Summary Report on Lease Renewal The University of Maine Museum of Art April 17, Introduction:

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1 75 Market Street, Suite 305 Portland, ME T/ F/ Summary Report on Lease Renewal The University of Maine Museum of Art April 17, 2014 Introduction: The University of Maine has engaged Corporate Finance Associates to assist the University Of Maine Museum Of Art ( Museum ) in renewing its current lease with Eastern Maine Development Corporation. The Museum currently occupies 12,212 square feet on the first level, referred to as the stream level of the historic Norumbega Hall building at 40 Harlow Street in downtown Bangor. The three story building has 36,636 square feet. The Museum wishes to renew the lease for its current space which expires on June 30, 2016 for an additional 15 years with two additional five year options. Further the Museum wishes to relocate its fine arts storage and accompanying registrar s office from the stream level of the building to the top floor. The space to accommodate the fine arts storage is estimated at 1,500 square feet and the registrar s office is estimated at 160 square feet. Current Lease - Financial Implications and Objectives: The Museum enjoys a below market rate lease currently paying $1.64 per square foot or approximately $20,000 annually for its space. The space is presently leased on a modified gross basis whereby the Museum is responsible for paying for its own electricity usage and for its cooling, dehumidifying, and security system costs, which are required to maintain its collection. Additionally, the University currently pays to heat its space from May to September, and shares in a portion of the heating costs the remainder of the year when the price of natural gas exceeds a threshold cost per therm. The landlord pays all other costs associated with the building. The current lease rate is in place through June 30, 2016 when the current lease expires. The annual rent remains level through remainder of the lease with no scheduled increases. The lease rate of $1.64 per square foot is substantially below market rates and will certainly increase upon lease renewal or potentially earlier if a longer term lease is negotiated sooner. Research indicates that the current lease rental rates for similar downtown Bangor office space are approximately $10 to $12 per square foot on a modified gross basis with a mean of $11.50 per square foot, whereby the landlord pays for all costs with the exception of a tenant s electricity usage. Electricity costs are estimated at $1.50 to $2.00 per square foot per year. Additionally, certain modified gross leases also call for participation by the tenant in paying for its proportional heating costs. These arrangements here vary greatly, and range from the tenant paying its share of the heating costs fully to the landlord paying for all heating costs. MERGERS, ACQUISITIONS AND CAPITAL RESOURCES SINCE 1956 SECURITIES OFFERED THROUGH CORPORATE FINANCE SECURITIES, INC.

2 Renewal at market lease rates would place annual rent costs for the Museum in its current space at $122,120 to $146,544 per year, a six to seven fold increase over the current rent, without consideration of the additional 1,660 square feet for the fine arts storage on the top floor. Through the University s annual E&G budget the Museum pays its rent, electricity, heating (gas), telephone, facility maintenance, staff expenses, etc. Earned income to support UMMA s exhibitions and educational programs comes from annual memberships, grants, individual support, corporate sponsorship, museum rentals, special events and workshops. The Museum has three objectives with regard to its space requirements: 1. Secure long term control over the Museum s space. With the current lease expiring in June 2016, the Museum is vulnerable to losing its current location, which it only controls through June 30, Minimize the Museum s occupancy costs. 3. Relocate the fine arts storage from the stream level to the top floor. Current Assessment of Eastern Maine Development Corporation Landlord: Eastern Maine Development Corporation, EMDC, is the owner of the Norumbega Hall building. EMDC currently uses, for its own purposes, the top floor of the building, but also has the first floor largely vacant. It previously occupied approximately one and a half floors, and subleased approximately one half of the first floor to five non-profit organizations. EMDC has had, in the last two year, a change of circumstances, as CFA learned from our discussions with Michael Aube, President of EMDC, and as recently reported in the Bangor Daily News. EMDC presently employs 45 staff members down from over 70 two years ago. Much of these staff reductions stem from expiration of federally funded job training programs, which have not been renewed by Congress, and therefore have no future funding. Mr. Aube shared with us that his organization could comfortably occupy one floor of the building, and presently has more space than it needs. EMDC has tried to sell the building, but has now determined that it is in its best interest to remain on the top floor and lease the remaining space to other tenants. The Museum s modified gross rental rate of $1.64 per square foot places additional financial burden on EMDC monthly. Analysis shows that EMDC pays operating expenses of approximately $3.01 per gross square foot of building space. Thus the $1.64 per square foot that the Museum of Art pays in rent does not even cover the occupancy costs of the space the Museum occupies. In conversations with Mr. Aube he expressed a strong desire to remain in the building. Mr. Aube has himself researched the rental market for class A- and B office properties in the greater Bangor Ares and has concluded that rents for space like the Norumbega Building lease in the current environment for between $11 and $12 per square foot of net rentable space on a modified gross basis for long term leases. Page 2

