Letter: Civic Center numbers one-sided

701
0

Editor:

I hope you don’t take what I say as too critical, but the recitation of numbers in the last two articles on the Civic Center seem one-sided.

Your source for the examples of public projects which benefit from the current cost environment doesn’t discuss how many, if any, were financed with taxpayer-approved bonds.  Isn’t whether the low cost environment has been persuasive to citizens elsewhere a common characteristic just as significant to our situation as is cost? One citizen’s opinion on the generic subject without any exploration of the numerical thinking behind the opposition’s points doesn’t really introduce a counter argument with the weight your numerical facts give to the other side. Either your research or the story-line itself isn’t two-sided.

Beyond that, do any of the champions of public sector construction now wonder why there are so few construction projects in the private sector pursuing this low cost opportunity? Buying things we couldn’t afford is how this country collectively got so far in debt.  If you can’t afford it, isn’t cheap at whatever price.

The article on Rent Vs. Build also falls short in its exploration of the numbers. You can ask the city for a copy or I can provide you a copy of the lease indicating the actual rent is currently $324,000 per year until the lease’s third anniversary next month when it rises to $335,000 for year 4. The difference between those two numbers and the ones you are being fed by supporters is in the operating costs of a commercial building.

Without someone explaining it to you, I wouldn’t expect you to know this, but the common “Triple Net” lease structure divides the Costs of Occupancy between Rent and Reimbursements to the landlord of operating costs.  The landlord pockets the rent while the tenants pay him back for his out-of-pocket operating costs on their portion of the building.

The total Cost of Occupancy includes both rent and reimbursement of operating costs or “Triple Nets” as they are known in the industry. What’s missing in the supporters’ numerical representation is that, by building, they will only escape the rent portion of those occupancy costs. Because they are a Municipal Corporation, the city will also escape the real estate tax reimbursement payment they are now making of about $2 per square foot (SF) or about $33,642 per year. (Their space is 16,821 SF and the taxes for Snohomish county Parcel 00747600000100 are just over $244,000 per year on a 120,000 SF building, which is where I get the approximation of $2/SF for the city’s portion.)  What that means is that for this year, the costs which they would not have to pay in their own building are ($324,343 +$33,642) or $357,985.

The building they want will, however also have utility costs, maintenance, janitorial and insurance payments as well as ongoing needs for capital replacements. Again, besides real estate taxes, an Apples to Apples comparison would not include the portion of the current Costs of Occupancy known as Operating Cost Reimbursements because those very same costs will exist in a new Civic Center.  In fact, since the structures to be built are larger than their current space, the total operating costs for the city will likely be larger as well. A civil engineer and a city manager should know this; they just aren’t telling you everything they know because the resulting comparison isn’t nearly as attractive.

If you were to take what rent (not total occupancy costs) are today and escalate them by a reasonable figure over time, the number comes out nowhere near the figure you were given. Their misrepresentation is twofold. The first, discussed above, is that only the rent portion of their current costs will go away. The second is the almost astronomical escalation rate of rent over time. I have seen them use numbers as high as 5 percent per year, but your article cites 3 percent, then 3.5 percent beyond 2030. Again, I can’t fault you for not having a wider ranging context upon which to draw when you are provided these numbers, but they are not realistic.  In 1999 when it was built, the quoted rents for the Redstone building were nearly $20/SF + Triple Net expenses. It didn’t lease at those numbers, but did fill to about 75 percent at rents between $15/SF and $20/SF.  In 2009, our deal started with seven months free rent after the landlord contributed substantial tenant improvements costing over $700,000.  The rent thereafter started at $18/SF and goes up to $20.66/SF in year five, or 3.5 percent per year.

So far, once operating costs are taken out of the calculation, their 3.5 percent figure seems well-founded. However, the truth is that the Mountlake Terrace/Lynnwood office submarket has been and remains one of the weakest in the Puget Sound region. You will note that 10 years after it opened, MLT was able to get a beginning rate of $18/SF, virtually the same as tenants who began leases 10 years earlier. Asking rents for what is currently a 50 percent vacant building now average closer to $16/SF than $18/SF, which is why the Assessor’s value has dropped by more than 33 percent in the interim (see pending 2013 valuation embedded below.)

The point is that the escalator clause only impacts the three- or five-year terms of any given lease. Then the lease rate resets to the market and again escalates for the period of the lease at probably 3-3.5 percent. This is not, however, a continual escalation as portrayed in the city’s example, but more a two steps forward, then sometimes more than twi steps back. If their logic worked they way they say and we started with 1999 rents of $18, the rents in 2009 would have been $26, not still $18. Or even more to the point,  rents that were $18 in 2009 would not now in 2012 be quoted at less than $16.

Here are some helpful links:

Snohomish County Structure Information for the Redstone Building

Current Building Property Summary

Leonard French

 

Leave a Reply