Template revised January 10, 2019.
COMMISSION
AGENDA
MEMORANDUM Item No. 10b
ACTION ITEM Date of Meeting October 22, 2024
DATE : October 10
th
, 2024
TO: Stephen P. Metruck, Executive Director
FROM: Kyra Lise, Director of Real Estate Development
Richard Duncan, Director of Aviation Business & Properties
SUBJECT: Purchase of International Place (AKA STOC property) for Port of Seattle Aviation
Operations
Amount of this request: $122,000,000
Total estimated project cost: $122,000,000
ACTION REQUESTED
Request Commission authorization for the Executive Director to execute all documents related
to assuming a long-term Ground Lease and purchasing related improvements and 2 acres of fee
owned property from STOC OWNER, LLC (Seller). The property is located at 1800 International
Blvd. SeaTac, WA and consists of a 17.7 acre, three-building office campus.
EXECUTIVE SUMMARY
The Port of Seattle is requesting commission approval to purchase a three-building office
property portfolio that includes two 11-story streel-frame buildings and one low rise four-story
concrete building known as International Place and commonly referred to as ‘STOC’ (SeaTac
Office Center). STOC is made up of a combination of ground leased property (15.7 acres) and
fee property (2 acres). As part of this transaction, the Port would be purchasing the following:
The building and property improvements (three buildings and surrounding parking lots)
The Ground Lease (term through 2114) - the Port would assume all existing leases and
financial positions associated with the Ground Lease.
All fixtures, furnishings, furniture, equipment, machinery, inventory, appliances and
other personal property owned by Seller, located at the property.
2-acre parking lot parcel located in the southeast corner of the site which the Port
would own in fee.
COMMISSION AGENDA – Action Item No. 10b Page 2 of 9
Meeting Date: October 22, 2024
Template revised June 27, 2019 (Diversity in Contracting).
The buildings contain 548,700 rentable square feet with 370 garage stalls on the first two levels
of the low rise building and 1,589 surface stalls, for a total of 1,959 stalls. The property is
currently 83.4% leased by 38 tenants with 57 total suites ranging from as small as 124 sq ft to as
large as 75,757 sq ft over several floors. The current vacancy rate for the property is 16.6%.
Existing leases range between 1 to 10 years remaining on their term.
The Port currently leases approximately 10% of STOC office space (47,178 SF) and over 400
parking spaces. This space is utilized by Port personnel in the Airport Building Department,
Project Management, Engineering, Central Procurement and Port Construction Services. The
Port has potentially identified space for future occupancy plans within the buildings which
would increase Port occupied space to a total of 122,841 square feet. Occupying this additional
space would bring the total occupancy of the STOC property to 95%.
The Port is currently performing a detailed due diligence process, investigating the condition of
the property and the contracts related to STOC. This process will confirm representations and
claims made by the owner during negotiations as well as Port assumptions.
The below table shows the key dates as it relates to this this transaction.
KEY DATES
JUSTIFICATION
SEA currently serves 51 million passengers a year and supports a combined workforce of
approximately 23,000 people. Though one of the largest domestic airports in the nation, and
among the fastest growing, SEA occupies the smallest geographic area of any major airport in
the country. “Surrounded by urban development,” the Seattle Times reported in a 2022 article,
“it cannot spread farther.” Lack of flexible space at or near the terminal creates an ongoing set
of challenges in facilities planning. With the constant flow of airport development /
maintenance projects, both large and small, the logistics of accommodating upgrades for our
new business interests is challenging. As airport operations advance, the Port is progressing
with a great deal of construction over the next five years, workspace availability can have a
major impact on large scale project delivery. It has been difficult to accommodate space
requests for office space for construction crews, airline and business customers. A lack of space
flexibility within the terminal and AOB can be problematic for passenger satisfaction and
worker efficiency alike.
COMMISSION AGENDA – Action Item No. 10b Page 3 of 9
Meeting Date: October 22, 2024
Template revised June 27, 2019 (Diversity in Contracting).
With this set of challenges in mind, in 2023 the Port’s Economic Development Real Estate team
along with the Aviation’s Business & Properties group teamed up to study how unmet real
estate needs were impacting SEA overall, in terms of basic operations. We worked closely with
our 12 subject matter experts that represented several Port Divisions, with local consultant
Heartland, LLC. We diligently worked through a process of interviewing key operations teams
within the airport, and we were able to roughly estimate our unmet needs for space and begin
to consider how to meet those requirements.
The SEA Real Estate study also discovered: “There are more Real Estate needs than land
available and Port-owned land needs to be leveraged strategically, as cost and ability to acquire
and replace land is inherently limited.” SEA is in a strong and rapidly escalating real estate
market with very few development parcels nearby. That means opportunities to acquire land
nearby is rare and costly.
Although it is rare for the Port to lease property (the Port is more generally a landlord than a
tenant) as documented above, the Port has leased office space at STOC since 2014. Our initial
lease supported contractors and PCS team members working on the International Arrivals
Facility (IAF). As that project progressed, additional space and longer lease terms were
required to fulfill the needs of the IAF and other projects. In addition, in 2023 the Port began
leasing some surplus surface parking spaces at STOC.
In 2023 we began discussions with STOC management to extend the Port’s footprint at STOC
into some open available recently renovated, full floors that had recently been vacated in the
North Tower. Through further reviews of the property with different operating groups at the
Port, we found near term uses for up to 114,000 sf and began discussions to bring about a new
lease incorporating the expansion square footage. By this time, we had finished our real estate
study, and it led us to inquire whether the owners might be willing to sell. Though the property
was not on the market, the ownership group and their financial partners agreed to consider a
Port offer on the property.
Moving forward with this transaction would support ongoing airport operations and projected
growth by providing the Port immediate access to a supply of existing office space and parking
which will allow for more operational flexibly at the adjacent terminal without the expense of
COMMISSION AGENDA – Action Item No. 10b Page 4 of 9
Meeting Date: October 22, 2024
Template revised June 27, 2019 (Diversity in Contracting).
new construction. In addition, the building is financially performing well, and the Port can
strategically stagger the timing of its needs of the facility. Any excess space can be leased to 3
rd
party companies to help cover the debt service and operating expenses.
Diversity in Contracting
Through the purchasing of the properties, there will be opportunities for WMBE and small
businesses to participate within either the design, tenant improvements, and service contracts
scopes of work.
DETAILS
As described above, the Port is currently conducting a series of due diligence tasks to
substantiate all claims and representations of value made by the seller. The Port has hired a set
of consultants to assist in this process (Heartland, LLC and Kidder Mathews). These consultants,
and their sub-consultants, have advised on financial aspects of the transaction as well as
building/property related items (i.e. property condition reports/assessments, mechanical
reports, etc.).
The Port has also engaged with an internal group of over 15 Subject Matter Experts (SME’s) to
review the reports delivered by our consultants. The SME’s have or will provide memos
detailing their evaluation of such reports. The Port SME teams have included staff from the
following departments:
Finance
AFR
Facilities and Infrastructure
Environmental
Survey
Legal
Risk
Capital Projects
Port of Seattle Fire Department
The Due Diligence period will continue until early November 2024. This is the deadline when
the Port must either (i) waive its Due Diligence contingency and proceed with the transaction,
or (ii) terminate the Purchase and Sale Agreement. If the Port elects to waive the Due Diligence
contingency, the deposit ($6 million) is no longer refundable.
Once the asset is acquired by the Port of Seattle, a transition period will ensue where the
existing management of the facility will largely remain in place and continue to serve the
building and its tenants as they do today, and the Port will begin to integrate the property into
our facilities management processes and accounting systems. A period of planning will inform
COMMISSION AGENDA – Action Item No. 10b Page 5 of 9
Meeting Date: October 22, 2024
Template revised June 27, 2019 (Diversity in Contracting).
a business plan that will be developed to help the Port maximize the benefit of STOC to support
the operational objectives of the airport, in line with the plan for growth.
Individual capital projects at the buildings/property will be part of subsequent Commission
actions and funding according to the ordinary processes of the Port’s budgetary approval
process.
ALTERNATIVES AND IMPLICATION CONSIDERED
Alternative 1 – Purchase this property
Cost Implications: $122,000,000 (approximately $222 per square foot)
Pros:
(1) Acquiring this property gives the Port ultimate flexibility in terms of utilizing and
managing vacant space.
