Title
Amendment of State Office Building Wrap Around Lease between the City of Wichita and Sedgwick County and the Wichita Public Building Commission.
Body
In 1991, The Wichita Public Building Commission ("Wichita PBC") entered into a Lease Agreement with the State of Kansas (the "State Lease") to lease approximately 190,000 square feet of office space in the former Dillards department store building located on William Street between Broadway and Market in downtown Wichita (the "State Office Building"). In 1993, the Wichita PBC issued $18,620,000 in lease revenue bonds to finance the costs to acquire and renovate the Dillards building and construct 475 spaces in the 650 space parking garage located on William between Emporia and Topeka.
At the time of the issuance of the Wichita PBC bonds in 1993, the Wichita PBC entered into a separate lease agreement with the City of Wichita and Sedgwick County which provided financial backstopping for the bonds during the first 10 years of the lease and delegated the Wichita PBC's landlord duties under the State Lease to the City. This lease agreement, which is referred to as the "Wrap Around Lease," contains a purchase option whereby the City and County may jointly obtain title to the State Office Building for $1.00, by mutual agreement, once the Wichita PBC bonds have been retired.
The various state agencies whose offices were consolidated into the new downtown location completed their move into the State Office Building on October 1, 1994 to begin the 20-year term prescribed by the State Lease. The State Lease provides the State with the option to renew the lease for a five-year term following the expiration of the initial 20-year term, or the option to purchase the building and associated parking facilities once the Wichita PBC bonds are repaid, for a price of approximately $8,000,000. The bonds, which were refinanced in 2003, will mature on October 1, 2014 - the same day the 20-year term of the Sate Lease will expire.
On June 7, 2013 the State notified the City of Wichita that it intends to terminate its occupancy of the State Office Building by the expiration date of the State Lease. City officials made several attempts to engage the State in negotiations for a longer term renewal of the State Lease at better terms than those provided in the State Lease. In the end, the State made a final determination to leave the State Office Building, based in large part on the needs of the largest tenant agency, the Department of Children and Families ("DCF") who felt that effective administration of its programs requires an office configuration not possible at the State Office Building.
All of the state agencies currently located in the State Office Building have lined up new leases and with two exceptions will be able to move prior to the expiration of the State Lease. The exceptions are DCF and the Kansas Bureau of Investigation ("KBI"). The KBI will co-locate with the Kansas Highway Patrol in a new facility being built at Hillside and K-254. DCF will lease the former Giant Store building at Oliver and Pawnee currently lease to the U.S. Postal Service. The Postal Service has announced its plan to close the Wichita Remote Encoding Center, but a firm date for the closure has not yet been set.
The State of Kansas has therefore requested a short term extension of the State Lease to accommodate the needs of DCF and the KBI for more time in which to make an orderly move to new quarters. To facilitate this State Lease extension, an extension and modification of the Wrap Around Lease is also required.
The Postal Service lease on the South Oliver building will expire on August 31, 2015. The landlord needs 60-90 days to complete tenant improvements for DCF. Under the terms of the proposed State Lease extension, the Wichita PBC will receive monthly rent payments of $145,075.38 for the initial 9-month extension term starting October 1, 2014 and ending July 1, 2015. The lease may be further extended on a month-to-month basis, at the State's option under the same terms, until December 31, 2015. The rent is computed on the basis of the current rental rates in the State Lease of $11.92 per square foot per year, net of rent directly related to Wichita PBC bonds which will no longer exist. The rental rate will be applied to the 137,238 square feet of State Office Building space currently occupied by DCF and the KBI.
The monthly rent consists of two components: Base Rent of $88,670.76 ($6.98/sf) and Operating Expense Rent of $56,404.62 ($4.93/sf). The State Office Building will continue to be operated by the Kansas Department of Administration under the terms of the Property Management Agreement entered into with the City in 2009. Under the terms of that agreement, the State pays operating costs of the State Office Building and at the end of each year the City remits the Operating Expense Rent back to the State after netting out the City's costs of operating the parking facilities and other incidental expenses.
During the last 20 years, the Base Rent payments and parking fees collected from state employees have been used to pay debt service on the Wichita PBC bonds. During the lease extension period, there will be no expenses to offset this revenue, which will accumulate to the amount of $798,036.82 for the nine-month initial extension term. City and County staff propose that these funds should be set aside to be used to pay operating expenses on the State Office Building after the State's occupancy is ended and until the next use of the building has been determined.
WRAP AROUND LEASE
The State Lease Agreement is between the State of Kansas and the Wichita PBC and its amendment to provide for the extension described above will be considered by the Wichita PBC Board if the City Council and Board of County Commissioners have each approved the extension of the Wrap Around Lease. Under the terms of the original Wrap Around Lease, the agreement to provide financial backstopping and landlord services will terminate on October 1, 2014 if not extended, along with the option for the City and County to take over ownership of the State Office Building and associated parking facilities.
In addition to extending its term, the proposed amendments to the Wrap Around Lease includes new provisions pertaining to the disposition of Base Rent payments received from the State during the extension period. As described above it is proposed that these funds be used only to pays costs of securing and operating the State Office Building after final expiration of the State Lease, for as long as ownership rests with the Wichita PBC or jointly by the City and County. When joint ownership ends, any remaining funds would be divided between the City and County on the basis of each jurisdiction's share in the costs of developing the State Office Building Project which were not financed by Wichita PBC bonds. Based on this, the City's share would be 57.23% and the County's share 42.77%.
Alternatives:
Decline to take the recommended action, in which case the County's rights to share in the net revenue and to participate in the determination of future uses of the State Office Building will expire this fall when the outstanding Wichita PBC bonds are fully repaid. In that circumstance, the Wichita PBC would enter into a new lease agreement with the city government alone, giving the city exclusive rights to the revenue and to decisions regarding the future uses of the building.
Financial Considerations:
There is no cost to the County anticipated by extension of the State Lease or Wrap Around Lease. Any cost associated with securing and operating the State Office Building after expiration of the extended leases will be paid by Base Lease revenue received from the State in an amount not less than $798,036.82.
Legal Considerations:
The attached Second Supplemental Lease Agreement (Wrap Around Lease Extension) has been reviewed by the County Counselor and approved as to form.
Policy Considerations: None
Outside Attendees:
Multimedia Presentation: