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Hidden perk in Caterpillar lease for Pima County building: Free utilities

Approved contract cut rent on 'unoccupied' space at 97 E. Congress

Glossed over in the recent deal for Caterpillar to rent a Pima County building in Downtown was a perk that could add up to nearly $1 million over the life of the lease: taxpayer-provided utilities and maintenance. Although officials said the company would "pay all operating and maintenance costs," those expenses were rolled into the base rent on 97 E. Congress.

In addition, the county will pay up to $2 million for tenant improvements and furnishings for the building, while officials approved a 30-percent cut from the proposed rent on parts of the building left empty until Caterpillar occupies them.

While the heavy equipment manufacturer is closing plants and delayed building a new global headquarters, the company plans to construct a new regional HQ in Tucson, promising to add about 600 jobs to its existing workforce here. The Rio Nuevo redevelopment district is backing a $50 million construction project just west of Downtown, as well as subsidizing Caterpillar with a $2 million upfront payment to defray the company's moving costs.

Caterpillar will lease space in a county-owned building at 97 E. Congress Street while a new structure is built on Rio Nuevo land just west of Interstate 10. A four-year lease was approved last month by the Pima County Board of Supervisors. Caterpillar will have two one-year options to extend the deal. The company plans to employ about 200-250 workers at the building, starting with about 50 people and growing in stages, occupying more of the building before moving to the planned facility in 4-5 years.

That deal was described by County Administrator Chuck Huckelberry as requiring Caterpillar to "pay all operating and maintenance costs associated with the building, as well as the standard government property excise fees," as he wrote to the supervisors in a memo June 3.

But under the terms of Caterpillar's lease, which was including on the agenda of a June 7 meeting and unanimously approved by the supervisors, the county is required to pay for all utilities for the building, except Internet and communications costs. The county is also on the hook for all maintenance and repairs on the building during the lease, which runs through August 2020. Caterpillar will pay for janitorial and security services.

In an earlier memo, outlining a draft of deal on May 3, Huckelberry told the supervisors that "Caterpillar will be responsible for paying agreed upon rent, including all operating, maintenance and utility expenses." The day prior, in a letter to Caterpillar's attorneys, he wrote that "operating and maintenance expenses for the entire building, as well as utility costs, are now included in the base rent."

Over a five-year period, the county budgeted more than $200,000 each year for maintenance and utilities for the building. Electricity alone was more than $75,000 annually, with $90,000 budgeted for it in fiscal year 2016-17.

The county's overall operating expenses for the 44,000-square-foot building for FY17 were budgeted at $5.05 per square foot  — $222,000.

Caterpillar's lease calls for the company to pay $13.72 per square foot of occupied space, annually, and $7.12 per square foot on unoccupied space. For comparison, full-service offices in Downtown are being advertised for between $12 and $21 per square foot.

The company plans to expand its Tucson workforce over about two years, eventually taking over the entire building, but starting with about half the structure in use.

The apparent rate on unoccupied space took a jump between the May draft proposal and June's final contract, but the fine print shows a cut in the effective rate.

On May 2, the county's proposal to Caterpillar offered the unoccupied parts of the building for $4.12 per square foot. But, that earlier draft also would have required Caterpillar to pay an additional $6 per square foot "option fee" on unoccupied space, to "offset the county's carrying costs."

The next day, the proposal was provided to the supervisors. TucsonSentinel.com then requested records of how much the county had spent on O&M for the building over a five-year stretch.

Officials at first declined to provide the information, but after being pressed for public records turned over a spreadsheet breaking down spending.

That document showed that the county spent more than $200,000 each year for utilities and other operating expenses for the building. In fact, the $4.12 proposed rent for unoccupied space was less than the county paid for O&M expenses on the building for any of the past five years. The county was also, at that time, asking for the additional $6 option.

About half of those expenses were for salaries and contracted building services — some of which may be directly borne by Caterpillar as the company pays for cleaning and security.

But just the costs of electricity, water/sewer and trash pickup hit about $90,000 each year since 2012. The county will also be tasked with keeping the physical plant — including the air conditioning system — in good repair.

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Huckelberry's terse response to a query about the O&M costs was "they are paying it in base rent," a county spokesman said.

On June 3, the administrator told the Board that, "tenant improvements to meet Caterpillar's space and design needs are estimated to cost $2 million; and Caterpillar has agreed to repay 30 percent of the capital tenant improvement costs over the four-year period."

While the lease requires the county to upgrade the building's office furniture and plumbing fixtures, floor coverings, paint, network cabling and other improvements, it contains no clause specifically requiring Caterpillar to repay any of those costs, which are may run up to $50 per square foot.

The June deal, which was approved by a unanimous vote with even Republican budget hawks Ally Miller and Ray Carroll joining in, bumped the rate on unoccupied space up $3 per square foot from the previous month's draft, which had also included building improvements to run $50 per square foot.

But, the approved lease eliminated the $6 per square foot "option fee" on unoccupied space that had been in the earlier draft, meaning an effective $3 cut in the rate on parts of the building sitting empty until Caterpillar puts them into use.

Because the lease terms do not specify how much of the building will be occupied, and exclude parts of the building from rent as "common areas," the total rent is difficult to calculate.

With officials noting that 34,900 square feet of the building is "net usable," and estimating that Caterpillar will occupy half of the building to start, the first year's rent would be about $364,000. If the company eventually occupies the entire building, the rent charged on the usable space would be about $479,000 annually.

The deal means current tenants, including Pima Vocational High School and the Tucson Indian Center, will have to find new homes. The latter group is set to purchase a county building at 160 N. Stone Ave. in a $1.5 million deal approved last week.

Miller, who seconded the motion to approve the Caterpillar lease when it was before the supervisors last month, said Tuesday that Huckelberry "seems to have deceived the Board."

"He told us a different story than what's in the lease," she said.

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3 comments on this story

3
9 comments
Jul 15, 2016, 6:17 pm
-0 +0

@Chuck Huckelberry
I re-read the story and no where can I find the word gifts in Dylan’s article. He did use the word perk, which could be construed as a gift. But in this case, let’s let bygones be bygones and make sure we don’t let Caterpillar get away. This is a way better deal than the gift of selling World View the building for $10 after 20 years of paying a very low lease at a very high risk.

2
Jul 15, 2016, 4:32 pm
-0 +0

Dylan,

Your July 12 story, “Hidden perk in Caterpillar lease for Pima County building,” is inaccurate and somewhat made up. The story claims the Caterpillar lease agreement gifts “up to $1 million” in “taxpayer-provided utilities.” That’s wrong.

Under the terms of the lease, the County is responsible for paying for utilities. However, as was explained plainly and succinctly to you before the story’s publication, the estimated cost of the utilities has been accounted for in the base rent of $13.72 per square foot per year.

I am uncertain how to explain it in any plainer terms.

Sincerely,

Chuck Huckelberry
Pima County Administrator

1
9 comments
Jul 13, 2016, 11:10 pm
-0 +0

Good article Dylan! If anything is missing, it would have to be that the Brexit outcome may affect what Caterpillar does in the next couple of months. Hopefully we can keep Caterpillar interested. And the lease, with the sale of the other building will work out for Pima County. After all, the jobs are 6 figure jobs and that money will circulate many times over in our local economy.

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