PORT OF SEATTLE
MEMORANDUM
COMMISSION AGENDA
Item No.
5d
Date of Meeting
October 11, 2011
DATE: October 4, 2011
TO: Tay Yoshitani, Chief Executive Officer
FROM: Melinda Miller, Director, Portfolio Management
Rebecca Schwan, Real Estate Manager
SUBJECT: Term Lease with Fremont Maritime Services, Inc. at Fishermen’s Terminal
Amount of This Request: $45,320 Source of Funds: Operating Revenues
ACTIONS REQUESTED
Request Commission authorization for the Chief Executive Officer to; 1) execute a five-year
lease at fair market value, with options to renew for two additional five-year terms, according to
the terms laid out in this memorandum, with Fremont Maritime Services, Inc. at Fishermen’s
Terminal; and 2) provide $33,570 as a tenant improvement allowance and $11,750 as a leasing
broker commission for a total request of $45,320.
SYNOPSIS
Fishermen’s Terminal is the home of the North Pacific Fishing Fleet. Over 50 percent of the
upland tenants are maritime or commercial fishing related businesses. One of the goals of
Fishermen’s Terminal is to support the needs of the fishing fleets and securing a tenant such as
Fremont Maritime Services, Inc. is consistent with this goal.
Despite consistent and comprehensive marketing of the facility, the office space proposed has
been vacant for nearly two years and is challenging in its location and its configuration. This
office space is the only remaining office vacancy in the Fisherman’s Center Building and leasing
it will bring the building to 100% occupancy.
Fremont Maritime Services, Inc. is one of America's most respected maritime safety and
emergency procedures training organizations. Every year, they help thousands of professional
mariners prepare for fire, flooding, abandon ship, and man-overboard emergencies. Some of the
world’s largest towing, cargo, passenger and fishing companies retain them to train their officers
and crew. They teach the skills that are essential to successful emergency response. Fremont
Maritime Services is the only civilian firefighting school the U.S. Navy retains to train and
evaluate their seagoing personnel. They also train employees of most of the major fishing
COMMISSION AGENDA
T. Yoshitani, Chief Executive Officer
October 4, 2011
Page 2 of 6
companies including American Seafoods, Icicle, Trident, Clipper, and Jubilee. Foss Maritime,
Crowley Marine, and Holland America are also their customers.
We have a signed Letter of Intent (LOI) and the major terms of the lease are described below. If
there are any material changes to these terms, we will return to the Commission for approval.
TERMS OF THE PROPOSED LEASE
The major elements of the proposed term lease are outlined below: (Signed Letter of Intent dated
September 16, 2011 is attached)
Term: Five years, commencing December 1, 2011, through November 30,
2016.
Renewal Options: Options to extend lease for two additional five-year terms.
Use: Operation of a maritime training school.
Premises: Premises consists of approximately 3,357 square feet of office
space.
Rent: 3,357 sf office @ $14.00/sf/yr/Net.
Leasehold Tax: Lessee will be billed monthly for their share of the Leasehold Tax.
Rent Increase: Annual CPI increase for first five-year term. The rate for the first
two years of the first renewal term shall be subject to an annual
CPI increase. The rate for the remainder of the term, first renewal
term and for the second five-year option shall commence at fair
market rental value of the Premises with subsequent annual CPI
increases. The Lease will contain an arbitration provision to
resolve disputes regarding “fair market rental value” in the event
the parties cannot agree on the rent.
Port Improvements: Port shall provide a tenant improvement allowance in the amount
$33,570.00, equal to $10.00/sf.
Maintenance: Lessee is responsible to pay for repairs and maintenance for the
interior of the premises.
COMMISSION AGENDA
T. Yoshitani, Chief Executive Officer
October 4, 2011
Page 3 of 6
Utilities: Lessee is responsible to pay for all utilities serving their premises
either directly or indirectly.
Security: Lessee shall provide a cash deposit, corporate surety company
bond or irrevocable stand-by letter of credit, in the amount of
$23,499.00, which is equal to six months base rent as security.
Insurance/Liability: $1 million General Liability.
Assignment/Sublease: Conditioned on the Port’s prior written consent.
MARKET CONDITIONS
This submarket has taken a hit in recent months. With rents dropping and property owners
offering concessions in the Central Business District, many non-maritime tenants are leaving this
area for nicer space downtown. We would be fortunate to secure a maritime-related tenant for
the next five years. In speaking with local brokers, they describe greater demand for high quality
space and less demand for Class B and C office space. According to reports from CB Richard
Ellis and Cannon Commercial Real Estate lease rates have been dropping for the past year and
likely will not stabilize until 2012. Tenants are being lured away by the low rates and
concessions in the Central Business District. It is difficult to retain tenants in this submarket,
unless they are maritime-related or reside in the area.
