PORT OF SEATTLE
MEMORANDUM
COMMISSION AGENDA – STAFF BRIEFING
Item No.
7a
Date of Meeting
August 2, 2011
DATE: July 14, 2011
TO: Tay Yoshitani, Chief Executive Officer
FROM: Eric Hanson, Manager, Seaport Planning
Mark C. Griffin, Director, Real Estate Development
SUBJECT: Terminal 91 Strategic Planning Briefing
SYNOPSIS:
In 2010, the Seaport and Real Estate Divisions began preparing a “Development Options
Study” to guide investment in and development of Terminal 91. Guided by the Century
Agenda recommended principles, staff’s work to date has focused on the following
objectives:
Accommodate expansion of “core mission” customers at the site.
Define the area available for new industrial and commercial tenants that are
permissible under the site’s existing industrial zoning.
Ensure any new development is as financially self-sustaining as possible.
Some of the questions that require Commission direction were posed by staff in the April
13, 2010, Commission meeting and include:
What is the appropriate level of Port investment in new infrastructure?
What is the optimal balance in achieving regional economic benefits, environmental
benefits, and desired financial goals?
How should any new investment be funded?
This briefing discusses the key findings of the analysis to date and poses policy questions
for which staff seeks Commission guidance. Next steps in the planning process are also
summarized.
COMMISSION AGENDA
Tay Yoshitani, Chief Executive Officer
July 14, 2011
Page 2 of 8
OVERVIEW OF WORK COMPLETED:
The approved scope of work for the Development Options Study encompasses several
tasks: a market assessment of the potential for new industrial and commercial development
at Terminal 91; alternative site development plans distinguished by varying levels of
development density; construction cost estimates for the utility infrastructure needed to
support new development and building cost estimates of any Port constructed facility or
structure; financial analysis; and an economic benefits analysis of the site development
options.
Expansion by Existing Tenants. Staff met with the major current Terminal 91 tenants to
understand their expected growth. From these meetings, staff determined potential needs
for additional warehouse, marine industrial, and cold storage facilities. In all, existing
tenants may need as much as 400,000 square feet of new development to satisfy their
anticipated growth.
Industrial Market Assessment. Kidder Mathews, a local brokerage firm, prepared a market
analysis of the potential for new industrial and commercial development at Terminal 91.
The study concluded that segments of the industrial market that are not reliant on
immediate access to highways (e.g., incubator, small industrial and “flex” space unlike
distribution uses) may find Terminal 91 an appealing location. However, to attract these
industrial uses, the land must be priced competitively with industrial land located outside
Seattle. The study further concludes that the current “highest and best use” of the land is
open storage, because there appears to be demand for open storage, which requires little
capital investment and as a result provides the best financial return on investment.
Development Zones. For planning and analytic purposes, Arai Jackson, the consulting
team lead, divided Terminal 91 into six development zones (see attachment 1) and
analyzed each for its best functional use given the existing tenants’ needs and the market
assessment. The overall planning approach was to meet the needs of existing customers
while simultaneously seeking ways to make more land available for other industrial uses.
For example, construction of a parking garage consolidates existing surface parking into a
smaller footprint. Additionally, new pier structures would allow activity that currently
occurs north of the bridge to move south of the bridge. A utility plan for the area north of
the bridge needed to support new developments was also created (see attachment 2).
Construction Cost Estimates. Port staff estimated construction costs for investments
anticipated to be made by the Port in developing the site. These estimates include a variety
of buildings for existing tenant expansion needs, new pier structures, a parking garage and
the utility improvement plan. Cost estimates include: raw construction costs; all related
Port management costs; risk factor contingencies; and mitigation costs. Third party
development costs north of the bridge were not estimated as it is expected the construction
costs will be borne by the developer/tenant that would ground lease the land from the Port.
