FISCAL NOTE FOR CAPITAL PROJECTS ONLY

Department:	Contact Person/Phone:	DOF Analyst/Phone:
Fleets & Facilities	Mary Pearson 4-0407 Ben Noble 4-8160	Candice Chin 3-7014

Legislation Title:

AN ORDINANCE relating to the sale of the Arctic Building, located at 700 Third Avenue, under the jurisdiction of the Fleets and Facilities Department, declaring the same to be surplus to the City's needs; authorizing the sale and a temporary leaseback of certain portions of the building; designating the disposition of sale proceeds; and making appropriations of sale proceeds; all by a three-fourths vote of the City Council.

Summary and background of the Legislation:

Summary of the Legislation:

· Declares the Arctic Building surplus.

· Authorizes the FFD Director to sell the Arctic Building, in accordance with a negotiated Purchase and Sale Agreement, for the gross sales price of $5,100,000.

· Authorizes the FFD Director to execute a lease with the Purchasers of the Arctic Building for continued City occupancy until the City completes a phased move-out from the building into office space in Seattle Municipal Tower and leased facilities.

· Designates the deposit of net proceeds, as further explained in this fiscal note, and appropriates funds, for which insufficient appropriations were made in the 2005 Budget.

Background (Include justification for the legislation and funding history, if applicable):

The historic Arctic Building was purchased in 1988, at the same time as the Dexter Horton and Alaska Buildings, for City occupancy. All three buildings were purchased with Councilmanic debt.

In the 1990’s the City undertook a planning effort to address its space needs in light of its aging buildings, which culminated in the acquisition of Key Tower (now the Seattle Municipal Tower) and the construction of the Justice Center and City Hall. The adopted Civic Center Master Plan identified a preferred alternative and defined a strategy for each City-owned downtown property, including the sale or lease of assets no longer required to meet the City’s space needs.

The Master Plan envisioned the upgrade of the Arctic Building for City occupancy, specifically for the Human Services Department. Subsequent analysis of the Arctic Building resulted in the conclusion that more significant seismic upgrades and renovation would be required than previously contemplated, resulting in a recommendation that the Arctic Building be sold and that the Human Services Department space needs be addressed at the Seattle Municipal Tower and, for certain functions, in leased space in the Second/Third Avenue corridor.

With City Council support, the Mayor directed FFD to offer the Arctic Building for sale by a competitive process. With the assistance of our real estate advisors, an offering was prepared. The sale was advertised, and approximately 200 Offering Memorandums were sent to potentially interested purchasers in May 2004. There was a very good response with some buyers interested in the Arctic Building, some in conjunction with the Alaska Building. Eight bids for the Arctic Building were received in July 2004. The offers were reviewed for price, creditworthiness of the buyers, and proposed re-use plan and its consistency with City goals. Bids were short listed and “best and final” offers requested. After further evaluation, FFD negotiated with the entity that submitted the highest and most responsive offer.

The proposed purchaser of the Arctic Building is the Arctic Club Hotel, LLC, an entity formed by Conover Bond, a Spokane-based redevelopment company which renovated Spokane’s Montvale Hotel. The purchaser plans to convert the Arctic Building to a hotel of approximately 120 rooms, with the Dome Room and adjacent spaces planned to serve as meeting and event rooms.

There is a short term lease for portions of the building to allow for continued City occupancy from the anticipated May 31, 2005 closing of the sale until our planned moves. The remaining tenants in the Arctic Building - Office for Civil Rights and Department of Neighborhoods - are expected to move in summer of 2005.

· Please check any of the following that apply:

___ This legislation creates, funds, or anticipates a new CIP Project.

____ This legislation does not have any financial implications.

_ X_ This legislation has financial implications.

Appropriations:

This legislation: (i) authorizes the deposit of proceeds from the in various City funds, and (ii) appropriates a portion of the proceeds for various uses. For purposes of clarity, the fiscal note template is amended to show these actions in separate tables.

DEPOSIT OF PROCEEDS

Gross proceeds of the sale are $5.1 million. Closing costs are estimated to total approximately $21,000 (costs at closing include title premium, escrow/settlement, and security deposits). Following deduction of these costs, an estimated total of $5,079,000 will remain as net proceeds available for deposit in various City funds. The following table displays the authorized distribution of these net proceeds.

