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The Port of Olympia: economic development or real estate speculation?

Act in haste, repent at leisure

For the past several years, the activities of the Port of Olympia have produced a shortfall in revenues over expenses. So, when the Port staff suggested a way to increase revenues by investing in real estate it seemed like a good move. As Commissioner Zita stated, “The potential to own and make revenue, instead of leasing, was a good idea worth considering.”

Relying on the confident advice of staff and positive statements from a feasibility study, the Port Commissioners moved to acquire the Commerce Business Center (CBC, or Center) in 2017 in Lacey for $6.5 million. Now, two years later, Commissioners discovered that those confident predictions left out details that could have raised questions about the wisdom of the purchase. How did that happen?

A flowchart chronicling key actions in the story from 2015 to 2019.

A unique opportunity to generate revenue

Mike Reid, the Port’s manager for business development, approached Commissioners in the summer of 2016 with the idea of buying the CBC. According to Reid, it was a unique opportunity that could generate revenue to support multiple objectives of the Port. There were 3 industrial “flex space” buildings that could be used either as warehouses or showroom/offices. They had historically low vacancy rates. It would diversify the Port’s real estate offerings and lead to a multitude of future opportunities.

After outlining the potential benefits of purchasing the CBC in an August meeting, Mike Reid urged the Commissioners to authorize then Executive Director Ed Galligan to enter into a Purchase & Sale Agreement (PSA) for the property.

At least one Commissioner wondered why this disturbing information was only now coming to their attention.

The Commissioners told Galligan to go ahead with the PSA, with the understanding that there would be no recommendation on closing the deal until they did a feasibility study. Expert firms would evaluate the condition of the buildings, offer an appraisal including costs and risks to the Port, and consider the likelihood of a financial partnership with the City of Lacey.

Looks good to go—minor defects, an 8% rate of return, high demand

At a meeting Oct. 24 2016, Mike Reid presented results from the feasibility study that corroborated his initial favorable view. According to Reid’s PowerPoint, Architects Rasmussun Triebelhorn had found that “the buildings are in good shape” with a “normal amount of wear” and defects that were “minor in nature.”

The firm McKee Appraisal had set a market value of $6.5 million for the property. Reid’s Power Point highlighted the financial analysis showing vacancy rates declining since 2012: “There is very little flex space available in the Thurston County area, so the space that is available tends to be in very high demand.” Other PowerPoint slides showed the report’s assumed occupancy rate at 75% with an 8% rate of return on investment. An annual inflation of 2% for revenues and expenses was projected.

Reid concluded his presentation by recommending that the Port make the purchase—and finance it with general obligation bonds. Assured by these favorable indications, the Commissioners voted to go ahead with the acquisition. When the Port took possession of the Center in March, 2017, the Olympian quoted Commissioner McGregor saying that the Port expected an “immediate return” on the property with a net of $80,000 a year after the sale.

Financial participation from the City of Lacey

Several months after the Port took ownership, Reid and Rick Walk, Lacey’s Community Development director briefed the Port and the City of Lacey on the partnership idea for Building 1. In November, the two jurisdictions entered into an InterLocal Agreement (ILA) to “create economic development opportunities for small and emerging entrepreneurs seeking to develop and grow in Thurston County.” It would provide “space for such businesses that is not readily available or adequately served by today’s real estate market” [emphasis added]. The ILA committed the Port to formulating a management plan, and Lacey to investing $200,000 for improvements to Building 1.

Lacey and the Port agreed to contribute $10,000 each for a Market Analysis.

Meanwhile, those nagging financial problems remained.

As the Port’s revenues continued to fall short of operating costs, Port Commissioners needed to address finances for the coming year. Commissioners McGregor and Downing favored increasing the Port’s property tax levy. Over the objections of Commissioner Zita, they voted to bump up the levy by $946,000—18% over the prior year—for a total of over $6 million to be collected from Thurston County residents’ property taxes.

The Commissioners get some unwelcome news

Two years into their new responsibilities as owner of the Commerce Business Center buildings, on July 18, 2019, Port staff disclosed the results of that Market Analysis jointly commissioned with the City of Lacey. The news was an unpleasant surprise.

