The so-called Verizon Tower in downtown Harrisburg, which the phone company plans to vacate in early 2016.
The state Department of General Services signed off this week on a 17-year lease of office space in downtown Harrisburg, in a deal that is expected to relieve the city of most of the $41.6 million in debt obligations associated with the facility, state officials confirmed Friday.
The office space, in the so-called Verizon Tower in Strawberry Square, threatened to become vacant upon the expiration of the phone company’s lease in early 2016, leaving the city on the hook for payments on the bonds issued to acquire the building.
The new lease, between DGS and the Harristown Development Corporation, the developer of Strawberry Square, is for a base amount of $65 million over the 17-year term, said Troy Thompson, a DGS spokesman.
That amount will rent office space for close to 900 workers to be relocated from what is known as the DGS Annex, an office complex occupying the grounds of the former state hospital above Cameron Street, Thompson said. Among the state workers to be relocated are employees from the Department of Public Welfare, the Department of Transportation, the state police and DGS itself, he said.
Though DGS signed the documents yesterday, the lease still requires the signature of the attorney general’s office to be fully executed. Thompson said Friday he did not know when the AG’s signature was expected. A spokesman for the state Board of Commissioners of Public Grounds and Buildings confirmed Friday that the board had approved the lease, pending the AG’s approval.
Steve Goldfield, a financial advisor who worked on the lease negotiations, said on Thursday that the rental agreement was made possible in part by the city’s parking deal last fall, which served as the keystone of the state-sponsored plan to resolve Harrisburg’s historic debt crisis.
“The state doesn’t usually do this, because parking usually kills the deal,” Goldfield said of the commonwealth’s decision to move workers downtown. But, after factoring in savings from a discounted parking contract that DGS signed as part of the recovery plan last fall, the state stands to save significantly on the office rentals, Goldfield said.
That contract, a 30-year agreement to lease 4,306 parking spaces in the downtown parking system, was a critical component of the recovery plan’s parking deal, a long-term lease of city parking assets that Goldfield also worked closely on as an advisor to Harrisburg’s state-appointed receiver.
Under the contract, the state agreed to pay an increasing amount per month for each space, starting at $130 per month early this year and climbing to $180 per month in 2016. But the contract also includes the automatic addition of 765 spaces by 2016, of which 344 will be rented at a discounted rate of $100 per month.
Those rates, according to Goldfield, helped achieve the savings realized in the DGS lease, which he estimated at around $1.6 million per year. Other factors in the cost savings are the rental price itself as well as a guaranteed energy savings contract that will accompany the lease, he said.
The current cost of housing employees at the DGS Annex is around $6.3 million per year, according to Thompson, the DGS spokesman.
Thompson described the DGS lease Friday as “mutually beneficial” for the state and the city, noting that, in addition to saving tax dollars on office rental costs, the lease also moves the state closer to being able to sell the old state hospital grounds.
Harrisburg is exposed to the office building’s debt because of how its acquisition was financed. In 1998, the Harrisburg Redevelopment Authority issued $23.6 million in revenue bonds to fund the purchase from the city of land and facilities in Strawberry Square.
Of these, $6.9 million, the Series A bonds of 1998, were to be repaid solely with rents paid for office space in the building. But the city also guaranteed the debt, such that if rents were insufficient to cover debt service, the city would be obligated to make up the difference.
Debt service on the Series A bonds starts coming due in the fall of 2016, with an initial payment of $930,000. The semiannual payments climb thereafter, from a total of $1,880,000 due in 2017 to $2,320,000 due in 2032. A final payment of $6,175,000 must be made on Nov. 1, 2033.
With the departure of Verizon, whose lease expires on Feb. 28, 2016, the Harrisburg Redevelopment Authority would have no way to meet the debt service, and the city would be left holding the bag for $41.6 million, Goldfield said.
After operating costs and other expenses are taken out, rent paid under the DGS lease will not provide total coverage of the debt obligation, Goldfield acknowledged. Those expenses include about $1 million per year in real estate taxes, $900,000 per year in utilities and $800,000 per year in common-space charges applied to occupants in Strawberry Square, according to Neal West, senior vice president and legal counsel for Harristown Development Corporation.
These costs leave about $750,000 per year for debt service under the DGS lease, West said. When asked why, even with its offices full, the building could not adequately cover debts as anticipated in the 1998 bond issue, West said he could not speculate about the calculations made at the time. He did observe, however, that the downtown real estate market had remained essentially flat since the late 90s, whereas the bond financing may have rested on the assumption it would grow.
Goldfield also noted Thursday that the DGS lease includes an option to purchase the building at the end of the term, at a price of around $4 million. If the state exercises the option, he said, the deal would bring the city’s total exposure down below $10 million. The debt can then be refinanced, in part through negotiations with Assured Guaranty, which insured the 1998 bonds, he said.
A 2012 report by the Patriot News described the city’s use of proceeds from the 1998 sale as follows: $10.3 million was used to repay hotel bonds previously issued by HRA; $4.7 million was placed in a “capital projects fund” for projects across the city; and $501,861 was used to repay bonds from the Harrisburg Leasing Authority.
The city’s then-finance director, Robert Kroboth, could not account for how the remaining $4.7 million in proceeds was spent, according to the report.
