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VOL. 39 | NO. 49 | Friday, December 4, 2015

State's go-to real estate privatization firm gets competition

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Amid debate about privatization within state government, legislators are glad to see Tennessee seeking competition in its building leasing program.

“To me, when you’ve got competition, you’ve got people who may do something for next to nothing just to get their foot in the door,” says state Rep. Mike Sparks, who raised questions about the state’s leasing program and contract with Jones Lang Lasalle, which started charging commissions when it got involved in 2012.

The State of Tennessee Real Estate Asset Management (STREAM) division recently posted an online request for information (RFI) from potential vendors interested in working for the state as a broker when it leases privately owned office space.

Tennessee’s real estate broker contract with Chicago-based JLL is set to expire Feb. 29, 2016 after four years, but even though it could exercise an option to extend the contract for another year, the division “decided that the evolving nature of leasing needs makes a new contract more attractive,” according to Dave Roberson, spokesman for the Department of General Services.

JLL remains eligible to respond to the RFI and any further invitations to bid, meaning it could retain part or all of the work.

Tennessee’s contract with JLL to evaluate certain state buildings came under criticism when amendments, including the leasing provision, ballooned the deal to $10.75 million from $1 million.

A second contract for facilities management, which will pay JLL $3.1 million over five years, is drawing concern, as well, as the governor studies further outsourcing management in numerous state departments, including colleges and universities.

STREAM holds about 475 leases statewide at any given time for office space, and JLL has 20 to 30 leases in various stages of completion. In Nashville, for instance, STREAM had contracts worth a combined $10.5 million in October, according to a General Services report.

With a “limited staff and capacity,” the division needs more resources such as a real estate broker to help manage its portfolio, according to Roberson. JLL’s contract covers the entire state, and STREAM wants to look at a regional approach.

A new contract will address changing lease needs, and the state anticipates outside brokerage services will be used mainly in urban areas on complex deals, Roberson says.

All hope is not lost, however, for real estate knowledge within the state office.

“Specifically, we’ve developed more in-house expertise in leasing over the last three years, and we also think that perhaps it might be better to have different brokers handling the three regions of the state rather than one broker handling the entire state,” Roberson states.

Complaints registered

Some landlords and legislators raised questions about JLL’s involvement in the leasing program and the 4 percent fees it started charging when it procured new contracts. Sparks says it makes sense for the state to take competitive bids on the real estate broker contract.

“I mean that’s more transparent. That’s a step in the right direction,” Sparks explains. “I’m a little surprised they’re going to do that, though.”

A former Rutherford County commissioner, Sparks recalls a decision to take competitive bids for auctions on surplus county property irked one big firm but wound up saving taxpayer dollars.

“We had a firm come in there and do it. They said you just pay for our advertising, and we’re going to do it for next to nothing,” Sparks explains.

“It’s made good sense. They got good exposure. They auctioned off the property, and we reimbursed them for their advertising.”

Sparks says he raised the issue with state officials when he found out JLL was charging a commission for negotiating new contracts with landlords who had been leasing their property to the state already and paying no commissions. Initially, he says, they wanted a 6 percent commission.

The Smyrna Republican feels they simply forced landlords to tack the commission onto the lease rate, which Tennessee taxpayers wind up paying.

Roberson says JLL makes money off the leasing only through the commissions it charges for procuring new contracts.

Democratic state Rep. Craig Fitzhugh of Ripley in West Tennessee says he received a similar complaint from a landlord in his district that said JLL told him to just add 4 percent to his bid.

Rep. Pat Marsh, a member of the Legislature’s Fiscal Review Committee, says he doesn’t know about concerns regarding JLL’s commissions. But he favors looking statewide for a company capable of doing the job better or cheaper.

“You don’t know what’s out there until you open that,” says Marsh, who was notified about competitive process by STREAM.

“They might break it up. A new company might get part of it, or (JLL) could keep it all with the right bid,” says Marsh, a Shelbyville Republican who co-owns Big G Express. “I thought when I read it, ‘Well, that makes sense.’ That’s what we do in our trucking business. We bid it all out occasionally.”

Sparks says the state should be able to find a state-based company rather than targeting a Midwest-based company to handle the services.

Marsh points out, “If they open up the bids and a Tennessee company wants to do it, I’m sure they would love to have that. But if they don’t, Jones Lang Lasalle has to [provide] work [for] Tennesseans.

“They’re going to work people who live in Nashville on most of the jobs. So I would think our Tennessee citizens are going to the jobs. The management might be somewhere else, but all the local management will be Tennesseans and all the local workers will be Tennesseans. I think we need to just look and see what’s out there.”

Opening eyes

Considering the current contract with JLL was vetted by the State Building Commission, rather than the Fiscal Review Committee, it is time to review and take a look at another direction.

In a hearing before the Fiscal Review Committee in July 2013, Gov. Bill Haslam’s former chief of staff, Mark Cate, told legislators JLL would be able to save taxpayers “millions and millions of dollars” because of experience the state doesn’t have in its own division or the staff and data to bring the best market rates.

Roberson, however, recently told The Ledger there’s no way to determine savings because the state doesn’t know what price it could have gotten negotiating itself.

With that in mind, it will be hard to tell whether other firms can save the state any money either.

In fact, since the state is capable of increasing its expertise in real estate, it might make sense to bring this leasing back in-house. But that would run counter to the Haslam administration’s preoccupation with privatization, even though the governor says he isn’t predisposed to giving work to private companies.

Sam Stockard can be reached at sstockard44@gmail.com.

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