State Property Leases Could Get a New Lease on Life

By Benita M. Dodd

There are two constitutional amendments on the ballot in Georgia for voters to consider on November 6. To borrow a word revived in the American lexicon by Vice President Joe Biden, there has been much malarkey in the debate regarding Amendment No. 1, which would provide more public charter school options. Few voters, however, are even aware of Amendment No. 2, which would allow the state to enter multi-year property lease agreements.

Georgia’s State Properties Commission, responsible for the inventory of all owned or leased state government facilities and property, has a database of 1,800 leases, 15,000 buildings and 1.1 million acres. The Commission says a longstanding interpretation of the Georgia Constitution limits the state to one-year leasing terms. Passage of the amendment would facilitate multi-year leases, subject to annual legislative appropriation of the lease amount.

The current process not only considerably complicates matters, it reduces the pool of landlords available to the state, according to Howard Boyd, executive vice president of Hailey Realty Company, an Atlanta-based firm specializing in leasing and management of commercial, office and industrial buildings.

Boyd has personal experience. He recalls his work on leasing a 20,000-square-foot space to one state agency.

“The big issue is that it was raw space that involved a buildout – improvements for the tenants – of about $800,000. The rent for the first year was about $250,000, so there was no way to recoup the cost of building out the space in one year.”

The solution: a one-year lease with 21 renewal options. If the renewal option was not exercised, there would be a non-renewal “fee” of 1/22nd of $800,000 for each non-renewed year.

“Not every landlord will do that,” Boyd notes. “Plus, the state was making taxpayers liable. That one-year lease looks like $250,000, but it’s smoke and mirrors. There’s really a non-renewal fee of $763,000. If we could’ve had the certainty of, say, a 10-year lease of the location, this would not have been an issue.”

In fact, state location leases currently average 10.7 years.

To some extent, the longer the lease contract, the more attractive the total package you can get, Boyd says: “Most landlords don’t want one-year leases because they don’t want to do paperwork every year. And landlords can’t seek long-term financing for a one-year space lease, so you’re immediately reducing the number of landlords.”

Amending the state Constitution to enable long-term state facility leases involves more than just allowing the state to do so, however. There must be responsible oversight and accountability to ensure that the leased space, length of lease and location are appropriate. So much more than economics goes into choosing a location: infrastructure such as access to telecommunications and transportation; traffic; area crime rates; the safety of employees and customers, and the accessibility for the agency’s customers.

The Legislature worked on numerous safeguards to ensure that multiyear leases are optimal: A multi-year lease may not be for longer than 20 years and subject to annual state appropriations. The Georgia State Financing and Investment Commission would also have authority to cap the cap the contract value of multi- year leases annually.

The state estimates the change will save about $66 million over 10 years, which “could pay the average salaries for over 1,300 teachers or policy officers in Georgia.” It would be so much better to promise that the money could remain in taxpayers’ pockets. But what is clear is that this will simplify the process and improve efficiency.

Boyd is hoping for a simpler process. Despite the complications, however, what sticks in his mind is how hard the State Property Commission negotiated on behalf of taxpayers. “I was impressed. It wasn’t just a matter of, ‘Let’s get this done,’” he says.

Benita M. Dodd is vice president of the Georgia Public Policy Foundation, an independent, state-focused think tank that proposes practical, market-oriented approaches to public policy to improve the lives of Georgians. Nothing written here is to be construed as necessarily reflecting the views of the Georgia Public Policy Foundation or as an attempt to aid or hinder the passage of any bill before the U.S. Congress or the Georgia Legislature.

©Georgia Public Policy Foundation (October 19, 2012). Permission to reprint in whole or in part is hereby granted, provided the author and her affiliations are cited.

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