3 Mr. Aube stated that EMDC wants to enter into a long term lease arrangement with the University, if they could enter into a reasonable lease arrangement consistent with current market lease rates on terms as those outlined above. Comparable Rents: The EMDC building is considered to be a Class A- to B building in the greater downtown Bangor Area. With the help of independent commercial real estate appraisers, CFA was able to review lease rates from several comparable buildings to the EMDC building. This analysis shows that the market for Class A- quality office space, space comparable to that occupied by the Museum ranges from $10.00 to $16.00 per square foot on a modified gross basis. The average vacancy rate for Class A and B office space in greater downtown Bangor is presently approximately 15% per the appraisers CFA spoke with, though there are few choices available to those tenants needing 10,000 S.F. or more as required by the Museum. The leases in comparable buildings reviewed indicated a broad range of lease rates. Most importantly landlords and commercial real estate brokers indicate that current renewal rates are in the $10.00 to $12.00 per square foot on a modified gross basis, where the landlord pays all building expenses with the exception of unit electricity, referred to as lights, plugs, and internal unit cleaning, which remain with the tenant. Electricity costs approximate $1.50 to $2.00 per square foot of space occupied making the all in cost of occupy to the tenant between $11.50 to $13.50 per square foot on an arms-length fair market value basis. Landlords are making concessions to retain tenants and entice new tenants to their buildings. For example, certain landlords in the greater Bangor area are capping tenant common area charges at $1.32 per square foot knowing well that their actual common area charges run in excess of $3 per foot. CFA estimates the annual operating costs of the Norumbega building to approximate $3.01 per square foot excluding real estate taxes of $1.12 per square foot which would need to be paid by a for-profit owner, and excluding a repairs and maintenance reserve which will be important for improving the building. Current modified gross rental rates are between $10.50 to $13.50 all in for Class A- and B office space in downtown Bangor similar to that occupied by the Museum. CFA estimate the fair market rate of the top floor of the 40 Harlow Street building at $11.50 per square foot and the stream level at $8.00 per square foot both on a modified gross basis. CFA places the stream level space at the $8.00 rent rate, a discount of 30%, principally due to its mode of access, lack of windows and direct external light, and its diminished visibility from the street or first floor level. Page 3

4 Additional Space Proposed: The Museum is located on the stream level floor of the Norumbega Building. The stream level floor is actually below street grade and within the 100 year flood plain of the Kenduskeag Stream which runs parallel to the building on its east side. With the growth of the Museum collection, and to ensure better protection of the Museum s existing valuable art assets, improved storage is required. George Kinghorn, Museum Director and Curator, has proposed a 1,660 square foot expansion to an upper floor of the building. The additional space provides the Museum with a storage area for its fine arts collection that is outside of the 100 year flood plain of the Kenduskeag Stream. The breakdown for the proposed space follows: Fine Art Collections Storage 39 X 39 1,500 sq. ft. Registrar s Office 10 X sq. ft. Total 1,660 sq. ft For planning purposes CFA has increased the 1,660 square feet to 1,955 square feet to account for common area spaces, and as a holding place for discussions with EMDC. Mike Aube has told the University that it does not need all of the top floor space and that would be the most appropriate and physically easiest place to locate the fine arts storage area, as the top floor is totally unobstructed and requires little HVAC work when compared to the first floor. Property Condition Report: The University of Maine and the University of Maine Museum of Art engaged WBRC, architects and engineers, to complete an engineering evaluation of the EMDC building in December 2010 and then in April 2011, WBRC and Consigli Construction Company to complete a detailed construction cost estimate to correct all repairs identified in the engineering evaluation report. The Consigli and WBRC cost study estimates the necessary repairs costs at $1,513,525 of which it estimates $1,263,525 of the total is necessary to complete immediately. Mike Aube is aware of the engineering evaluation report and the building s deferred maintenance issues as well. It will be important to the Museum if it is to remain at its current location that the building be adequately maintained. The negotiation for a lease renewal should address the University s concern with the physical condition of the building. Lease Renewal Strategy: The Museum s objective, as mentioned earlier, is to stay in its present location and ideally to negotiate for the relocation of the fine arts storage to the building s top or third floor. The current location resulted from a collaborative economic development strategy with the City of Bangor and the University of Maine. This space has been successful in the growth of the Museum, advances the principles of the University Blue Sky Project thru the mission of cultural outreach and service to Maine citizens, and continues to play Page 4

