History
My earliest recollection of the idea of a new building came when Ross Holliday, who at the time was chair of Governmental Affairs, suggested we consider the idea as a resource for non-dues revenue. Since that time and over varied conversations deliberating the virtues and pitfalls; the Board approved our new building fund. Shortly after this and early in his presidency, Jarom convened a New Building committee Co-chaired by Steve Dailey and Ross Holliday.
Prior to the first meeting, many committee members visited sites and contacted land/office brokers to see what opportunities existed in the market. As these ideas were shared, it became obvious the committee needed direction due to the variety of options available. The range of ideas spread from an acre parcel off 12300 South where we would build a single use building with limited visibility, to a ten acre parcel west at 700 W that would be developed using profits to build.
Wisely, the committee acted on defining what was agreed on as the ideal building opportunity. We felt as though efficiency would harness our diversity of interest, thus allowing for us to be nimble enough to act quickly in the hot real estate market. The basic parameters were set. We agreed that the building should be located between Redwood Road and 1300 East, 3300 South and 14600 South. A multiple tenant building, up to 40,000 square feet, and have high visibility (ideally on I-15).
Not many in the room felt we could find a building that would contain all on the wish list but felt components of each allowed for significant improvement to our current offices. Additionally, it gave us the desired revenue and strengthened our balance sheet.
In that meeting, Steve had remembered the “Miller building” which was half built and sitting vacant. He asked if anyone knew anything about it. We didn’t. Debate ended with a commitment to reach out to the bank our group we felt was holding the asset as an REO. That night I ran into Heather Osmond in an HBA function. In our small talk I discovered she and her husband Jared had bought the building. In later discussions with the Osmond family, we were presented with an opportunity to buy. This is largely due to their commitment to our association.
Due diligence
This came fast, arguably part of the reason it has created emotional energy. Time is money to the Osmond’s. Their original plans are held at bay as we move through the delays that naturally come as an organization such as ours makes decisions on long term commitments. Pressed for time, the committee has done everything it their power to answer questions for the board as they are seeking many for themselves. While there are frustrations with the speed, it is believed to be a better path then starting from scratch. The members working on the project have the experience to handle the tasks required. Board processes are being learned. From start to finish, the current building we are pursuing can be completed within our current real estate markets economic strength. We know if we are to start this over again from ground up, it would be a two year process at a minimum. This timing could contain interest rate risk along with the unknown economic conditions some may fear.
The joint boards of the State and Salt Lake met and voted to continue with the pursuit of the office building. The parameter was that consideration be made to sell at least a third of the opportunity to an outside party. While there are differing views as to the interpretation of the motion, fact is the building committee needed to act in an ever changing environment. Many may not understand that we pulled out of the opportunity prior to the time our earnest money went hard. We didn’t have the answers to critical financial needs. In a conversation with Jared Osmond where we announced we were pulling out of the contract. He generously offered an extension if needed. We declined not having an answer. He suggested he would dig a little personally. Jared came back to us with a financing option from a conventional lender who offered terms we felt were superior to those sought after with a private party, or financially strong industry sponsor.
The lender is Central Bank. They are a strong local bank with deep ties to our industry. Their flexibility in part comes from an interest in seeing our organization succeed in meeting our objectives. The terms they offered carry interest charges that we had hoped would be donated. (Please note this was a dream, we were certainly ambitious in asking knowing it was a big ask). The charge needed to be added to our numbers. It hadn’t been accounted for previously. The terms they offer have added flexibility to more options on ownership and the disposition of assets as we move through construction. Too, they guarantee long term financing.
Central Bank has a requirement of having at least ten percent cash down. Our estimate was that this would mean $712,000. This meant both Salt Lake and the State would need to contribute their equal share. Ross and I visited knowing Salt Lake’s cash positon is stronger. We talked about whether it would be easier for Salt Lake to loan the State funds so that CD’s wouldn’t have to be cashed out. We both understood the state’s ability to contribute improved with time and that there was a day at the completion of the building we bring better understanding with the needed capital. To date, we have anticipated nothing in member donations and overstated expenses. These will lessen the need for capital if we chose to leave our LTV constant.
