University of Washington - Metropolitan Tract

Only a 4.2% return on a $285 million investment

Imagine owning a $285 million investment in downtown Seattle that includes the Rainier Tower, commercial office buildings and the Olympic Four Seasons Hotel. But you only earned a 4.2% return on your investment (last year). Contrast this to your brother’s 8.6% return on his $335 million investment of One and Two Union Square in downtown Seattle.

You, in this scenario, are the University of Washington and your brother is the State Investment Board (SIB).

Background: The University of Washington was established in Seattle in 1860 by the Legislative Assembly of the Washington Territory. The original site is now in downtown Seattle. In 1895 the UW moved to its present location, but the state retained ownership of the original property. The University’s Board of Regents has managed it as the "Metropolitan Tract" since then.

For years the legislature has tried to get better visibility over the rate of return on its multi-million dollar investment in downtown Seattle. The reports that the UW provided contained little useful information and the regents have resisted efforts to provide more oversight. Finally, the 1999 Legislature directed the UW Board of Regents to report on all leases and transactions of the Metropolitan Tract. The first report was received by the Joint Legislative Audit and Review Committee (JLARC) late last year.

The JLARC summary of the report showed that "the $12.1 million of net operating income generated by Metro Tract office properties represented a 4.2% return against the $285 million value of the commercial office building properties. The $28.8 million of net operating income generated by Union Square represents a 8.6% return to the SIB against the $335 million value of these properties. The Metropolitan Tract, therefore, is generating about 49% of the amount of the operating income (relative to asset value) as the State Investment Board generates on Union Square."

Deeper than the problem of a low rate of return is the UW’s relationship with its property manager, UNICO. In the commercial real estate industry, a property manager normally is paid about 3% of gross profits, and the owner pays capitol and operating costs. The UW lease with UNICO is different in that UNICO manages property and plans improvements, but UW picks up capitol costs. When it is all said and done, the amount of money UNICO returns to the UW is less than half of the gross receipts received from tenants. This is an unexplainably low payment rate.

The UNICO contract was originally scheduled to expire in 1989, but, in 1974, the UW extended it to 2014.

The JLARC report revealed:

the UW does not know the amount of operating costs paid by UNICO out of its management fees. This is unacceptable.

the UW used UNICO funds to make several capital improvements when the lease was extended in 1974. UNICO paid for the improvements to the properties and is being reimbursed (with interest) by UW. JLARC staff concluded, "[I]t seems clear that the 25-year lease extensions to UNICO in the 1970s in return for UNICO acting as the banker for capital improvements, has become far more costly to the UW than had the UW simply borrowed money for the improvements from commercial sources."

JLARC’s most critical comment: "Had UW simply borrowed the funds to complete the improvements and allowed UNICO’s lease to expire in 1989, UW rather than UNICO would be receiving the benefit of UNICO’s continuing ownership interest."

JLARC recommends that the UW "should not renew its current lease with UNICO, upon its expiration, for management of the Metropolitan Tract under the terms and conditions currently prevailing.

Recommendations:

1. EFF recommends that the Legislature transfer the responsibilities for the Metropolitan Tract properties from the UW to the State Investment Board. The Investment Board has a demonstrated track record of investment performance.

2. The State Investment Board should review the UNICO contract and consider the economic benefit of revisiting the contract or buying out the remaining period.

Prepared by Bob Williams, Senior Research Analyst (360) 956-3482 or effwa@effwa.org

Evergreen Freedom Foundation P.O. Box 552, Olympia, WA 98507 Phone: (360) 956-3482, Fax: (360) 352-1874 Email: effwa@effwa.org