KEY TOWER -- $1.215 MILLION REAL ESTATE EXCISE TAX GIVEAWAY
By Bob Hegamin and Nigel Keiffer
On January 12, 1996 Seattles elected officials praised themselves on the purchase of the Key Tower for the City of Seattle. They, however, did not mention that the buildings seller had their help in avoiding the countys Real Estate Excise Tax. As a result, RCW 82.45, which provides a tax for the support of the common schools, was not collected. The " creative path the city took to assist private developers..." essentially deprived K-12 education programs of $1,215,000.
Seemingly out of context, on June 18, 1998 the following response to complaints about the unrelated Pacific Place Garage issue was made public:Part of the problem, he said in a letter to (Seattles current) Mayor Paul Schell, is that citizens have not understood "the creative path the city took to assist private developers." Its apparent that city officials and their legal counsel carefully designed the agreement to withstand legal challenges, and they succeeded, Sonntag said. (The Seattle Times June 18, 1998 Seattle held blameless over deal for garage.)
The "creative path" euphemism was attributed to Washington State Auditor Brian Sonntag, following an investigation by his office of the Pacific Place Garage, a facility built by a developer for $50 million and for which the City of Seattle has agreed to pay $73 million.
Although the statement by Mr. Sonntag related to methods the City had used during negotiations with the developer of the Pacific Place Garage, it could just as easily have been made about the Key Tower negotiations. The two cases simply illustrate the continuing disingenuous relationship City officials have had with the people of Seattle.
A SHORT HISTORY
The Key Tower is a 62-story office building, completed and occupied in 1989. Built at a cost of $160 million, it had a high vacancy rate for most of its life. By early 1994, its outstanding debt had ballooned to over $200 million, while its assessed valuation had dropped to $111,325,000. On October 5, 1994 the valuation had dropped further to $79,300,000. Meantime, the City had been negotiating with Gateway Associates for the lease of nine floors of the Tower.
On October 14, 1994 the Puget Sound Business Journal publicized the plight the owners of the building were facing. It provided some options the owners and lenders could take to minimize their losses and avoid taxes, among which it offered the following: "One theory is that by selling the loan, rather than foreclosing and then selling the property itself, the banks would avoid paying hefty excise taxes."
By January 17, 1995, Gateway Associates - developer and owner of the building - was in default. The Bank of Montreal, - the lender was acting for itself and as agent for several other lending institutions. By foreclosing, the lender would have had a building to sell and a Real Estate Excise Tax of 1% of the selling price to pay. On that January 17, the law firm of Perkins Coie, acting on behalf of its client, the Bank of Montreal, asked the Washington State Department of Revenue a rather pointed question: Does the Real Estate Excise Tax have to be paid if a property is conveyed by a Deed in Lieu of Foreclosure from the borrower to the lender? The response from the Department of Revenue was made the following day. Under state statute WAC 458-61-330, a Deed in Lieu of Foreclosure precludes the paying of the tax. In just one word -- NO!
The Key Tower was now on the market. Gateway Associates was in default but the lender was not going to foreclose. Today, the assumption has to be made that both the borrower and the lender must have seriously considered the suggestion provided by the Puget Sound Business Journal. Now, if they could only find a buyer who could turn the suggestion into reality. Meantime, the City had been negotiating with Gateway Associates for the nine floors and subsequently signed a lease while the following was taking place.
- By June 12, 1995 the City had asked for and received the right of first refusal on the property.
- On July 31, the Seattle City Council gave then-Mayor Rice the authority to buy the building if it did not exceed $125 million.
More accurately, the City of Seattle agreed to pay and did pay - the Bank of Montreal the sum of $121.5 million for the NOTE secured by a Deed of Trust, since the Bank did not own the building. But, no Real Estate Excise Tax was paid as no property was conveyed to the City. The plan was playing itself out as the City, now the new lender, prepared to foreclose on Gateway. Essentially, though, the City had been a party to the plan when it agreed, in principle, to include the following in the Agreement for Purchase and Sale: "
- On September 27, the City agreed to pay $121.5 million for the Tower.
.this Agreement constitute transfers of interests in the Loan and the Contract and (ii) the Contract constitute a reduction in the outstanding balance of the Loan followed by a transfer of the collateral for the Loan in lieu of foreclosure and that such transactions are not and will not be subject to the Washington State Excise Tax. Buyer (the City) agrees to fully cooperate with Seller to structure the Closing to effect this intent:" (emphases added)
So, it appears that between September 27, 1995 and January 12, 1996 the City of Seattle became a moneylender or "THE BANK". On January 12, 1996, treating the City as if it were its original creditor, Gateway Associates signed a Deed in Lieu of Foreclosure and formally turned the Key Tower over to the City of Seattle. By law, Gateway Associates did not have to pay the excise tax.
Mr. Sonntag had said it all: " Its apparent city officials and their legal counsel carefully designed the agreement to withstand legal challenges, and they succeeded, ." Obviously, they also succeeded in creating a lot of losers in K-12 education. by their cavalier giveaway of more than a million tax dollars - $1,215,000 to be exact.