The Legislative Council is hoping the Alaska Industrial Development and Export Authority can help it out of an untenable situation, while keeping legislators in their Anchorage offices.
Council members voted unanimously Saturday afternoon to recommend the full Legislature not pay the $3.3 million per year lease it has for the Anchorage Legislative Information Office, or LIO.
At the same time, they voted to request help from state agencies in brokering a deal between the Legislature and the building owner that is equal to the cost savings that would come from moving legislative offices into the Atwood Building in Downtown Anchorage, which houses executive branch agencies.
The cost of the lease has been heavily criticized by legislators and the public both in and out of Anchorage while the state faces annual deficits nearing $3.5 billion, although when signed a year ago it met state law that requires long-term state lease extensions to be at least 10 percent below market value.
That is one of the points of contention in a separate lawsuit filed by Jim Gottstein challenging the lease as illegal as neither an extension nor 10 percent below market value.
Sen. Peter Micciche, R-Soldotna, made the advisory motion, noting that it is the Legislature’s duty to operate government as cost-effectively as possible.
The state agency to help the council would very likely be the Alaska Industrial Development and Export Authority, or AIDEA. A quasi-government finance entity, AIDEA manages unique business transactions throughout Alaska, some of which are done at the request of government’s political bodies.
If a deal isn’t reached after 45 days, the council’s motion would recommend not funding — or breaking — the 10-year lease with building owner 716 West Fourth Avenue LLC, co-owned by Anchorage developer Mark Pfeffer and Bob Acree.
The leaseholder company name is the Downtown Anchorage address of the LIO.
Pfeffer has indicated he is willing to sell the 64,000 square-foot building for $36 million, which cost $44.5 million in 2014.
The Legislative Council decided to rebuild on the old LIO building site in 2013 after numerous attempts to find existing suitable space that meets the unique needs of a public government body in Anchorage failed.
The Legislature contributed $7.5 million towards the construction cost, so Pfeffer and his company ultimately funded $37 million, about $28 million of which is long-term debt and $9 million is Pfeffer’s cash equity position in the property.
A year of the lease has already been paid for at $3.3 million, which means Pfeffer’s property company would walk away with $39.9 million over two years at his sale price.
The lease is paid through May 31, 2016.
The Legislature could terminate the lease seemingly without legal ramification because of a clause in nearly all government contracts stating fulfillment of the agreement is “subject to appropriation,” in this case, by the Legislature. If the Legislature doesn’t fund it, for any reason, the lease or contract falls apart.
The “out” clause is virtually never used, though, and ascribing it to the Anchorage LIO lease situation could call the State of Alaska’s credit worthiness into question.
While breaking the lease may not directly lead to a credit downgrade for the state, it would not look good after credit rating agencies have warned that the consequence of not addressing the budget deficit will be a downgrade from the state’s AAA credit rating.
A consequence of moving out of the LIO to the Atwood Building could be slightly higher bond rates and generally a poorer perception of the state’s trustworthiness.
Before a break in the hours-long meeting resulted in Micciche’s motion when the meeting came back to order, Legislative Council members urged against taking action until all options are fully vetted, as the idea of employing AIDEA, nor the consequences of moving had not been fully vetted.
Rep. Liz Vasquez, R-Anchorage, a former attorney, vehemently warned against taking a politically expedient way out in testimony to the committee.
“It appears to me we have not done our due diligence and we’re going to pay for it in litigation,” Vasquez said.
Sen. John Coghill, R-North Pole, characterized the appropriation clause less as an option for the Legislature and more of a “last resort.”
If an agreement is not reached that keeps the Legislature in the Anchorage LIO for cost on par with the Atwood Building, the issue is sure to be a big part of a session already ripe with budget conundrums.
716 West Fourth Avenue spokeswoman Amy Slinker said in a formal statement the firm is happy the Legislative Council is gathering more information before making a decision.
“We believe there are several options that save the state money without taking the drastic step of breaking the lease and risking what others have said would be serious negative credit implications,” Slinker said.
Moving to the Atwood Building, with 30,000 square feet of usable space, would cost $10.1 million over 10 years, which would include a $3.5 million initial refurbishment.
The Anchorage LIO is 64,000 square feet; however, it has about 45,000 square feet of usable space, which omits restrooms and other common areas.
Pfeffer said he would sue the Legislature for terminating the lease, which could cost the state anywhere from $1 million to $2 million in legal fees, regardless of the outcome, according to an attorney for the Legislative Council.
In a Dec. 14 interview with the Journal, Pfeffer also noted that he entered the agreement with the Legislature — the state appropriator in charge of funding the lease it signed — and not a state agency with less control over what is funded.
AIDEA’s ability to finance, sometimes at lower than market rates, for special projects, combined with the state’s positive investment returns, could make an authority purchase of the LIO building the best option, AIDEA Chief Investment Officer Mark Davis testified to the council.
First, the Legislature would remain in the LIO. Second, AIDEA’s purchase would be preferable over an outright purchase by the Legislature because the authority can borrow money at a rate lower than state savings and investment returns. The Legislature would then lease the building from AIDEA, which would pay a portion of its return on the building back to the state in the form of its annual dividend to state coffers.
Elwood Brehmer can be reached at elwood.brehmer@alaskajournal.com.
