POSTED ON SEPTEMBER 26, 2007:
Throw No Stones
Can city expect more transparent government once city moves into sexy, new building?
After spending a little more time with real estate procedures than it expected, the City of Tulsa is the proud new owner and soon to be resident of a nearly brand-new, slightly used "Borg Cube."
It's the name one city councilor affectionately gave the sexy, 15-story glass building at 100 S. Cincinnati, which is officially known as the One Technology Center, and best known as the new City Hall.
Last week, the City Council unanimously approved a master lease by the Bank of Oklahoma, according to which the financial institute is guaranteeing $28.7 million to the city in rent revenue for the next 10 years for space leased by two existing tenants, as a portion of profits made on the remaining unused space.
A master lease was a condition set forth by the City Council in July when the body approved purchase of the building.
Because the success of the transaction depends on revenue from leasing space the city won't be using to cover much of the $85.4 million it will cost to purchase, move into and maintain the building for the next 10 years, the Council only agreed to the deal on the condition that Mayor Kathy Taylor's office find a third party willing to assume the risk, but with it, the bulk of the profits.
So, they required a 10-year master lease with a third party responsible for retaining and/or finding tenants. If tenants can't be found, that third party would have to pony up the missing rent money.
Or, the Council said, if that master lease didn't solidify by the Sept. 10 closing date, the city was to create a reserve fund with at least $12 million in capital assets using city properties vacated by the move.
Councilor John Eagleton was the sole voice of dissent, who cast the single "nay" vote on the deal, arguing that the "or" separating the two conditions should have been an "and" so the risk-diverting master lease wouldn't be merely optional.
He said the proposed reserve fund didn't decrease the risk to the city because it would only hold buildings in trust that the city already owns anyway.
About a week before the Sept. 10 deadline, Don Himelfarb, the city's director of economic development, said his office had been approached by a certain "large financial institute" offering to fill the role of master leaser, but the offer wasn't "in the best financial interest of Tulsans," he said.
So, the "or" condition came into play when the city planned to transfer property at 23rd and Jackson Ave. to the Tulsa Public Facility Authority for the $12 million reserve fund.
Eagleton refrained from the obvious "I told you so!"s (but, to the trained eye, they could still be seen bubbling beneath the surface).
Before Eagleton's self-control broke and the city found itself out $12 million in real estate, George Kaiser once again came to the city's rescue when BOK and the Mayor's office hammered out a master lease, the terms of which are apparently more agreeable than what was previously discussed.
According to the lease, BOK guarantees the lease revenue from the two current tenants--Deloitte and Touch and Level 3.
The bank has also agreed to give the TPFA 20 percent of the net proceeds from leasing 66,589 sq. ft. of currently unused space.
BOK's own profits from the lease of that space are capped at $4.5 million, so the city will receive 100 percent of any profits after that.
Mike Kier, the city's finance director, explained that, if the best-case scenario materializes and the unused space is leased out, the city could pocket more than $11 million from the deal.
Under the worst-case scenario, though, the city could fall about $2.4 million short of the $85 million price tag, he said.
However, it was generally agreed that the "worse-case scenario" was not just unlikely, but preposterous.
"That's kind of an absurd scenario," said Councilor Cason Carter.
"It assumes we'll lose all tenants and never get new ones. The Bank of Oklahoma is taking $28.7 million in risk on this, and anyone who thinks BOK will sit around and lose $28.7 million without leasing out space is fooling themselves," he added.
Kier also said, if the worst-case scenario somehow plays out, $8.7 million in assets that were intended to fund deferred maintenance on existing facilities could be put toward the shortfall.
"This is as good a master lease as we're going to get," said Councilor Bill Martinson.
Himelfarb said the moving plan should be hammered out by the end of the month, but it will be about a year before the 14 city departments, eight data centers and about 1,000 employees are completely moved into their shiny new Borg Cube.
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