Fund Name (Number)	Amount	Expected Use	Appropriated Under This Ordinance?
Fleets and Facilities Fund (50300)*	$132,000	Staffing costs and broker’s commission costs.	In part. See following table.
Municipal Civic Center Fund – Non-Bond Receipts (34225)	$382,700	Capital expenses related to department (Office for Civil Rights) move to leased office space and partial build-out of Cultural Café.	Yes. See following table.
General Bond Interest/Redemption Fund (20110)	$3,455,100	Retirement of remaining debt service on the Arctic Building.	Yes. See following table.
TOTAL	$3,969,800

*Though not specified in the ordinance, it is anticipated that the deposit into the Fleets and Facilities Fund will be directed to the Facilities Subfund (50330). Any proceeds received in excess of the $3,969,800 shall be deposited in the Cumulative Reserve Subfund, Capital Projects Account, Unrestricted Subaccount.

APPROPRIATIONS

Fund Name and Number	Dept	BCL	2005 Appropriation	2006 Anticipated Appropriation	Remarks
Fleets and Facilities Fund (50300)	Fleets and Facilities	Technical Services (A3100)	$97,000	0	Appropriation authority is requested for brokers’ commissions (est. $88K) and building cleanup expenses (est. $9K).
Municipal Civic Center Fund – Non-Bond Receipts (34225)	Fleets and Facilities	Civic Center Plan – Key Tower, Park 90/5, and Other Projects (A34200-2)	$382,700	0	CIP appropriation will be directed to Seattle Municipal Tower Tenant Improvement Projects, associated with the moves of City employees to private leased space, and to build-out the “Cultural Café” space in City Hall.
General Bond Interest / Redemption Fund (20110)	Finance / Finance General	Reserves (Q5972010)	$3,455,100	0	Pays remaining debt service on outstanding capital facilities bonds used to purchase the Arctic Building. This amount is the current best estimate.
TOTAL			$3,934,800	0

A total of $35,000 of the net sale proceeds does not require additional expenditure authority.

The following proviso is applied to $250,000 of the additional appropriation for the Civic Center Plan project:

“Of the additional $382,700 appropriated from the Municipal Civic Center Non-bond Subfund, $250,000 is appropriated solely for the purpose of making capital improvements, including but not limited to electrical system upgrades, heating and ventilation enhancements, and installation of finished walls and doors, to the portion of Seattle City Hall’s L1 level that has been identified throughout the building’s planning and design process as the Cultural Café, for the sole purpose of making the space a suitable location for artistic performances, artistic displays and cultural gatherings, and may be spent for no other purpose.”

SPENDING PLAN

BCL	Use	FUND	2005	2006	2007	2008	TOTAL
Technical Services (A3100)	Brokers’ commission/ clean up costs	50300	$97,000	0	0	0	$97,000
Civic Center Plan – Key Tower, Park 90/5, and Other Projects (A34200-2)	Moving expense and build-out of Cultural Café	34225	$382,700	0	0	0	$382,700
Finance General Reserves	Debt service	20110	$3,880,000	($424,900) credit	0	0	$3,455,100
	TOTAL		$4,359,700	($424,900)	0	0	$3,934,800

BREAKDOWN OF USE OF PROCEEDS

This section explains in greater detail the spending plan outlined above, and accompanies Attachment A to this fiscal note.

Staffing and Other Incremental Costs: Labor expense of $44,500 reflects an estimate for FFD’s real estate services and Seattle Conservation Corps labor for clean-up. $87,500 is estimated for brokers’ commissions costs.

Debt Payoff: The current best estimate of $3.88M debt payoff for the outstanding principal for the Arctic Building’s debt will be partially offset by budgeted debt service payments for 2006.

Incremental Moving Expense and Build-out of Cultural Café: Expense for tenant improvements for the move of Office for Civil Rights (OCR) to leased space and for basic building system improvements to the Cultural Café space in City Hall.

Incremental Operating Expense: Outside lease for OCR are estimated at $20/sq. ft. (the leases are not yet signed). The rate for outside leases reflects FFD’s best estimate. The other line items are also estimates, but FFD does not expect significant deviations from these amounts. However, changes in the following dates will impact lease expenses.

· Leaseback Expense in Arctic ($13/sq. ft.)

Leaseback	Effective 6/1/05 thru	Month factor
DON to SMT	8/31/05	3
OCR to lease	8/31/05	3
Arts Storage	8/31/05	3

· Lease Expense for Commercial Office Space ($20/sq. ft.)

Outside Lease	Effective 8/1/05 thru	Month factor
OCR to private lease	12/31/06	17
Arts Storage	12/31/06	17

· Foregone Revenue from Arctic Commercial Tenants (Shop fronts): Assuming a sale date of 5/31/05, this amount reflects 7 months of foregone lease revenue in 2005 and 12 months in 2006.

· Avoided Arctic Property Management Expense: Assuming the sale of Arctic occurs on 5/31/05, this is the amount of property management expense that would have been paid to Cushman Wakefield through 2006. This amount is treated as a credit in this analysis.

