A Saturday morning special City Council meeting which was supposed to seal the deal for moving City Hall to One Technology Center (OTC, aka the Borg Cube), 100 S. Cincinnati. Instead, it left city councilors more uneasy than ever with the financial aspects of the deal.
The meeting was supposed to be a behind-closed-doors executive session featuring a presentation from City economic development director Don Himelfarb. Under Title 25 of the Oklahoma statutes, a governing body can go into executive session to discuss the purchase or appraisal of real property, but anyone who would profit directly or indirectly from the sale cannot participate in the session.
What happened instead is that City Council Vice Chairman John Eagleton and Councilors Jack Henderson, Bill Martinson, and Bill Christiansen, among others, insisted on discussing as much of the deal as possible in open session.
Henderson pointed out that they had been given a set of briefing books "thicker than five Bibles" (the line provoked Martinson to a near spit-take), and that only a small proportion of the information was marked as confidential, either printed on pink paper or highlighted in pink. Christiansen added that he didn't believe that all the information on the pink sheets was really confidential.
Himelfarb was clearly displeased with the turn of events, and he complained that he had been told that because it would be an executive session, he couldn't bring the experts with him.
Three hours in open session was followed by two hours in executive session, after which the Council decided not to consider the deal at Thursday night's Council meeting, but to postpone any decision until July.
Because of the method of financing being proposed, the move would require approval of seven councilors. Any three could block the move.
The meeting uncovered some details of the deal that had not heretofore been made public.
The Tulsa Public Facilities Authority, a city-controlled Title 60 trust, would issue $67.1 million in revenue bonds. That money would cover the purchase price of the building (rumored to be $52.25 million), remodeling, and other costs associated with the move. The TPFA was created in 1981, under the name Tulsa Civic Center Authority, to own, finance, and manage the newly expanded Maxwell Convention Center.
TPFA would operate the building, repaying the bonds from revenues from lease payments from third-party tenants at OTC. Deloitte Touche and Level 3 are the current tenants, and the financial analysis assumes that they will stay. Deloitte Touche has expressed interest in expanding. Level 3's lease will allow it to begin vacating at the end of 2007.
Any debt service on the bonds and any operating expenses not covered by third-party lease payments would be paid by the City of Tulsa as its "rent check" to the TPFA. The money would most likely come from the City's General Fund, which is generated by two of the three pennies of the City's sales tax. If tenants leave, if replacement tenants can't be found or won't pay as much as current tenants, the City would be on the hook for the difference.
The first five years the loan would be interest only, with payments of $3.5 million a year. In year 6, debt service would include principal and interest and would jump to $4.8 million annually. Although this was never stated, the loan seems to be structured with the hope that the properties being vacated by the city could be sold within five years and the debt refinanced.
As he did in the fairgrounds annexation debate, Councilor Bill Martinson put on his green eyeshade (figuratively speaking) and presented his detailed analysis of the numbers that had been supplied by the Staubach Company, the group hired by Mayor Kathy Taylor to study the deal.
Although I've had my differences with Martinson on some significant issues and haven't endorsed him in the past, in the last few months he has really put his analytical brain and business experience to work for us. I'm glad he's on the City Council.
Martinson mentioned that he spent seven years with one of the city's largest property companies and was there when the bottom fell out of the market. He saw first-hand how the real estate market can change in a flash.
In analyzing the cost to the City, Martinson used lease rate estimates of $8 to $10 per square foot. He said that his sources indicated that downtown Class A office space (the newest, highest-quality office space available) would fetch $13 to $17 per square foot. An analysis of the current Tulsa office market by Tooman Partners LLC shows a $14-$17 range for downtown class A space.
Himelfarb and CBRE Vice President Angela West, the broker for OTC, took exception to Martinson's numbers. Martinson countered that the configuration of the building, which was designed to be occupied by a single large company, didn't lend itself to multiple occupancy. The building configuration would mean discounted, not premium, rates.
The building has been for sale for a year and a half, and only four floors, plus a bit of a fifth, are leased out of fourteen floors available.
Martinson's lease rate estimates assume that new tenants will be governmental or quasi-governmental bodies, unable and unwilling to pay premium rates, no matter how nice the building is. Using Martinson's numbers, the cost of consolidating in OTC could be anywhere from $4.3 million to $9.1 million more than staying put.
Neither Martinson's numbers nor Staubach's numbers include the big unknown -- what could the City garner from the sale of the properties it would be vacating.
