Today, the City Council and Bill & Melinda Gates Foundation are poised to complete the largest sale of city property in Seattle history...
Today, the City Council and Bill & Melinda Gates Foundation are poised to complete the largest sale of city property in Seattle history, in a deal that holds major significance for the city and one of the world’s wealthiest philanthropic organizations.
For $50.4 million, the city would sell 12 acres of Seattle Center land, mostly used for parking, to the foundation for its new world headquarters.
The city would net about $22 million in cash, which would wipe out Seattle Center’s mounting deficit, help pay down the remaining construction debt on the opera hall, and finance center maintenance.
Putting the parcel on the tax rolls through the sale would add about $150,000 a year in property taxes to the city treasury.
Seattle Center also would gain a new neighbor whose work promoting global health and education dovetails with the center’s mission to promote diverse culture.
What’s not so clear is whether the city got top value for the parcel. The city arrived at the selling price without a bidding process or a formal appraisal, and it would net far less than a $72 million estimate of the property’s “unencumbered” value, or what it would be worth if the entire site were easily developable.
The council’s oversight of the deal also has not quite reflected its reputation for painstaking public process. The council held four meetings on the deal over six weeks, and it heard little public testimony — with none from objective real-estate experts.
Still, Councilman David Della, co-chair of the council’s oversight committee, said the deal went through an “extensive process, with good public input and transparency” to insure the city received fair market value.
But a national expert on valuation of complex real estate said city leaders should have insisted on an appraisal.
“The city is making political decisions about values when they should have had a real-estate appraiser make objective economic evaluation of the issues,” said Dr. John Kilpatrick, president of Seattle’s Mundy Associates, who has reviewed city documents on the deal.
Kilpatrick is an appraiser, an appraisal-standards instructor and has worked as a consultant for the U.S. Justice Department and the federal General Services Administration.
Kilpatrick was one of two experts The Seattle Times contacted for their opinions of the deal. The other expert, economist Adrian Moore, thought the city might be getting a “decent deal.”
Virginia Anderson, Seattle Center director, noted that the city and Gates Foundation did hire an appraiser, but he didn’t finish a formal review of the property’s value. Instead, the appraiser provided a draft report on comparable sales in the area, which helped determine market value.
Anderson said the city stopped the appraisal process after the appraiser suggested that 40 percent of the land should be discounted because the Gates Foundation would need to build interior roadways on the parcel.
Kilpatrick said he is puzzled by that logic. If the city didn’t agree with the first appraiser, it should have gone to another appraiser and gotten a second opinion, he said.
Bids not required
Another way to determine fair market value would be to solicit bids on the property. But the city isn’t required to do that on land sales. Instead, the city is supposed to receive fair market value in a sale and adhere to a state prohibition against “lending credit” to a private entity in a property sale, said Mary Pearson, the city’s real-estate services director.
The city may sell property at less than fair market value if it’s pursuing certain objectives, such as development of low-income housing.
When Anderson learned early last year the Gates Foundation was looking to build a headquarters campus, she approached the foundation — and only the foundation — with a pitch for the property known as Lot 2.
With its 200 employees and a $27 billion endowment, the foundation represented more than a prestigious neighbor, according to Anderson. The foundation complements the center’s mission to “inspire the human spirit and bring us together as a rich and varied community.”
Anderson also hopes the foundation will provide other benefits, including rentals of center facilities such as the opera house for conferences and events.
She said she told foundation officials that the city “couldn’t discount the property based on our liking you.” At the same time, foundation executives did not want to overpay for the land.
Foundation spokesman Greg Shaw said both sides believed they arrived at a “market-based price” after lengthy negotiations. “I don’t think either side feels it gave or received a discount,” he said.
A triangular parcel bordered by Fifth Avenue North and Mercer, Broad and Harrison streets, the lot now contains a 1,200-stall surface parking lot, the Sonics and Storm practice facility, a public skate park, an outdoor public basketball court and a waste-reduction facility.
Moore, an economist and national expert on public-private partnerships, said that while bids might reveal the true market value of the 12-acre parcel, the city is seeking something more complicated than sheer monetary value.
“The city does not own that land in order to sell it to the highest bidder. It is trying to find a use … that fits the Seattle Center and meets a private developer’s goals,” said Moore, vice president of the Reason Foundation, a nonprofit think tank based in California that has a research program dedicated to market-oriented urban planning and real estate.
Moore also noted that given Seattle’s sagging economy, “there is no guarantee that going out to bid on the land would lead to a better deal … My quick evaluation is that this is at least a decent deal for the city.”
The appraiser’s “preliminary report” determined the land has an unencumbered value of $72 million, meaning it would be worth that much if it wasn’t polluted and wasn’t saddled with restrictions that would keep the buyer from using the entire 12 acres.
The city agreed to reduce the value to $50.4 million to reflect the following discounts:
• The Sonics have a one-acre practice facility in the northeast corner of the parcel that is leased until September 2010.
• The city wants to hold on to a 50-foot swath along the parcel’s northern edge in the event Mercer Street is widened, leading to another one-acre discount.
• The foundation needs to build interior circulation roads estimated to occupy about 1.5 acres of the site. Councilman Richard McIver questioned this discount several weeks ago. McIver now says the overall deal is good enough that he expects the full council to unanimously approve it.
The discount appears reasonable to Moore, of the Reason Foundation. “It’s common for a deal to be sweetened when the buyer has to put in infrastructure,” he said.
• The city wants to retain most of its parking capacity on the site, so the foundation will provide almost three acres for a 1,010-stall garage.
Millions in credits
Having settled on a $50.4 million price, the city then agreed to $28.4 million in credits against that purchase amount, reducing its cash proceeds to $22 million.
In effect, the foundation will cover a series of preliminary costs, including $4 million to relocate electrical, water and sewer lines that run under and over the property; $4 million to clean up soil and water pollution on the site owing to its one-time use as a Metro bus barn; $1 million to relocate the skateboard park, public basketball court and a city waste-reduction facility on the parcel, plus a $1 million contingency fund for costs that exceed initial estimates.
But by far, the largest of the credits is a city contribution of $15.3 million toward construction of the parking garage, which the city would own for at least 50 years.
The deal calls for the foundation to build the garage, own the underlying land and lease it to the city for $1 a year. The foundation gets daytime use of 300 parking stalls, with an option to later rent up to 420 more at market rates. It would pay about $100,000 a year for garage maintenance starting in 2008.
As owner of the garage, the city would collect revenue from parking stalls.
Valuation expert Kilpatrick said he couldn’t determine the appropriateness of the credits and discounts, which he called a “pretty huge adjustment.” He said they seemed reasonable. But absent a detailed appraisal, he said he couldn’t judge the final price.
Councilman Nick Licata acknowledged that the deal went through the City Council like “a knife through warm butter.” But Licata doesn’t believe a bidding process and potentially higher price outweighed the financial certainty and compatibility that the Gates Foundation brought to the table.
“There is a premium for having that type of certainty and we paid for it, but from the market analysis I’ve seen, I believe it was a reasonable cost.”
Bob Young: 206-464-2174 or firstname.lastname@example.org