Negotiations between the University of Washington and Seattle City Hall over redeveloping Rainier Square offer a rare look at the anatomy of a deal and raises the question: Did the city leave millions in affordable-housing fees on the table?

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Stand at the corner of Fifth Avenue and University Street in downtown Seattle and you’re on University of Washington property. Drive along these blocks and the same is true.

Through a quirk of history, these holdings gave the UW a strategic edge in long-running negotiations with City Hall over the university’s Rainier Square property, where a 58-story, boot-shaped tower and a smaller hotel are planned, awaiting permits.

In a deal that mixed law and politics, the city may have left millions in fees for affordable housing on the table, at a time when city leaders are scrambling to respond to what they call a housing crisis.

The UW’s goal in Rainier Square was simple, according to emails from city planning director Diane Sugimura: Maximize the project’s footprint so the UW could reduce the amount its developer paid in fees for affordable housing.

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City officials balked at first, and even dared the UW to play hardball, saying the university risked a public backlash.

But the city ended up conceding to the UW’s legal arguments and struck an agreement both sides say is balanced in the public interest. University executives dispute Sugimura’s characterization of their motives, saying they didn’t object to affordable-housing fees. But they don’t disagree that they wanted and needed to squeeze the most financial value out of their downtown assets.

The Rainier Square deal points to what some see as a problem with the city’s “bonus” policy of giving builders extra height in exchange for their payments to a fund for affordable housing.

City Councilmember Mike O’Brien has requested an audit of the program because of questions about fees from Rainier Square and another downtown development.

The project will pay $7.5 million for affordable housing and child care, and another $4.2 million to a county fund to preserve rural land, according to Rainier Square developer Wright Runstad & Company.

A union representing hotel workers says that’s not enough and contends the city lost another $15 million for affordable housing by letting the UW “gerrymander” the development boundaries.

“The university is acting as a developer in downtown Seattle and should play by the same rules that any other developer does,” said Stefan Moritz, director of strategic affairs for Unite Here Local 8.

UW and city officials say the union’s view ignores history and the unique nature of the UW’s downtown property. That is what dictated the deal.

Historical perspective

Long before Washington was a state, in 1861 several of Seattle’s founders gifted a 10-acre forested patch called Denny’s Knoll to a new territorial university. That patch, known as the Metropolitan Tract, gave rise to the first UW campus where the Fairmont Olympic Hotel now stands, across University Street from Rainier Square.

The campus moved in 1895 to its current Montlake home, 3.5 miles north. The university began making money by leasing the Metropolitan Tract. The land now brings in about $10 million a year for UW property maintenance, construction and acquisition, said UW Associate Vice President Norm Arkans.

Along the way, an odd bit of history surfaced in the tract. The city gained control of Fourth Avenue in the early 1900s through eminent domain, or condemnation. But for reasons that remain unclear the city never acquired sections of Fifth Avenue and University Street within the tract — a decision now looming over Rainier Square.

The UW used the streets as key leverage in negotiations, according to city officials.

Sugimura wrote an email to her boss, then-Deputy Mayor Tim Ceis, in 2008 saying the UW wanted the city to interpret the tract as one undivided lot, streets and all. That novel argument would benefit the UW in calculating the development footprint, or base.

The UW even wanted to include the Skinner Building across the street (also in the tract), and an alley behind it, in crucial calculations.

The bigger the base, the logic went, the more square footage a developer could build before triggering affordable-housing fees under the city’s formula. “Otherwise,” Sugimura wrote in the email, the UW’s strategy was, “We will charge you for the use of ‘our’ streets, at their calculation of $3.5 million a year!!!”

Ceis, who ran day-to-day City Hall operations for Mayor Greg Nickels, sounded defiant in an email to Sugimura. “Let them know that I would personally love it if they decided to publically [sic] try and charge us for the use of the streets. I think there might be a bit of a public backlash against them.”

Ceis, whose City Hall nickname was “The Shark,” even threw down some counter-demands. He wanted the UW’s help in developing affordable housing at the old Sand Point Naval Air Station. Another request: “Fix the damn 5th Avenue garage. It is an eyesore,” he wrote.

The city got neither. Instead, it ended up agreeing with the UW’s main argument.

Project’s footprint

What happened?

Sugimura and Ceis, now a consultant to Wright Runstad, explain it similarly. The city interpreted the whole tract as one undivided lot, allowing the UW to count the streets and more toward the project’s footprint.

The university held a heavy hammer in negotiations. Because the UW owned development rights for the land under Fifth Avenue and University Street, it could make the city compensate it, one way or another, for using those streets, Ceis said.

The deal met several objectives, Arkans, of the UW, and Ceis said. It would revitalize Rainier Square, allow the city to continue using the streets at no charge, and contribute millions for public benefits.

Despite what city officials said, Arkans maintained that records do not show the UW opposing affordable-housing fees. He said the UW’s goal was to put together an attractive proposal to get an “underperforming” parcel developed. It was obliged to do so because of its public-education mission, he said. The UW also argued, according to city officials, that it already provides a lot of affordable housing — called dorms.

“What you’re looking at is the record of a deal,” Arkans said. “It got done, I think to everyone’s satisfaction. It’s sausage-making with the city.”

Local 8’s Moritz wonders what may happen in five years when the street-use agreement expires. The UW holds options for two 10-year extensions. Moritz is concerned the UW could use the streets again as leverage.

That won’t happen, Ceis said, because no similar development opportunity is left in the Metropolitan Tract.

It won’t happen in the University District, either, where the city is planning to allow more dense development, said Theresa Doherty, UW senior project director. “Whatever we do in the U District will conform to the land-use code,” Doherty said.

Taking another look

Had the UW been held to a strict interpretation of project boundaries, Local 8 calculates that its Rainier Square developer would pay $22.5 million instead of $7.5 million in city fees for housing and child care.

The union’s interests in the project are twofold, Moritz said. It wants the new hotel planned for the square to hire union workers. But affordable housing is also important to its members, particularly those who work in Seattle but can’t afford to live there, he said.

Arkans said he didn’t know how the union arrived at its numbers and wouldn’t critique specific figures. The union’s analysis, he said, is “an interesting exercise but it distorts history.”

The union knows the history well, Moritz responds, from examining a trail of records that offers a look at the anatomy of a deal. With affordable housing such a hot issue in Seattle — a steamy Town Hall was packed for a rent-control debate last month — Moritz says city officials should revisit the Rainier Square deal formalized in 2010 before issuing a permit for the project.

“I think we owe it to ourselves to take another look at that,” he said.

The union’s watchdogging on this and another development played a part, council member O’Brien said, in his request for an audit of the city’s zoning program.

It’s not clear, O’Brien said, how closely city auditors might look at the Rainier Square deal — and whether the project will be re-examined by city officials.

But O’Brien, chair of the council’s land-use committee, said the planning department may have too much discretion in how it interprets such cases.

He acknowledged that Rainier Square may be a “one-of-a-kind deal” because the UW owns the streets. “But I want to be crystal clear with the department,” he said, “that if you have any discretion, the council’s intent is to have you maximize affordable-housing fees.”