Himelfarb confirmed that the City does not intend to compete with private landlords for private tenants. While the City would keep the current tenants as long as possible, and wouldn't necessarily turn away an interested private tenant, there have been discussions with the Tulsa Metro Chamber, INCOG, the State Department of Commerce, and OETA about leasing space in OTC.
Himelfarb also mentioned the Corps of Engineers as a possible tenant, but it was pointed out that the Corps is in a very new building at I-44 and 101st East Ave.
Martinson presented a written list of questions, many of which went without an answer. Some of the questions were policy matters that the Council will have to decide.
"Can the [City] effectively manage a multi-tenant building?" And given that the Mayor is saying that the existing buildings require $24 million in deferred maintenance, "[w]ill the [City] have the discipline to invest in maintenance" in OTC?
This purchase would give the City the risk of ownership for hundreds of thousands of square feet of surplus space. Philosophically, should the City even be in the business of real estate investment? Martinson said no: "The City is the business of public safety and infrastructure."
Even if it's philosophically acceptable, will the City be able to compete for tenants? The City's maintenance and operations cost is currently $13 per square foot per month, and that's with $24 million in deferred maintenance. $6 per square foot is the industry standard. Martinson granted that the cost of utilities would be lower in OTC, but that only accounts for perhaps $3 per square foot.
Martinson also questioned whether enough money had been figured in to cover the cost of tenant improvements. In his experience, which was many years ago, a landlord would have to spend $20 to $30 per square foot to configure a space for a new tenant -- moving walls, doors, electric and phone outlets, painting, carpeting, etc. CBRE's West insisted that for this building $1 to $2 per square foot per lease year would be sufficient -- about $10 for a typical five-year lease.
Councilor Cason Carter confirmed that real estate experts had told him that $30 per square foot is the current rule of thumb. Martinson pointed out that tenant improvement money has to be paid up front, before the landlord collects a penny in rent.
Of the eight councilors present (Chairman Roscoe Turner had a prior commitment) only Carter spoke to counter some of the concerns raised by his colleagues. He seemed most inclined to support the move.
At several points in the discussion, Himelfarb cited real estate experts who were uniformly positive about the deal. It eventually came out that the real estate experts he'd been listening to are the largest property owners in downtown. He mentioned that Maurice Kanbar, the San Francisco investor who owns over a dozen buildings downtown, said that short of buying up his buildings, taking OTC off the market was the best thing the City could do for him.
The most negative voice at the meeting was that of Bill Christiansen. He said the deal seemed to him to be a "house of cards" and if any one element failed, the whole deal would collapse on the City's taxpayers. Christiansen believes that the deal unfairly shifts the burden of downtown's surplus office space from the private sector to the citizens of Tulsa.
Christiansen also stated that the Council had been misled to believe that the Staubach Company was being paid a fixed fee for its independent analysis. Instead, as Himelfarb said Saturday morning, Staubach will be paid a larger amount if the deal goes through. If the sale doesn't happen, Staubach would get a smaller fee, not enough to cover its costs. Third-party experts who studied parking needs and space configuration will get paid the same regardless.
One question that wasn't answered: Where's the itemized list of $24 million in deferred maintenance? That amount is what tips the balance in Staubach's analysis in favor of moving to OTC. Himelfarb and Director of Finance Mike Kier didn't have an answer, but it was mentioned that the structural problems with the Civic Center's plaza and underground parking accounted for $16 million, and that there is $1.4 million in the current third-penny package toward City Hall's deferred maintenance needs.
Himelfarb also didn't have an answer for my question about first-year net costs, which are shown to be less in OTC than if we stay put. As I pointed out last week, that's counter-intuitive -- even if debt service on OTC is less (only one half-year payment), the first-year will include moving costs and overlapping operation of existing facilities during the move. Some of that may be rolled into the loan, but how much?
Councilor Eagleton raised a concern about the title to the land on which City Hall sits, and the possibility that previous owners may have a "remainderment" interest if the land reverts to private use. The title opinion which was recently obtained traces back only as far as a 1942 quit claim deed, which wasn't filed of record until 1953.
Councilor Maria Barnes asked the key question: Why do we have to move out of the current facilities?
Himelfarb's reply was the cost of deferred maintenance and the need to release the current City Hall space for hotel development. The Convention Center can't be successful without an adjacent headquarters hotel, he said.
Tulsans with a long memory will scratch their heads at that: The Doubletree (originally the Excelsior), connected by sky bridge to the Convention Center, was built on urban renewal land precisely to serve as a headquarters hotel for the Convention Center, which was expanded in the early '80s
Tulsans ought to be proud of our City Council, which is asking the right questions of the Mayor's Office about this deal, doing due diligence on our behalf.
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