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March 2, 2015

Waterfront property? Time to plan now

  • The Highway 99 project is already affecting real estate decisions ahead of an unprecedented transformation of Seattle's waterfront.
  • By DAN EVANS and STEVE DUFFY
    Special to the Journal

    Highway 99 won't be torn down for years, but the anticipation of better views and a walkable, enjoyable streetscape along the waterfront is already heating up the area's real estate transactions.

    The timing couldn't be better. Seattle is one of the strongest real estate markets in the country based on job creation, income and work-life balance, and now its waterfront real estate — like many other cities' formerly industrial waterfronts — is being recognized for the premium it commands.

    So what financial, tax and development factors go into these waterfront real estate decisions? What can current landowners and their potential buyers expect during and after the seawall reconstruction, highway tunneling and viaduct teardown?

    It's quite interesting to watch what's unfolding along this two-mile stretch of US 99. Local media have reported on 11 transactions in residential development alone.

    Office projects, such as the recently announced headquarters for Weyerhaeuser at 200 Occidental in Pioneer Square, will benefit from enhanced waterfront views as well.

    Issues for owners

    Here are some things owners should consider in current and future waterfront transactions:

    1 Current waterfront businesses and property owners must weigh the impact of the construction and teardown on current tenancies.

    This is key for those along the tunnel route and related construction areas. Many owners in direct proximity to the project are responding to state and related agencies charged with minimizing the impact. For example, the $290 million Elliott Bay Seawall project has already closed several piers, and a $30 million fund will help many affected firms.

    2 Property owners along the tunnel route are determining future impairment or proactively accelerating development plans.

    While the impact of seawall and construction projects is fairly clear, the tunnel project has other implications for the feasibility of new construction, and may affect the rehab of existing properties. Businesses need to determine how it affects their property and potential improvement or expansion, as zoned.

    Market forces are driving the initial activity. There are plans for more than 1,600 apartments and condominiums along the waterfront, with The Post, Wave, and Nolo already adding more than 700 apartments to the corridor. Post-teardown views, still years away, are already adding value to many properties.

    Office construction is also leveraging the project's timing. Allegra Properties' 2200 Western Avenue is completing a major rehab. Lease Crutcher Lewis, a co-owner of that project, anticipates occupancy this summer.

    3 Older properties can qualify for historic tax credits and tax credit transfers that support revitalizations.

    An interesting component of the revitalization of several of these buildings is the Federal Historic Tax Incentive Program. Many properties near the viaduct date back to the early days of Seattle's waterfront and likely qualify for tax credits to help fund improvements if not major redevelopment.

    Adopted in 1978, the federal historic tax credit (HTC) encourages preservation and reuse by offering federal tax credits to owners of historic properties through a dollar-for-dollar reduction of federal taxes.

    Many property owners are exploring these tax credits. Projects range from offsetting minor improvements to claiming multimillion-dollar HTC benefits that help make a reuse or redevelopment project viable.

    Tax credits were one piece of the picture in a major rehabilitation of 619 Western, a 74,000 square-foot office and retail property near Pioneer Square. L&B Property Investments LLC undertook renovation of the circa-1910 building, which at one point had been slated for demolition because of the tunneling. Two technology firms, Chef Software and Artefact, are leasing all five floors of office space.

    The 2200 Western building also used HTCs. Last year, Lease Crutcher Lewis announced it had purchased a 50 percent interest in the Allegra-owned building, and would codevelop it and move its headquarters there.

    A Lease Crutcher press release said the project earned preliminary approval for federal historic preservation tax credits by aligning the improvements more closely with the original building. This included retaining the doorways on Western Avenue and slightly reducing the profile of a new penthouse level.

    4 Funding and financing — often difficult for waterfront construction — are available in Seattle.

    Real estate capital markets are in excellent shape, particularly for urban projects in the strongest markets, with competitive availability on both the debt and equity side. Important details such as timing, entitlement, development costs, highest and best use, etc., will all require thoughtful support.

    Looking at the big picture, a number of positive forces makes the future of Seattle's waterfront development quite special — which is why many owners and investors are acting now to advance development and capital planning.

    The Highway 99 removal effort is already affecting real estate decisions ahead of this unprecedented transformation of Seattle's waterfront. Owners who carefully weigh the financial and risk factors can count on the best results.

    Dan Evans is tax partner at Moss Adams LLP. Stephen Duffy, managing director, leads the real estate investment banking business at Moss Adams Capital LLC.



    
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