Lawsuit challenges expensive state lease for Anchorage legislative building

An Anchorage lawyer whose building adjoins the rebuilt state legislative building downtown on Tuesday sued the state, contending that the lease for what he calls a newly constructed Legislative Information Office is illegal, too expensive and should be declared "null and void."

Jim Gottstein has owned the retail and office building at Fourth Avenue and G Street since 1995 and it's been in his family since 1926, the lawsuit said. He contends that the remodeling, which stripped the old legislative building down to its steel frame, damaged the shared wall between his Alaska Building, built in 1916, and the Anchor Pub, which used to be the Empress Theatre and was incorporated into the Legislature's building. He describes his building as a historic landmark and the first to use concrete in Anchorage.

But the bigger part of his complaint seeks to invalidate the state lease extension signed in 2013 in which the state committed to pay $3.4 million a year for the next 10 years. The deal, negotiated by state Rep. Mike Hawker, R-Anchorage, when he chaired the joint House-Senate committee that manages the Legislature's business, has been sharply criticized as too expensive and not a good deal for the state. With the current state budget crisis, some legislators are examining whether the state can abandon the lease and move into cheaper space.

"One of the purposes was just to say, look, everybody is complaining about this thing and it's illegal," Gottstein said in an interview.

Hawker declined to comment Tuesday, saying he was didn't know anything about the lawsuit.

The suit names a number of defendants including the state Legislative Affairs Agency, the building owner -- a company owned by Bob Acree and developer Mark Pfeffer -- and companies involved in the remodeling. Doug Gardner, legal director for the Legislative Affairs Agency, said he couldn't comment on the suit.

In an email, Pfeffer, who managed the project, said he looked forward to resolving the matter "in a rational and thoughtful forum.

"From the beginning, everyone has operated above board and in good faith to provide public building space in Anchorage for our Legislature," Pfeffer said. "To date, everything that was asked of everyone and authorized by the Legislature has been accomplished on time and within budget."

The lease payments don't include property taxes, building insurance, utilities, routine maintenance or janitorial services, which often are incorporated into commercial leases. Gottstein said the lease underestimates the costs in other ways as well, including the way it calculates the building's square footage.

Gottstein contends the no-bid lease agreement violates a state law that says leases can only be extended for a decade with no bid if the price is at least 10 percent below market value.

"In fact, the rental rate of the LIO Project is at least twice the market rental value," the suit contends.

A semi-retired commercial broker, Larry Norene, in 2013 called the lease "outrageous." He determined that the state was effectively paying more than $7 per square foot a month once all the costs were added in. The going rate for commercial space downtown was $2 to $3 a square foot.

Gottstein also contends the lease arrangement is not really an extension since the building was redone so extensively. Instead, it's akin to new space and the state should have sought bids before signing the lease document, Gottstein said.

An appraiser who evaluated the project for the state determined the rent was below market value. But appraiser Timothy Lowe, who was contracted by the Alaska Housing Finance Corp., used a method rooted in the value of the building once Pfeffer completed the renovation, not one based on the going rate for office space in Anchorage.

Gottstein said the lengthy appraisal was an effort to "hide the ball."

Reporter Nat Herz contributed to this story.

Lisa Demer

Lisa Demer was a longtime reporter for the Anchorage Daily News and Alaska Dispatch News. Among her many assignments, she spent three years based in Bethel as the newspaper's western Alaska correspondent. She left the ADN in 2018.