6f
PORT OF SEATTLE MEMORANDUM COMMISSION AGENDA Item No. 6f ACTION ITEM Date of Meeting November 5, 2013 DATE: October 28, 2013 TO: Tay Yoshitani, Chief Executive Officer FROM: Patricia Spangler, Real Estate Manager Melinda Miller, Director, Portfolio and Asset Management SUBJECT: New Ten-Year Term Lease at Terminal 34 with Masters, Mates and Pilots Maritime Advancement Training, Education, and Safety Program d.b.a. Pacific Maritime Institute ACTION REQUESTED Request Commission authorization for the Chief Executive Officer to execute a lease for a tenyear term with one five-year option substantially as drafted in Attachment 1 and according to the terms laid out in the memorandum at a fair market rate, with Masters, Mates and Pilots Maritime Advancement Training, Education, and Safety Program d.b.a. Pacific Maritime Institute at Terminal 34. SYNOPSIS Pacific Maritime Institute provides advanced education and training for masters, mates and pilots supporting the mission of the Port to promote the maritime industry. Pacific Maritime Institute is a current tenant with the Port occupying industrial flex space that includes 15,084 square feet of industrial flex space and 29,545 square feet of improved land at Terminal 34. Pacific Maritime Institute wishes to enter into a new lease with the Port at the expiration of their current ten-year lease term, expiring March 31, 2014. Port staff has negotiated a new ten-year lease that includes one five-year option to extend; terms discussed later in this memo. Port staff determined an initial market rate of $9.40 per square foot for the industrial flex space and $2.90 per square foot for the improved land. The total rent received over the term of the lease is approximately two million dollars. This lease obligates the Port to $85,000 of tenant improvement allowance and a broker commission fee of $93,602 for a total amount of $178,602. BACKGROUND The building and improved parking lot on Terminal 34 was constructed in 1950 and consists of a 15,084 square foot single-story masonry commercial building and a 29,545 square foot improved parking lot. In 1993, the Port purchased Terminal 34, located at 1727 Alaskan Way, from Flint, Inc. The facility remained vacant for several years. In 2003, the Port signed a ten-year lease with Pacific Maritime Institute (PMI). At that t ime the facility was in very poor condition. Prior to occupancy the building was substantially renovated with PMI contributing $350,000 and the Port funding $400,000 toward the improvements. Template revised May 30, 2013. COMMISSION AGENDA Tay Yoshitani, Chief Executive Officer October 28, 2013 Page 2 of 5 PMI's importance to the maritime industry should not be understated. It is a leader in maritime training and education and helps mariners maintain and advance their qualifications, assists individuals who would like to enter the maritime profession, and provides operational research services for the maritime industry. PMI also provides sophisticated simulation services with specialties in the areas of simulation databases and operational research models. PMI's full mission ship simulator is one of only three on the West Coast. For many of the courses offered, there are no equivalent alternatives north of the San Francisco Bay Area. MARKET CONDITIONS Port staff met with PMI early in the first quarter of this year to discuss their interest in negotiating a new lease at the end of their current term. PMI decided to work with a tenant broker and issued a request for proposal to the brokerage community. At that time, Port staff contacted the United States Coast Guard (USCG), occupying the west parcel on Terminal 34 adjacent to the PMI parcel. The USCG was interested in the property; however, to enter into a purchase or lease was not an option due to the current sequester limiting federal funds. The USCG referred Port staff to the Exchange. The Exchange is a supplemental department of the military funded by their retail sales and not reliant on federal funding. The Exchange supports the Seattle USCG currently located on the USCG base on Terminal 34. The Exchange was looking to expand the size of their current facility and considered the PMI parcel an option to relocate. Ultimately, the E xchange decided their current location would work for their expansion plan. In order to establish the market rate for Terminal 34 industrial flex space, Port staff engaged the services of a real estate appraisal firm through an existing IDIQ contract. The appraisal evaluated recent lease transactions of other similar office and industrial properties in the Seattle area and concluded that the market rate for the office building was $7.95 per square foot per year, triple net and $2.40/sf./yr. triple net for the improved yard area. The Port negotiated rates in line with the appraisal rates of $9.40/sf./yr. triple net for the office building and $2.90/sf./yr. triple net for the improved yard with annual two and a half percent (2.5%) increases and renegotiated rent commencing the sixth year. TERMS OF PROPOSED LEASE The major elements of the proposed term lease are outlined below: Term: Ten years commencing April 1, 2014 Use: Administrative office and classrooms providing the education and training for the maritime industry and parking for approximately 54 vehicles. Premises: Premises consists of approximately 15,084 square feet of industrial flex space and 29,545 square feet of improved land used for parking. COMMISSION AGENDA Tay Yoshitani, Chief Executive Officer October 28, 2013 Page 3 of 5 Base Rent: 15,084 