MEMORANDUM 09-118

TO: Mayor Hornaday / Homer City Council

FROM: Walt Wrede

DATE: September 22, 2009

SUBJECT: UAA / KBC Lease

The University of Alaska, Anchorage, KPC Campus lease with the City of Homer for the West Campus at the old Homer Intermediate School expires on September 30, 2009. As you know, I have been talking to the University about a new lease for several months. These discussions have been complicated somewhat by the City’s current budget situation. The draft budget I submitted several weeks ago proposes to mothball the building in January in an attempt to reduce expenditures.

Attached is a resolution approving a one-year lease extension. The lease amendment also contains an option year. The base rent is increased by about $7,500 to $64,837.14 annually. Although this rent is likely still below market value ($.06 sq/ft), the increased rent basically covers the costs of fuel, electricity, and other utilities for the section of the building that the college occupies. The College staff inform me that they really only need three more semesters until they can occupy their new building on the East Campus (projected January 2011).

I put this resolution before you because a decision needs to be made rather quickly. The lease expires at the end of this month. Although the budget I presented anticipated closing the building in January, upon further review and consideration, I don’t believe that it is practical for a variety of reasons. They are:

1. Inconvenience: The University has contracts in place with instructors for the semester beginning in January. The schedule for the Spring semester is already set and students are counting on being able to obtain those credits. There is no practical place for the University to move on short notice. Some classrooms, like the lab, would be almost impossible to move.
2. Section 11b of the Lease states that the parties will give each other 120 days notice if either wants to terminate the lease. I just barely gave the University 120 days verbal notice. However, what I submitted was a draft budget and the final decision rests with the Council. The reality is that there is no way the Council can make a final decision on this in time to give proper notice and close the building in January.
3. Rent: As noted above, the University is paying rent and is covering the cost of fuel and utilities for the section of the building it occupies. It does not seem appropriate to penalize the University because the City is losing money by keeping the entire building open.

The Council has several options. If it disagrees with extending the lease, it can make a decision now and we can give the University 120 days notice that it must vacate the building by February. If it agrees, then the City can simply extend the lease at a minimum, to cover the Spring semester. That way, the City won’t be closing the campus down in the middle of the school year and it would give sufficient notice. The lease calls for 120 days notice or both parties can terminate at anytime upon written agreement.

Extending the lease and allowing the College to remain, at least through the Spring semester, has budget implications. However, I think the fiscal impacts of keeping just the college portion of the building open will be revenue neutral. If this lease is signed, there will be $64,837 in new lease revenue that is not in the budget now. My rough estimate is that it would cost the City approximately $63,000 to keep this section of the building open for 2010; less if you closed it at the end of the Spring semester. That estimate includes $4,000 for insurance, $10,000 for water and sewer, $12,000 for electricity, $30,000 for fuel, and $7,000 for buildings and grounds maintenance and professional services. The budget still would not contain any funding for depreciation, capital improvements, or energy efficiency. We would move forward with boiler installation.

If Council approves this resolution, I will submit a budget amendment form at the next meeting.

RECOMMENDATION: Approve the lease extension.