The building committee elected to take the changes in financing to an emergency board meeting. This method was called merely because it is offered as an option in our by-laws. The terminology may be a slight contributor to the emotion as we know many aren’t able to come with short notice. The term emergency may suggest to some “trouble” which was not the case at all.
Board meeting
The difficulty in any large group is meeting the varied needs of members. The understanding of the committee was that we would talk about the $712,000 down payment which included a change in the numbers. As Ross Holliday surveyed the group, he could see there were attendees who hadn’t enjoyed the detail of members who had been actively involved in meetings throughout the year. There is a tight rope walk which is nearly impossible to negotiate as one is providing new members enough data and burdening those with greater experience too much information. I have described the meeting as having offended both groups equally. Some remained hungry for more as others were checking out mentally.
The discussion took a turn which was unexpected for the committee. Discussions began readdressing the motion that had passed in a previous board meeting. With emotions high—for many of the reasons above—discussion led to conversations asking the State if they held a quorum; they didn’t. This naturally meant they would have to reconvene at a later time. Salt Lake voted on a motion to approve their side of the funding which gave the State help in reaching their commitment. It failed 14 yes and 15 no as recorded. There were actions and emotions that erupted from both sides which is understandable. In questioning the day’s events, members who mainly were the yes votes began seeking answers from leadership and staff. One question asked was directed toward the validity of votes from some who were felt to be new to the discussion. We learned there were two that attended, had voted and don’t hold current membership status. By-laws offer that a board member must be dues paying. The change would mean the vote was 14 yes and 13 no as recorded. Motion passed.
What to do? Leadership and staff are more interested in the stability of the association then the outcome of a vote and have chosen to re-address the motion after the State board meeting. A second motion that passed the emergency board meeting was that Salt Lake would not proceed without the States participation. This passed unanimously as recorded. There would be no reason to address a vote from Salt Lake if the State isn’t on-board with us.
Where are we today
Nate Larsen in my opinion was bold and brave in placing himself out in a public forum with his feelings. It is hard at best to be able to share comments in person let alone in this type of medium. You see some of the responses; he has received many in private correspondence as well. Those as is typical are of support and admiration. What his actions have done is engage us in philosophical debate. It has brought what are thought to be warring enemies onto the same page in healthy discussions of what is best for our association. I have stated that I know of no individual who is in support of the building without reservation and have learned the strongest no votes are a yes with some simple questions answered. We are doing finding these solutions now. I thank those who have come to my office to learn of details as I see them. These are members I hold in high regard knowing it is on their backs we are where we are today and that without them we fail going forward.
Because it is hard to bring everyone onto the same page, and knowing there are some who haven’t enjoyed the experience of understanding the sophistication of a large commercial deal. I want to attempt to answer what may be remaining questions:
- Has the committee laid out the HBA space? No- the building is framed as anticipated for the use of the Miller Company. The committee has felt we would take approximately the same space as occupied in our current offices but have efficiencies with sharing some employees such as a shared receptionist. Our numbers show the west wing merely because we had to pick a space. We will be happy to occupy nearly any space that remains after future tenants pick theirs.
- Are we anticipating bringing education to the new building? We understand it is very difficult to provide parking in a class “A” office environment because the ground is so expensive. The state needs to address education which we are doing. Our options include both using the proposed building for a time and due diligence on an outside location. We are confident as of this writing that we can add fourteen stalls, and that Boyer will grant us up to twenty four spaces to be used in periodically. We have asked that they give us unlimited parking from the time we occupy until they build out their offices (18-24 months anticipated). This will give the state time to ensure the viability of their education offering and to find a more suitable location if needed. I have reached out to Carlos Braceras of UDOT to see if we could use the vacant land between the parking and freeway entrance. Fact is, we are under parked for education in our current offices and would not be able to provide parking in any new office building that fits within our parameters if we desire class “A” offices. Again, it is too expensive and why many educators default to outlying areas or using campuses.
