State costs increased in Capitol Ave. building deal | Arkansas Blog

Friday, September 30, 2011

State costs increased in Capitol Ave. building deal

Posted By on Fri, Sep 30, 2011 at 12:08 PM

UNHAPPY: Agency head says landlord Richard Mays (left) and tenant Bill Walker (right) werent happy about tough negotiating on real estate deal.
  • UNHAPPY: Agency head says landlord Richard Mays (left) and tenant Bill Walker (right) weren't happy about tough negotiating on real estate deal.
I wrote yesterday about a new state lease agreement by which a division of the Arkansas Department of Career Education Department, headed by Bill Walker, will occupy an expanded building at 525 W. Capitol Avenue owned by an LLC headed by his friend, political ally and fellow Beebe supporter, Richard Mays.

Walker and Mays have not returned my calls. But Anne Laidlaw, director of the Arkansas Building Authority, has now provided me more history on the lease arrangement, which dates back to 2009, and the costs. She reveals that circumstances about the original deal raised questions with her sufficient that the state broke off negotiations until questions about ownership were resolved. In the end, she said, she believes the state made a good deal and that, as a result, "Bill Walker wasn't very happy with me for a while."

Bottom line remains the same, if appearances matter: Bill Walker's agency negotiated a long-term lease on space in a building that he knew Richard Mays intended to buy. And Richard Mays knew he was buying a building that had a pre-committed state tenant.

Laidlaw said the purchase was intended to consolidate two locations of Arkansas Rehabilitation Services. Walker believed it was inefficient not to have the locations combined. That is a decision the Building Authority doesn't review, Laidlaw said. Its job is to make the best deal possible on leases and purchases.

The first lease between the state and Capitol Place LLC was entered Nov. 19, 2009 (this lease actually was with a previous building owner but taken over by Capitol Place) for 28,964 square feet of the old Arkansas Baptist Convention headquarters on Capitol Avenue. The Mays-led Capitol Place LLC bought the building a month later for $3.2 million. This relocated staff from 1616 Brookwood. Cost comparison:

Capitol Avenue: $405,510 annual rent for 28,964 square feet and a six-year lease.
Brookwood: $207,615 for 21,035 square feet.

The Building Authority notes that the state received $1 million for improvements to the new quarters and 100 parking spaces, valuable in downtown Little Rock. In December 2009, the state leased an additional 1,524 square feet of storage in the basement for $9,525 a year.

In May, the state agreed to increase the Capitol Avenue space to 48,963 square feet, with rent beginning at $782,444. This included $1.1 million for tenant improvements. The building will add a third floor. Costs above the allowance will be amortized in the six-year lease. The expansion will bring staff from 26 Corporate Hill Drive, currently costing $538,000 for 30,000 square feet.

1616 Brookwood & 26 Corporate Hill = 51,035 s.f. @ $745,615.45 combined annual rent (at time of relocation)
525 West Capitol Avenue (after expansion) = 48,963 s.f. @ $782,444.72 annual rent + $9,525.00 for storage

So the move means at least 6.2 percent increase in leasing costs for 2,000 square feet less space, but achieves Walker's aim of consolidation. I don't have figures yet on what building the improvement costs into the lease will cost the state. Laidlaw said the expansion is being priced now and a final figure on amortized costs isn't known yet, though it's expected to increase the lease cost because the expansion will exceed the allowance. If it's too expense, the state can terminate the contract before construction begins, she said.

The negotiating road wasn't easy. Laidlaw acknowledges that she looked askance at appearances when she learned during original lease negotiations that the building was to be changing hands to a business headed by someone associated with Walker. Here's her account of events:

Walker had sought to consolidate Rehabilitation Services since Beebe named him a department head, Laidlaw said. In 2009, Laidlaw's agency began gathering information on potential locations. There is no formal RFP or bidding process in Arkansas for leases of existing buildings, only for new construction. During the search, the agency was approached by Colliers International about the building on West Capitol, then owned by PB Capitol Properties LLC. Laidlaw said Walker toured the building and it clearly was his choice.

But this happened: While negotiating a lease with Colliers, "we became aware there was to be a change of ownership. We can't negotiate with someone who's not going to be the lessor of the building." Laidlaw said. Among other things her agency heard was that the terms then being discussed would not be high enough for the buyer.

"So we just stopped negotiating," Laidlaw said. "I got involved. ... I went and met with Mr. Walker and explained to him we were going to need to stop and back up because I wasn’t comfortable with how things were proceeding."

I asked: Do you agree this doesn't look exactly right?

Laidlaw: "I agree. I had concerns as well."

Laidlaw said the Mays-Walker relationship was precisely why she'd taken a harder look at the deal and notified the governor's office.

From there, Laidlaw insists, the agency went by the book. She said the Building Authority studied comparable buildings, negotiated hard on a new tenant allowance, got parking spaces and got an agreement to be allowed to expand in the future on an out parcel of land. She has promised a copy of the 2009 report on the study of comparable locations and I'll post it when I have it.

The original lease was with PB Capitol Properties, which would sell the property two weeks later to Mays' Capitol Place LLC. The lease commenced March 1, 2010, when improvements were completed, and the lessor was amended to reflect the Capitol Place ownership.

So that was 2009.

In 2011, Walker's agency was back to bring in the employees in the Corporate Hill offices to the West Capitol building. This would require an addition to the building. Mays' LLC wanted that addition to qualify the building as new construction, and thus qualify for a 10-year state lease. Laidlaw said she would not agree to that term. "It was clearly an existing building and was not being bid for new construction."

Neither Mays nor Walker was happy about her agency's tough bargaining, Laidlaw said. She insisted she felt no political pressure. "I work for the governor. I kept the governor's office informed and shared challenges with them and they also understood my concerns. They said you need to make the best decision for the state."

"We work really hard to keep things between the tracks and make as good a deal as we can make for the state.In the end, I think we accomplished that."

In answer to my question, she said the state had no future plans to buy the building.

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