Fiscal Review Presentation - Tennessee General Assembly · Tennessee Real Estate Portfolio 93.5 MSF Real Estate Portfolio 3 . General Government ... due to lack of preventative maintenance

Fiscal Review July 2013

Overview of two contracts between State of Tennessee, Department General Services

and Jones Lang LaSalle Americas, Inc. 1. SBC Number 460/000-01-2011 2. CPO Agency Tracking Number 32101-00124

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Real Estate in 2011

“Our job is to deliver the best possible service at the lowest possible cost.”

- Governor Bill Haslam

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Tennessee Real Estate Portfolio

93.5 MSF

Real Estate Portfolio

3

General Government Real Estate Portfolio

35.5 MSF

Remaining General Gov’t – Owned

24.4 msf (69%)

FRF – Owned 6.6 msf (19%)

Non-FRF – Leased 1.5 msf (4%)

FRF – Leased 3 msf (8%)

Today’s focus is the FRF portfolio

(Facilities Revolving Fund – general

office buildings)

General Gov't Real

Estate 35.5 msf

(38%)

Tennessee Board of Regents 33 msf (35%)

University of

Tennessee 25 msf (27%)

Real Estate in 2011

4

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

Pre-1960 1960's 1970's 1980's 1990's 2000 andBeyond

Squa

re F

oota

ge

Aged Portfolio • Estimated Asset Replacement

Value of General Government Buildings is $6.2 billion

• Average Age of Owned Portfolio is 35 years

• However, the oldest 43% of the portfolio has an average age of 50 years

• Architecture and technology have surpassed current portfolio

Chattanooga State Office Building Built 1955

Lowell Thomas State Office Building Built 1977

Donnelly J. Hill Built 1968

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Life Safety Issues

Windows Falling Out of the James K. Polk Building

April 17, 2011 – A glass window fell out of the building – the 11th window to fall out. Wind speed was only 25mph and not the cause of this event or any other windows that fell.

One of many windows where the glass and frame were separated by ½ inch or more.

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Life Safety Issues

May 31, 2011 - In the Andrew Jackson garage,

a heavy chunk of concrete with rebar

fell off the ceiling and nearly hit (and could have

seriously injured) a State employee.

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Space Inefficiencies

Cluttered and under-utilized spaces were common throughout the FRF 9.6 million sf portfolio.

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FRF Administration Inefficiencies

Contract Administration • 479 different facility management contracts

• 107 different Janitorial Contracts • 72 different Alarm System Contracts • 35 different Generator Maintenance Contracts

Lease Administration • 381 Leases were administered by only two employees • Reactionary vs. Proactive management due to volume –

leading to more than 100 holdovers and subpar quality spaces

• Agencies moved out of State space for nicer leased space leaving State space under-utilized

• Random pockets of vacant space within leased buildings

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Assessment and Solution

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Researching Best Practice

The Department of General Services met with and spoke to numerous Industry Leaders including:

Public Sector:

States of Texas, Virginia and Indiana

Private Sector: AT&T, Nissan, Mars, Motorola

and Proctor & Gamble

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Industry Assessment

Why is the private sector outsourcing real estate services?

“Nissan focuses on the core business of making cars and relies on experts

for real estate services.”

How can the State of Tennessee best manage its real estate assets?

Recommendation – The State should procure an industry expert to provide comprehensive, integrated real estate

management services.

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Research

• Six (6) states have active or recent solicitations for Master Planning and Additional Services (including brokerage services)

• State of New York has RFP for Facility Assessments, Master Planning, and Additional Services (including brokerage services)

• Eight (8) states already use service providers for brokerage services • Twelve (12) states do SOME outsourcing but not comprehensively

What Other States Are Doing

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Tennessee Leads the Nation Forward

Tennessee is the first state to outsource comprehensive real estate services. Eight (8) states looking to follow Tennessee's lead include: Oklahoma, Georgia, North Dakota, California, Hawaii, Florida, Arizona and Washington.

Procurement of the Initial Contract

RFP Scope was for Comprehensive Real Estate Services including: • Facilities Assessments • Master Planning • Leasing • Facility Management • Project Management

Comprehensive outsourcing of real estate services was NEW TERRITORY for a governmental entity like the State of Tennessee. RFP development began in May 2011 as a joint effort between multiple departments and agencies. The RFP was released for bid on October 19, 2011.

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RFP Respondents

Six (6) Proposals Received by November 9, 2011: • Cassidy Turley • CB Richard Ellis • Colliers International • Jones Lang LaSalle • Tetra Tech • Johnson Controls

Three (3) Respondents Qualified: • CB Richard Ellis • Tetra Tech • Jones Lang LaSalle

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Respondents had to reach a technical score threshold to qualify.

