Lake City School Deal
A number of the School Board directors seemed confused by the proposed deal with Lorig and Associates on the Lake City School. Perhaps I can clarify the situation.
The proposal is for Seattle Public Schools to buy an office building for $3.2 million as an investment property.
If you think this is a good deal for the District and something the District should be doing, then why stop here? Why not use our capital funds to buy additional investment properties? In the current era of tight credit and low interest rates, the District could find a lot of bargains. Cap rates on Class B and Class C buildings are high right now, particularly outside the downtown core. The District could realize very strong returns on these investments - returns comparable to the offer from Lorig. After all, Lorig would offer the same deal to anyone else - to take over the building for $3.2m. The District's money is no greener than anyone else's. While it is true that the District has a history with this building, that history doesn't effect the terms of this investment.
On the other hand, maybe the District shouldn't be using its capital funds for real estate investments aimed at profits, but to build and maintain schools for students.
The proposal is for Seattle Public Schools to buy an office building for $3.2 million as an investment property.
If you think this is a good deal for the District and something the District should be doing, then why stop here? Why not use our capital funds to buy additional investment properties? In the current era of tight credit and low interest rates, the District could find a lot of bargains. Cap rates on Class B and Class C buildings are high right now, particularly outside the downtown core. The District could realize very strong returns on these investments - returns comparable to the offer from Lorig. After all, Lorig would offer the same deal to anyone else - to take over the building for $3.2m. The District's money is no greener than anyone else's. While it is true that the District has a history with this building, that history doesn't effect the terms of this investment.
On the other hand, maybe the District shouldn't be using its capital funds for real estate investments aimed at profits, but to build and maintain schools for students.
Comments
with this: "If the proposal is approved, the District would assume management of the property sometime this summer. No decision has been made as to whether the tenant would be asked to continue to manage the property, or if SPS would do it in-house (as with John Marshall) or outsource to a property management firm."
So in short, "we think we're gonna make a bunch more money if we do this, but we don't really know how we're going to handle our end of the responsibilities if we make the change, nor have we actually tried to take a look at what our additional costs (in time, money, distraction or effort) might be."
Oompah
I ask, 'cause, as far as I know, SPS isn't really getting into the real estate investment business. This deal sounds a little bit like those email deals one gets that say "earn big bucks at home" that someone proposed to them as a no-lose proposal (and, yes, we know how safe those are).
But, I also want to know if there's some kind of cronyism going on?
(zb)
Too bad we would rather pay for plastic surgery than do sit ups every day.
There are a number of similar leases around the city, such as Oak Tree on Aurora at 100th and Jefferson Square near the Admiral Junction in West Seattle.
The district gets $75,000 a year under the current lease terms, which are due for re-negotiation. The lease income is set to rise significantly. Lorig used the building as collateral for large loans and they are now out on a limb because they are having trouble re-financing it. Lorig is looking for a cash-rich buyer to take the building off their hands and pay off the debt.
The District's current involvement in this real estate is completely independent of this proposed deal. This is just an office building that a developer wants to sell them.
The school district isn't in the investment real estate business.
"The Lake City School property is ground leased to Lorig Associates through 2082. The tenant has loans on the property which come due this fall. In order to refinance, they have asked for a restructuring of the rent provisions, which the district has declined to do. They have instead offered to terminate the lease, if they receive a payment of $3,200,000, which would pay off their loans plus about $200,000.
The property generates $75,000 annually in rent payments for the District."
The rationale behind this transaction is complex. Good idea to watch the SB meeting video. When all is taken into account it starts to make sense.
Oompah
-worried
Mr White
The action report clearly states that the Lake City School property is ground leased to Lorig and Associates.
The District owns the land, but Lorig owns the building. That's what a ground lease is and that's why Lorig could mortgage the property.
Either way, it doesn't matter. This is still a straight real estate investment deal. The District is considering a $3.2m investment in an office building for the purpose of collecting rents. If the District is going to do this with this building, then why shouldn't they be open to doing it with any other building?
$3.2M could buy/replace aging technology, torn blinds and curtains, busted up boilers - stuff that directly impacts our students' learning environment.
Vote no.
Yes, this had been a school a very long tie ago.
Sherry Carr caught Ron English in some wording. He had said that the Community Schools Fund would get paid back and then later went on to say the district would make more on rent than they did now (paying off the $3M in 10 years).
Sherry said, no Ron, we will not make money for 20 years because we have to pay the $3M to the community schools fund BEFORE we see a profit.
Oh.
And note, the company will make a $200k PROFIT from this deal.
No, no and no.
Oompah
Thanks,
Oompah
Thanks!
- Confused
By the way, as anyone who has leased space in an office building knows, the tenant typically pays the cost of tenant improvements, such as the office space build-out. Lorig may not have paid to renovate the school into an office building. They certainly didn't pay $3m for it in 1986. Lorig mortgaged the building so they could do the deal with OPM.
Also, this isn't the original mortgage used to secure the lease nearly thirty years ago. Do not presume that commercial real estate deals are anything like familiar residential ones. Commercial mortgages may have thirty-year amortization schedules, but they typically have five year terms.
Not that it matters anyway. Whatever investment Lorig has sunk into the building is their problem, not the District's.
