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Gardner Courts BSU For Tax-Exempt Space

 June 16, 2014 ⋅  Post a comment

UPDATE 6/19/14 STATE BOARD OKed THE DEAL OUTLINED BELOW.
Meeting in Idaho Falls, members of the State Board of Education approved the proposal.

Looks like the Gardner Company has found a pot of gold in the form of government funding for downtown Boise projects.

Latest move to get public funding for a pair of proposed downtown buildings to be squeezed into the Grove Plaza on either side of the U.S. Bank Building at Capitol and Main involves fragmenting the Boise State University Campus by moving portions of the of the Computer Science Department off campus, leaving existing facilities vacant.

Do you think such a move will justify bike lanes or a trolley?

Gardner’s proposal calls for the University to co-locate portions of its Computer
Science Department, including faculty, staff, and instructional areas related to
upper division courses, in the new development to be located near technology
firms in the downtown area.

While it is an admirable sales pitch on the part of Gardner, it will make even more space TAX-EXEMPT, forcing property owners on the Bench and other areas outside downtown to fund police, fire and other services. Why? Because these GOVERNMENT-OWNED buildings, including the so-called transit center, a $38,000,000 Greater Boise Auditorium District ballroom and kitchen, and now a BSU structure which could cost at least $15,000,000, will never yield a dime in tax revenue.

BSU is attempting to get the State Board of Education to approve the deal–which has several lease options, but with the clear intent of making annual “lease” payments for at least 20 years with the clear intent of owning it at the end.

State institutions are beholding to the State Board and the Legislature. However, local government agencies — such as the Auditorium District — have to seek voter approval for multi-year debt. They can also seek “judicial confirmation” from the court which is a limited exception to the constitutional mandate for a vote.

Ironically, Boise city councilors will soon begin working on annexing sparsely populated farm land along Ten Mile Creek nearly to Kuna-Mora Road…so much for curbing urban sprawl.

Read the State Board June 18-19 Agenda proposal.

BUSINESS AFFAIRS AND HUMAN RESOURCES
JUNE 19, 2014
BAHR – SECTION II TAB 11 Page 1
BOISE STATE UNIVERSITY
SUBJECT
Facility Lease with Acquisition Options
APPLICABLE STATUTE, RULE, OR POLICY
Idaho State Board of Education Governing Policies & Procedures, Section V.I.2
BACKGROUND/DISCUSSION
Gardner and Company (“Gardner”), a private developer, has approached Boise
State University (BSU) with a proposal that provides BSU with an opportunity to
own or lease space in its new downtown development at a reduced cost.
Urban universities such as University of Utah and Portland State University often
operate satellite campuses in downtown locations. BSU has been invited to
participate in several such developments proposed by both government and
private entities. This particular location would serve to create collaborative
partnerships with leading industries, allow local businesses and industry greater
access to our programs, and provide our students with the opportunity to interact
with local partners by working on projects of mutual interest.

Gardner recently completed construction of the Zion’s Bank building. It has now
acquired the US Bank building and proposes placing a mixed-use development
on the adjacent surface parking lot. The development, consisting of two
connected buildings, the Centre Building and the Clearwater Building, will be
called City Center Plaza. Gardner has secured lease commitments from
computer science industry partners and other public agencies. The goal is to
build a computer science/software industry focused development in addition to a
transportation and retail location.

Gardner’s proposal calls for the University to co-locate portions of its Computer
Science Department, including faculty, staff, and instructional areas related to
upper division courses, in the new development to be located near technology
firms in the downtown area.

Project Partners:
In 2013, Valley Regional Transit (VRT) issued a Request for Proposal for a
downtown regional transit center. Gardner, the sole respondent to the RFP,
proposed that the transit center be placed within its new development. VRT has
announced its commitment to be part of the project and final approval from the
Federal Transportation Administration is expected in June 2014. While Gardner
will develop the transit center, VRT will hold final ownership as part of a
condominium agreement for the project.
BUSINESS AFFAIRS AND HUMAN RESOURCES
JUNE 19, 2014
BAHR – SECTION II TAB 11 Page 2
The Greater Boise Auditorium District (GBAD) recently announced its intention to
partner with Gardner to develop additional auditorium and convention space at
this site. GBAD has retained its own planners and designers and in advance of a
final commitment to Gardner, GBAD will program and estimate the cost of the
space.

Clearwater Analytics has signed a ten year lease with Gardner for five floors of
the development. Gardner will own the Clearwater suites as part of a
condominium agreement. In addition, Gardner has several lease commitments
from retail tenants to occupy the ground floor of the development.

Project Description:
The two buildings will be approximately 370,000 gross square feet, of which the
University will occupy 53,549 gross square feet comprised of two complete
floors, the second and third floors of the Clearwater Building and a small portion
of the Centre Building. Additional information follows:
Clearwater Building (250,000 gross square feet):
Ground Level: Building lobby, elevators, and retail
Second and Third Levels: Boise State University
Fourth through Ninth Levels: Clearwater Analytics
Centre Building (120,000 gross square feet):
Subterranean Level: Transit center
Ground Level: Lobby and retail
Second through Fifth Levels: Auditorium and convention spaces and a small
space for University use

IMPACT
Gardner has offered to lease 53,549 gross square feet to BSU for $16 per square
foot/per year, triple net ($856,784 in the first year). This lease rate will escalate
annually by three percent, with a three percent discount if paid annually in
advance. The triple net status requires that in addition to the base rent, the
University will pay additional annual rent. The additional rent is detailed in the
attached lease and represents common area services provided to the complex
including landscaping, facility maintenance, trash services, and utilities as well as
taxes and insurance. These expenses are estimated to be between five and six
dollars per square foot, per year, approximately $294,000 in the first year.