Remaining Proceeds:

The combined sale proceeds of the Alaska and Arctic Buildings are sufficient to cover all related expenses (real estate transaction costs, incremental property management and operating expense, moving expense, debt service, and art removal) and foregone revenues (due to loss of payment from commercial tenants in the Alaska and Arctic Buildings as well as the Seattle Municipal Tower) currently anticipated for 2005. The situation becomes more complicated should only one or the other building actually advance to closing following passage of the proposed ordinance. If only one building sells, sale proceeds will obviously be lower, but related expenses borne by the Fleets and Facilities Department will not necessarily be similarly reduced. If only the Alaska Building sells, expenses will exceed revenues by $5.3M, with the deficit expected to occur in 2006 as departments move. If both buildings sell as planned, expenses will exceed revenues by approximately $1.53M, which is expected to occur in 2006. Because many of the project costs are current best estimates and any shortfall resulting from both scenarios would occur next year, additional funding sources will be identified through the 2006 budget process.

Funding source:

See preceding tables.

Bond Financing Required:

Not applicable.

Uses and Sources for Operation and Maintenance Costs for the Project:

None.

Periodic Major Maintenance costs for the project:

Not applicable.

Funding sources for replacement of project:

Not applicable.

Total Regular Positions Created Or Abrogated Through This Legislation, Including FTE Impact:

None.

· Do positions sunset in the future?:

Not applicable.

· What is the financial cost of not implementing the legislation:

Asset Preservation Costs. Calculation of the 2005-06 Asset Preservation allowance did not include the Arctic Building, given the likelihood that it would no longer be a City responsibility, allowing the City to avoid certain major maintenance costs needed in the near future. Without the property sales, likely future expenses could include, but not be limited to, replacing floor coverings (at approximately $35/sqyd for 71,000 SF of useable space, the cost would be around $2.5 million), upgrading the elevator cars ($231,000 per car for 3 cars), replacing the windows eventually with thermal pane, replacing the heat pumps in the Arctic Building (approximately $20K apiece, with one under nearly every window), and installing energy efficient lighting and upgrade emergency systems (e.g., generators and exit signs).

Bond Interest Payments. Absent proceeds for bond defeasance, these would be a continuing burden on the City budget.

· What are the possible alternatives to the legislation that could achieve the same or similar objectives

There are no possible alternatives to the legislation that could achieve the same or similar objectives. No other additional revenue source has been identified which could substitute for the sale proceeds.

· Is the legislation subject to public hearing requirements:

No.

· Other Issues:

None.

Please list attachments to the fiscal note below:

Attachment A: Arctic Building Sale: Uses of Net Proceeds and Other Expenses Related to Sale

Attachment B: Preliminary Report - Evaluation of Reuse and Disposal Options for the Arctic Building, 700 Third Avenue.

Attachment C: Map of Sale Property

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ATTACHMENT A to Arctic Fiscal Note
Arctic Building Sale
Uses of Net Proceeds and Other Expenses Related to Sale
				Arctic
Proceeds		Summary Amount	Combined	2005	2006	Key Assumptions
Combined Gross Proceeds		5,100,000		5,100,000		CLOSING DATE: May 31, 2005
			5,100,000	5,100,000
Combined Closing Costs		(20,840)		(20,840)
	Title Premium		(7,834)	(7,834)
	Escrow/Settlement		(2,462)	(2,462)
	Security Deposits		(10,545)	(10,545)
Net Proceeds		5,079,160		5,079,160
Uses of Net Proceeds and Other Expenses Related to Sale
Staffing and Other Incremental Costs		(132,000)		(132,000)
	Sale Prep: Labor Expense		(44,500)	(44,500)		Estimate $36k FFD labor, $9k Seattle Cons Corps for clean-up
	Brokers Commissions		(87,500)	(87,500)
Debt Payoff		(3,455,063)		(3,880,000)	424,937
	Total Remaining Obligation		(3,880,000)	(3,880,000)
	2006 Budgeted Debt Service (Credit)		424,937		424,937
Incremental Moving Expense		(382,700)		(382,700)
	OCR to Private Lease		(132,700)	(132,700)
Am	Build-out of Cultural Café		(250,000)	(250,000)
Incremental Operating Expense		183,022		(7,147)	190,169
	Leaseback Expense in Arctic ($13/sqft)		(58,390)	(58,390)	-	3 months of leaseback for DON and OCR
	Lease Expense for Commercial Office Space ($20/sqft)		(293,845)	(86,425)	(207,420)	5 months of private lease for OCR in 2005; 12 months in 2006
	Forgone Revenue: Arctic Commercial Tenants		(281,988)	(103,890)	(178,098)	7 months of forgone lease revenue in 2005; 12 months in 2006
	Arctic Building Lease Termination		(88,000)	(88,000)	-
	Avoided Arctic Property Management Expense (credit)		905,245	329,558	575,687	7 months of avoided expense in 2005; 12 months in 2006
Balance		1,292,419		677,313	615,106
					ACRONYMS
					DON	Department of Neighborhoods
					OCR	Office of Civil Rights

