The following was prepared by Citizens for Saint Edward State Park from the audio recording posted on the City of Kenmore website. The discussion of Saint Edward State Park occurs on Part 2 of the recording and begins at approximately minute 49.
Transcript of June 2, 2014, Kenmore City Council Mid-Year Retreat when discussing Saint Edward State Park:
Facilitator begins by stating that if saving the Seminary is important to the community, first step is to wrest control of the Building from State Parks.
Facilitator introduces Jay Reich of Pacifica Law Group who will explain mechanism of Public Development Authority.
Assistant City Manager who has drawn up a memo to City Council asks City Council to read and mentions “where we are”:
It is different this time around. State Parks at the leadership and Commission level is considering what to do with the building. She asks City Council to see the Power Point by State Parks on this topic, in their packet, and notes that Commission will reconvene that discussion in late July.
Assistant City Manager:
Is there some sort of role for the City that will entice development? We know there is market interest now.
City Manager:
Nancy (the Assistant City Manager) has pointed out to me the past history is a potential user shows up. We all react then for whatever reason, potential user goes away and it goes quiet. . . Let’s be proactive while it is semi-quiet. So the next time a potential user comes to us, we will be ready for that user. By the way, it is not so quiet. We are hearing some good vibes out there right now.
Someone says:
Jay Reich and his firm – one of the reasons we are tapping into them is because they did the port Townsend PDA. So they have already had experience working with the State and they know how that works too.
Jay Reich:
I would like to begin by stepping back and ask you to strategically think about how you might want to proceed. Clearly this facility is going to require a huge amount of capital and operating costs. You are going to have to attract a very substantial, stable investor who wants to come here and that entity is going to have to negotiate with someone who has site control if they are really going to get involved and get to yes in a reasonable period of time.
We also know from experience with the State that the State Parks Department is not the most nimble negotiating group on the other side. In fact they are pretty awful.
So if you allow entrepreneurs to come willy nilly to negotiate with the State Parks Department, it’s very likely that you are sealing the fate of this process in the negative. So the question is how to increase the opportunity here. What we imagine just in early conversations is the City and Parks Department will begin discussions about a “term sheet.” Not get into heavy lease negotiations. See if we can negotiate a mutually agreeable seven to eight page document that fundamentally outlines businesses under what circumstances might lease a facility to a city or its agent, a PDA, who would be responsible for what I would call on ramps and off ramps: when would this entity have to take a leasehold possession. Ideally you would want to take a lease hold possession when you have a sub-leasee, then to just pass it on. Or if nothing happened you would maybe want to just give it back to them, so this is the off ramp and the on ramp.
In and of itself is not easy dealing with the Parks Department, but it seems to me if you can’t get to yes on a term sheet there is no way you can get to yes on an labyrinth lease and you are going to save yourself a lot of heartburn and expectations and burn a lot of legal fees if you do it that way.
So the first step would be to see if you can deal with Parks Department and Nancy’s point is well taken; this should be a white elephant for them. It’s deteriorating in front of them with pressure to maintain it. They can’t, they don’t have the funds to do it. They might welcome the opportunity.
We represented the City of Port Townsend in a long term lease of Fort Worden from the State Parks to then be leased to non-profits. So a parallel situation, not exactly but pretty darn close.
So then the next question is what could the role of the PDA be. A PDA is a very flexible entity. The City creates it and sort of launches it. And it allows you to create a buffer between you and this facility. Which is really an entrepreneurial effort. It’s negotiating with a for-profit perhaps or with a non-profit, cutting a business deal to manage this property. I would say this without any disrespect, it is probably not your core competency to run a historic preservation renovation site, negotiate with a huge company that wants to do this.
But a PDA would allow you to attract some people from the community. You would pick the Board and they would have liability for what goes forth, not you. It also takes it out of the political context. It is still subject ot open public meetings law and open public records but they are not elected officials. So you might attract people who have expertise in real estate development from your community to represent you but who would not want to run for office. And also (avoid?) the sort of political pressures, “No we don’t want that kind of development.” They would be somewhat immune to that, which could be beneficial.
