Analysis finds buying Anchorage LIO close to cost of moving offices

An independent review of the Legislative Council’s options to deal with the Anchorage Legislative Information Office building found the cost of purchasing the building to be nearly on par with moving the Legislature’s Anchorage offices elsewhere.

San Francisco-based Navigant Consulting Director Nigel Hughes concluded in a report dated March 14 that purchasing the Anchorage LIO would cost 4 percent more, on a per square-foot present value basis, than moving to the nearby Downtown Atwood Building, which houses state executive branch agencies.

The conclusion is first based on a $37 million purchase price, which Anchorage real estate developer Mark Pfeffer, managing member of the building owner group, 716 West Fourth Avenue LLC, has said he would be willing to sell for. It also assumes the purchase would be financed over 20 years at 3.1 percent interest, which was the going rate for tax exempt bonds on March 7, according to the Alaska Housing Finance Corp.

The LIO building is located at 716 W. Fourth Ave.

Subsequently, the analysis takes into account that the 42,900 square feet of usable space in the LIO is significantly greater than the 34,100 square feet of space available at the Atwood Building.

While purchasing the LIO for $37 million equates to a 20-year net present value cost of $31.7 million and the 20-year cost to move would be $24.2 million, according to Hughes, the additional usable space in the LIO closes the per square-foot cost gap to $3.08 per square foot to stay and buy the LIO versus $2.95 to move to the Atwood Building.

Included in the Atwood scenario is the $3.5 million in renovations the Legislative Affairs Agency estimates it would cost to make the available Atwood space suitable for legislative offices.

The Legislative Affairs Agency handles business and legal matters for the council.

Extending the existing 10-year, $3.3 million per year lease on the building to 20 years would cost $61.8 million in today’s dollars, or an even $6 per square foot, the analysis concludes.

“Our goal from the beginning of our conversations with the ALaska Legislature and the Legislative Council has been to find an agreement that is good for Alaska,” 716 spokeswoman Amy Slinker said in a statement. “The Navigant analysis provides a solid step forward. We will continue to discuss in good faith options that can achieve savings.”

The Legislative Council has found itself in a political bind over the current lease at a time when the state is trying to manage its way out of a $3.5 billion-plus budget deficit.

On Dec. 19, the Legislative Council unanimously recommended the full Legislature vote not to fund the lease at a meeting in the Anchorage LIO unless a solution that is cost-competitive with moving to the Atwood Building could be resolved within 45 days with help from state finance agencies. With the issue being a political hot potato, that help didn’t come.

Navigant’s Hughes notes in his analysis that there are issues for the council to consider beyond simply the bottom line cost.

If the council decides not to fund the current LIO lease, it “will need to consider the wider financial and legal implications between the state and the business community,” Hughes wrote.

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.

Pfeffer has hinted intent to sue if the Legislature walks away from its obligation.

The Legislative Council, then led by Rep. Mike Hawker, R-Anchorage, decided to rebuild on the old LIO building site in 2013 after 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, he has said.

Appraisals of the six-story building plus its underground parking facility have been as high as $48 million, but numerous estimates put its value at $44 million. The customized office space cost $44.5 million to build in 2014, according to Pfeffer.

A Nov. 24 cost analysis done by AHFC and the Department of Revenue with information provided by the Legislative Affairs Agency put the 10-year cost of purchasing the LIO for $37 million with fixed-rate bonds at $48.8 million when financing and operating costs were included — translating to $8.97 per square foot. The comparable cost to move to the Atwood Building was found to be $10.1 million, including the $3.5 million for tenant improvement costs.

AHFC Deputy Executive Director Mike Buller sent an email to Legislative Affairs Agency Executive Director Pam Varni Dec. 3 contending the analysis should not be considered when evaluating the council’s options because, among other reasons, it used a 10-year amortization for the purchase of longer-term assets and ignored the residual value of owning the building after it would be paid for.

“Unfortunately, I cannot support the analysis of the options presented in your report to the council and a public discussion at this time will only embarrass everyone involved,” Buller wrote. He declined to comment further.

Varni said in an interview that Legislative Council chair Sen. Gary Stevens was made aware of Buller’s concerns; however, neither Stevens nor Varni brought the issue up in discussions, according to a transcript.

Questions to Stevens’ office regarding the Nov. 24 analysis were directed to Chief of Staff Katrina Matheny, who also serves as council staff. Matheny said Stevens waited until Feb. 11 to recommend an independent analysis of the council’s options because he was concerned more with the Legislature’s direct cash outlay on a 10-year basis, which is equivalent to the current lease, and less so with the inflation-adjusted present value cost or other issues.

“We had no intention at that point (in early December) of hiring an independent third-party; we didn’t think one was needed,” Matheny said.

When a Jan. 29 proposal from 716 West Fourth Avenue contended purchasing the LIO for $37 million would save the state money over moving to Atwood was quickly disputed by Varni for overstating moving costs by up to $16 million over 30 years, Matheny said the “dueling comparisons” pushed council members towards an independent review.

Settlement passed

Ultimately, waiting to hire outside help could have cost the council an opportunity to settle a lawsuit challenging the legality of the current Anchorage LIO lease.

716’s Jan. 29 proposal for the Legislative Council to purchase the building included a settlement in the lawsuit brought against the building owner and the Legislative Affairs Agency by Anchorage attorney Jim Gottstein, who also owns the Alaska Building adjacent to the LIO.

Gottstein contends the lease violates state law because the council did not follow proper procurement code when it contracted with Pfeffer’s development team in 2013. He and 716 agreed to settle by Feb. 12 if the council and Legislative Affairs agreed to not attempt to recoup attorney fees from Gottstein in the settlement.

The settlement, from 716’s perspective, was also contingent upon the council funding the current LIO lease or agreeing to purchase the building, according to the Jan. 29 document.

Matheny said the settlement “fell by the wayside” because of the deadline and that Stevens wanted the state Superior Court to decide whether the lease is legal or not before making a decision on the building.