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Judge rejects motion to dismiss suit over Anchorage legislative offices

  • Author: Lisa Demer
  • Updated: May 31, 2016
  • Published January 7, 2016

An Anchorage judge on Thursday rejected a motion to throw out a public interest lawsuit seeking to void the Legislature's controversial and expensive lease for its downtown Anchorage office building. The motion from the building's developers and the state argued the suit had been filed too late, but with the judge's rejection, the suit will continue.

Jim Gottstein, an attorney who owns the building next door to the renovated Anchorage Legislative Information Office, did wait an unreasonably long time to sue, but that doesn't matter at this stage in the case, Superior Court Judge Patrick McKay said in the 10-page order.

Genuine issues still need to be decided and it's unclear that voiding the lease would damage the Legislature or the building's owner, the order said.

In his ruling, the judge noted the rule that allowed the Legislature to renew the lease for 10 years – at an annual cost five times higher than the previous annual rent -- without seeking bids from other property owners.

That rule came from a report by an appraiser, since ridiculed by an independent broker, that said the extended lease was more than 10 percent below market, a requirement for a lengthy no-bid rental contract.

If the cost is below market, the judge suggested, the property owners might have nothing to lose, and everything to gain, if he ultimately voided the lease for 716 W. Fourth Ave.

Using the corporate name of the developers, 716 W. Fourth Ave. LLC, the judge said that if he declares the lease "illegal, null and void," the landlord "will be able to lease the building at a greater rate since it claims the current rate is 10% below the market value. Indeed, 716 may even benefit from a finding that the lease is 'illegal, null and void.'"

The Legislative Affairs Agency – the Legislature's administrative arm – could benefit, too, the judge found.

"Neither the LAA's nor 716's future harm seems particularly egregious," the order said.

Gottstein, who says his adjoining building was damaged during the renovation, alerted a lawyer for the owners in October 2013 that he thought the lease was illegal and might sue. But he didn't do so until 17 months later, in March 2015.

Gottstein is seeking to void the lease, with 8½ years left on it, and except for a what the judge called a "novel" side argument, isn't seeking damages, which McKay said factored into his decision.

Under the lease extension signed in September 2013, the monthly rent for the space once renovated went from $56,863 to $281,638 – plus the state has to pick up other costs including utilities and property taxes. The building was gutted, expanded and refurbished, with glass elevators and bigger meeting rooms.

The building owners, Bob Acree and Mark Pfeffer, have argued they spent more than $37.5 million to renovate the building to the Legislature's needs.

The state also put money into the building -- $7.5 million – to cover carpet, walls, doors and other basics to finish the interior. The Legislative Affairs Agency has argued if the lease is canceled, the state may have to abandon all that.

But Gottstein's real estate expert estimates the state will be paying more than $17 million in excessive rent, the judge said. If the Legislature finds cheaper space elsewhere, it could save much more than the $7.5 million lost, his ruling said. And all that money might not be forfeited – the lease doesn't specify what would happen to it in the event of a voided arrangement, the judge found.

Amy Slinker, a spokeswoman for the LIO building owners, said in an email Thursday night that it was undisputed that the owners have poured millions into the building and took issue with the judge's finding that the state may not have to forfeit the $7.5 million put into the building. The state will have to spend millions more to move, she wrote.

The building owners have offered to sell it to the state for $37 million, $10 million below a state-commissioned appraisal, Slinker said.

The Legislature has been struggling with what to do about the lease. The Legislative Council, a joint House-Senate committee that handles administrative functions, voted Dec. 19 to advise the Legislature not to spend money on the lease until the lawsuit is resolved, or unless a competitive cost per square foot can be negotiated.

Rent payments are subject to annual legislative appropriation. Pam Varni, executive director of the Legislative Affairs Agency, says she is requesting the Legislature fund the lease for next budget year.

Doug Gardner, the agency's legal director, said the judge raised some interesting issues, but not all had been addressed in filings by the lawyers involved.