Assistant City Manager:
It is my understanding that the Board members can come from outside the City.
Reich:
Yes. It is whatever you choose and we usually like a, we usually suggest seven to nine people, a workable group, people who have the range of talents or interests that you think appropriate so that when they make a recommendation or enter into this you are feeling comfortable that they are not gonna go rogue on you and you will have some oversight responsibilities but no legal liability.
For example, we ? the Pike Place Market is a PDA created by the City of Seattle because the City of Seattle does not want to run this historic end deal with all the huskers and all the retailers. The Seattle Art Museum is a PDA we represent that owns the physical facility and leases it to the Seattle Art Museum that brings in the art and does the programming. The Museum of Flight. There are just lots of them that we represent.
So, it’s a useful vehicle. You don’t have to make that decision at this point. But it would seem to me that once the parameters of the deal are determined with State Parks, that is to say, What’s the term? What kind of possible uses or limitations will they impose? Because they are gonna want to maintain long term ownership, but maybe after forty or fifty years. Then it would seem to me that it might be useful to then impose a PDA to actually do the negotiation.
Now, a PDA in this initial phase has no resources, so you have the authority if you choose to lend staff to do that and they can hire attorneys if they have not. At the point at which a lease is really consummated with a for profit at the other end, it should be totally self-sustaining because part of the lease payments could be to pay the PDA which is really going to have a very passive role at that point – just to make sure that the covenants are followed and so on.
So, it’s a strategic kind of decision that is a process, start with Parks Department to think about a PDA, solicit suggestions for who the developers might be to enter into those lease negotiations, consummate that, but a PDA might just be a very useful vehicle and it’s very flexible for you to think about, who would actually do the work on that side, and free you up from the kind of details and hassles that may not be your core competency or top priority with everything else you have to do.
Unknown speaker, sounds like City Manager:
I understand there is opportunity for lease hold excise tax in a building like that.
Reich:
Yes. There would be lease hold excise tax. I would have to take a look at that. There are some – normally the PDA does not pay any taxes; it is in the same situation as the City.
Unknown speaker:
Right, a publicly owned building.
Reich:
But a private lease would have to pay excise tax.
Unknown speaker:
In lieu of property tax.
Reich:
Right. Should work the same way.
Questions:
Brent Smith:
Thanks Jay. Good explanation. I really appreciate you talking about State Parks and how difficult that can be because that is probably my biggest single concern that we exert a bunch of Staff time and City dollars down a hole that they’re going to change their mind every two weeks on what they want or what they think is worthwhile. So I guess one of my questions is, will State Parks partner in the cost of creating a PDA?
Jay Reich:
No. I think the PDA is yours.
Smith:
Okay.
Reich:
If you choose to do it – you don’t have to.
Smith:
Absolutely
Reich:
The critical issue it seems to me is the discipline of getting into a lease agreement with the State and then having the State gone. Essentially we work within the parameters of the lease holder they have given us and the PDA or the City, then to figure out how we are going to sub lease it to this non-profit, this for profit. We want to get them out of the picture, because you are right, they cannot make decisions in any real market time.
Smith:
I think the experience has been so poor in what I have seen them do that I have zero faith in their ability to even get to a deal point sheet. That leads to my next question of estimate of $40,000 to $60,000. How secure are you in those numbers? Because I get the sense that this could be one of those things that you get into $50,000 into it then you realize you are only 40% of the way there and you need and that’s my concern.
Reich:
Well the critical thing is we are going to start with the term sheet so we should be able to discipline ourselves and take our temperature at reasonable cost. But we went through this with Fort Worden and it’s painful, but you don’t necessarily need a lawyer involved with all of that. You’re gonna have to invest in Staff time. So we would try to manage the legal time. Certainly through the term sheet which is really business terms and some legal handshakes there – What kind of uses? What kind of freedom do you want? What kind of terms, on ramps, off ramps. We would help shape that. Staff would be very much involved. Then if we get that, we feel, then we are halfway home or 80% home. Then unfortunately the lawyers are going to have to do the lease.