5 an important role in the enhancement of arts and culture in the Bangor region. In 2002, private citizens, The City of Bangor and The University invested $955,000 in the renovations at this location. EMDC has had the building under contract for sale at least twice in the last year. Each time the contract fell through. Given recent showings to prospective tenants of the first floor and recent discussions directly between George Kinghorn and Mike Aube, CFA would advocate a strategy that pursues a lease renewal and expansion to the upper floor for the fine arts storage as quickly as possible. The University should engage the landlord now and negotiate a long term lease for the space it currently occupies and also could potentially lease the additional space, 1,660 square feet for the fine arts storage and registrar s office on the upper floor. CFA would propose a blend and extend strategy whereby the University would be willing to pay a higher rental rate for the next two years in order to secure a long term lease. CFA proposes that the University lease the space for the remaining two plus years on its current lease and then an additional 15 years further. In this option the University could offer to increase its current rent incrementally over the two years remaining until the current lease renews, and then pay rates more closely aligned to market rates for the period of the new lease. CFA suggests the fair market rates for such a rent cost structure as follows on the next page assuming the Museum renews its stream level space and additionally leases 1,955 square feet, including common area, on top floor for the fine arts storage. As mentioned, market inquires indicate the fair market value for the first and upper floor space on a modified gross basis whereby the landlord pays all expenses with the exception of the tenant's electricity and janitorial services within their space is approximately $11.50 per square foot with no designated parking slots. CFA estimates the stream level space to have a fair market value of approximately $8.00 per square foot or a discounted value of 30% from the first floor level of $11.50 per square foot per annum. The five allocated parking spaces are estimated to have an annual value of $58.00 per month X 5 spaces X 12 months or $3,480 per year, which amounts to a benefit of $0.25 per annum per square foot. The University pays for its own heat from May to September and then for a prorate share of the heat the rest of the year but only when the price per gallon of heating oil is in excess of $1.50 per gallon. Since the current lease was written, the building has converted to natural gas, and a conversion calculation is performed monthly. For the last 12 months the University paid $5, in heating costs to EMDC. EMDC estimates the total cost to heat the building at $.82/s.f. or $30,042 per year. CFA did not validate this estimate, as the costs will be shared on a prorata basis with EMDC the estimate is moot. Page 5

6 Estimated Rent at Fair Market Rates: Rental rate increases estimated every five years: 10.00% Stream Level Stream Level Top Floor Top Floor Total Rent Blended Rate Year Base Rent/ sq. ft. Rent Base Rent/ sq. ft. Rent By Lease Year Rate/s.f. 1 $8.00 $97,696 $11.50 $22,483 $ 120,179 $ $8.00 $97,696 $11.50 $22,483 $ 120,179 $ $8.00 $97,696 $11.50 $22,483 $ 120,179 $ $8.00 $97,696 $11.50 $22,483 $ 120,179 $ $8.00 $97,696 $11.50 $22,483 $ 120,179 $ $8.80 $107,466 $12.65 $24,731 $ 132,196 $ $8.80 $107,466 $12.65 $24,731 $ 132,196 $ $8.80 $107,466 $12.65 $24,731 $ 132,196 $ $8.80 $107,466 $12.65 $24,731 $ 132,196 $ $8.80 $107,466 $12.65 $24,731 $ 132,196 $ $9.68 $118,212 $13.92 $27,204 $ 145,416 $ $9.68 $118,212 $13.92 $27,204 $ 145,416 $ $9.68 $118,212 $13.92 $27,204 $ 145,416 $ $9.68 $118,212 $13.92 $27,204 $ 145,416 $ $9.68 $118,212 $13.92 $27,204 $ 145,416 $ $10.65 $130,033 $15.31 $29,924 $ 159,958 $ $10.65 $130,033 $15.31 $29,924 $ 159,958 $11.29 Totals $ 1,876,936 $ 431,934 $ 2,308,869 Ave. ann. cost over 17 years: $ 110,408 $ 25,408 $ 135,816 Ave. cost per SF over 17 years: $ 9.04 $ $ 9.59 In the above graphic, CFA has assumed the new lease becomes effective July 1, The lease would run for the two years remaining on current lease and then an additional 15 years on top of that for 17 years in total. Base rent rates in the above graphic for the stream level at $8.00 per square foot and $11.50 per square foot for the fine arts storage approximate market. CFA has increased the based rent by 10% every five years, as a cost of living increase, which typically runs from 10% to 15% for each five year leasing period. Total leased top floor space for fine arts storage is 1,660 plus a common areas factor or 1,955 S.F., which is 1,500 s.f. for fine arts storage and 160s.f. for a registrar's office totaling 1,660 s.f. CFA has assumed the University will build out of upper floor fine arts storage space as soon as possible. The University is responsible for its own build out costs. The University Facilities staff needs to estimate the costs associated with the upper floor renovation cost of the 1,500 s.f. storage and some surrounding space (total approximately 1,955 s.f.). This is not including the storage racking system purchase and installation or any additional advertising, contingency and other additional costs. Earlier estimates place the cost at approximately $110 per square foot, assuming no structural changes. The additional internal racking system is estimated to cost between $150,000 to $200,000 installed. The Museum has a special fund of approximately $200,000 set aside Page 6

