TVA may fix up HQ to cut costs

CHATTANOOGA, TENNESSEE - The Tennessee Valley Authority, which began developing plans this summer to relocate its Chattanooga office complex to Hixson, has struck a deal to keep its power headquarters downtown instead.

TVA appears ready to buy back Chattanooga's biggest office complex for only a fraction of the $180 million the utility got when it sold the building to a Chicago-based real estate partnership in 1986, according to those involved in negotiating the deal. "We still have some details to work out, but the tide has turned, and we're hopeful we can stay downtown," TVA President Tom Kilgore said recently. The proposed deal is expected to go before the TVA board at its next meeting in February. If approved, the building sale would occur in early 2011 and eventually cut TVA's operating costs for the building by more than 50 percent.

By staying in the four-building, six-story complex at 11th and Market streets, TVA and its tenant in one of the buildings - Cigna Healthcare - also would help keep nearly 3,000 office jobs downtown.

"I truly believe this as an excellent outcome for the TVA ratepayers and for the city of Chattanooga," said U.

S. Sen. Bob Corker, R-Tenn., the former Chattanooga mayor and real estate developer who helped broker the deal. But for all its advantages, the deal nearly didn't happen. TVA currently pays $52 million a year in lease payments and spends more than $6 million a year on other building expenses, including taxes, maintenance, energy and employee parking reimbursements, TVA officials said.

The 1 million-square-foot facility houses 2,200 TVA employees and another 800 employees of Cigna Healthcare, which subleases 160,000 square feet from TVA. The principals of Chattanooga Valley Associates, a limited partnership formed to buy and lease back the building to TVA, were reluctant to renegotiate the 25-year lease with TVA or to give up ownership in a building that enjoys some of the highest office rents anywhere in the South.

Under the agreement struck in 1986, Chattanooga Valley Associates charged TVA only a fraction of the prevailing rental rates for such buildings in the 1980s and allowed the federal utility to recover its investment in the building despite construction cost overruns.

The lease payments on the office complex have ballooned over time.

"Early on in the lease, we paid very, very little," said Terrell Burkhart, TVA's vice president of facilities management who has spent the past couple of years trying to negotiate a better deal than the one put together by his predecessors at TVA. "But t has escalated over time, and right now, we are in the height of that balloon."

At more than $50 a square foot, TVA's rental rates and other building expenses today are nearly three times the market rate for comparable offices in Chattanooga. David Devaney, president of Charter Real Estate Co., one of the city's biggest commercial real estate firms, said Class A office rates in Chattanooga range from $18 to $23 per square foot for full-service leases and from $11 to $16 per square foot when tenants pay taxes, utilities and maintenance as in the TVA lease.

To get a more competitive rate, TVA began in January 2006 to pursue new office options to replace the current lease when it expires in January 2011. Because of cutbacks in TVA's overall staff over the past two decades, TVA estimates it now needs only about 600,000 square feet, or less than two-thirds of the total space in its Chattanooga office complex.

When it began construction of its power headquarters in the 1980s, TVA had more than 52,000 employees and projected it might later double the size of the downtown facility. Since then, however, TVA has cut its staff by nearly three-fourths and sold or ended leases in a half dozen other buildings downtown.

TVA began soliciting offers last year for office space and determined at least four offers were worthy of further study. By this summer, TVA staff determined it could build a new office on TVA property near the Chickamauga Dam for less than Chattanooga Valley Associates had offered to renew the downtown lease.

"The net present value was significantly better for us at that time to build new at the Chickamauga site," said John E. Long Jr., TVA's chief administrative officer and executive vice president of administrative services. "Without the proposal for us to purchase the downtown building, the best financial deal for TVA, its ratepayers and its employees was to go to Chickamauga." When Sen. Corker heard about the likelihood that TVA might vacate downtown, he asked for a chance to meet with the principals in Chattanooga Valley Associates.

"We have done an outstanding job of keeping the downtown area the civic, business and cultural center of our area," Sen. Corker said. "It is very important that TVA stay in the downtown area, not only because of all of their employees but also because the type of space they have would have been very, very difficult to lease to any other business." Mr. Corker arranged a meeting with top officials from TVA and Chattanooga Valley Associates in November.

During the three-hour, morning session at The Chattanoogan, a tentative agreement was struck for TVA to buy the downtown office complex in 201 for about $22 million. Such a price was below any other office alternative for TVA, officials said.

"We do have a tentative agreement about what the price will be," said Mr. Long, who declined to discuss the terms of any deal before its approval. "It's not final yet, and we're exchanging language in the existing lease to allow us to make improvements on the building without their approval since we intend to purchase the building."

Mr. Long said TVA is eager to begin a multimillion-dollar upgrade of the buildings even before the current lease is up. "We've got to green that building up," he said. "We know some systems are going to need to be replaced or updated, and we've factored that into our financial analysis."

Former TVA Chairman S. David Freeman, who in the 1970s convinced the federal agency to build downtown rather than near Chickamauga Dam, wanted the downtown complex to be a "solar showcase" of energy efficiency. But plans for solar panels on the roof and geothermal features in the basement later were scrapped.

"It never has worked as designed," Mr. Burkhart said. The building earned the federal designation as an Energy Star building for its passive lighting, basement chillers and other efficiency measures. But because of the amount of open space in the atrium, the overall energy costs remain relatively high for he useful office space in the structure.

"If you look at all of the cubic feet in the atrium of these buildings, we are heating and cooling a lot of space that we can't use," Mr. Burkhart said. The six-story atrium also makes the structures difficult to sublease into smaller offices, according to real estate officials.

"That building would be terribly difficult to find another tenant for because it was built with TVA in mind," said Paul Brock, president of the downtown development agency, RiverCity Co.

TVA was able to split off one of the four buildings in the complex in 1998 to Cigna. The health insurer agreed to pay TVA $25 million for a 10-year lease of the Blue Ridge office building, or just under $17 per square foot, Mr. Burkhart said. That lease expires next fall, and Cigna Vice President John Sorrow said the company is looking at its future office options. If TVA had moved out of the complex, downtown boosters worried that Cigna also might move out of downtown.

"If we stay downtown and own the building, we're certainly very interested in Cigna staying in the complex," Mr. Long said. Mr. Brock said TVA and Cigna are key parts of Chattanooga's central city. "The employees who work downtown in the TVA office complex frequent our restaurants and retail shops and add to the vitality of our downtown," he said.

"We have a lot of positive things happening downtown and having them remain downtown is vitally important to sustain the momentum that we have." Looking for parking spots Cigna employees can park near Finley Stadium, but TVA does not provide any of its own parking for its downtown employees, Mr. Long said. The federal utility leases about 250 spaces for its own vehicles at the city-owned Chattanoogan parking garage.

TVA reimburses its employees $50 a month to find their own parking spaces or to use public transportation. A survey of TVA employees indicated many employees would like to have better parking options, Mr. Long said.

"We do have some issues with parking," Mr. Long said. "A lot of our employees are having to walk six, seven or even eight blocks." TVA has begun preliminary talks with local officials about new parking options, potentially including another parking garage. "We want to talk to them about a lot of things about parking," Mr. Long said. "There may be some things we can do short term and some things we do long term."



Search NEWS ARCHIVES

in Year

TRAINING EF COURSES
LATEST Electrical Jobs

Content Community Connection
Top