because we would be asking that the current boundary be revoked and that the boundary issue be revisited. He noted the United States has already agreed to give away some islands under dispute, as well as some fishing grounds. A Russian trawler was recently chased off of some of the disputed grounds, but the United States is operating on the premise that the disputed grounds belong to it. SENATOR GREEN moved CSHJR 27(STA) from committee with individual recommendations and its zero fiscal note. There being no objection, CSHJR 27(STA) moved from committee. CHAIRMAN WARD announced the arrival of Senator Wilken. HJR 34-REPEAL ESTATE AND GIFT TAX REPRESENTATIVE COGHILL, sponsor of HJR 34, stated his original intent was to repeal the estate tax in Alaska, but it is a sponge tax, therefore Alaska receives only a portion of what the federal government gets. HR 86 is making its way through Congress at this time. HJR 34 expresses support for HR 86 which would do away the inheritance tax. SENATOR GREEN moved HJR 34 from committee with individual recommendations. There being no objection, HJR 34 was moved from committee. HB 189-AHFC ACQUISITION OF BUILDING JOHN BITTNEY, legislative liaison for the Alaska Housing Finance Corporation (AHFC), gave the following presentation on HB 189. The measure is one of two sections; it authorizes AHFC to purchase the office building it currently occupies. AHFC was approached about purchasing the building by the owner about one year ago. The purchase will result in a significant savings to AHFC, so AHFC felt compelled to forward the proposal to its Board of Directors. After review, the Board of Directors passed a resolution supporting the purchase and authorized him to present the proposal to the Legislature. MR. BITTNEY explained the contents of the fiscal note. The fiscal note shows a budget reduction of $496,600 in its contractual component, which reflects a savings in AHFC's lease cost. AHFC's current lease expense for the year exceeds $1 million. That cost would be eliminated, and the difference between that amount and the reduction in the fiscal note would be the maintenance and operation costs of the building. Two funding sources would be used: AHFC is asking for a reduction in its federal and corporate receipts. AHFC uses both of those sources to fund its current lease payments. Because HUD's public housing functions are managed by AHFC, AHFC can charge a portion of its lease costs to the federal dollars it receives from HUD. Number 180 CHAIRMAN WARD asked who is responsible for the minor and major repairs and maintenance according to the current lease. MR. BITTNEY replied AHFC has occupied the building for two years, and has a ten year lease with two five year renewal options. He deferred to Mike Buller for the details of the lease. MIKE BULLER, Chief Administrative Officer of AHFC, answered the repairs and maintenance are the responsibility of the building owner. CHAIRMAN WARD questioned how much has been spent on repairs and maintenance of the building. DAN REYNOLDS, Schwamm and Frampton, stated he has managed the building for the past seven or eight years. He was unable to provide the amount spent on repairs and maintenance over the past 24 month period, but stated no major expenses were incurred during that time period. His budget for general day-to-day budget is $1500 per month, and he typically spends that amount. CHAIRMAN WARD asked if that $1500 per month expense should be considered in the operating cost. MR. REYNOLDS said that is correct. CHAIRMAN WARD asked when the last roof repair took place. MR. REYNOLDS answered in the summer of 1997, some roof repairs were done. Those repairs included the resurfacing, replacing, and resealing the perimeter flashing. Regarding major expenses, he noted that an underground fuel tank for the back-up generator was removed 18 months ago at a cost of about $20,000. Number 228 CHAIRMAN WARD questioned how long the current owners have owned the property, and how far back the maintenance history records are available. MR. REYNOLDS explained the current owners funded the Teamsters Local 959, who built the building in the mid 1980's. As the result of a bankruptcy, the building reverted to the current owners in 1989. MR. REYNOLDS added he has managed the building since 1991 and could provide the maintenance record from that time. CHAIRMAN WARD asked who the owners are. MR. REYNOLDS stated it is a union trust named the Union Labor Life Insurance Company (ULLICO), based in Washington, D.C., and that the building was referred to as the "Teamster Building" for many years and is also known as the "Jesse Carr Building." CHAIRMAN WARD asked what the debt ratio would be and whether the savings would include the $1500 per month in maintenance costs. MIKE BULLER explained AHFC planned to issue debt for the purchase of the building. AHFC projected a cost of $27,000 per year for major repairs and maintenance through the remaining 18 years of the lease, for the purpose of comparison to the lease purchase