An Article by Hanover's Director of Finance and Management Services, Kathy Seay, CPA, CISA.
The decline in real estate values and the decline in interest rates during the recession created the opportunity for localities to examine lease terms for existing facilities and determine the benefit of purchase options. Localities also may have more leverage for negotiation with existing landlords and owners of speculated office condo developments or underutilized facilities. Traditional lease terms up to five years with annual escalators did not afford the flexibility to respond timely to changes in the economy. The benefits of leasing include delegation of maintenance costs and flexibility of terms which were now weighed against the low debt service costs, decreased building maintenance with condo ownership and removal of traditional tenant constraints (e.g., rent escalators, landlord responsiveness).
Hanover County partnered with the Virginia Resources Authority for financing the acquisition of new Human Services and Economic Development facilities. The office condo project included the Community Services Board's supported employment facility and the Economic Development Department, totaling $2.4 million, funded through a capital lease. Hanover has been able to vacate seven leased spaces to produce a savings in the first year of over $110,000. The new condo spaces are County owned and improved facilities with upfits specifically addressing County uses. Savings over the next five years are projected to be $830,000. Other facilities are being considered and financing is in process to purchase a building currently occupied by a mix of public and private tenants. Tax-exempt financing considerations include cash funding the private portion, or a 100% public occupancy to qualify for tax-exempt financing. Because of decreased investment income from declining interest rates, Hanover County administration made the decision to cash-fund a recent condo office project for $2.2 million to house Community Services Board, Social Services and Voter Registration departments. The County is using EDA financing to reimburse the County cash expenditure.
In these condo office projects, the County is the owner of the majority of the building space and will have a controlling interest in management once the developers are no longer involved. Because of the innovative financing approach to the condo office projects, the County cut costs, streamlined the planning process and located County services in areas of the County convenient to citizens. As an additional benefit, the presence of County offices at these locations is anticipated to be a marketing tool for the developers of the office projects in the area.