Smith:
So does that deal, that term sheet, if you reach an agreement, are you reaching an agreement with the Commissioners approval or just the Staff approval?
Reich:
It is not binding. We would want their initials, the way we would want your, someone, signing off based on the Council, yes, that is deal. We now want to get to the next step and put it into paper in the full bore.
Assistant City Manager:
Thinking back to when we were asking Jay and his colleagues, okay, what would this look like as far as legal fees for that initial work that the deal points, the term sheet, $7,000 to $15,000 in legal. I should also clarify that when we talk about what we’re referring to or assuming in this endeavor, it would not be the entire Park, it would be just the several acres containing the buildings and the surrounding.
Reich:
That would be part of our negotiations, what ultimately what would give to somebody else. And what will theirs be to maintain the site.
Smith:
So does that get into the Land and Water Conservation dollars that were used for the acquisition? Would that term sheet address all those issues? Because this conversion issue is a major issue for State Parks before and that if there is conversion then you have to replace it with like property and what not. I am just curious.
Reich:
Everything that is important has to be outline in there; it does not have to be in legalese, whether it is parking or maintenance or shared costs, their costs versus our costs, or the cost of the leasehold. Then we have to ask ourselves, is that a deal we think we can then pass on to an investor without having to burden the City at all. That is the goal.
Nigel Herbig:
How realistic is it that they would continue to maintain the building while we’re looking around for a lease?
Reich:
Well that goes to the on ramp, off ramp thing. It depends on how long, how much time we think we need and how excit3ed they are that we are going to take this thing off their hands, how much time we think we need to actually market it. And then as we talk about that, there are all sorts of ways of slicing and dicing. We would perhaps share cots for a time, a limit on the time, part of the term sheet.
Unknown – presumably City Manager:
My intent would be that we’re never responsible for the building and that the lease or the sublease never gets triggered until we have a tenant.
Reich:
Best way to do would be to negotiate an options lease with the terms of the option and the terms of the lease negotiated. We don’t exercise the option until we get the sublease in hand.
Mayor David Baker:
So let’s say we went down this road. Given State Parks’ history, they could at any time just walk away from it. We could have invested a lot of money, lawyer time, staff time, whatever and they could all of a sudden just say, No, and they could even after they entered into an agreement, turn around and change their minds.
Reich:
They certainly theoretically could after they entered into a term sheet and initialed it, I think you know we are negotiating here and we have to assume that they would rather get rid of this white elephant, because they don’t have any other choices except to feed it or watch it deteriorate, that’s not attractive to them given all the historical. So if they find something that is a viable alternative they can initial, I think it’s huge pressure from them, though legally they could.
Once they sign the lease, it is a done deal. Because, we are then gonna turn around and sublease it and you know that we are going to have to and the State is going to have to guarantee to the subleasee that they have a property right, that they can put in whatever, how many millions of dollars they’re gonna need. So as they go down that route, the escape for them becomes harder and harder.
But we gotta start somewhere.
Baker:
But with this last person that was interested, they were going to have to terminate the lease on the gymnasium, and they were gonna do it. So there is an example of another lease that they entered into that, Hey, they don’t care, they’ll terminate it. So I am just very hesitant. I have seen them pull the rug out from people on three or four different occasions – here in the last few years, and I would just hat to get down that road and find they could do it to us.
Reich:
Well part of our job is to protect you, and there is no question in my mind that once that lease is signed, there are huge damages if they choose to cancel that lease assuming we are abiding by the terms of that lease and our job is to make sure it is a lease we can abide by. Prior to that time, the goal will be not to expend too much money but to get us comfortable an agreement can be reached so we can begin marketing, we can basically have the situation where we have both sides coming together. And I acknowledge they are difficult to work with. That was our experience in Port Townsend but we did it. They did sign the lease.
Baker:
It is usually that future bodies are not help to prior bodies decisions.
Reich?:
Legislative bodies.
