1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 REPORTER'S TRANSCRIPT 8 SEPTEMBER 21, 2011 9 OTHER ADMINISTRATIVE MATTERS 10 ITEM P5 ADMINISTRATION DEPUTY DIRECTOR'S REPORT 11 P5.1 FACILITIES UPDATE 12 P5.1.b PENDING BOND SALE 13 14 15 16 17 18 19 20 21 22 23 Reported by: Juli Price Jackson 24 No. CSR 5214 25 26 27 28 1 1 P R E S E N T 2 3 For the Board Jerome E. Horton of Equalization: Chairman 4 5 Michelle Steel Vice-Chairwoman 6 7 Betty T. Yee Member 8 9 George Runner Member 10 11 Marcy Jo Mandel Appearing for John 12 Chiang, State Controller (per 13 Government Code Section 7.9) 14 15 Diane G. Olson Chief, Board 16 Proceedings Division 17 Liz Houser Deputy Director 18 Administration 19 20 ---oOo--- 21 22 23 24 25 26 27 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 SEPTEMBER 21, 2011 4 ---oOo--- 5 MS. HOUSER: My next facilities item concerns 6 the rental payments at 450 N Street building. 7 Today the Pooled Money Investment Board 8 approved the renewal of the short term loan on this 9 building in the amount of $91,667,000. 10 According to the Department of Finance, they 11 plan to move forward with a bond sale in October or 12 November of 2011 for the 450 N Street building, which 13 would result in a rent increase for BOE in the '12-'13 14 fiscal year. 15 During the '11-'12 budget process, the Board 16 approved a placeholder BCP to insure BOE has adequate 17 funds in our budget to pay this increased rent should a 18 bond sale occur. This placeholder BCP is still pending 19 in Finance, but I wanted to make the Board aware of the 20 current status and our expectation that our operating 21 budget will be adjusted by the appropriate amount to pay 22 any rent increase. 23 MS. STEEL: I have a question. Building is 24 going down and rent is going up. 25 And do we have a lease with them? I mean, why 26 do we even have to pay rent? 27 MS. HOUSER: There's a specific section of 28 Government Code in regard to State buildings -- I want 3 1 to say it's 14101, but I'm sure someone from DGS will 2 know right off the top of their head -- that requires us 3 to pay rent in the -- to pay whatever dollar amount is 4 identified for us because we are placed in a State-owned 5 building. 6 So, if we were in a privately-owned building 7 and we were having these types of problems, there would 8 be some sort of recourse where -- like what you're used 9 to with your businesses where you typically don't pay 10 rent with those types of things and you have the ability 11 to move out. 12 But we are in a State-owned building. So, we 13 have to continue paying the rent. And then whatever the 14 ownership of the building decides to do with it -- that 15 being the State of California with DGS as their agent. 16 So, if they -- if they sell the loan on the 17 building or turn the short term loan into a bond and 18 there is bond debt service payments, the tenants in the 19 building have to pay the bond debt service. 20 And they estimated that the -- the estimated 21 amount was approximately $2 million annually, but I'm 22 waiting to see what comes out because we've got the 23 dollar amount -- every time they renew that PMIB loan, 24 the interest is rolled into the loan. So, at this point 25 we haven't even been paying down the interest only 26 payments on the loan. It's just been rolling, waiting 27 for the bond sale. 28 MS. STEEL: But can we deduct those private 4 1 companies that we hire to work for the buildings at 2 least? 3 MS. HOUSER: No. The way the -- 4 MR. RUNNER: Is that right? 5 MS. HOUSER: -- the way formula -- the way the 6 formula works -- 7 MR. RUNNER: Real world. 8 MS. HOUSER: -- DGS is a fee for service agent 9 on behalf of the State. So, the costs that are incurred 10 in relation to the building, BOE must work with the 11 Department of Finance to locate funds to cover both our 12 costs and DGS's costs associated with the repair of the 13 building. 14 MR. HORTON: Mr. Runner. 15 MR. RUNNER: Yeah, there probably is a lesson 16 there in the future for how -- how we handle a new 17 building, isn't there? 18 MS. HOUSER: For me there certainly is, sir. 19 MR. RUNNER: Let me just ask, in regards to the 20 fact that -- of going out and selling bonds then to 21 finance the building is basically what that is, do we 22 anticipate that the condition of the building could 23 prove to cause those bonds to be more expensive? 