COMMISSION AGENDA
Tay Yoshitani, Chief Executive Officer
July 14, 2011
Page 3 of 8
Financial Analysis. Staff developed a financial model with the intent of determining the
financial performance of the planned developments. Due to the conceptual nature of this
planning effort, the model is appropriately meant to be a high-level projection of the return
on the Port’s potential investment in the site. To identify overall financial performance,
results were aggregated by each development zone (shown in attachment 1) and by each
site plan option (see attachment 3). Financial modeling includes capital costs required to
develop the property and the revenue associated with such development. The capital costs
are inflated based on the anticipated year of construction. The revenue streams accrue over
a 50-year period, inflate over time, are based on current lease rates, and assume a certain
percentage of vacancy dependent upon asset type. Revenues are generated from a variety
of sources including building leases, ground leases, yard storage, moorage, and parking. It
is important to note that the model does not include operating and maintenance costs,
insurance, capital reserves, leasing costs, or land value. These factors would clearly add
additional expenses to the cost side of the financial model.
Economic Impact Analysis. Kidder Mathews also performed the economic benefits
analysis. Their analysis estimates the benefits at full build-out of each of the four
development options analyzed. The analysis assumes all the developments attract new
activity to the region rather than a redistribution of existing economic activity. It does not
include temporary economic benefits derived from construction activity.
KEY MESSAGES AND ISSUES:
Pier 90. To meet core mission customer expansion needs, the planning process evaluated a
new freeze facility building shell and a rebuilt existing warehouse onto totally rebuilt pier
structures. The timber pilings underneath Berth 6 / 8 on Pier 90 today are degrading and
require strict observance of load limitations in certain locations. High level conceptual
estimates for replacing timber pilings range from $35 to $41 million. Because the Port
placed protective wrappings around some of the timber piles, degradation throughout this
section of Pier 90 is not consistent. The methods and phasing options available for
replacing all the timber pilings are numerous. The Seaport is currently assessing this
situation through its Asset Management Program. These are the last berths to be
reconstructed as part of an investment program which has steadily invested $129 million in
dock replacements since 1987.
Key Messages.
1. Positive net present value (NPV) results from Port constructed industrial
buildings are unlikely. Future considerations in accommodating existing
tenant expansion should include ground leasing as a possible alternative.
2. The cost for replacing the timber piling introduces a significantly negative
impact to the NPV performance of each of the four development options
analyzed.
COMMISSION AGENDA
Tay Yoshitani, Chief Executive Officer
July 14, 2011
Page 4 of 8
Key Issue. Should the financial modeling associated with this planning process
remove the cost of rebuilding Berths 6 and 8 and instead consider these costs
from an asset management perspective? This would significantly improve the
financial results of the four development options analyzed (shown in the
financial tables below).
Shortfill. The uses considered for this area include maintaining the current parking and
yard storage activity, adding additional pier structures and building a garage with an office
complex. The strategy associated with new investments here was to relocate activities that
currently occur north of the bridge to this area south of the bridge to increase the land
available for third-party development.
Key Messages.
1. Existing revenue from cruise lease and open storage provides a positive
NPV.
2. New investments in piers and a garage contribute to significant negative
financial results. Although these investments create additional land north
of the bridge for new tenants, the financial analysis indicates this may be
a costly strategy to pursue.
West Yard. The market assessment concluded the highest and best use for this area is for
new commercial office space. Each development option assumed office use in the form of
a ground lease with a third-party developer.
Key Messages.
1. Current market conditions suggest that it may take five to seven years
for any office space demand to materialize.
2. A zoning modification (associated with aggregation of allowable office
space at Terminal 91) approved by the City Council is needed for any
non-accessory office development in this area.
3. Once office demand does materialize, ground leasing the site may
provide a positive NPV.
Key Issue. A separate briefing will discuss the potential land swap with Seattle
Parks & Recreation and how King County’s need to site a combined sewer
overflow facility might be accommodated either on Port or Parks’ land.
Tank Farm. Because of its ideal size and location, the planning process evaluated a new
warehouse on this site to meet the needs of existing customers.
Key messages.
1. Due to additional costs associated with building on a remediated tank farm,
this location may be better suited for open storage rather than a building.
2. The best location of a warehouse built to meet core customer needs requires
further evaluation.
COMMISSION AGENDA
Tay Yoshitani, Chief Executive Officer
July 14, 2011
Page 5 of 8
3. Positive NPV results from Port constructed industrial buildings are unlikely.
Future considerations in accommodating existing tenant expansion should
include ground leasing as a possible alternative.