Baker:
So is that what the Commission would be?
Reich?:
Yes.
Baker:
If the Commission would enter into a lease agreement, could it be overturned by a future commission?
Reich:
But even legislative bodies and anybody that signs a contract is legally bound by it. You can’t sign a contract and then change your mind. You are bound, your bonds would be bound, because the other people have contractual obligation that are protected by law.
Laurie Sperry:
First of all, thank you again for being here, presenting a realistic view of this. My first question is at what point do you have to get Commission approval? I hear you saying “initial” – is that just Staff at the term sheet level?
Reich:
I think we are going to have to look at that. I think we would want Commission and Staff approval of the term sheet before we would spend any more money or commit for all the reasons you said. But most importantly, we are going to have an obligation on the other side if we’re dealing with someone. Those people we want to attract here are not gonna negotiate with us unless we can assure them that we have some control. We are going to have to move towards that.
Sperry:
Okay.
Assistant City Manager:
Certainly the Commission is engaged in this discussion you know. And we know two of them who are pleased with how the PDA at Fort Worden is working out. They see this as a real viable option to be looking at it in other parks.
Reich:
Yes. And to further answer that, I’ve looked at all the options that they have out there and this option in my opinion is the one that costs them the least amount of money, because even demolition costs money and demolition on a building like that ain’t cheap. So to me this is their cheapest option and it is the option that perhaps might save the building.
Sperry:
Asks estimate of size and Staff states 80,000 to 90,000 square feet.
Assistant City Manager:
Even though it goes quiet from time to time, I just think that this specter of a gradually decaying, important historical resource with no plan going forward doesn’t do much for the City’s image and in the memo I talked about having a user that would allow Bastyr to still flourish and you had a question about what does that mean? It could be someone else, but I can tell you that I for one was really watchful in this last episode about the user that might be coming in and kind of overshadow Bastyr and make it less viable for them to grow at the Kenmore campus.
So there are definitely a lot of options to consider in the end user there. And the other thing I want to just point out is that aside from this, we have identified an opportunity for us to kind of help set the table as far as reducing the uncertainty for a potential user coming in with respect to land use and zoning. So that would be part of the term sheet holding Parks accountable to move along with a Master Plan update and then also for the City to be doing our work as comp plan designation if that was needed if a change was needed.
City Manager:
Pro-active land use. Maybe a planned action or something to help set the table.
Baker:
The CAMP plan that was done a few years ago, how much would we be running afoul of that CAMP plan?
Assistant City Manager:
I am not an expert on the CAMP plan. Council member Smith was on that committee, but kind of next level of detail on Parks’ lexicon of plan document is a Master Plan. There isn’t one for this particular park, so CAMP would definitely need to be re-visited, the Land and Water Conservation Found, that would have to be dealt with. A couple of years ago they, even this time last year, they felt like no problem. They identified some adjacent properties and so, you know, I think there are ways to certainly address that.
Smith:
I would just say on the CAMP if you want, the building itself I think the finished document left a fair amount of flexibility, it is the surrounding property that
Unknown:
Right.
Smith:
And usually that is excluded anyway cause that’s mostly natural designation. So if that’s not part of it I think that will help but it doesn’t mean that there won’t be significant opposition.
Baker:
Right. Because as we heard last year that CAMP process was brought up a number of times especially when it came to anything to do with parking and any use of that building is gonna require some parking, so I guess I just would like to insure that it is something we can move forward on, and, yes, we are going to have a lot of criticism in the community, but as long as we’ve got a legal leg to stand on.
Assistant City Manager:
I guess that I. What I have heard in this past year or so, that contrary to what some people may believe, there is a true, moderate voice in this whole issue too. People who said, “Gee, maybe McMenamins wouldn’t have been such a bad thing.” Who have been pretty well opposed to it earlier. So, we just bring up these points for your consideration. And we will continue to discussion.
Baker:
That moderate voice is out there. Definitely. It’s unfortunate we never hear them.
Facilitator?:
Rob, do you have something to say before we close the discussion?