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PRELIMINARY REPORT

EVALUATION OF REUSE AND DISPOSAL OPTIONS FOR

THE ARCTIC BUILDING, 700 THIRD AVENUE

Resolution 29799 directs the Executive is to make its recommendations on the reuse or disposal of excess property on a case by case basis, using the Procedures for Evaluation of the Reuse and Disposal of the City’s Real Property adopted by that resolution. Additionally, the Resolution identifies guidelines which are to be considered in making a recommendation. This report addresses each of the guidelines outlined in Resolution 29799 in support of the recommendation.

Property Management Area: PMA# 89

BACKGROUND INFORMATION

Legal Description:

Lots 5 And 8, Block 27, addition to the Town of Seattle, as laid out on the claims of C.D. Boren and A.A. Denny and H.L. Yesler (commonly known as C.D. Boren’s Addition to the City of Seattle), according to the Plat thereof, recorded in Volume 1 of Plats, Page 25, in King County, Washington;

Together with the southwesterly half of the vacated alley in said Block 27 abutting on said Lots, as vacated under Ordinance Number 2005 of the City of Seattle;

Except the southwesterly 9 feet of said Lots condemned in King County Superior Court Cause Number 54135 under Ordinance Number 14345 of the City of Seattle for widening of 3^rd Avenue.

Physical Description and Related Factors:

The Arctic Building is a nine-story office building plus an office penthouse (Floor 10) and a basement, with a total gross area of approximately 96,197 square feet, of which 87,465 square feet are rentable. The property occupies a quarter-block on the northeast corner of Third Avenue and Cherry Street in Seattle in the downtown business district. The property lines are located along the building footprint with a site area of approximately 13,708 square feet. The building was constructed in 1914 for the Arctic Club, a private club whose membership consisted of the City’s leaders and entrepreneurs. The building underwent extensive renovations in 1982. The building is known for its Italian terra-cotta façade, tusked walrus heads and rococo-gilt Dome Room, which served as the club’s formal dining room. There is no on-site parking.

GUIDELINE A: CONSISTENCY

The analysis should consider the purpose for which the property was originally acquired, funding sources used to acquire the property, terms and conditions of original acquisition, the title or deed conveying the property, or any other contract or instrument by which the City is bound or to which the property is subject, and City, state or federal ordinances, statues and regulations.

The City bought the Arctic Building in 1988, along with the Alaska Building and Dexter Horton Building, for general municipal purposes, to provide for its downtown office space needs. The purchase was funded by Councilmanic debt. There is a Conservation Easement, which preceded City ownership, which protects the historically and architecturally significant elements of the building. The zoning is DOC 1.

GUIDELINE B: COMPATIBILITY AND SUITABILITY

The recommendation should reflect an assessment of the potential for use of the property in support of adopted Neighborhood Plans, as or in support of low-income housing, in support of economic development, in support of affordable housing, for park or open space; in support of Sound Transit Link Light Rail station area development; as or in support of child care facilities, and in support of other priorities reflected in adopted City policies.

Context

The Civic Center Master Plan adopted in 1999 contemplated that the Arctic Building would be renovated and that the Human Services Department would relocate to the building after the upgrade. Subsequent analysis indicated the Arctic Building would need more significant seismic upgrades and major maintenance than previously contemplated. The City evaluated the current needs, lease rates, and building rehabilitation cost, and concluded that it would be prudent to sell both the Arctic and Alaska Buildings. Proposed alternate space for the Human Services Department included approximately 58,000 square feet in the Seattle Municipal Tower and approximately 20,000 square feet in leased space in the Second/Third Avenue area.

The sale offering was structured to allow for evaluation of opportunities in light of both financial return and reuse plans serving other City objectives. The proposed sale and redevelopment as a hotel is consistent with the Civic Center Master Plan and Seattle Comprehensive Plan’s intent of stimulating a vibrant area with day and night time activity. It also addresses both Goal 1 and Policy 3 of the Commercial Core Neighborhood Plan, creating new jobs toward the area’s target while preserving a historic resource.

Range of Options.

