No-bid contract in Chattanooga triples taxpayer tab

photo Workers work on frosting the glass for the new U.S. Attorney's Office at Warehouse Row. The rental rate for the penthouse offices is $29.32 per square foot for the first five years, a record high for Chattanooga.

SAVING MONEY?• Old rent: $14 per square foot for 14,780 rentable square feet, or $206,915 per year• New rent: $29.32 per square foot for 22,311 rentable square feet, or $654,263 per yearGSA POLICY SAYSCompetitive bids force prospective landlords to compete, which in theory results in lower rent as building owners attempt to underbid each other to earn the government contract.This saves taxpayers money.According to the U.S. General Services Administration's website, "GSA solicits offers on a competitive basis, negotiates with offerors, and, for most acquisitions, makes awards to the lowest-priced acceptable offer."The explanation goes on to say: "Typically, for acquisitions greater than 10,000 square feet, the award is based on a building rate and a specific allowance for the build-out of the tenant space."IN THIS CASEThe U.S. General Services Administration justified what it calls "other than full and open competition" by touting cost savings of between $400,000 and $800,000 if it bypassed the competitive bid process and remained in Warehouse Row.Instead, the no-bid process resulted in a cost increase of $1.35 million for new, larger offices in Warehouse Row's penthouse.Source: GSA

Plans to save taxpayer money have backfired on federal officials in Chattanooga.

A no-bid lease at downtown's Warehouse Row, initially touted as a way to save on moving expenses, instead resulted in the U.S. attorney's office paying one of the highest rents in the city.

Taxpayers will foot a $5.75 million rental bill over the 10-year term. The new offices will cost the federal government $1.35 million more than the U.S. General Services Administration's initial estimate over the next decade and triple the amount now spent to house federal prosecutors in Chattanooga.

GSA officials say the U.S. attorney's office needed more space and the new lease had to meet federal security and accessibility standards. The Department of Justice wanted its attorneys close to the Joel W. Solomon Federal Building, where prosecutors try civil and criminal cases.

But real estate experts question why the government didn't solicit bids for needed space, which will cost $23,366 per employee for the first five years in the new fifth-floor office at Warehouse Row.

For that much, the U.S. attorney's office could double its number of attorneys and staff to 56 and pay each new worker $11.23 per hour. For the same amount, the feds could buy a median-priced home for each of its employees within the next seven years.

The new deal has federal prosecutors paying $29.32 per rentable square foot, or about $54,521 a month, according to documents released in response to an open records request.

"They would be paying the highest rate in the city," said David DeVaney, president of NAI Charter Real Estate. "You can find space in Chattanooga all day long at $22 per square foot, for full-service, including a generous build-out."

The rent is more than double the previous rate in the same building -- $14 per square foot -- and well above Warehouse Row's advertised lease rate of $16 per square foot.

By not using competitive bidding, federal officials ignored more than 1 million available square feet of office space downtown.

DeVaney said competitive bidding typically results in bids from landlords that are slightly less than the advertised rate.

"It should be the list rate or slightly less unless you have to put in some unusual type of build-out," he said.

Same landlord, brand new office

Gary Wilson, chief of facilities management for United States Attorneys, initially pushed for a no-bid lease extension on the grounds that if the attorneys had to leave Warehouse Row, "critical funds would have to be dedicated to build out new space to replicate space which already exists and still meets the needs of the USAO."

As it worked out, that's exactly what happened.

For reasons that officials did not explain, the U.S. attorneys will relocate their offices to 22,311 square feet in the building's penthouse instead of expanding the present offices on the building's third and fourth floors.

New offices, even if they're in the same building, require millions of dollars in construction that the no-bid strategy was designed to avoid.

"They probably could have found something cheaper," said Ben Pitts, a commercial real estate agent for Herman Walldorf Commercial.

The cost of construction is built into the rental rate for the first five years, part of the reason for the higher rate, according to the agency's contract.

Saudia Muwwakkil, regional public affairs officer for the GSA, argued that "these rates were found to be within the expected market ranges and approved for award."

photo Construction is under way at the U.S. Attorney's Office at Warehouse Row, where the federal prosecutors are paying $54,521 per month in rent for their new space.

"The market search was limited to encompass this area," she said. "Base rates advertised by other commercial real estate sources are not likely to include all of the standard federal requirements and U.S. attorney's office-specific requirements."

The attorneys needed more space, they needed it close to the courthouse and they needed customized security, she said.

But those justifications weren't mentioned in the original no-bid request.

The GSA approved the no-bid agreement in 2008, justifying it instead by touting anticipated taxpayer savings of between $400,000 and $800,000.

They warned that moving to new offices could cost $31.09 per "usable" square foot, or about $5.2 million over 10 years.

The new penthouse office will cost $33.72 per usable square foot, or about $5.75 million over 10 years.

"That's a very healthy rental rate," said Russ Elliott, principal broker for Luken Holdings. "I wish I was renting space for that much."

Currently, the highest rent price on Chattanooga-area commercial property is about $28 per rentable square foot in the Pavilion at Panorama building on East Brainerd Road, according to the Greater Chattanooga Area Commercial Multiple Listing Service.

Price versus proximity

U.S. Attorney Bill Killian echoed the GSA rationale, saying that Warehouse Row was simply the only option that offered proximity.

"With the current lease set to expire and facing the need for additional space, the U.S. attorney's office in Chattanooga worked in conjunction with GSA to find an office in proximity to the federal courthouse that met all suitability and security requirements in accordance with applicable regulations," Killian wrote in an email. "GSA conducted a market analysis and determined that the Warehouse Row location was the only location that met all requirements that would serve the office and the community."

However, neither Killian nor the GSA would say what, exactly, drove the rent to the top of the charts.

When the build-out costs are paid after five years, the rent will drop to $22.26 per square foot -- still well above downtown's highest listed rate of $20.50 per rentable square foot at Liberty Tower.

A number of costs at Warehouse Row could theoretically drive the rent up from a market rate, brokers speculated.

Building security costs about 33 cents per square foot. The heating, air-conditioning and 34 on-site parking spaces could also be factored into the rate, said Pitts.

"They've got some of the highest security requirements around," Pitts said.

Downtown parking can cost $65 per month per space, which would add about $2,200 to the monthly bill of $54,521, Elliott said.

"They're paying a full-service rate, so it's probably all-inclusive with the exception of Internet and telephone services," Elliott said. "That could skew the numbers higher and make the rent seem higher than what it is."

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