Initial Contract

Contract Awarded to Jones Lang LaSalle on December 6, 2011 Services began on January 23, 2012 Funding Available at Beginning of the Contract:

• Only $1 Million in appropriated funding initially available • Amendments to the original contract were executed as

additional funding became appropriated and available.

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Initial Work Performed

• Facilities Condition Assessments on the

largest 33 of 159 buildings representing 5.5 million square feet (57% of FRF).

• Master Planning involved a space utilization housing plan, space ownership plan, and a project prioritization plan on the same 5.5 million square feet.

• Leasing Services

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FRF – Owned and Leased 9.6 msf

Remaining General Gov’t - Owned and Leased 25.9 msf

GENERAL GOVERNMENT REAL ESTATE PORTFOLIO

35.5 msf

Initial Work Performed March 2012 through June 2012 Limited by the initial $1 million in funding, only certain work in the contract was authorized including:

Initial Findings – Facilities Management

• Overstaffed but underperforming • High operating costs • Poor maintenance practices (Run to Fail) • Dangerous working conditions • Lack of training programs • Little documentation on systems and buildings • Little industry best practice • No plan to improve

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Initial Findings – Operational Benchmarking

FY 11 Spend Analysis for TN

$995,594$5,317,631

$191,543$260,890

$6,065,081

$5,991,757

-

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

Cleaning GB R&M Grounds Admin Utilities Security

Total

Spe

nd

Industry Standard Benchmark Potential Savings

Savings Potential :

$ 18.8 M per year $94 M over 5 years

on Pass through Expenses

“Pass through” expenses are all costs, expenses, charges and allocations of contractor in connection with the Services in accordance with the Approved Budget. There is no mark-up on pass-through expenses. All above are pass through except Utilities.

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Initial Findings – Risk Management

Exposed electrical panel increases the risk of electrocution

Fire extinguisher was last serviced in 2009, violating fire codes and indicating a high risk of

failure

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Storage room is cluttered and has an oil spill near the drain, increasing risk of environmental pollution and

plumbing and/or electrical system failure

Main electrical switch gear is next to a urinal, creating a life/safety issue and

increased risk of electrocution and/or fire

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Andrew Jackson: Improper duct penetration, causing contaminated air

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James K. Polk: Exposed high voltage electrical panel creates a life/safety issue

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James K. Polk: Machine does not have a protective guard or insulation, violating OSHA guidelines and creating a dangerous environment

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Exposed high voltage electrical wiring is in violation of code and is major life/safety issue

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Tennessee Regulatory Authority: Air damper does not open and close properly and has been propped open with a 2X4

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TPS Complex: Air dampers are being held open with zip ties due to lack of preventative maintenance

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Tennessee Regulatory Authority: Improper storage of chemicals and inadequate spill containment creates risk of poison and fire

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Tennessee Tower: Pipes are not insulated, allowing for corrosion over time, and resulting in wasted energy

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Tennessee Tower: Loose belts on fans create a serious life/safety issue

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TPS Complex: Fuel leak represents a fire hazard and environmental concern

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TPS Complex: Fuel filter is 10 years past its expected life expectancy creating a fire and life/safety hazard

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TPS Complex: Corrosion of battery cable terminal increases the risk that the emergency generator may fail

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TPS Complex: Lack of fall protection represents a serious safety hazard

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Henley Street Office Building: Access to fire alarm panels are blocked due to clutter, creating a fire and life/safety hazard

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Citizens Plaza: Air filters have not been changed producing poor indoor air quality

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Citizens Plaza: Improper storage represents a fire hazard

37


Andrew Jackson: Lack of belt guards creates dangerous conditions and violates OSHA guidelines

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Initial Findings – Deferred Maintenance

Categories Requiring Immediate / Short-Term Investment Are:

Category

Required Investment

Average Per Square Foot

Comments

Life-Safety $ 7.3 M $ 1.58 Fire protection, safety violations

Roof Repair and Replacement

$ 7.2 M $ 1.56 Roof, parapet, flashing

Building Systems $118.4 M $25.71 Elevator, HVAC systems, electrical, plumbing, data

Building Structure $ 46.9 M $10.18 Foundation, basement, exterior, superstructure

Interior $ 61.1 M $13.27 Interior finishes, equipment/furnishings, site conditions

Total $241.1 M $52.30

Covers only 33 of the 159 FRF buildings – 5.5 million square feet. Represents 57% of FRF’s portfolio.

