VII. STANDING COMMITTEES F 4 B. Finance and Asset Management Committee Rainier Square - Approve Ground Leases and Development Agreement and Delegate Execution of Documents RECOMMENDED ACTION It is the recommendation of the administration, the Advisory Committee on Real Estate, and the Finance and Asset Management Committee that the Board of Regents: 1. Approve two eighty year Ground Leases, a Pre-Development Agreement, and related documents for the re-development of the Rainier Square site on the Metropolitan Tract, providing for demolition of the existing Rainier Square improvements (specifically not including demolition of Rainier Tower), and construction of a 1,150,000 square foot mixed-use development project; and 2. Delegate to the President the authority to execute all documents related to this transaction. BACKGROUND The University will reacquire full control of the majority of the ten-acre Metropolitan Tract (excluding the Olympic Hotel and garage sites) at the expiration of the Unico Properties Ground Lease on October 31, 2014. The administration intends to create additional value to the University through the management of existing assets and the re-development of selected sites. The Rainier Square site was identified as an opportunity to re-develop and maximize value at this premier and underutilized city center location. The developer for this project will be WRC Fourth Avenue LLC, a Washington limited liability company that is a subsidiary of Wright Runstad & Company. The completed development will be an asset for the University and for the city as a whole. It will bring vibrant density with at-street destination retail activity, highly desirable residential and hotel units, and world-class office space. Located at the heart of the city and supported by multiple transportation options, this iconic development will enhance and sustain the value of the Metropolitan Tract as well as the surrounding center of the downtown commercial core. PROPERTY DESCRIPTION The Rainier block is located in the north central portion of the Metropolitan Tract. It is bounded by University Street to the south, Union Street to the north, 4 th F 4/205-14
VII. STANDING COMMITTEES B. Finance and Asset Management Committee Rainier Square - Approve Ground Leases and Development Agreement and Delegate Execution of Documents (continued p. 2) Avenue to the west, and 5 th Avenue to the east. The Rainier Square Development site totals 66,040 square feet of land and includes everything north and west of Rainier Tower, and specifically does not include Rainier Tower. The subject site will be leased as an air-rights condominium unit that sits within the Redevelopment Parcel. (Attachment 1) PROPOSED DEVELOPMENT The proposed project is a mixed-use development totaling approximately 1,150,000 square feet situated in a 50-story (795 ) tower (Tower) and a separate but connected 15-story hotel (Hotel). The elements will include: approximately 750,000 square feet of office; 170,000 square feet (182 units) of high rise residential apartments; 30,000 square feet of street level retail; a 200,000 square foot (198 room) luxury hotel; and a 1,200 car parking garage. (Attachment 2) TRANSACTION STRUCTURE There are six documents that define the financial and legal obligations of this transaction. The financial terms are contained in the three primary documents, the Pre-Development Agreement, the Tower Ground Lease and the Hotel Ground Leases (collectively, the Ground Leases ). (Attachment 3) PROJECT SCHEDULE 2014 University approval, documentation, and developer due diligence 2015-16 Design and entitlement 2017 Early construction start (target) 2020 Early construction completion (target) 2021 Late construction start (deadline) 2024 Late construction completion (deadline) RISKS AND MITIGATIONS Cash Flow. Near term cash flow for current income from Rainier Square is guaranteed by the developer. Required payments for Pre-Development Agreement extensions will provide additional near-term income. Upon commencement of the Ground Lease and construction, minimum rent payments will begin, with additional revenue sharing provisions starting during lease-up. Projected stabilized University income is approximately $4,000,000/year (current income is $1,500,000/year). F 4/205-14
VII. STANDING COMMITTEES B. Finance and Asset Management Committee Rainier Square - Approve Ground Leases and Development Agreement and Delegate Execution of Documents (continued p. 3) Project Entitlement. In the event that the developer does not secure a Master Use Permit (MUP) within the first three years, the University will retain all or a portion of the $2,500,000 deposit. If the developer has not submitted Design Development Drawings (DDs) within the first three years, then the developer cannot exercise the second extension option and the Pre-Development Agreement terminates. If the developer has not submitted Construction Drawings (CDs) within the first five years, then the developer cannot exercise the fourth and final extension option and the Agreement terminates. The developer cannot execute the Ground Lease without a fully entitled and financed project. In the event of termination the University retains all drawings and entitlements. Construction. To reduce exposure to construction issues and to assure completion, the University has required a payment and performance bond for the shell and core structure