Potential lease-breaking raises questions for state

~ The governor's administration is set to find out what happens if the state backs out of a lease.

JEFFERSON CITY, Mo. -- When a resident or business breaks a lease on a building, it usually comes at a cost -- like the loss of a deposit, or the continued payment of rent until a new tenant is found.

So what happens if the state backs out of a lease?

Gov. Matt Blunt's administration is poised to find out.

Blunt's Office of Administration intends to terminate its lease on a St. Louis office building at the end of June -- a move that already has prompted a lawsuit, accusations of political retribution by the Republican governor and claims of political coziness against his Democratic predecessor who awarded the contract.

Blunt officials concede the building's owner has done nothing to breach his 15-year lease. But they contend the rent under the 2001 contract is too high. And negotiations have failed to persuade owner Charles Hennemeyer to lower the rent or sell the building at a price the state finds acceptable.

So Blunt's administration is taking advantage of a constitutional provision that makes all state expenditures -- even for long-term leases -- subject to annual appropriations by the Missouri Legislature.

Blunt's budget liaisons have asked legislators not to fund the annual $1.3 million lease payment for the 65,000-square-foot building at 3101 Chouteau in St. Louis. The budget passed by the House followed those wishes. Now a Senate committee is considering it. And Office of Administration Commissioner Michael Keathley already has written Hennemeyer saying the legislature will not appropriate the money.

A pair of past and present state facilities directors say this would mark the first time the state has bucked a lease by failing to appropriate the money.

In an Oct. 25, 2001, letter meant to reassure Hennemeyer's financiers that such a thing never would happen, facilities management director Lin Appling asserted: "If the state were to walk away from a lease before the end of a term, we would most certainly permanently damage our credibility with lenders, damage our credit rating with bondholders, and would severely limit our ability to lease quality office space at a market rate."

Appling, now a member of the utility-regulating Missouri Public Service Commission, said in an interview that he is still somewhat concerned, but he deferred to the judgment of the new administration.

Blunt's facilities director, David Mosby, is not nearly as concerned. Neither are some financial experts, though they note the state is taking a bit of a risk.

Because the building in question is not backed by government bonds (and the rigorous risk assessment that comes with that), breaking the lease is not likely to affect Missouri's good credit rating on future bond issues, said Bob Kurtter, who manages the state ratings team for Moody's Investors Service.

But "other things being equal, now the market would perceive a greater risk to leasing to the state of Missouri under a standard lease," Kurtter said. "I presume the market will react to it somewhat negatively."

Mosby acknowledges that breaking the lease "could put some ripples" into the financial markets. But he expects those ripples to be small, because the building is one of just 450 the state leases.

"If we started doing this routinely, it would destroy our ability to get money, but we are still a valued lease," he said.

David Mandy, chairman of the Economics Department at the University of Missouri-Columbia, said the effect of the lease-breaking would depend on how other potential lessors perceive the circumstances.

"If it's a situation where the government had some reasonable reason, then I think probably most people would shrug their shoulders," Mandy said. "But if it's sort of capricious and it's significant, they may think twice before leasing property to the state in the future."

Blunt's administration asserts the cost is good reason to break the lease -- $19.75 per square foot in rent, plus an additional $2.65 a foot in state expenses for janitorial service and other items. He says that's more than the state pays for any other building in the city of St. Louis.

Hennemeyer counters that he charges rents similar to other buildings in the St. Louis area and that his building was constructed specifically to meet the state's needs -- including such things as stainless steel restrooms, urinalysis rooms and panic buttons because of the visitors who are on probation or parole.

"Under their guise of saving money, they in effect are just twisting my arm," Hennemeyer said.

At least one fellow developer suggests that if the state breaks the lease because of cost concerns, it could establish a precedent that the state won't stand for higher bids, resulting in lower future lease costs to Missouri.

"It will probably make them more competitive," said Jefferson City developer Larry Kolb, who also leases buildings to the state.

At this point, however, no one really knows what will happen, because the state appears to be breaking new ground.

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EDITOR'S NOTE: Capitol Correspondent David A. Lieb covers Missouri government and politics for The Associated Press.