Neither Executive Director, Ed Galligan, nor Mike Reid was there to hear it. Ed Galligan had been replaced as Executive Director by Sam Gibboney in January of 2019. Mike Reid had taken a new job as Economic Development director for the City of Olympia a year earlier.

The task of presenting the results of the analysis conducted by Business Street thus fell to Rudy Rudolph, Port Airport Director and Interim Real Estate Director.

The Market Analysis focused primarily on Building 1, but effectively contradicted much of the information that Mike Reid had presented to the Commissioners. According to the summary, Building 1 presented problems:

  • There is a limited demand for flex space in Thurston County
  • There are few businesses of the kind envisioned for this type of building
  • A limited number of businesses need 2000 square feet or more of space
  • Current zoning would likely prevent half of potential users.
  • Converting Building 1 to small industrial flex space was a bad idea —it would cost more than $200,000 and require modifications that would eliminate parking.

That wasn’t the end of the bad news. Rudolph put the current occupancy rate of the Center at 58% — far too low to cover debt service and capital outlays. He indicated that the Center could lose still more tenants due to a possible recession and competition from new buildings south of the airport—plus deferred maintenance that would come to $1 million currently and another $400,000 over 30 years. The still-vacant Building 1 alone was losing $100,000 per year plus maintenance costs of $20,000. Rudolph said he would look for a tenant for the building in 2020. Finally, the rate of return for the venture was now projected at .2%—dramatically below the 8% return included in the October 2016 PowerPoint.

What did they know and when did they know it?

Instead of ownership leading to more revenue, the Port’s new real estate venture looked to become another money-losing investment. At least one Commissioner wondered why this disturbing information was only now coming to their attention.

Apparently, there was a lack of communication and transparency between Port staff and the Commission. In a telephone conversation, Rhonda Gillogly of Rasmussen Triebelhorn, the firm who evaluated the building for the feasibility study, stated that their report did include a cost estimate for repairs to each building, all of which would soon need new roofs. The cost estimate for Building l was about $460,000. Building 2 needed $30,000 in repairs and $100,000 for the roof. Building 3 needed $400,000 plus $100,000 for the roof.

The record bears out Commissioner Zita’s claim that deferred maintenance was not in the PowerPoint presentation of October 2016. Port staff who read the feasibility report, including Mike Reid and Rudy Rudolph, were aware of the adverse findings but did not include them in their presentation. Commissioner Downing responded to a question saying that he hadn’t seen the building report but was happy with his vote to purchase the property.

Commissioner McGregor wrote an email to this reporter saying that he had reviewed both the appraisal and the inspection report and knew that $1 million in repairs was needed. He noted “this was over an estimated 10-year cycle and with proper maintenance some of these items could last longer than the estimated life-span provided by the inspection report.”

Rick Walk only learned about the deferred maintenance in the spring of 2018. He is still happy the Port has a presence in Lacey, but in view of the problems with Building 1, he is committed to renegotiating the ILA to use space in one of the other buildings.

When you’re in a hole the first task is to stop digging

At the July work session, Commissioners looked at options for moving forward: McGregor suggested moving the Port offices to Lacey could save $278,000 they currently pay to the Rants Group for space. However, staff said such a move would require $900,000 in renovations as well as millions in lost revenue.

More recently, Executive Director Sam Gibboney supported Commissioner Zita’s recommendation that construction of a new facility combining Port and Marina offices on Port peninsula property would offer savings over time. The other two Commissioners asked for more ideas for using the CBC site.

Whether the Port’s real estate investment in the Commerce Business Center becomes an asset or a liability remains to be seen. The new Executive Director has expressed an interest in improving transparency, communication and analyses of Port finances. Helen Wheatley, a candidate in this fall’s Port election, has made that a key goal if she is elected. We’ll keep you posted!

Esther Kronenberg lives in Olympia and follows the activities of the Port.

Quotes from the PowerPoint report on the CBC feasibility study are from Reid’s presentation at the Port’s October 12, 2016 meeting, available online. Information from the Market Analysis is from the Port’s Work Session agenda for July 18, 2019.

 

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