Utilities and the NW Yard and Upland Zones north of the Magnolia Bridge.
Attachment 2 shows the utilities planned to support new developments north of the bridge.
Major components of this plan include a new perimeter roadway, upgrades to existing
electrical substations, upgrades to existing water, power, natural gas and sewer utilities and
a new storm water treatment vault. Conceptual cost estimates for this utility plan range
from $20 to $24 million, depending on the scale and type of development that might occur
north of the bridge.
A variety of uses were considered for the uplands areas north of the bridge: expansion area
for existing tenants; construction of a parking garage; providing land for new tenant
development and open storage for use by existing customers.
Planning options north of the bridge intended to make available increasing amounts of land
for new tenants. Staff’s current thought is to consider ground leasing areas intended for
new tenants to a third-party developer. The development options created to date depict a
range of industrial uses a developer may seek for the site. These options range from
limited new buildings and open storage at the low end to a high end that includes a high-
tech research and development campus that meets the requirements of the existing
industrial zoning.
Key message.
1. Today, the surface parking lot for cruise passengers covers 10.5 acres of
land. Building a garage requires 2.5 acres. Therefore, an additional
eight acres could be made available for other uses.
2. It is exceptionally difficult to forecast uses and revenues associated with
a new garage at Terminal 91 and new leasing strategies would have to be
explored.
3. The NPV associated only with building a garage is negative. However,
combining the garage revenue (including off-cruise season revenue)
with 8 acres of additional land lease revenues produces a slightly
positive NPV ($0.8 million). If the Port pursues development of the NW
Yard and Upland zones, a parking garage may be worthy of
consideration and may be essential to efficiently use the land and
thereby maximize the economic benefits associated with any Port-
funded infrastructure in the area.
4. Ground leasing land north of the bridge (i.e., the NW Yard and Uplands
zones) under the current assumptions at best roughly breaks even given
the cost of the utilities needed to support new development. At worst, a
negative NPV of $5 million would result.
COMMISSION AGENDA
Tay Yoshitani, Chief Executive Officer
July 14, 2011
Page 6 of 8
Key Issues.
1. What should be the Port’s targeted financial return from the property
north of the bridge?
2. Should the Port seek other public partners to share in the cost of any
infrastructure investments?
3. Should the Port invest in the needed infrastructure before ground leasing
to a developer or attempt to identify a developer willing to take the
property as is?
4. What should be the timing of any Port investment given the “status quo”
scenario discussed below?
FINANCIAL RESULTS:
The table below summarizes the financial performance by zone and by total of each of the
four development options. As currently constituted, all four of the options in total have
negative NPVs. The financial projections for each option; however, are best understood by
separately examining the different development zones as summarized above. In preparing
the four development options, staff envisioned that any recommended option would likely
be a hybrid of two or more of the initial options rather than one of initial development
options in total.
Pier 90 Scenario Berth & Buildings Berth & Buildings Berth & Buildings Berth & Buildings
Port Investment $73.9 $73.9 $73.9 $73.9
NPV ($40.4) ($40.4) ($40.4) ($40.4)
Shortfill Scenario Yard with No Fill Yard with No Fill Apron Extension - Notches Full Apron with Garage
Port Investment $0.0 $0.0 $8.8 $111.3
NPV $3.3 $3.3 ($4.3) ($67.8)
NW Yard Scenario Existing Cruise Parking Existing Cruise Parking Garage & Leases Development & Yard
Port Investment $0.4 $0.4 $33.6 $0.5
NPV $2.6 $2.6 $0.8 $10.1
Tank Farm Scenario Warehouse Warehouse & Office Warehouse & Office Warehouse
Port Investment $22.0 $26.7 $26.7 $22.0
NPV ($9.7) ($10.4) ($10.4) ($9.7)
West Yard Scenario Development & Yard Development & Yard Development & Yard Development & Yard
Port Investment $0.5 $0.5 $0.5 $0.5
NPV $3.3 $3.3 $3.3 $3.3
Uplands Scenario Development & Yard Development & Yard Development Development
Port Investment $0.9 $0.9 $0.9 $0.9
NPV $15.1 $15.1 $13.4 $13.4
Utilities Scenario
Port Investment $22.7 $23.4 $25.3 $26.6
NPV ($17.4) ($17.9) ($19.4) ($20.4)
Total Port Investment $120.4 $125.8 $169.7 $235.6
NPV ($43.2) ($44.4) ($56.9) ($111.5)
IRR 5.8% 6.0% 6.5% 4.5%
Note: $ (000,000's)
Zone
Option 1
Option 2
Option 3
Option 4
COMMISSION AGENDA
Tay Yoshitani, Chief Executive Officer
July 14, 2011
Page 7 of 8
STATUS QUO:
Current short-term leases for yard storage, which in the short run require minimal new
capital investment, provide positive financial returns. However, at some point in time there
will be a need to make more significant capital investments to maintain current operations:
1. Evolving regulations are expected to lead to requirements for substantial storm
water system upgrades. For the purpose of this planning process, an integrated
storm water system was developed to meet city code requirements associated with
new developments north of the bridge. This system is preliminarily estimated to
cost approximately $3.25 million. Regardless of whether the Port seeks new
development, there remains a likely need to make improvements to the storm water
system throughout the entire terminal.