The range of options, within the context of the Civic Center Master Plan, includes sale for highest and best use. The offering was structured to allow the City to understand the financial implications of the alternatives and to provide maximum flexibility in confirming and achieving its goals for this property.

GUIDELINE C: OTHER FACTORS

The recommendation should consider the highest and best use of the property, compatibility of the proposed use with the physical characteristics of the property and with surrounding uses,

timing and term of the proposed use, appropriateness of the consideration to be received, unique attributes that make the property hard to replace, potential for consolidation with adjacent public property to accomplish future goals and objectives, conditions in the real estate market, and known environmental factors that make affect the value of the property.

Highest and Best Use: The highest and best use was anticipated to be continued office use, but the response to the offering indicated hotel could generate equivalent financial return.

Compatibility with the physical characteristics: A hotel use allows the historic building to continue to provide public access to the Dome Room and facilitates the historic renovation of the building.

Compatibility with surrounding uses: To the east of the site, there are relatively new office buildings, parking garages, retail and the Civic Center. To the west, there are mostly older buildings, some in continued office use (Dexter Horton Building), some with housing conversion. In particular, recent conversions of the Lowman Building, the St. Charles, the Lyon, and the Tashiro Kaplan Building provide a mix of nearby affordable and market rate housing above ground level commercial uses.

Potential for Consolidation with adjacent public property: None.

Timing and Term of Proposed Use: The sale is expected to close April 30, 2005, with the City continuing to occupy a portion of the building through mid-2005, when the Office for Civil Rights and Department of Neighborhoods will move. The purchaser intends to begin redevelopment and seismic upgrades immediately after the City’s lease expires. They are projecting the hotel will be completed and ready for occupancy by late 2006.

Appropriateness of the consideration: The offering used an openly competitive process. The array of offers indicated that the financial return to the City for the hotel offer was equivalent to or greater than offers for continued office use or housing conversion.

Unique Attributes: The building’s historic designation, architectural appeal and location at the boundary of the office core and government district and Pioneer Square all support strong market appeal. The proposed hotel will incorporate and embrace the historic character of the Arctic Building and Dome Room into the ambiance of the hotel.

Conditions in the real estate market: The proposed hotel use has a good market demand for the location and building type.

Known environmental factors: Potential asbestos containing materials.

GUIDELINE D:SALE

The recommendation should evaluate the potential for selling the property to non-City public entities and to members of the general public.

Through the City’s disposition process, the Arctic Building was circulated to other public entities with no interest expressed for use as a facility.

The offering was announced June 8, 2004. The offering memorandum was sent to over 200 potential buyers, and the City received 8 offers in response, most above the offering price.

RECOMMENDATION

The Real Estate Services Division of the Fleets and Facilities Department recommends the sale of the Arctic Building to the Arctic Club Hotel, LLC for $5.1 million.

PROPERTY REVIEW PROCESS DETERMINATION FORM
Property Name:	Arctic Building
Address:	700 Third Avenue
PMA ID:	89	Subject Parcel #:		232
Dept./Dept ID:	A50009		Current Use:	City offices and storage, retail on ground floor
Area (Sq. Ft.):	13,708 SF lot 96,197 GSF building		Zoning:	DOC - 1
Est. Value:	offered at $3,500,000		Assessed Value:	$4,299,400
PROPOSED USES AND RECOMMENDED USE
Department/Governmental Agencies:			Proposed Use:
Other Parties wishing to acquire: Arctic Club Hotel LLC			Proposed Use: Hotel
RES’S RECOMMENDED USE: Arctic Club Hotel LLC at $5,600,000 for a hotel
PROPERTY REVIEW PROCESS DETERMINATION (circle appropriate response)
1.) Is more than one City dept/Public Agency wishing to acquire?					No / Yes	15
2.) Are there any pending community proposals for Reuse/ Disposal?					No / Yes	10
3.) Have citizens, community groups and/or other interested parties contacted the City regarding any of the proposed options?					No / Yes	10
4.) Will consideration be other than cash?					No / Yes	10
5.) Is Sale or Trade to a private party being recommended?					No / Yes	25
6.) Will the proposed use require changes in zoning/other reg’s?					No / Yes	20
7.) Is the estimated Fair Market Value between $250,000-$1,000,000?					No / Yes	10
8.) Is the estimated Fair Market Value over $1,000,000?					No/ Yes	45
Total Number of Points Awarded for "Yes" Responses:						70
Property Classification for purposes of Disposal review: Simple / Complex (circle one) (a score of 45+ points results in “Complex” classification) Signature: Department: Date:

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Attachment C: Map of Sale Property

(Not available in electronic format)

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