After months of review, my committee made a decision last week to hold legislation that would have authorized the sale of the Pacific Place Garage owned by the City. (We try not to use the term “Pacific Place Garage Sale,” because that sounds like a bargain shopper’s dream and not the sale of a piece of subterranean urban infrastructure worth tens of millions of dollars.) It was not an easy or simple decision, so I thought it would be good to explain the Council’s review process in greater detail. But first, some background.
In the mid-1990s, the City entered into a public-private partnership to catalyze a revitalization of the northern end of downtown with a new retail shopping center (privately owned) on top of a parking garage (purchased by the City in 1998 using $73 million in bonds). The partnership transformed this area in the last 15 years. Furthermore, the City’s tax experts estimate Pacific Place has generated more than $30 million in sales, admission, business and occupation, and property taxes since 1998.
The garage by itself, however, has operated at a net loss since 2008. So the executive branch of City government entered into negotiations last year with the owner of the retail mall to sell the garage for $55 million, lower than the original purchase price but higher than its current appraised value of $50 or $51 million. To confirm this analysis, the Council contracted for its own independent appraisal that came to the same conclusion.
In late January, the Council received legislation from the Mayor authorizing the sale of the garage. Initial analysis showed that the proposed deal would have left the City slightly over $10 million in the red with remaining debt service costs and loan repayments, but it looked better than any alternative. It was arguably a reasonable price to pay for the revitalization of this area.
The Council’s lead analyst on this issue John McCoy performed excellent analysis, though, that led us to a different conclusion. (You can read it in great detail in a March 6 memo and a March 15 addendum.) With updated information from the Mayor, he found the true costs of selling the garage now would leave the City nearly $21 million in the red in net present value.
Why did the number double? This is where it gets complicated, but it has to do with when the 1998 bonds can be paid off. For various reasons, our garage debt cannot be paid off directly — or “called” in the language of the bond market — until late in 2017. That leaves us paying the bonds' 5% interest rate in the meantime. Per the Mayor’s proposal, the $55 million we would get from selling the garage would sit in an escrow account and make the future debt payments, but it would earn less than 1% interest at today's historically low interest rates. This difference in interest rates inserts a significant wedge in the deal, adding millions in additional interest costs.
Council staff also explored the terms of the original agreement between the City and the mall owner that allow the City, anytime between 2018 and 2028, to force a sale of the garage to the mall owner for the lesser of $50 million or the amount required to make the City whole on its original investment (paying off outstanding debt principal plus accumulated losses with interest). It's pretty counterintuitive, but selling later for less actually pencils out better under most scenarios, because we will be paying down debt in the meantime and we can avoid those extra interest costs.
Under all but the most pessimistic of scenarios when forecasting revenue and expenses for the garage, the City would be in a better financial position to hold onto the garage until 2018 or later instead of selling now. (And under some of the more optimistic scenarios, the City could be made entirely whole on its original investment in the 2020s.) If the City can fetch a price higher than $50 million in the future, we may even turn a profit for the taxpayers.That is why the committee decided not to approve the proposed sale and directed the Mayor to continue discussions with potential buyers. If a better deal can be proposed, we would be willing to take a fresh look.