OCHE LEASE TERMINATION

OCTOBER 2004

 

As we have previously discussed SAF is currently in need of space to house the staff associated with it's growth. Management projects that we will need more space than we currently occupy by the end of 2005. Currently SAF has approximately 136.7 FTE;s and with projected servicing and loan growth to reach $1.6 billion within 5 years by conservative estimates it is projected SAF will have approximately 206-225 FTE;s within 5-7 years. SAF has been looking at many options for meeting the space needs associated this growth. As a result of our discussions it has become known that OCHE and MGSLP desire more space in the future as well.

SAF has been working with MGSLP and OCHE to identify potential solutions for space. We started out trying to keep all three tenants in one facility. It was determined that the current space at 2500 Broadway would not meet long-term needs of all three entities at a reasonable cost. We have also explored numerous other build options at other locations. SAF Management does not believe building a new facility that houses all three entities is in SAF's best interest. The primary reason for this is that SAF would lose certain economic advantages that the current facility provides. Among those are:

1. A fixed known cost for the next 10 years based off of the $2.8 million purchase price for the existing building as opposed to the cost of a new facility.

2. Utilization of the $2.5 million in equity in the current facility. As you may recall, SAF acquired the rights from MHESAC to the $1 purchase option from Lewis and Clark County on the current building during SAF's creation. This purchase option would be executed at the time that the bonds are paid off by MHESAC (which can now occur at any time without call premium but shall be no later than 2008.)

SAF Management recommends that we pursue obtaining the space presently occupied by OCHE in the current facility to meet SAF's immediate-to-mid-term space needs. effective December 1, 2005 -0 June 30, 2006. The terms of the current financing and leases on the facility provide that MHESAC shall have the option to terminate the lease on any December 1 (starting on December 1, 2002) with 12 months prior notice. Upon such termination, MHESAC becomes responsible for the OCHE space under the MHESAC Prime Lease. Under the MHESAC-SAF Sublease SAF is responsible for all MHESAC space including the OCHE space if MHESAC terminates OCHE's lease. This option would require that OCHE move to new space. We have been working with OCHE to determine a location that works for them. We have also tried to induce OCHE to leave the space immediately by offering to pay part of their moving costs and part of any incremental rent they may incur for temporary quarters. It is anticipated that the effective date of the termination would be between December 1, 2005 and June 30, 2006.

Acquiring use to the space presently occupied by OCHE would provide SAF with approximately additional 7800 square feet of space in this building. Once OCHE departs the building the Regents Conference room can then also be converted to office space which would provide an additional 2400 sq.ft. The SAF/MGSLP reception space would be moved to the first floor and conference rooms would be established on the second floor. SAF anticipates it could house 75-100 additional employees in the space provided by this move. The current visitor parking would be re-configured to provide an additional 40 spaces and as necessary 25-30 parking spaces would be leased from St. Peters Hospital in their new lot immediately to the east of 2500 Broadway. With these changes and the departure of OCHE's 40 staff, parking would be available for approximately 100 additional staff. This space should satisfy SAF's space requirements for 4-7 years (2008- 2011). We are also pursuing providing diagonal parking on the west side of the building as well.

The financial impact to SAF of paying for the OCHE leased space is $150-160,000 annually through 2008 and drops by $100,000 thereafter. While the actual overall level of dollars that SAF would be paying for facilities is increasing under this proposal the cost will really be passed on to MHESAC and other serviced clients. This cost will be absorbed by future MHESAC budgets without increasing their overall basis point levels as their portfolio is growing sufficiently during this time period. Furthermore SAF will charge some of these costs to its expanded servicing efforts for non- MHESAC clients and the revenue from that effort will be more than sufficient to support its proportional share of this cost.

During our discussions OCHE has indicated they would like MGSLP to move with them when OCHE leaves 2500 Broadway. The financing and leases do not allow for an early termination of the MGSLP space. Rather the documents provide that MGSLP will pay its full lease costs until 2008 and between 2009-2014 it will be able to continue to lease its current space at a rate reflective of no Basic Rental payments. The MGSLP Lease terminates on 2014. MGSLP could only move out (unless it defaults on its lease) if it subleased its space or if MHESAC assumed the MGSLP lease as well.

SAF does not project it will need more space beyond the OCHE space until 2008 but anticipates it will need more space beyond 2008. . SAF is fully cognizant of the value to MGSLP of its reduced rental rates starting in 2009. SAF also has no reason to sublease further space at 2500 Broadway until it reasonably expects to use it. In order to understand the financial implications of the MGSLP lease SAF Management has conducted some analysis of the NPV of this lease situation. SAF estimates that if MGSLP were to leave its space at the end of FY 2006 the NPV of the unfulfilled MGSLP lease obligations would be would $335584 (based upon a 6% discount rate). SAF calculates the NPV of the MGSLP reduced rental rates to be $440877. The difference of these two items is $105,923 that SAF might look to incur (in addition to paying $204-206,000 annually for MGSLP space until 2008) if SAF were to assume MGSLP space starting in FY 2007. While no formal discussions with MGSLP have occurred to date Management believes that this option has sufficient value that it should be evaluated.

OCHE and MGSLP and SAF have been engaged in recent discussions with a developer who wants to build a building on California street. The discussions have centered around having OCHE and MGSLP becoming tenants in this new facility. SAF has facilitated discussion but OCHE (and possibly MGSLP) still need to finalize their plans relative to their space if this plan is implemented.

 

RELATED STRATEGY DISCUSSIONS

After MHESAC has provided OCHE notice to terminate, SAF could request MHESAC pay-off the Bonds associated with the Building. Paying-off the Bonds would allow SAF to exercise its purchase option on the facility. If the purchase option were exercised, SAF rental costs for the space presently occupied by OCHE and MGSLP could be eliminated. SAF could then consider refinancing the building thereby allowing SAF to pay-off its building note with MHESAC and providing enhanced SAF cash flow, funds for improvements to the property, and potentially capital to SAF to fund new programs.

 

RECOMMENDED SAF BOARD ACTION

1. Instruct SAF management to arrange with MHESAC the provision of a one year - nineteen month lease termination notice to OCHE on OCHE's space @ 2500 Broadway on December 1, 2004. OCHE is aware of Management's intent and has exhibited a willingness to cooperate.

2. Instruct SAF management to negotiate a potential "early" assumption of the MGSLP space with MGSLP. MGSLP is aware of Management's intent and has exhibited a willingness to cooperate.

3. Instruct SAF management to evaluate the execution of the purchase option on 2500 Broadway and the possibility of SAF refinancing the building.

4. Request SAF management to provide a final long-term building recommendation at the Board's November meeting.