option. The total sum budgeted for major repairs and maintenance is about $600,000. MR. BULLER referred to two spreadsheets provided by Mr. Bittney, and noted the total cost of leasing the building for the next 18 years would amount to $19 million. Under the "buy" scenario, the cost to purchase the building over the next 18 years would amount to $10,076,000. That number includes all maintenance, repairs, and operating expenses. The net savings to AHFC would be approximately $9,887,000. Number 298 CHAIRMAN WARD asked how the projected maintenance costs were calculated. MR. BULLER indicated those numbers came from a complete appraisal of the property done by Kincaid and Riely for the current owner. The $27,000 maintenance cost per year was adjusted for three percent inflation for each year thereafter. CHAIRMAN WARD asked Mr. Buller to supply a copy of the appraisal to the committee. CHAIRMAN WARD questioned how much AHFC would borrow to purchase the building. MR. BULLER replied AHFC would initially purchase the building with cash but would bond for 100 percent of the purchase amount at a future date and reimburse itself. The cost of bonding has been included in the spreadsheets. Number 332 CHAIRMAN WARD asked for clarification of the building's ownership history. MR. BULLER stated ULLICO originally financed the construction of the building by the Teamsters in the mid 1980's. When the Teamsters filed for bankruptcy in the late 1980's, ownership reverted to ULLICO which has owned it since. The Teamsters vacated the building two years ago, and through an RFP process, AHFC moved in. AHFC did not have the option of purchasing the building at that time. CHAIRMAN WARD questioned whether any problems remain with the underground storage tank. MR. REYNOLDS said that DEC signed off on that project, and the documentation has been supplied to AHFC. SENATOR WILKEN asked who initiated the contact about purchasing the building. MR. BULLER said the owners decided to sell the building and contacted AHFC to give it the first shot. Number 350 SENATOR WILKEN asked why the purchase price is $150,000 more than the appraisal price. MR. BULLER replied the initial appraisal was completed March 1, 1998; a revised appraisal was completed in October, 1998, and simply through inflation, the price increased. The current purchase price is the appraisal price of $6.65 million. AHFC hired the Appraisal Company of Alaska which confirmed that appraisal amount. SENATOR WILKEN questioned whether the committee was provided with a copy of the confirmation of the appraisal. MR. BULLER said it was. MR. REYNOLDS added a full MAI appraisal was done, in which several approaches are reviewed, such as an income approach. By comparing the analyses, a value is determined. CHAIRMAN WARD asked about the life expectancy of the roof. MR. REYNOLDS replied the life expectancy of the building is considered to be 35 to 42 years. He was unaware of the life expectancy of the roof, but offered to provide Chairman Ward with that information at a later date. Number 390 CHAIRMAN WILKEN asked if the first appraisal was completed in March of 1998, an update was completed in October of 1998, and a review and confirmation was completed on December 18, 1998. MR. BULLER said that was correct. SENATOR ELTON questioned whether the prospective BP-ARCO merger will affect the appraisal price of commercial real estate in Anchorage in the near future. MR. REYNOLDS said the potential merger would not occur for nine months to one year. If new office space comes on to the market at that time, it will not be located in the same vicinity as AHFC's location, therefore it is AHFC's opinion that it will not affect values in a negative way. Anchorage currently has an occupancy rate of 93 to 95 percent for commercial office space. MR. BULLER offered to ask the Appraisal Company of Alaska to provide an opinion on that question. CHAIRMAN WARD asked Mr. Buller to do so, and to forward the information to committee members, especially Senators Wilken, Green, and Phillips, who are members of the Senate Finance Committee. MR. BULLER stated he would also provide the maintenance costs. Number 432 SENATOR PHILLIPS asked if a building inspection will be done before the purchase negotiations begin. MR. BULLER indicated a complete inspection has been done, and that he would forward a copy of it to committee members as well. MR. REYNOLDS informed committee members the due diligence that was performed by AHFC included review by a structural, electrical and mechanical engineer, and an architect. He assumed reviewed the building for compliance with their respective building codes. CHAIRMAN WARD questioned whether a commercial code must be approved before the purchase transaction is completed. MR. REYNOLDS said not that he was aware of. SENATOR ELTON moved CSHB 189(FIN) and attached fiscal notes to the next committee of referral. There being no objection, the motion carried. There being no further business to come before the committee, CHAIRMAN WARD adjourned the meeting.