- Do we have a partner in the deal? No- but it is the charge of the board that we look for one in an effort to mitigate risk. Nearly all who have learned of the opportunity have wanted to join in ownership with us. Examples beyond the contractors who have given numbers (Rimrock and Davies Construction) are potential tenants and the Osmond family. Jared offered to take our existing building in trade suggesting the value is higher than appraisal ($1,590,000). He also would look to buying a third of the building and/or bringing an online version of their store as a tenant. The committee knows the greatest value in the building comes at the time we have purchased and built out all but the tenant improvements. We wanted to wait for this value bump (increase) to optimize the opportunity for the association. We have many no votes that would change to support if we had such a commitment. Now knowing this disconnect, the committee is active in getting a formal commitment which isn’t binding so we can accomplish both objectives. The parties to be approached will be the Osmond’s and Davies Construction.
There may be other questions but these are the most commonly asked.
The last point I want to address is risk. This discussion can’t be held without viewing some pros and cons.
- The pros are that we accomplish the objective of the board who established the new building committee; we create a revenue stream in continued attempts to offset the reliance on the parade and secure PAC dominance. The numbers bear this out in a conservative approach. Our projections anticipate no donations; have two hundred thousand in contingency with other minor unexpected expenses while understating revenue. And we occupy a building that is part of the most significant office/retail/residential development of our state (some say nation) as the prison is relocated. It will be an even more important geographical location bolstering value as this project is built out over the next ten years.
- The cons are—along with what I addressed above— the threat to our future viability. This is a welcome discussion and what drives both sides to hesitancy and even points of pulling out. It is difficult at best to place the time and knowledge gained by those who are on the committee and arguably those who are in active discussions daily into the hearts of the concerned. Our banker members are hesitant. They fear what the last recession brought or others economic downturns less significant may bring. The worst case scenario presented, if we were to keep our existing building, is a sixty five percent loan to value. It would take a tremendous fall for us to reach a point of value dipping below this amount. We would have certainly discussed options prior to reaching that point if it were to occur. At sixty five percent, we enjoy the ownership of our existing building free of debt. This asset could be sold if needed. Even at an extreme discount there is still great value there. The other risk is that a major tenant fail and we are stuck without the revenues of their rents. As in the above, we have the stability of the existing buildings rents (currently estimated at $160,000 annually and not in our numbers) that could be used as an offset for the needed time. Too, as each year progresses; we have lower debt and increased revenues. This cataclysmic event can lessened by staggering our leases and seeing that we mitigate through the selection of tenants. Nothing can prevent the impossible unforeseen, but we can set in place protections as we proceed. I talk here about us keeping both assets merely to show a worst case. The options we have head are to sell the completed building for a profit at completion, turn the construction loan into permanent financing at finished value, sell our existing building and take out cash, sell our existing building and reduce the long term debt to sixty percent, reduce the debt as described and bring in a partner for one third, or two thirds. There are perhaps options we haven’t talked about or seen to date that may arise. The last con no one may have addressed is the potential unintended consequence of fallout by some whose perception is that the organization is content with the status quo. I can only state the safest way to ensure our future regardless of the outcome will be to talk through the opportunity without predetermined minds.
In my conversations I am comforted in the dedication to our association and interest we share in being a part of a team. Regardless of where we fall, my hope is that we get there with well more than a margin of a single vote. It is our future; we have had those before us take bold moves. They have paid off, let’s get to a place the future leaders look back and note that we did what was best during our time. We are in a window of opportunity rarely seen let alone taken advantage of. Here’s a thank you from a man who has come to greatly appreciate what it is our collective efforts do for communities. We have powers higher than us who are helping at times we have felt all was lost. Keep up the good work!
Jaren