(2) By acquiring an office property occupied by strong credited tenants, the Port will
consistently benefit from the collection of rent and operating expenses.
(3) Tenant diversity mitigates ownership risk.
(4) External market factors further justify acquiring this property at this time due to the
current office market downturn.
Cons:
(1) The Port would bear full building/asset management responsibility. Historically, the
Port has not undertaken an effort of this scale.
(2) Largest impact on Port staff needs and resources.
(3) Costs to relocate Port departments and personnel to the STOC building are not yet
known.
This is the recommended alternative.
Alternative 2 – Extend and expand current STOC lease
Cost Implications: $44,834,000 over 10-year term
Pros:
(1) Preserves funds for other uses and office conversion projects among other Port
owned facilities.
(2) Would not bear full property/leasing/building asset management responsibility.
(3) As part of the overall rent structure, Landlord would contribute to the Port’s tenant
improvement efforts.
Cons:
COMMISSION AGENDA – Action Item No. 10b Page 6 of 9
Meeting Date: October 22, 2024
Template revised June 27, 2019 (Diversity in Contracting).
(1) Continuing as a lessee will hamper our ability to be flexible with space within STOC as
we will ultimately be dependent on the decisions of STOC management through lease
negotiations.
(2) Leasing prohibits full control over our own use, capital spend and tenant improvements
at the property.
(3) In the event the Port needs additional expansion space, offsite options would need to
be considered, however, offsite properties near STOC are difficult to find and cost
prohibitive.
This is not the recommended alternative.
Alternative 3 – Build a new building
Cost Implications: Estimated between $900-$2,000 per square foot plus the cost of land (Land = $100 per foot)
Pros:
(1) Port would be able to design the building to their exact needs and standards.
(2) Take advantage of recent experiences in the development of net – zero construction
and planning options.
Cons:
(1) Most expensive option.
(2) Developable land near the airport is scarce and expensive.
(3) The timeline to purchase land and develop a building does not align with the near-
term Port office space needs.
This is not the recommended alternative.
Alternative 4 – Do nothing (continue to lease 47,178 in the low rise building with no expansion)
Cost Implications: $1.521 million annually
Pros:
(1) Lowest cost option
(2) Minimizes the effort on Port staff and resources
Cons:
(1) Does not address the Port’s short, medium, or long-term space needs.
(2) The Port would continue to have space constraint issues at the airport. This will be
further exacerbated by upcoming construction projects.
(3) Port would need to negotiate an extension of its current lease at the low rise building as
the current term expires on 12/31/2024.
This is not the recommended alternative.
COMMISSION AGENDA – Action Item No. 10b Page 7 of 9
Meeting Date: October 22, 2024
Template revised June 27, 2019 (Diversity in Contracting).
FINANCIAL IMPLICATIONS
Cost Estimate/Authorization Summary
Capital
Expense
Total
COST ESTIMATE
Original estimate $122,000,000
$NA
$122,000,000
AUTHORIZATION
Previous authorizations 0
0
0
Current request for authorization 122,000,000
0
122,000,000
Total authorizations, including this
request
122,000,000
0
122,000,000
Remaining amount to be authorized $0
$0
$0
Annual Budget Status and Source of Funds
The 2025 Budget includes a proposed budget request for this real estate initiative in the
amount of $7.8M for estimated annual operating expenses and incremental management
staffing (assumes maintaining the current maintenance agreements and 3
rd
Party Property
Management service provider for the STOC property in the near term). The 2025 Budget will be
updated to also include an incremental $14.8M in annual revenue based on property revenue
estimates provided by the seller.
The acquisition of this property will be funded through the issuance of revenue bonds which
will be repaid primarily from non-aeronautical revenues.
Financial Analysis and Summary
The purchase price ($122 million) is based on market negotiations between the Port and Seller.
Both parties obtained appraisals for the property which informed the purchase negotiations.
The Port is comfortable with this purchase price due the property’s low vacancy rate, historical
financial performance and the unique aspect of the building being directly adjacent to SEA.
The final cost to the Port may be at or potentially below $122 million as the ultimate amount
will be determined immediately prior to closing when all funds due and owing are reconciled to
the date of closing including such matters as utilities, fees, taxes, rental income and, expense
that are as a result of negotiated interests between tenant and seller, though the final amount
will only be an equal or lessor amount.