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Initial Findings - Office Environment

• Out-of-date furniture

• Worn out carpet

• High workstation walls

• Little to no daylight

• Silos

• Depressing Interior Office Space at Chattanooga State Office Building

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Resulting Initiative – Project T3 Objectives

• Reduce Costs • Migrate From Leased to Owned

Space • Occupy Vacant Owned Space • Update Office Environments • Assist in Changing the Culture of

the Workplace

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Resulting Initiative – Shed Obsolete Assets

Master Planning/Pre-planning Revealed Assets Ready for Disposition

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Initial Outcome – Projected Savings

Work performed under the Original Contract has resulted in initiatives (Project T-3 and

Decommissioning) that will reduce State office space by at least 1.0 million square feet

and a projected net 10-year savings greater than

$100 million.

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Contract Amendments

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Amendments to Original Contract

Amendments to the original contract were

executed as additional funding became appropriated and available.

These services were anticipated in the original contract.

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Amendment Maximum Liability Increased Approved Amendment 1 • Leadership of T3 • Pre-planning services for budget

2013/2014

$3.5 million June 14, 2012

Amendment 2 • Clarified that JLL could receive lease

commissions

$0.0 November 19, 2012

Amendment 3 • Pre-planning services for budget

2014/2015

$1.15 million December 17, 2012

Amendment 4 • Phase 2 Master Planning /Facility

Assessment • Deleted Facilities Management from

Original Contract

$1.0 million December 17, 2012

Amendment 5 • Project T3 Leadership Service to

Legislative Branch office spaces

$1 million • March 25, 2013

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Amendment 1 – Outcome

• Construction in 9 State-owned buildings is 48.9% complete as of June 17, 2013

• Project T3 will be complete by December 31, 2013

• More than 14,000 employees have been moved

Existing Stacking Plan for TN Tower – housing 1,150 people

Post-T3 Stacking Plan for TN Tower – housing 1,875 people

Project T-3 Update:

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Amendment 1 – Project T3 Update

BEFORE Inefficient and ineffective

work spaces

AFTER Collaborative, bright, modern

work spaces

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“The difference is even more than I thought it would be. It is so much brighter and fresher.” – Mary Beth Franklyn

Amendment 1 – Project T3 Update Transforming Tennessee’s Workspace

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“The new space has increased the ability of our staff to collaborate, and we think it has boosted productivity. It’s made a noticeable, positive difference in our overall office environment.” – Hanseul Kang

Amendment 1 – Project T3 Update

BEFORE Adapted space in

office area

AFTER Specifically designed

modern, functional space

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“The new office layout has improved communication and productivity and creates an efficient workspace.” – Tim McClure

Amendment 1 – Project T3 Update Eliminated junk, storage issues, records management

procrastination and mismatched furniture.

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“Project T-3 has enabled us to move much more quickly towards electronic files and a more efficient workspace.” - Buddy Lea

BEFORE AFTER

How Lease Commissions Work

Per Industry Standard: • JLL runs the lease procurement process • Lessor and JLL sign commission agreement • Lessor pays JLL pursuant to commission

agreement

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Facilities Management Contract Procurement

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Facilities Management Contract Competitive Negotiation

Pursuant to Policy Number 2012-001 Central Procurement Office Contracting Communications and Negotiations Policy

& Procedures for Procurements and Amendments: “Competitive Range” is defined to mean “those proposals that

have a reasonable chance for contract award based on criteria set forth in the written solicitation document. Only

proposals within the Competitive Range shall be considered for additional discussions and negotiation.”


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Selection for CPO’s Competitive Negotiation

• Six respondents responded to the prior SBC RFP that included Facilities Management in its scope formed the initial pool.

• Two best evaluated respondents (JLL & CBRE) determined to be in the competition range for award.

• The third highest rated proposer was 11% lower than the next highest evaluated technical score and was deemed to be outside the competitive range for consideration in the RFQ process.

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CBRE

• 60.65

JLL

• 59.83

Tetra Tech

• 52.9


Timeframe For Process

• November 2012: Preparation of RFQ • January 7, 2013: Discussions between CPO and Comptroller

began to review changes to the RFQ • January 22, 2013: RFQ was released to CBRE and JLL • March 2013: Presentations by both companies to State • March 18, 2013: Notice of intent to award sent to JLL

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Contract Awarded to Jones Lang LaSalle on March 18, 2013


• Jones Lang LaSalle best evaluated with a composite score (technical and cost) of 99.67.

• CBRE received a composite score (technical and cost) of 78.69 • JLL Pricing was $14.5 million (over five years) lower than CBRE’s pricing. • Labor and Management Fee quote from JLL over five years was $36.7

million whereas CBRE quoted $51.2 million. • JLL Management Fee of $660k annually is 50% fixed and 50% at-risk. JLL

must perform to specific performance goals to receive full fee. Goals include 23 performance indicators including cost savings, energy reduction, and customer satisfaction.

