published Sunday, January 2nd, 2011

TVA buys back building for a bargain

  • photo
    TVA will take ownership of its Chattanooga office complex Monday after leasing the property for 25 years.
    Staff photo by Dan Henry

The Tennessee Valley Authority will take ownership of Chattanooga's biggest office complex Monday for only one-eighth as much as it sold the same buildings for 25 years ago.

TVA will repurchase its Chattanooga office complex on Market Street for $22 million. It sold the structures to a Chicago real-estate partnership in 1986 for $158 million.

"We wanted to stay downtown where we have been for a long time, and we negotiated a very good deal," said Rick Eason, TVA's general manager of facilities.

"In downtown Chattanooga after BlueCross moved up on Cameron Hill, there is a lot of vacant office space, and the market was just right for us to buy it at this price."

The discounted price reflects the unique characteristics of the building, the terms of the previous lease and the depressed market for downtown offices, officials said last week.

"There are major challenges trying to convert a single-tenant building for multiple tenants and, if a building isn't occupied or could end up empty, then the value really goes down," said David DeVaney, president of NAI Charter Real Estate Group.

For all of Chattanooga's downtown success, three of the city's biggest downtown offices changed hands over the past two months for well below their initial asking prices.

TVA negotiated an agreement two years ago to buy back the Chattanooga office complex on Jan. 1, 2011, once its 25-year lease with Chicago-based Chattanooga Valley Associates expired.

Under the lease, TVA didn't pay any rent during the 1980s, but in recent years lease payments had escalated to $52 million a year — more than twice what TVA will spend to buy the buildings outright.

The Chicago company wanted to renew the lease at the current rate. But U.S. Sen. Bob Corker, R-Tenn., intervened to help strike a deal to keep TVA downtown, and Chattanooga Valley Associates agreed to sell the buildings.

"If TVA moved out, there was very little prospect of refilling all that space," Corker said at the time.

UNHEALTHY INSURANCE MOVES

SOLD FOR LESS

With more office vacancies and less credit financing, three of Chattanooga's biggest downtown offices sold recently for only a fraction of the $315 per-square-foot cost of building and equipping the new BlueCross BlueShield headquarters atop Cameron Hill:

• TVA Chattanooga Office Complex, 1100 Market St. TVA repurchased the 1.2 million-square-foot complex for $22 million, or about $18 per square foot.*

• The BlueCross Gold building, 801 Pine St. Developers Ken and Byron DeFoor bought the 177,020-square-foot building for $6.15 million, or less than $35 per square foot.

• Chestnut Tower, 601 Chestnut St. Parking magnate Jim Berry bought the 192,000-square-foot building for $4 million, or about $21 per square foot

* TVA retained the buildings' ground lease under the previous owners, Chicago-based Chattanooga Valley Associates

Sources: Hamilton County Register of Deeds, Tennessee Valley Authority, BlueCross BlueShield of Tennessee

The Hamilton County Assessor's Office valued the TVA office complex at more than $94 million. Then Cigna Corp. moved its downtown offices out of the complex and into the 401 Building downtown, leaving vacant 186,000 square feet.

BlueCross BlueShield of Tennessee vacated its signature Gold building more than a year ago to move to its $299 million campus atop Cameron Hill.

BlueCross listed the Gold building for sale for $22 million. The building sold in December for less than $6.2 million, or less than $35 per square foot.

Another largely empty downtown building sold in 2010 at a deep discount to what comparable buildings have fetched.

Republic Parking System President Jim Berry bought the 17-story Chestnut Tower in August for $4 million, or about $21 per square foot. He also owns the adjacent 21-story Republic Centre.

DeVaney said a comparable SunTrust Bank sold a few years earlier for the equivalent of $85 per square foot "but that was occupied and generating significant revenue."

The various corporate relocations and downsizing have left more than 1 million square feet of empty offices in Chattanooga's central business district, according to office vacancy reports.

The amount would have been twice that had TVA followed through with plans in 2008 to build a new office complex near the Chickamauga Dam. The utility determined it now needs only 600,000 square feet -- 40 percent less than its current lease downtown.

UPGRADE AND SAVE

Despite discounted building prices, companies say newer offices can offset higher capital costs by reducing energy use and improving employee efficiency and morale.

BlueCross estimates it will cut its overall facilities costs by 10 percent at Cameron Hill, despite its much higher construction costs.

The complex replaces 10 Chattanooga buildings where 4,200 people worked. It is more energy efficient and requires less maintenance and security.

The new owners of the other downtown buildings also are planning energy and maintenance upgrades.

Berry's group and TVA plan to invest about $20 million each at the Chestnut Tower and downtown complex, respectively.

"We will spend money over the next several years on maintenance and efficiency improvements and we'll look at HVAC [heating, ventilation and air conditioning] and lighting to see if there are improvements to be made," TVA spokeswoman Barbara Martocci said.

The purchase will keep TVA's power headquarters and more than 2,000 employees in downtown Chattanooga.

With the end of the Cigna lease, Eason said TVA plans to move employees who work in the basement of Warehouse Row or in the TVA-owned Edna Building at Market and 11th streets into the vacant Blue Ridge building.

"The original plan for the Chattanooga office complex was to consolidate all of the Chattanooga staff in a single complex, and this will help allow us to do that and gain the efficiency and security advantages of being in a consolidated facility," he said.

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Tax_Payer said...

This needs to be reported to the SEC.

January 2, 2011 at 7 a.m.
mrredskin said...

where are all the TVA flamers at on this one?

January 2, 2011 at 11:11 a.m.
alohaboy said...

UTC wanted to expand, will they get to buy at $30-40/sf or will they have to build something at $200-300/sf?

January 2, 2011 at 6:21 p.m.
alohaboy said...

Also Blue Cross, being a non-profit, has to spend their profits in a way that reflects costs (other than paying GPs more or lowering rates).

January 2, 2011 at 6:24 p.m.
NoMyth said...

"....in recent years lease payments had escalated to $52 million a year...." Egad! The headline appears to be misleading. The recent lease payments suggest that TVA has already paid for these buildings many times over. The headline could easily read that this is an example of wasteful spending and a poorly negotiated deal.

January 2, 2011 at 7:29 p.m.
mrredskin said...

noMyth maybe you need to read the article a few more times. the lease ENDED yesterday. would you rather them continue to pay $50+ million a year or buy it now for $28 mil? what's that saying? something about hindsight?

January 2, 2011 at 10:06 p.m.

I don’t think the SEC, the TVA OIG or even the FBI should investigate this apparently underhanded deal between the TVA and “Chicago investors”.

This one should go directly to the U.S. Attorney General for investigation and possible criminal prosecution. Nobody grossly over pays for property without some arcane reason, usually underhanded. This appears to have been a very big sweetheart deal. Again, it is the appearance of wrongdoing that generally gets TVA in trouble and then they have to spend much time and money justifying their actions while wasting ratepayers’ money.

In a recent case, I have been requesting information from the TVA through their FOIA office about their “Green Power Switch” program which appears to be fraudulent. The first response from the TVA five months after making the request is pitifully skimpy and misleading. I have requested that they take another look at my straightforward questions and try to answer them in a comparable and straightforward manner.

This seems to be part of TVA’s cultural problem; to hide, to avoid giving information, and failing to factually report on their actions. What TVA usually puts out is hyperbole and they do not back up most of their grandiose assertions. (See TVA’s economic benefit statements)

Some way, somehow, TVA must be held accountable for its mistakes; that is a trait long missing from the TVA.

Ernest Norsworthy http://norsworthyopinion.com

January 3, 2011 at 9:01 p.m.
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