@Confused, the Community Schools Fund is a "pot" of capital dollars raised from the sale of school buildings. There are a number of different sources of capital funds, each with their own rules about how they can be spent. There's BEX money and BTA money, there's some state and federal money - often in the form of matching grants, and there's other capital dollars from other sources. Among these is the account they call the community schools account. Don't read anything into the name, it doesn't refer to anything specific.
Actually, don't read much into the separate accounts. The District routinely pours money from one account to the other and back again like a mad scientist in the lab. Money is swapped from BTA to BEX to Community Schools and back again. In fact, this free and frequent swapping made it difficult for the district to know what they had spent on the JSCEE or where the money really came from.
It sounds, from Director Peaslee's comments above, that the nature of this lease is not clearly understood (by the Board). First, I would expect the Board directors individually and as a group to have a clear understanding of the existing situation.
As far as what to do about this? Sounds like it's Lorig's challenge to resolve. They need to come up with $ to pay off obligations - they can do what they need to do to refinance, or risk their default.
I don't understand how their default would suspend the rental payments due to SPS "for several years" as the action report states. I am, in fact, not sure I believe it.
I am hard-pressed to understand why Enfield, Harmon and McEvoy would recommend this action to the Board.
Should the Board really want to add this building back into their "portfolio"? (Which already includes lots of buildings that the district is already challenged to maintain.) I don't think so.
Oompah
(Okay, I have to go get a life now.)
Two and a quarter years to go
"Community Schools Report/Expenditure Authorization – Duggan Harman went over the corrections from the Audit Committee meeting first draft. The committee was in agreement with this Resolution and BAR. The School Board Routing Form is in place to move this to March 21 Board meeting.
NEXT STEPS – The committee wants to be sure that staff is monitoring the transfer of funds (temporary loans approved by the Board) and will be requesting frequent updates."
See, seems the Board uber-mgrs were concerned that the proceeds from the giveaway-I-mean-sale of district properties was getting nibbled away by program placement costs so the uber mgr said we want a better accounting.
Now they want to fork over a mega-chunk to bail out Lorig.
Oy vey!
When I dont have the money to pay my rent, my landlord evicts me...
Why doesnt the District let Lorig default on its payments, then take Lorig to court for the arrears and then let the court break the lease and give the District the building back?
It is entirely possible that if the District doesn't want this deal, Lorig can sell the building (subject to the ground lease, of course) to another party -- and the District goes on getting its rent for X more years. Is that what we want? I don't know! Have they basically offered it to the District at fair market value (net of the costs of actually selling to someone else -- broker's fees, legal fees, etc.)? If we don't take this deal, and they can't find another buyer -- and they put it into bankruptcy (where they may be able to assume and assign the lease), will we like that result?
If people are assuming (and maybe they are not) that failure to reach a deal means we just walk off with the Lorig building "for free," that would not be a safe or reasonable assumption. The real issues, I think are:
1. What Charlie said -- is this a good investment for the District? Where will the funds come from and what would we have used them for if not for this?
2. Can we in fact manage (or pay someone to manage) this asset well? Frankly, I assume the answer is yes. Property managers abound, and this seems like a pretty standard property. I have no clue about inhouse resources.
3. Is there any value (and if so, how much) to the District in actually getting back "control" of the entire property (cancelling the ground lease and owning everything outright). Maybe we don't want to do anything with it today -- but in 5 years? 10? A 99 year ground lease goes for a mighty long time -- and this may be our ONLY shot at terminating early (or terminating early at this price, as opposed to a higher one).
Whether Lorig has any money "left over" at the end should be solely driven by the economics of the deal -- the price at which they are offering the building to the District. We shouldn't pay too much, and they should sell for the highest price they can (there is an element of distress here, but what discount is associated with it is impossible to tell without knowing what other options they have -- either in the market or in bankruptcy court).
Braessae
I didn't understand this type of transaction to be the sort that is meant by "investing in our kids."
-not too sure, but I'm curious
They have to figure out whether it's a good deal -- or a bad deal. Whether to agree, counter-offer, or walk away. But even a non-decision is a "decision," since the building is in play one way or another. The only question is -- do we want it. Obviously, it's not a school, and it IS expensive, so if we take it, we have to be able to justify it as an "investment" for at least a while (until the rents have "amortized" the acquisition cost, at least to some extent). It IS complicated, but is it not impossibly so.
Braessae
Ordinarily, the ground lessor/owner of the land (here the District) doesn't see much (except cash) for the length of the lease. But these are not ordinary times. So -- the building that sits on the leased property is going to be sold, and my guess is that the building owners have rightly deduced that maybe the entity that would value it most highly (in a depressed market) is the entity that owns the ground, and could "merge" the land and building back into one legal lot -- which they could then use as they wished.
It is pretty clear to me that they just need to hire really good real estate advice on this, to determine whether the offer is a good one for the district (Matt Griffin and Stuart Sloan -- where are you now that the District has a big (for them) commercial property deal to figure out?). IF the District bought it, you are right that they would have to manage it -- but there are LOTS of good property managers around, and it is easy enough to figure out the going rate for one. I would think taking management "in house" would be risky, given the District's history of bad management (even if you start with someone good -- will they stay, and if they go, will someone competent replace them?)
As for MLK -- that was a straight up boondoggle, clearly "in the works" from the time the CD movers and shakers got state laws changed to permit sale to less than the highest bidder. It was a horrible transaction, but wouldn't necessarily carry over to this (unless some other glad-handing cheap buyer comes along and shakes down the District again some time in the future -- which I suppose could always happen).
Braessae