Although most of the quarterly reports do not report on Class B and C rent in this submarket, we
have confirmed with local brokers that $14.00/sf/yr/Net falls in line with comparable rates that
property owners are taking to fill space. A new lease at Pacific Palisades, a Class B office
complex located on lower Queen Anne, was negotiated at a rate of $12.00/sf/y/Triple Net
(Operating Costs @ $4.85/sf/yr). The property owner dropped the rate from $16.00/sf/yr/Triple
Net to $12.00/sf/yr/Triple Net in June of 2011 because they could not lease the space. It consists
of 2,310 sf of office space and the term is three years, effective October 10, 2011. Another lease
at the Canal Building, a Class B office building located near Lake Union, was negotiated at a rate
of $13.21/sf/yr/Gross. It is comprised of 1,226 sf of office space and was effective in December
of 2010. On West Commodore Way, approximately a quarter of a mile east of Fishermen’s
Terminal, the former Marco Marine has been redeveloped into Class A waterfront office space
and earlier this year they were offering rates of $20.00/sf/yr/Gross (Operating Costs @
$7.00/sf/yr) along with $50.00/sf as a Tenant Improvement allowance. At the Wharf Building
across the street from Fishermen’s Terminal, we have a recent comparable showing an office
lease that was negotiated at a rate of $16.00/sf/yr/ Gross. (Operating Costs @ $5.00/sf making it
$11.00/sf/yr/Triple Net)
COMMISSION AGENDA
T. Yoshitani, Chief Executive Officer
October 4, 2011
Page 4 of 6
FINANCIAL ANALYSIS:
Budget/Authorization Summary
Previous Authorizations
Current request for authorization
Total Authorizations, including this request
Remaining budget to be authorized
Project Cost Breakdown
Tenant Improvement Allowance
Leasing Broker Commission
Other
Total
Source of Funds:
The 2011 Capital Budget included a tenant improvement allowance under CIP 800126 Tenant
Improvements Capital in the amount of $72,302. The 2011 Operating Budget included a lease
commission in the amount of $2,518. Per the terms of the lease, and Port policy, the tenant
improvement allowance and lease commission will be expensed. The proposed funding required
of $45,320 will result in an unfavorable operating expense variance as noted below. This
amount will be offset by savings in other areas.
Tenant improvements and lease commissions will be funded from operating revenues.
Financial Analysis Summary:
CIP Category
N/A
Project Type
N/A
Risk adjusted
Discount rate
9.0%
Key risk factors
Risk of Tenant default partially mitigated by the following
factors:
• Fremont Maritime Services has been in business for
twenty-two years.
• Security deposit from Fremont Maritime Services equal
to six months of base rent.
• Allowance provided to the tenant is for improvements
deemed marketable in the event of a default.
COMMISSION AGENDA
T. Yoshitani, Chief Executive Officer
October 4, 2011
Page 5 of 6
Project cost for
analysis
$45,320
Business Unit (BU)
Portfolio Management & Leasing, Real Estate Division
Effect on business
performance
The impact to Net Operating Income (NOI) and NOI After
Depreciation resulting from the extended lease term of this
current tenant is shown below.
Revenue is inclusive of estimated operating expense
reimbursements collected from the tenant.
Expenses are inclusive of estimated recoverable and non-
recoverable operating expenses, a tenant improvement
allowance, and a lease commission.
IRR/NPV
ALTERNATIVES CONSIDERED/RECOMMENDED ACTION
Do Not Execute Proposed Lease: Not executing the proposed lease and waiting to see if
we can secure another tenant at a higher rate per square foot. The space has been vacant
for over two years and the market shows little sign of recovery for at least a couple of
years. If we did find another potential tenant, it would likely be a general office user and
would require a far more substantial build-out than Fremont Maritime Services, Inc. The
space has a very open configuration, which is ideal for the classroom use of this tenant.
If we do not execute this lease, it would result in a loss of revenue to the Port and the
likelihood of significant additional costs to secure a new tenant in the future. Even if the
Port was able to secure another tenant, there is no guarantee that we would get a better
rate.
Execute Proposed Lease: Proceeding with the proposed lease agreement will secure a
financially strong maritime tenant for at least another five years at a fair market value and
is in line with the Fishermen’s Terminal 20-Year Plan and the Port’s commitment to the
NOI (in $000's) Year 1 Year 2 Year 3 Year 4 Year 5
Revenue $65 $67 $68 $70 $72
Expenses ($67) ($22) ($23) ($23) ($24)
NOI ($2) $45 $46 $47 $48
Depreciation $0 $0 $0 $0 $0
NOI After Depreciation ($2) $45 $46 $47 $48
NPV Payback IRR
(in $000's) Years (%)
$148 2 NA
COMMISSION AGENDA
T. Yoshitani, Chief Executive Officer
October 4, 2011
Page 6 of 6
maritime industry. Fremont Maritime Services, Inc. has been in business for 22 years and
provides services and jobs to the maritime industry. This is the recommended action.
OTHER DOCUMENTS ASSOCIATE WITH THIS REQUEST
Signed Letter of Intent
PRIOR COMMISSION ACTION OR BRIEFINGS
None