City Manager:
Well when the cyber security firm came and seemed pretty real, the CAMP did not seem to be an issue in the eyes of Parks Staff. It was in the eyes of some community members, but Parks staff did not seem to think that the CAMP was an obstacle.
Facilitator?:
Anything else on this?
Smith:
Rob can you pull up on the leasehold excise tax, a little more information on this? That is something I don’t.
City Manager:
We’ll do a little more research on this, but basically when an entity does not pay property tax leases to a private sector, that you have to pay leasehold excise tax in lieu of property tax. That percentage I have kept in my head all these years. It is 12.84% of the rent.
Assistant City Manager:
That is correct. I checked on it.
City Manager:
But we don’t get all that – the State, the schools, so we get a piece of that.
Assistant City Manager:
Cities can take up to 4%.
Dr. Alan Van Ness:
We have been collecting lease hold excise tax on Kenmore Village. Right?
City Manager:
Yes.
Van Ness:
There’s certainly legal costs and so on in setting this whole thing up. The thing I worry about is it needs to be iron clad agreement that they are going to maintain this building in the same status that it’s in until we execute that lease. I don’t want us responsible for the maintenance of that building. It would be a big ticket item. It’s a big enough ticket item to go with attorney fees and our staff time.
Reich?:
But also strategically it encourages them to say yes to turning it over.
Dr. Milton Curtis:
My big concern is staff time as a major resource. We’re working on a priority based budget, a lot of work. We’ve got a major emphasis on safety. Gonna take a lot of work. I just don’t know that we have the band width to deal with this at this time.
Nigel Herbig:
If we say we do this and we’re leasing it to somebody for essentially zero dollars for tenant improvements
City Manager:
Leasehold excise tax still has to be paid on what the market rent would have been.
Unknown:
Say $40 Million for upgrades to the building and not paying any rent, they are still paying. First of all there is a lease hold excise tax on the Capital Improvements and then there is lease hold excise tax on what market rent would have been even if the rent is zero.
City Manager:
My recommendation is that we move forward a little bit and the reason is because like I said at the beginning, we’re seeing some good signals right now from a possibly interested developer or whatever we want to call it and we think that if this developer is interested they might want to move fast.
And so I think we should start getting ready now and what I am talking about is using Pacifica Law Group to help us with a term sheet and using the $7,000 to $15, 000 range. That could be money that gets flushed down the toilet. I want to warn you because as we all know things happen when we’re negotiating with the State. And so, I think given what we’re seeing, I think that is my recommendation, to direct Nancy to start working with Pacifica and State Parks on a term sheet.
Unknown:
Do you need that head nod tonight?
City Manager?:
I think we do. Normally I would say wait for this to go through the priority based budgeting process, but given the amount and given that an opportunity that might be coming soon, my recommendation is to get going now. Nancy, from a work load standpoint, how are you doing?
Assistant City Manager:
I could fit this in.
Facilitator?:
So Council needs to nod yes or no.
Unknown:
Don’t we have to do that at a regular meeting?
Facilitator?:
Typically you do.
Baker:
Typically, but we are really not going anywhere, we’re just
Unknown:
Yes, but if there is a general consensus, and there are not any objections.
Unknown:
We are not approving a contract and you are not approving money you did not already have in your budget, right?
Baker:
Rob, to Milton’s point with Staff time. We do have that incubator that we are working on and we all want to see it move forward.
Unknown:
We have Lakepointe.
Baker:
We have other issues, right? So Rob, you’re the one we’ve got to turn to and if you say yes,
City Manager:
I think until Lakepointe or something start revving up – and maybe we’ll get some direction on that tonight too, but I think until other things are revving up, I would like Nancy to be moving forward on this.
Assistant City Manager:
And I will let you know.
Sperry: One thing I like about this, it is sort of a low risk to see how, you can get to the term sheet and that is something, and if you can’t, that also says something. That’s the part I like about this.
Unknown:
Okay. Good.
Baker:
General consensus? Nobody’s having heartburn, so great.
END