The lease is a one-year lease with nineteen one-year renewal options. A landlord
contribution of $50 per square foot for tenant improvements ($2,677,450) is
included. The University holds the option to decline landlord funding of tenant
improvements. Should the University self-fund tenant improvements, the initial
lease rate extended to the University is reduced to $11.25 per square foot, triple
BUSINESS AFFAIRS AND HUMAN RESOURCES
JUNE 19, 2014
BAHR – SECTION II TAB 11 Page 3
net ($602,426 in the first year), with the same three percent annual escalations
and prepayment discount.
The proposed lease also provides the University with an initial purchase option of
$9.1 million, and subsequent annual purchase options which decline in cost
through the twentieth year of the lease, at which time the University will have a
one dollar purchase option.

At this time, the University requests only that the Board approve a facility lease.
The proposed lease provides that final decisions about the University’s
investment may be delayed for approximately two years without penalty. The
University will monitor the project’s construction and costs, observe market
conditions, and if warranted, return to the Board within two years for any
investment proposal requiring Board approval.
Because the University would prefer to hold an annual lease and declining
annual purchase options, the landlord’s lender requires some unique conditions
to secure financing:
1. Tenant improvements are generally considered sunk costs specific to
an individual tenant. Therefore, the lender will not lend to the landlord
for the cost of the University tenant improvements due to the annual
lease status, unless:
a. The University agrees to a minimum five year lease term; or
b. The University agrees to pay a lease termination fee equal to the
unamortized portion of the tenant improvement costs should the
University not lease for five complete years; or
c. The University agrees to self-fund the tenant improvements.
2. The landlord’s financing will likely include a loan pre-payment penalty.
Should the University exercise a purchase option, any applicable loan
pre-payment penalty will be added to the University’s purchase price.
The exact amount of the prepayment penalty is not yet known and is
subject to the final financing package at the conclusion of the
landlord’s construction loan. However, the landlord has agreed to allow
some lease years without prepayment penalty to the University:
lease years 0 (initial purchase option), 1, 2, 12 and 20 ($1 purchase
option).
Should the University exercise any purchase option, the lease becomes null and
void, thus activating the University’s full ownership rights per the condominium
association bylaws. The association bylaws are not yet agreed upon; however,
the University’s obligation to pay rent under the lease is conditioned on its
approval of the association bylaws. The University is not required to pay rent
BUSINESS AFFAIRS AND HUMAN RESOURCES
JUNE 19, 2014

BAHR – SECTION II TAB 11 Page 4
under the lease until the bylaws have been approved by the University and
recorded.
Over the next two years the University will work closely with the developer and
their lender as the project and financing progresses, monitor how the financing
structure will impact purchase option pricing, and monitor market conditions and
University priorities. The University will then return to the Board with updates,
analyses, and recommendations related to the funding of tenant improvements,
the lease versus purchase decision, and the timing of those decisions. Approval
of the proposed lease agreement allows the developer to secure construction
loan financing and proceed with construction of the project which is expected to
be completed in approximately two years.

ATTACHMENTS
Attachment 1 – Lease Agreement Page 7
STAFF COMMENTS AND RECOMMENDATIONS
The landlord anticipates substantial completion of construction and preparation of
the premises (excluding tenant improvements) not later than 24 months after the
execution of the lease. The term of the lease begins upon the “commencement
date” which is either the date the tenant takes possession (other than for
purposes of competing tenant improvements), or 120 days after landlord notifies
tenant that the premises are ready for tenant improvements, whichever occurs
first.

Funding for lease payments will come from budget reallocations or operating
reserves. BSU has affirmed it does not anticipate seeking new appropriated
funding in the form of a state budget request or tuition or fee increase request.
The “going rate” for lease space in downtown Boise is one figure which blends all
buildings, so some new buildings leasing for $25 a square foot or more are
averaged with old buildings leasing at $10 per square foot. That being said, the
current office rate downtown is $18.20 per foot full service, which translates to
about $13.20-$14.20 Triple Net. Brand new construction leases for a premium
over the average blended rate. For example, at the new 8th and Main Tower, the
current market rate is $26.50 or $21 triple net. As such, the $16/SF NNN
negotiated by BSU is competitive for premium new construction.

Pursuant to Board policy V.B.10., only owner-occupied space is eligible for
occupancy costs funding from the state. However, since there is an option to
purchase, staff recommends notifying Legislative Services Office and Division of
Financial Management staff within 30 days of Board approval to enter into the
lease agreement.

BSU should be prepared to discuss plans for the use of space vacated on the
main campus as the result of this relocation.
BUSINESS AFFAIRS AND HUMAN RESOURCES
JUNE 19, 2014
BAHR

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