August 4, 2008

Blue Cross Lease is Helena, Mont., Airport’s Most Lucrative

By John Harrington, Independent Record, Helena, Mont.

Aug. 3--As commercial development has sprung up on and around the Helena Regional Airport, land values in the area have climbed. As a result, the proposed lease agreement between the airport and Blue Cross and Blue Shield of Montana is more lucrative than others the airport has signed.

The agreement calls for lease payments of $241,000 annually, with a 10 percent increase every five years for the life of the 40-year lease.

The insurer announced in late June a preliminary deal to lease nine acres of airport land for a new 120,000-square-foot office building for its 550 local employees. Blue Cross has cited the inefficiencies of working in two separate office buildings downtown as well as insufficient parking as its reasons for looking for a new home, and said that the airport site clearly rose to the top after a thorough look at various commercial properties available around town.

Spokeswoman Linda McGillen said Blue Cross looked at both leasing or purchasing property as it searched for a site for a new building.

"It was an either/or, I don't think we had our minds set on going one way or the other," she said. "It was just what we could purchase or lease that would fit our needs."

McGillen said that in addition to having much of the needed infrastructure already in place, the airport location offers enough room for a construction staging area, which will lower the cost of the building, and is ready for work to begin as early as next spring. Blue Cross hopes to be in its new building in early 2011.

From the airport's perspective, the Blue Cross lease will generate more revenue than other recent commercial leases.

The Independent Record, for instance, has a similar lease deal (40-year term, 10 percent escalator every five years) for the 5.14 acres the newspaper leased in 2002 for its printing plant and book and magazine divisions on the west side of Washington Street.

The IR preceded most of the commercial development in the area, including Home Depot and the rest of the Skyway Regional Shopping Center.

The IR's rent, which increased for the first time in 2007, is now $42,625 a year, or $8,293 per acre.

More recently, Costco leased 14 acres at the corner of Custer and Washington in 2006 for 40 years. Unlike the other commercial tenants, though, Costco paid its entire lease up front: $2.35 million.

That works out to about $168,000 per acre, though accounting principles dictate Costco got its land at a discount for paying in full up front, versus making annual payments over the life of the lease.

By comparison, the preliminary agreement with Blue Cross calls for annual rent of $26,778 an acre.

The airport used Costco's up-front payment to prepare the surrounding property for further commercial development, according to airport manager Ron Mercer.

That included the building of Cromwell Dixon Drive to the south of the warehouse store, the widening of Washington Street, a storm water retention pond north of the soccer fields, a new intersection and signal at Washington and Skyway Drive, a new water line and electric and gas service, as well as relocation and expansion of the Last Chance Tennis Association building, which sat where Costco is now.

"The idea is you get an anchor tenant to offset the cost of the overall project, then use the rest (of the lots in the subdivision) for revenue generation," Mercer said.

The airport has sought commercial development to provide income beyond aviation operations, both to keep its runway and terminal rates low and for protection in the event of lost revenue if commercial air service gets cut.

According to the agreement, the Blue Cross lease is based on an initial land value of $8.25 per square foot, capitalized at 7.5 percent, meaning the insurer is paying 7.5 percent of the value of the property each year.

By comparison, the Web site for the Nob Hill development, on the southeast side of town, shows prices ranging between $7.25 and $12 per square foot for commercial lots for sale. And a 9.9-acre commercial parcel adjacent to Wal-Mart is listed for sale at $4.29 per square foot.

Mercer said airport officials had worked up possible lease rates for the airport's commercial lots prior to any discussions with the insurer.

"That number was not developed for Blue Cross," Mercer said. "We had been talking to PEG Development (Utah-based developer of the Skyway shopping center) about additional property, and that number was developed previously."

Still, Mercer said there was some negotiation with Blue Cross.

"They made a proposal that was probably half of that (rate). We said, 'No, we'd already set a rate,' " he said. "But they're a good tenant, stable, you don't have to worry about getting paid, so we made about an 8 percent adjustment."

The parties expect to execute the lease by the end of September, though Blue Cross has until mid-December to back out if its further analysis determines the project isn't feasible. Lease payments begin in January.

McGillen said that at this point the insurer plans to keep its downtown buildings and lease to other tenants when the new space is complete.


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