of the Tower. Tenant Improvements are not covered under the bonding and will be constructed as the Tower is leased. The full Hotel construction will be covered by bonds. Environmental. The Ground Leases cover risks by limiting the developer s use of hazardous substances; requiring the developer to indemnify the University for environmental claims; and releasing the University from liability to the developer for hazardous substances that may already exist on the property or that may migrate from other properties unless there is third party insurance to cover the liability. Insurance. The insurance provisions in the various documents have been reviewed with UW Risk Management and are consistent with the insurance plan for the Metropolitan Tract. Dispute Resolution. Certain specific disputes such as design review during the permitting process and audits of developer s adjusted gross income will be resolved through an alternative dispute resolution process. Other disputes such as a default by the developer in paying the Ground Lease rent will be resolved through litigation, which offers a broader scope of remedies and better tools for regaining control of the property if there is a serious lapse in performance by the developer. REVIEW AND APPROVAL The terms of the Ground Leases, Pre-Development Agreement and related documents have been reviewed and recommended for approval by the Chief Real F 4/205-14
VII. STANDING COMMITTEES B. Finance and Asset Management Committee Rainier Square - Approve Ground Leases and Development Agreement and Delegate Execution of Documents (continued p. 4) Estate Officer, the UW Advisory Committee on Real Estate (ACRE), and the Senior Vice President. Attachments 1. Rainier Square Site Plan 2. Rainier Square Project Concept Design 3. Rainier Square Term Sheet F 4/205-14
RAINIER SQUARE SITE PLAN F 4.1/205-14 ATTACHMENT 1 Page 1 of 1
RAINIER SQUARE PROJECT CONCEPT DESIGN F 4.2/205-14 ATTACHMENT 2 Page 1 of 2
RAINIER SQUARE PROJECT CONCEPT DESIGN F 4.2/205-14 Page 2 of 2
RAINIER SQUARE TERM SHEET Below is a summary of the significant negotiated transaction terms. Parties: o Lessor: The Board of Regents of the University of Washington o Lessee: WRC Fourth Avenue LLC, a Washington limited liability company Land Parcel: o 66,040 square feet located at the north and west sections of Rainier block Proposed New Development: o Mixed-use project totaling approximately 1,150,000 SF including: A 50-story tower with 750,000 SF of office and 170,000 SF (182 units) of high quality residential apartments, and 30,000 SF of street level retail A separate but connected 15-story hotel with 198 luxury rooms A 1,200 car parking garage Contract Documents: o Due Diligence Agreement 60-day investigative period with no commitment o Pre-Development Agreement Governs developer payments and rights before Ground Lease execution o Ground Leases Primary agreements for Tower and Hotel o Operating and Property Management Agreements for Rainier Square and Tower o Air Rights Condominium Declaration Transaction Structure: o Due Diligence 60 day investigative period with no commitment o Pre-Development Agreement Two (2) year term with four (4) one-year extensions at $500,000 each Lessee property manages existing Rainier Square and guarantees cash flow Portions of extension payments can be applied to cash flow guarantee Lessee cannot exercise 2nd option unless Lessor has received DDs Lessee cannot exercise 4th option unless Lessor has received CDs $2,500,000 deposit to be refunded to developer $1,500,000 refunded upon submittal of Master Use Permit (MUP) to City, and submittal of Schematic Design Drawings (SDs) to Lessor $500,000 refunded if City Director s MUP decision within three years $500,000 refunded if MUP issued and no appeals within three years Lessee property manages Rainier Tower Page 1 of 2 F 4.3/205-14 ATTACHMENT 3
Ground Lease Agreements - Terms o Property is taken As-Is with all faults o No capital or debt obligations by University o 80-year unsubordinated term commencing at conclusion of pre-development period o Lessee must have Tower permitting and financing in place prior to lease execution o Tower construction must start within 120 days of lease execution o Tower construction must be complete within three years of lease execution (subject to force majeure) o Base Rent of 8% of stabilized adjusted gross income on Tower, and 3-4% on Hotel o Minimum rent $500,000 for years 1-5; $2,000,000 thereafter with increasing floor at stabilization o Separate Ground Lease agreements for Tower and Hotel (but cross-defaulted) o Cross default is released for Hotel after Tower and substructure completion o Hotel may be constructed subsequent to the Tower o Hotel construction must start within seven years after execution of the Pre- Development Agreement o Hotel construction must be complete within two years after construction start (subject to force majeure) o Payment and performance bond required for the Tower shell and core and the Hotel structures o Lessor environmental exposure limited to government orders and third-party claims related to the pre-existing condition; Lessee indemnifies Lessor for any contamination during the term o Reasonable cooperation among all parties for shared and common space serving both Rainier Tower and Rainer Square re-development o Parking rights for Rainer Tower within Rainier Square re-development Page 2 of 2 F 4.3/205-14