24 MS. HOUSER: I'm not an expert in bond sales. 25 We have to defer that to bond counsel. 26 I do know that we've been working with the 27 folks from -- and I don't know if anybody from DGS wants 28 to come up and take that, come on up -- but we've been 5 1 working from -- the bond folks -- 2 MR. RUNNER: They're not running down. 3 MS. HOUSER: -- yeah, the bond folks are -- are 4 with the Department of Finance. And what they have 5 expressed to us over the years was there were several 6 times where they wanted to move forward with the bond 7 sale on this building, but some of the activities that 8 were going on made it difficult to do so. 9 So, like when the windows were falling out and 10 there was scaffolding up on the sides of the building, 11 that was not a good time to try to do a bond sale. 12 MR. RUNNER: I'm just wondering if we could be 13 in this ironic position to where we are out financing 14 the building and now those bonds are harder to sell, 15 which usually means that you have to then increase the 16 return and now we end up paying higher rent. 17 MS. YEE: Yeah, I'd be curious to see what kind 18 of due diligence was done with -- associated with the 19 bond. 20 MS. HOUSER: We have -- in the last two rounds 21 when they were going to try to do the bond sale, in 22 order to insure that the Board was protected, we had 23 contacted the bond folks over at Finance and made it 24 clear that when they hired bond counsel we wanted to 25 make them aware of our website and the things that we 26 had disclosed in relation to this building, uh, that -- 27 that everything is there for anybody who wants to look 28 at it, because we were concerned on the due diligence. 6 1 So, we -- we've spoken with them a number of 2 times, but we'll reengage that conversation because 3 Nathan Brady decided to move to Utah -- the guy who used 4 to be our -- our bond guy at Finance. 5 MR. RUNNER: Okay. So, we'll have -- we'll get 6 an impression as to how saleable the bonds are and, I 7 assume they are saleable, but if there is an additional 8 cost for that? 9 MS. HOUSER: Right. We'll -- 10 MR. RUNNER: And then our relationship in terms 11 of the -- in terms of the statute then is clear that 12 whatever the cost is, we have to -- we end up paying? 13 MS. HOUSER: Correct, as well as cost of any 14 repairs of -- 15 MR. RUNNER: All the remediation, all the 16 things we're talking about? 17 MS. HOUSER: -- yeah, anything above and beyond 18 just basic maintenance, because the basic maintenance is 19 included in the base rent. 20 But DGS doesn't receive like a special 21 allocation to address large building issues. So, it's 22 -- it's up to the tenant to move forward to pursue 23 that -- 24 MR. RUNNER: Thank you. 25 MS. HOUSER: -- those funding requests. 26 MR. RUNNER: Thanks. 27 MR. HORTON: We have a unique responsibility, 28 this body, as representatives of the people of the State 7 1 of California, to be fiduciarily (verbatim) 2 responsible -- even though we're just shifting funds 3 around. 4 But at the end of the day, it's the people of 5 the State of California that's paying for this. And if 6 there is a lawsuit, the people of the State of 7 California will pay for it. 8 If there is problems here and higher leases and 9 so forth, and we could theoretically be saving the 10 people of the State of California funds, they're going 11 to end up paying for it. 12 And, you know, considering all of the 13 discussions centered around property tax and those 14 issues, well, here we go again, the people of the State 15 of California. 16 I could see the news, a slumlord. 17 Anyway, um -- 18 MS. HOUSER: My last -- or any more questions 19 on the bond sale? 20 MR. HORTON: No. 21 ---o0o--- 22 23 24 25 26 27 28 8 1 REPORTER'S CERTIFICATE. 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, JULI PRICE JACKSON, Hearing Reporter for the 8 California State Board of Equalization certify that on 9 SEPTEMBER 21, 2011 I recorded verbatim, in shorthand, to 10 the best of my ability, the proceedings in the 11 above-entitled hearing; that I transcribed the shorthand 12 writing into typewriting; and that the preceding pages 1 13 through 8 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: September 30, 2011 17 18 19 ____________________________ 20 JULI PRICE JACKSON 21 Hearing Reporter 22 23 24 25 26 27 28 9