Mercer Megablock Sells to Real Estate Equity Firm for $143 Million

Mayor Jenny Durkan announced today that the city will sell the “Mercer Megablock” property—three parcels in South Lake Union totaling just under three acres—to Alexandria Real Estate for a total of $143 million. (I was first to report that the city had chosen Alexandria as the buyer last month.) The sale of the property, one of the largest undeveloped properties in South Lake Union, will net $78 million for various affordable housing uses (including both low-income and middle-income housing); pay back several loans the city took out against the future sale of the property; and provide $5 million for unspecified homelessness-related programs—including, perhaps, the restructure of the city and county’s homelessness response systems into one regional agency.

The $143 million price tag includes a $38 million “discount” in exchange for Alexandria’s guarantee to provide affordable housing; the price without affordable housing would have been just over $171 million. “It’s a new benchmark number in terms of price for square foot” on the portion of the property Alexandria plans to develop, Steven Shain, from the city budget office, told reporters during a briefing on the plan last week. “I think we did a great job negotiating. … I don’t want to characterize in the press that they’re overpaying [but] they are going way above to make sure that they won this project.”

During last week’s briefing, Mayor Jenny Durkan called the deal “one of the most consequential property deals the city of Seattle has ever done. … I think it will be one of those things that people look back and say, that really was a generational opportunity for the city of Seattle and they were able to seize it and make our city better because of it.”

Here’s a detailed look at what the project will look like and where the money from the sale will go.

What will be included on site:

The project will primarily be a life-sciences campus like the ones Alexandria has already developed in cities like San Francisco, San Diego, and in South Lake Union—”creating … hundreds of new jobs, if not thousands of new jobs, that will lead to our ability to be the city that cures cancer and other things like that,” Durkan said.

In addition to commercial space, the project will include a community center of up to 30,000 square feet, according to Shain, at no rent to the city, and will a single, large building (up to 12 stories tall) combining 175 units of low-income housing—the minimum number the city asked for in its original request for proposals—with about 38 moderate-income units built under the city’s Multifamily Tax Exemption (MFTE) program, which grants developers a property tax break if they keep units affordable to moderate-income households for 12 years. (City officials who briefed reporters on the plan last week said the developer could build as many as 190 units in addition to the affordable ones, but has not committed to a specific number, which will determine the exact number of MFTE units).

The affordable units, according to Shain , would be distributed throughout the same building as the market-rate apartments—”there wouldn’t be two separate doors”—and would be available to people making less than 60 percent of the Seattle area median income, or about $45,600 for a single person. The new units would mostly be studios and one-bedrooms, not the family-sized units that are most lacking in Seattle, particularly in the downtown core.

Alexandria would also be responsible for building two blocks of protected bike lane on Mercer St. and to open a pedestrian path through the campus on the block between Mercer and Roy. The company has agreed to pay for pay for environmental remediation on the site, which has been the site of a dry cleaner and a gas station, among other things; Shain said the cost would probably be a “significant eight-figure number.”

Paying back the city’s debts

The city has been banking on the sale of the megablock properties to pay back a number of significant debts, including a $12 million internal loan that the Seattle Department of Transportation took out to pay for work related to road work in the Mercer corridor; another, $3.6 million SDOT loan used to make up an ongoing shortfall in operating revenues on the existing South Lake Union streetcar; a third $9 milloin loan to SDOT that will (if approved by the council) pay to restart design and engineering work on the Center City Connector streetcar plan; and a one-time $4.3 million loan the council approved in 2018 to pay for homeless services.

The sale would also provide about $16.7 million for other transportation projects, including—according to SDOT director Sam Zimbabwe—some of the projects that were originally promised in the (since scaled-back) Move Seattle levy. Alex Hudson, the director of Transportation Choices Coalition, said she was most excited by the streetcar project. “I think there’s a real direct connection between this project, this site, and what’s going to happen here, and the need for the streetcars to be connected,” she said after the announcement.

In addition, the money will pay for a $9.2 million shortfall in commercial parking tax revenues from 2018. Budget director Ben Noble said last week that the 12.5 percent tax had been growing at 4 percent annually, but slack growth in 2018 blew “a hole in our revenue forecast.” Parking tax revenues rebounded this year, but it’s unclear what the city plans to do if driving (and thus parking) declines in the future, which is one of the city’s long-term climate action goals.

Off-site benefits

About half the proceeds from the megablock sale—$78 million—will pay for affordable housing for low- and middle-income homebuyers and renters. The bulk of that money, about $42 million, will be used to buy up property near transit (presumably along the future light-rail route to Northgate and points north) for transit-oriented development—mixed-use buildings, with amenities like open space and child care, within walking distance of transit stations.

Another $15 million will be used to create a revolving loan fund for groups that want to participate in the city’s Equitable Development Initiative, which funds projects that combat displacement by providing amenities such as affordable housing, job opportunities, and cultural centers. Community groups have struggled to buy sites for equitable development projects in Seattle’s market, and the thought is that the revolving fund could provide access to capital that would make their bids more competitive.

Homeownership programs for people making up to 80 percent of the Seattle median (about $87,000 for a family of four) would get a boost of $15 million from the sale, funding programs at city-owned properties at Fort Lawton, surplus City Light land, and some small pieces of land along the existing Sound Transit light-rail route that Sound Transit plans to transfer at little or no cost to the city (I first reported on plans for those properties last week).

The money from the sale will also make it easier for some homeowners to build accessory dwelling units—backyard cottages or basement apartments—on their property, using low-interest and deferred loans that would come due when a homeowner sells their house. The theory behind this program, which would be funded with $6 million from the megablock sale, is that giving homeowners access to low-interest loans to build and rent out second units will bring in income that helps them stay in their homes. The city has not decided the maximum income level at which homeowners will be eligible for the ADU program. One council member who saw an early draft of the plan, Lorena Gonzalez, said that loans aimed at people making up to 120 percent of median income (about $130,000 for a family of four) would disproportionately benefit wealthier white homeowners, not the people of color and low-income folks at risk of displacement who are the ostensible targets of the proposal.

Finally, the sale will pay for $5 million in unspecified homeless investments—Noble, the budget director, said the mayor does not intend to use that money to pay for ongoing new programs with one-time funds, as she has in the past—and about $12 million, give or take a couple million, in payments into the city’s affordable housing fund through the city’s residential and commercial Mandatory Housing Affordability (MHA) program, which requires developers to build affordable housing on-site or fund housing elsewhere.

Some affordable housing advocates argued out that although the city could have paid off its outstanding debts by selling part of the megablock property, then turning the rest into permanently affordable housing, keeping the bulk of the land under city ownership. Cary Moon, a progressive activist and 2017 mayoral candidate, says she’s disappointed that Durkan “started with the assumption that they were going to sell it. That’s the key problem: She doesn’t own this land, the government is holding this land in trust for the citizens of Seattle. We own this land.” Moon says the city could have refrained from taking out additional loans against the future sale of the property, which would have allowed them to sell “a slice to pay that back.” Instead, she says, “they’ve been using this land as a piggy bank.”

The city council’s sustainability and transportation committee will discuss the details of the proposed sale on Friday, August 16. Council member Mike O’Brien, who chairs the committee, said Tuesday that he thinks the city “found a great partner” in Alexandria and that the mix of expenditures the mayor is proposing from the sale revenues seems “totally appropriate,” although he adds that the council will “want to understand the mix of ownership and rental housing.”

After that, the committee will take up an ordinance to formally approve the sale, most likely on September 6.

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