2. As previously discussed, Berths 6/8 will require some action at a future date. Costs
for reconstructing the berths were included in the Seaport’s 2011 Ten Year Capital
Plan and are being evaluated as part of the Seaport’s proposed 2012 Ten Year
Capital Plan.
3. Other expected future costs accrue from: extensive building maintenance associated
with older structures (example: roof replacements); re-paving large portions north
of the bridge; and upgrading water lines and electrical systems.
The financial performance of the four development options improves significantly when
estimated asset management costs (berth 6/8 replacement and storm water improvements)
are excluded from the financial analysis (see table below). However, even when excluding
these costs, projected returns for the four options remain negative.
Key message. One alternative, should the Port not pursue substantial
infrastructure investment to attract new industrial development at the site, would
be to execute longer term open storage leases for uplands area that is currently
vacant. Longer term leases will likely generate more interest from potential
tenants to lease the vacant area compared to the month-to-month and short-term
leases currently in place.
Key issue. What is the optimal balance in achieving regional economic
benefits, environmental benefits, and desired financial goals?
Option 1 Option 2 Option 3 Option 4
Total Port Investment $68.0 $73.4 $117.7 $183.8
NPV ($4.5) ($5.6) ($18.5) ($73.3)
IRR 10.3% 10.1% 9.0% 5.8%
Note: $ (000,000's)
(excluding Berth &
Stormwater costs)
COMMISSION AGENDA
Tay Yoshitani, Chief Executive Officer
July 14, 2011
Page 8 of 8
ECONOMIC IMPACTS:
The economic benefits for each development option are shown in the table below.
NEXT STEPS:
The intent of this planning process is to arrive at a strategy and plan to guide investment in
the development of Terminal 91. After Commission feedback and outreach to existing
tenants, the community and other stakeholders, the planning work will be refined to
identify a recommended development option. Staff anticipates early fall as the next
briefing for this planning process.
OTHER DOCUMENTS ASSOCIATED WITH THIS BRIEFING:
Attachment 1: Map of development zones
Attachment 2: Utility map
Attachment 3: Four development options
Attachment 4: Existing Condition Aerial Photo
Attachment 5: PowerPoint presentation
PREVIOUS COMMISSION ACTIONS OR BRIEFINGS:
Staff briefed Commission on the intent of this planning endeavor on April 13, 2010. Funds
to proceed with the work were approved by Commission on July 13, 2010.
Option 1 Option 2 Option 3 Option 4
Jobs
Direct 388 506 783 3,198
Induced 323 437 648 3,936
Indirect 218 295 458 3,050
Total 929 1,238 1,890 10,185
Income ($1000)
Direct $22,797 $30,746 $44,367 $241,422
Induced $11,676 $15,804 $23,431 $142,611
Indirect $9,947 $13,568 $21,351 $159,580
Total $44,420 $60,118 $89,149 $543,613
Direct Business Revenue ($1000) $75,064 $103,049 $157,231 $1,191,319
State and Local Taxes ($1000) $4,131 $5,591 $8,291 $50,556