7 that could be used for the purchase and installation of the fine arts storage racking system. CFA would suggest a modified gross lease structure where the University pays its share of the heating costs estimated at $11,600 per year, and the electricity it uses which totaled $29,000 for Rent Renewal Strategy at Below Fair Market Rates: Rental rate increases estimated every five years: 10.00% Stream Level Stream Level Top Floor Top Floor Total Rent Blended Rate Year Base Rent/ sq. ft. Rent Base Rent/ sq. ft. Rent By Lease Year Rate/s.f. 1 $3.68 $45,000 $9.00 $17,595 $ 62,595 $ $3.68 $45,000 $9.00 $17,595 $ 62,595 $ $6.00 $73,272 $9.00 $17,595 $ 90,867 $ $6.00 $73,272 $9.00 $17,595 $ 90,867 $ $6.00 $73,272 $9.00 $17,595 $ 90,867 $ $6.00 $73,272 $9.90 $19,355 $ 92,627 $ $6.00 $73,272 $9.90 $19,355 $ 92,627 $ $7.00 $85,484 $9.90 $19,355 $ 104,839 $ $7.00 $85,484 $9.90 $19,355 $ 104,839 $ $7.00 $85,484 $9.90 $19,355 $ 104,839 $ $7.00 $85,484 $10.89 $21,290 $ 106,774 $ $7.00 $85,484 $10.89 $21,290 $ 106,774 $ $7.80 $95,254 $10.89 $21,290 $ 116,544 $ $7.80 $95,254 $10.89 $21,290 $ 116,544 $ $7.80 $95,254 $10.89 $21,290 $ 116,544 $ $7.80 $95,254 $11.98 $23,419 $ 118,673 $ $7.80 $95,254 $11.98 $23,419 $ 118,673 $8.38 Totals $ 1,360,048 $ 338,035 $ 1,698,083 Ave. ann. cost over 17 years: $ 80,003 $ 19,884 $ 99,887 Ave. cost per SF over 17 years: $ 6.55 $ $ 7.05 CFA would further suggest that the University seek to obtain a more favorable lease with EMDC. The proposed lease structure above is approximately 22% below current market for the top floor fine arts storage space, and remains significantly below market for the stream level space for several years, 25%, and then increases to still below market but more in line with the market. The appraisers with whom CFA spoke state that Bangor office market rents have remained fairly stagnate for the last decade. They anticipate that such rent rates will continue to remain flat for the foreseeable future. As there is no significant demand drivers in the market that have been observed. The lack of new office space constructed in downtown Bangor over the last decade also echoes that belief. The flat rents over time bodes for caution when committing to cost of living rate adjustments which could over time put the rent rate per s.f. over market. Page 7

8 The blend and extend strategy has merit in that it accomplishes the goal of a long term home for the Museum, but may not accomplish the objective of containing costs for the long term in the way the University requires. Page 8