County Purchases New Office Tower for $25 Million

Written by Jeff Johnson on April 26, 2011. Posted in General, Golden Hydrant

Golden Hydrant Goes to Purchase of New Downtown Office Buildinggoldenhydrant

The county board voted 6 – 1 today to purchase the “701 Building” across the street from the Hennepin County Government Center for $25.8 million (actually a $23 million purchase price and another $2.8 million for scheduled improvements).  The Star Tribune yesterday gave an accurate description of the then-expected decision:

Seeking to consolidate the county’s downtown Minneapolis office rentals, the Hennepin County Board Tuesday is expected to buy a pink-and-blue glass office tower that’s across the street from the Government Center.

Commissioners will vote on a $25.8 million purchase agreement for the 701 Building, an 18-story structure at 701 4th Av. S. The deal would be one of Hennepin County’s most significant building acquisitions in recent years. Rarely has the county bought an office building so big, expensive and relatively new.

But the 701, county real estate manager Michael Noonan said, “is a good opportunity to own rather than lease.”

The county’s public defenders office already rents there. If the deal closes in early June, the first new batch of county employees — from the Environmental Services building near Target Field — would move in this fall. That building is slated for closing to make room for a new light-rail platform.

Counting the public defenders, the county then would occupy a third of the building’s 287,000 square feet.

I voted “no” on this purchase.  Not only was it a terrible bargain for taxpayers (the building sold for approximately $15 million in 2007 and was assessed at approximately $11 million this year), but  it will also bring Hennepin County into the downtown commercial leasing business in a significant way for many years.  The assumptions upon which the decision was based include the county leasing out approximately 150,000 square feet of prime downtown office space to commercial tenants immediately upon purchase and continuing to lease at least a portion of that floor space for ten years – and likely much longer.

Those private tenants are crucial to the financial model presented to make the building “cash flow”, as even if the county were to move every county department that currently leases elsewhere downtown into the 701 Building, we would still have somewhere between 50,000 and 90,000 empty square feet in the building without the private tenants. 

In other words, the building purchase will be a signficant loss to the county without the private tenants – we have to enter into the commercial leasing business to make this deal work, and we probably have to stay in it for many years (at least until we grow county government enough to fill all of those square feet with new county employees).

Hennepin County has avoided being in the commercial leasing business until today.  By all accounts, every county in the state has avoided that role, as has the state of Minnesota.  In fact most government entities in the country avoid this business like the plague – and for good reason:

The more we venture into the private sector and become competitors to private businesses, the more we skew the market, the more we lose focus on our fundamental obligations, the more money we spend and the more we shift property taxes (in this case potentially several hundred thousand dollars in property taxes shifted from the 701 Building to our other property taxpayers).

I believe a legitimate argument could be made for this purchase if the county could relatively quickly clear the 701 Building of private tenants and fill the space with county employees who are renting elsewhere.  Unfortunately, that’s just not the case.  I expect instead, we will be a significant player in the downtown commercial leasing business for many years to come.

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