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Outcomes Summary Conclusion

• Facilities Assessments and Master Planning led to Project T-3 and Decommissioning, which combined, will save the State in excess of $100 million over ten (10) years.

• Facilities Management Outsourcing will save the State between the range of $50 million and $100 million over five (5) years. Additionally, the expertise will reduce the State’s risk for non-compliance of Life Safety, Code, and other Standard Practices.

• Comprehensive Real Estate Services will lead to a safer, efficient and more productive environment for State employees and significant savings to taxpayers.

Comprehensive, integrated real estate services allow the State of Tennessee to receive the

“best possible service at the lowest possible cost.”

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Cordell Hull and Central Services

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Two separate buildings in accounting, but a single building from an operational and maintenance standpoint…

A facility assessment of the buildings recommended: • That the buildings are now functionally obsolete. The building systems,

especially the mechanical, electrical, exterior envelope, and foundation are difficult to maintain and expensive to replace.

• Further, the floor plate design reflects a very different office style than is currently utilized making the building inefficient in terms of density of occupancy. Therefore, this building is expensive to continue to occupy, and the occupants of the buildings are to be relocated.

Building Date Built Operating Cost per SF Deferred Maintenance Value of Building Approximate FTEs Gross SF

Cordell Hull 1954 $8.60 $24,265,500 $3,200,000 to $3,500,000 1,062 348,606

Central Services 1961 $7.71 $13,210,000 $400,000 to $600,000 60 80,945

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Industry Average Operating Cost is $5.77 per SF.


“Both the Cordell Hull Building and the Central Services Building will require substantial capital investment in order to effectively continue their use and occupancy.”

Electrical Upgrades 1,700,000.00$ Recommend replacement of roof as deteriorated and in poor condition. 350,000.00$ Recommend review by a engineering\architectural firm specializing in fire life safety for project improvement plans. Probable cost is for firm to review and make design change recommendations to stairwell. 170,000.00$ Egress\exit stairway in North tower has two awkward step downs at door openings and an area that may not be included in stairwell pressurization plan. This is very difficult to change as changes to the stairway would affect riser tread size. However, improved signage; warning, lighting and door hardware may improve the situation. Probable cost for door hardware, lighting, signage to implement immediately. 20,000.00$ Perform testing and certification of backflow devices. 1,000.00$ Relocate FDC to exterior of Gen enclosure with signage $ 10,000. 10,000.00$ Repair stairwell pressurization and test after hours $5,000. 50,000.00$ Repair flow switch $250 1,500.00$

Engage an engineering\design firm to evaluate smoke evacuation system for correct function 300,000.00$ Recommend Arc flash engineering study and service of electrical distribution system. Implement labeling and safety training program to meet arc flash requirements. 50,000.00$ Probable cost to refurbish loading dock and exec parking lot 8,000.00$ City of Nashville responsible for sidewalks on perimeter. North Egress path to sidewalk has a bad section at the lowest landing. Probable cost for sidewalk repairs 5,000.00$ Total Deferred Maintenance 2,665,500.00$

Included in 2013 Pre-Planning Budget:Cordell Hull Exterior Door Replacement 170,000.00$ Cordell Hull Elevator System Modernization 3,080,000.00$ Cordell Hull Waterproofing Building Foundation 2,850,000.00$ Cordell Hull HVAC System Upgrades 10,000,000.00$ Cordell Hull HVAC System Upgrades 3,650,000.00$ Cordell Hull Fire Alarm System Replacement 1,850,000.00$ Total Pre-Planning Costs 21,600,000.00$

Total Costs 24,265,500.00$

Cordell Hull Building

Capital Expenditures Required: $24,265,500

Recommend repair of dewatering pump system 15,000.00$ Servicable, but recommend cleaning 5,000.00$ Conduct fault current study and electrical safety (arc flash labeling and safety training program). 405,000.00$ Time and material estimate to skim coat landing on 5th Ave where the concrete is not level 5,000.00$ Total Deferred Maintenance 430,000.00$

Included in 2013 Pre-Planning Budget:Central Services Plumbing Upgrade 6,800,000.00$ Central Services Cable Upgrade 350,000.00$ Central Services HVAC Upgrade 550,000.00$ Central Services Exterior Waterproofing & Repairs 4,900,000.00$ Central Services Replace Grease Pits 180,000.00$ Total Pre-Planning Costs 12,780,000.00$

Total Costs 13,210,000.00$

Central Services

Capital Expenditures Required: $13,210,000

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Documents

Fiscal Review Presentation - Tennessee General Assembly · Tennessee Real Estate Portfolio 93.5 MSF Real Estate Portfolio 3 . General Government ... due to lack of preventative maintenance