A valuation of the STOC property based on its current use and occupancy level, using revenue
and expense estimates provided by the current owner, was completed by both Kidder Mathews
COMMISSION AGENDA – Action Item No. 10b Page 8 of 9
Meeting Date: October 22, 2024
Template revised June 27, 2019 (Diversity in Contracting).
and Port Finance staff. The resulting valuations, using discounted cash flows (DCF) were closely
aligned at ~$90M. With a negotiated purchase price of $120M, this results in a NPV of negative
($30M).
Alternate valuations assuming higher occupancy and increased Port utilization of vacant space
in the STOC buildings resulted in higher valuations. Those future planned usage scenarios
represent opportunities to reduce or close the gap between the negotiated purchase price and
the current state valuation. However, the relevant costs (both capital investment and operating
expenses) and timing estimates associated with those potential future uses are not yet
available. As such it is not possible currently to determine the impact on NPV of those potential
future uses.
Project cost for analysis $122,000,000
Business Unit (BU) Non-Aeronautical Commercial Properties (ORG 3630)
Effect on business performance
(estimated cash flow after debt
service)
IRR/NPV (if relevant) NPV negative ($30M)
CPE Impact NA
STOC Property based on Owner Financials
(in $millions) 2025 2026 2027 2028
Effective Gross Revenue 14.8$ 15.0$ 16.3$ 16.5$
Total Property Expenses (7.5) (7.7) (8.0) (8.2)
Estimated Net Operating Income 7.4 7.3 8.3 8.3
Leasing & Capital Costs (0.3) (2.0) (1.8) (2.6)
Cash Flow Before Debt Service 7.1 5.2 6.5 5.7
Estimated Debt Service (9.0) (9.0) (9.0) (9.0)
Estimated Cash Flow after Debt Service (1.9)$ (3.8)$ (2.5)$ (3.3)$
COMMISSION AGENDA – Action Item No. 10b Page 9 of 9
Meeting Date: October 22, 2024
Template revised June 27, 2019 (Diversity in Contracting).
Future Revenues and Expenses (Total cost of ownership)
Total cost of ownership for this property acquisition will vary depending on the future planning
and uses of the facility. Estimates of property operating costs and capital investment or major
maintenance requirements under Port ownership have not yet been developed.
Potential future benefits & costs related to this property acquisition have not yet been
evaluated. Opportunities to relocate existing Port departments to the STOC property would
require capital investments to prepare vacant STOC space for those planned Port uses.
Operating expenses incurred to relocate Port staff from current locations to the STOC property
have not yet been estimated. Space within the airport terminal which is vacated by potential
department relocations would similarly require capital investment prior to leasing to a new
tenant. The scope of work associated with future department moves and new leasing
opportunities have not yet been defined and the related cost estimates have not yet been
developed.
ATTACHMENTS TO THIS REQUEST
(1) Draft Purchase and Sale
(2) WSDOT Air Space Lease
(3) Ground Lease
(4) Presentation slides
PREVIOUS COMMISSION ACTIONS OR BRIEFINGS
July 23, 2024 - The Commission authorized an additional $525,000 to support costs
associated with the lease extension to the end of 2024 and to increase the authorized
funding for contract payments through the extension.
February 27, 2024 – The Commission authorized an additional $700,000 to support costs
associated with the lease to meet lease obligations due to cost escalation higher than
originally estimated
August 1, 2023 – The Executive Director approved, under delegated authority, a
$294,000 amendment to the existing STOC lease agreement for the lease of additional
parking stalls for employee parking through August 31, 2024
November 14, 2017 – The Commission authorized the Executive Director to approve a
lease amendment for office space for two additional departments to move into the
SeaTac Office Center (STOC) for $6,829,000
October 24, 2017 – The Commission was briefed on a proposal to execute a lease
amendment for office space for two additional departments to move into the SeaTac
Office Center (STOC) for $6,829,000
April 28, 2015 – The Commission was briefed on, and authorized, a request to execute a
four- year lease agreement to provide office space for the IAF Program Management
Group in the SeaTac Office Center (STOC) for $1,995,285
