Tennessee defends shift to leases, private operators of state offices

Tennessee defends shift to leases, private operators of state offices

July 17th, 2013 by Andy Sher in Business Around the Region

The James P. Mapp Building currently houses state offices, but the state wants to close the facility citing costly needed repairs.

Photo by Staff File Photo/Times Free Press.

SITE PROPOSALS

Downtown Chattanooga

• Chestnut Center, 730 Chestnut St., 96,250 square feet, owned by Henry Luken

• Tallan Building, 201 M.L. King Blvd., 55,989 square feet, owned by Henry Luken

Near downtown

• Tennessee Valley Technology Center, 1301 Riverfront Parkway, 52,762 square feet, owned by Charles Whitener

• Riverside Business Center, 1501 Riverside Drive, 65,849 square feet, owned by Henry Luken

Suburbs

• Former Kmart store at 4801 Highway 58, 102,510 square feet, owned by Henry Luken

• Eastgate Town Center in Brainerd, three spaces for 51,000 square feet, 62,000 square feet and 16,000 square feet

• The Pointe Centre, 1285 Premier Drive, 127,272 square feet available in two buildings, Ryan Allen is the property manager

Source: Tennessee Department of General Services

Mark Cate

Photo by Associated Press/Times Free Press.

NASHVILLE - A top Haslam administration official Tuesday hailed the state's controversial multimillion dollar outsourcing of its real estate services, although he acknowledged the change could have been handled in a more transparent way.

"We think this is a great story that has not been told," Mark Cate, chief of staff to Gov. Bill Haslam, told members of the Legislature's Fiscal Review Committee, who had sought information on the contract with Chicago-based real estate services firm, Jones Lang LaSalle.

Cate said Tennesssee is "the first state in the country as far as we can tell that has done integrated, comprehensive outsourcing" of its real estate. Six other states have since contacted the administration about it.

Still, Cate conceded that "we could do a better job of keeping you [lawmakers] informed.

"As you're plowing new ground of this magnitude and this level of importance, sometimes it's not easy," he said. "Part of this was a continuous learning as we go."

Among other things, the administration's moves over the past two years led last month to the layoffs of 126 state General Services' employees whose jobs have been outsourced.

Tuesday's meeting was the first full-fledged explanation to lawmakers on the state's awarding of two competitively bid contracts to Jones Lang LaSalle.

One dealt with an initial assessment of state-owned and leased property as well as the outsourcing of state office building management and maintenance.

It initially began as a $1 million contract even though officials knew it was going to become far larger through later appropriations. The contract grew through five amendments approved by the State Building Commission.

Cate said the fuller costs were reflected in bidding and should have been included budgetarily at the onset.

The building management contract calls for paying Jones Lang LaSalle $38 million in direct management fees and expenses over the next five years. That excludes some $300 million in normal pass-through costs such as electricity, which Jones Lang LaSalle hopes to cut by $94 million over the next five years. Fifty percent of the management fees depends on that.

A second contract, split off from the first, puts Jones Lang LaSalle in charge of leasing state office space in the future. That allows the company to charge up to a 4 percent fee off the top of money coming to commercial real estate vendors.

"We are 100 percent confident in the end that this was a fair process and that this is the right thing to do for our state," Cate said.

The state of Tennessee's Chattanooga State Office Building is at 400 McCallie Ave. in downtown Chattanooga, Tenn.

Photo by Alyson Wright/Times Free Press.

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Along the way, the state plans to unload six "functionally obsolete" or otherwise unsuitable buildings, including the Chattanooga State Office Building and nearby James R. Mapp Building, which the company says are too expensive to repair and maintain.

Cate said Jones Lang LaSalle's assessment of state-owned space showed numerous code violations in a state system in which buildings were operated on a "run to fail" basis. In one building, a urinal was installed right next to a major electric switching station.

In Chattanooga, the state received seven bids -- including four owned by Chattanooga businessman Henry Luken -- to house the nearly 400 employees now in the two downtown state office buildings.

Savings from relocating employees in state offices to leased facilities across Tennessee is projected to save $100 million over 10 years.

During Tuesday's hearing, Cate sought to clear up one aspect of the Jones Lang LaSalle contract that drew newspaper headlines. Haslam, a multimillionaire, reported during his 2010 gubernatorial race that he owned at least $10,000 in the company's stock.

Cate noted that Haslam sold that in 2011 -- a fact reflected in Haslam's filing with a state ethics agency. Still, since most of Haslam's holdings were placed in a blind trust, Haslam says he doesn't know if he has any investments in the firm at this point.

Contact staff writer Andy Sher at asher@timesfreepress.com or 615-255-0550.