FAIRBANKS -- The prospect of buying an Anchorage office building for $28 million to get out of an expensive no-bid lease is meeting resistance from some members of the Legislative Council.
The 14-member committee, which handles business decisions for the Legislature, again canceled a meeting Thursday at which it had been scheduled to decide whether to ask the full Legislature to buy the building.
While there is internal dissension over whether the $28 million buyout is a solution or the latest in a series of mistakes, it's clear that the Legislative Council brought this dilemma on itself by the way it handled the Anchorage lease. Advocates of the sale are pitching the buyout as a bargain. They say it will save the state a lot of money compared to the current high-priced lease, which they approved last year.
But it's easy to see why skeptics question spending $28 million on a no-bid purchase, as it amounts to a repudiation of what the council did last year with the no-bid lease.
Weak bargaining position
In June, the group directed Anchorage Republican Rep. Mike Hawker, chairman of the council, to act on its behalf and negotiate a lease extension and renovation for Anchorage office space. When they gave Hawker his instructions, the council members made a point of saying they had no intention of buying the building, only extending the lease. Once he came back with proposed terms, the council approved the lease and dropped its opposition to buying. The group approved Hawker's plan to try to negotiate a purchase, a sequence of events that put the state in the weakest possible bargaining position.
In effect, legislators negotiated against themselves, which is not a way to get the best deal.
Hawker has asked the Legislative Council to endorse a purchase of the building, not the land under it. The idea is to hold down the upfront sale price by leasing the land and parking facilities for $100,000 a month. Under the old deal, the state paid about $57,000 a month for the property.
Under the new lease, the council is to pay $282,000 a month for office space, more than four times as much as the old agreement. The landlord, Pfeffer Development, signed a document last month approving plans to turn the lease into a sale of the building and a lease of the land, with one major condition.
"Landlord is willing to accommodate this lease restructure so long as the net effect of the transaction will preserve its economic position under the original lease," the agreement said.
If the landlord preserves his economic position, that must mean that the state is not getting a better deal under the sale when the purchase price and monthly rent are considered in total. The agreement with the landlord said the buyout "may" reduce the net cost to the state.
Hawker asserts that it will save $48 million over the next 20 years. The lease was for 10 years.
Disappearing leverage
Such a deal. Legislators put themselves in a bad position and watched their leverage disappear. They fell into this trap because the old lease was set to expire in the spring of 2014, and they told themselves they faced a crisis.
What they should have done a year ago was to consider whether they wanted to buy or lease a building and seek competitive bids. They should have negotiated with the landlord by asking for a one-year extension. If the landlord refused, they would have had a year to find office space and make plans to move.
The purchase of the building may be the most sensible option now that the Legislative Council put itself in this box, but that hardly justifies the failed process on display here.
Contact Dermot Cole at dermot(at)alaskadispatch.com. Follow him on Twitter @dermotmcole.