square feet of industrial office @ $9.40 per square foot = $141,790 29,545 square feet of improved land @ $2.90 per square foot = $85,681 Rent Increase: The Base Rent shall be adjusted on the anniversary of the rent commencement date and annually thereafter through year five by two and a half percent. The rent will be renegotiated in year six to the then fair market rental value and shall increase annually through year ten by two and a half percent. Option to Extend: PMI has an option to extend for one five year term. The rental rate the option term will be at the then market rate. Operating Expenses: PMI shall be responsible for all utilities, repairs and maintenance of the building and the improved land. Port Improvements: The Port will provide a tenant improvement allowance not to exceed $85,000 toward the cost of one new HVAC unit and new carpet. Security Deposit: The Port requires a security deposit in the amount of $127,421.72; equal to the average of six month's rent over the term of the lease. Remove Easement for Ingress/Egress: PMI shall cause the removal of the exiting Ingress/Egress Easement that granted access through Port owned Jack Perry Park to the parking lot located on the west side of the property directly behind the office building. License for Temporary Occupancy or Use: The Port will enter into a License for Temporary Use and/or Occupancy to grant PMI ingress/egress to PMI's parking lot located behind the building with the only means of access through Port owned Jack Perry Park from the south side. FINANCIAL IMPLICATIONS Budget/Authorization Summary Capital Expense Total Project Original Budget $0 $0 $0 Previous Authorizations $0 $0 $0 Current request for authorization $0 $178,602 $178,602 Total Authorizations, including this request $0 $178,602 $178,602 Remaining budget to be authorized $0 $0 $0 Total Estimated Project Cost $0 $178,602 $178,602 COMMISSION AGENDA Tay Yoshitani, Chief Executive Officer October 28, 2013 Page 4 of 5 Project Cost Breakdown This Request Total Project Tenant Improvement Allowance $85,000 $85,000 Leasing Broker Commission $93,602 $93,602 Other $0 $0 Total $178,602 $178,602 Budget Status and Source of Funds The operating expense portion of the project costs will be included in the 2014 Operating Expense Budget and the portion of the tenant improvements qualifying for capitalization are provided for in Committed CIP C800126 Tenant Improvements. The source of funds will be the Real Estate General Fund. Financial Analysis and Summary CIP N/A Category Project Type N/A Risk 7.0% adjusted discount rate Key risk Risk of tenant default, which is partially mitigated by: factors Security deposit in the amount of $127,423 Good standing status as a current tenant of the Port Project cost $178,602 for analysis Business Portfolio Management, Real Estate Division Unit (BU) Effect on Net Operating Income After Depreciation for the period Year 1 through Year business 5 is shown below: performance NOI (in $000's) 2014 2015 2016 2017 2018 Revenue $171 $232 $238 $243 $250 Expenses ($134) ($4) ($4) ($4) ($4) NOI $36 $228 $234 $239 $245 Depreciation ($4) ($5) ($5) ($5) ($5) NOI After Depreciation $33 $219 $225 $231 $236 Lower Net Operating Income in Year 1 is primarily a reflection of the payment of Broker Commissions ($94K) and the expensed portion of the tenant improvements ($38K). Depreciation is based on the capitalized portion of the tenant improvements (HVAC unit cost of $47K) depreciated over a 10 year useful life. COMMISSION AGENDA Tay Yoshitani, Chief Executive Officer October 28, 2013 Page 5 of 5 IRR/NPV NPV IRR Payback (in $000's) (%) Years $1,613 NA 2 The NPV is based on incremental net cash flows generated by the lease and does not factor in the underlying value of the land and improvements. The basis for establishing the market rate for the lease is described in the memo under "Marketing Conditions". ALTERNATIVES AND IMPLICATIONS CONSIDERED Alternative 1) Not enter into a new lease with PMI; Pursing a new Tenant. Port staff could advertise through a request for proposal in pursuing another potential tenant for Terminal 34. This option has several risks: the Port may receive proposals with lower rental rates than currently negotiated with PMI, no revenue to the Port during the downtime between vacating PMI and new tenant's start, and the new Tenant would likely require higher funding by the Port for tenant improvements. PMI would relocate elsewhere which is no easy task, interrupting their scheduled education and training courses that support the maritime industry. This is not the recommended alternative. Alternative 2) Keeping with the current use of the property as currently improved by proceeding with the proposed lease agreement that will increase the revenue to the Port. In addition PMI as a long-term tenant of the Port will continue to provide education and training to the maritime industry supporting the mission of the Port and aligns with the Commission's interest in retaining maritime related jobs and training facilities. This is the recommended alternative. ATTACHMENTS TO THIS REQUEST Draft Term Lease PowerPoint presentation
Limitations of Translatable Documents
PDF files are created with text and images are placed at an exact position on a page of a fixed size.
Web pages are fluid in nature, and the exact positioning of PDF text creates presentation problems.
PDFs that are full page graphics, or scanned pages are generally unable to be made accessible, In these cases, viewing whatever plain text could be extracted is the only alternative.