Gateway Owners Lose Investment
THE LAST HIGH RISE to go up in the overbuilding boom of the '80s has never been close to full and the mortgage is in default. Possible tenant City Light would get a bargain.
The owners of AT&T Gateway Tower, Seattle City Light's prospective new home, have lost their entire investment in the skyscraper and have been in default on its mortgage for months.
Gateway was built by a partnership of Herman Sarkowsky, a prominent Seattle investor; Kumagai Gumi, a Japanese construction company; and First City Equities, a Canadian developer. But the partnership has ceased to make payments on an estimated $165 million loan and retains ownership of the building in title only. A consortium of banks, headed by the Bank of Montreal, controls the building's fate.
The banks, local real-estate brokers say, are actively shopping the building's mortgage. People familiar with recent appraisals say the building is worth slightly more than half the value of the loan.
"The lenders are going to take a real haircut in this deal," one broker said.
Bank of Montreal spokeswoman Lynn Kilpatrick said she could not comment on the Gateway loan. Generally, she said, "We're not in the business of owning real estate."
Sarkowsky acknowledged the partnership is in default with little hope of recovering.
"We do not have the building up for sale but we have no control over what the banks do," he said.
He said the tortuous development of Gateway was nonetheless among the most enjoyable business experiences of his life.
"At some point you realize you made a mistake and you have to live with it," Sarkowsky said.
Sarkowsky and his partners are estimated to have lost $30 million, half of it from Kumagai and a quarter each from Sarkowsky and First City.
Unlike many other high rises, Gateway was financed with what is called a non-recourse loan, meaning the banks are unable to take control of other assets owned by the mortgage holders to satisfy the loan. Sarkowsky, for example, is one of the investors in the proposed redevelopment of the Nordstrom block.
The Gateway default, along with the $550 million refinancing last week of several office buildings owned by Wright Runstad, a local real-estate development company, mark the final unraveling of a boom era in downtown Seattle.
In the 1980s, developers built as much downtown office space as had been constructed in the previous 100 years. The boom was predicated on what turned out to be misplaced faith in a growing market and fueled by the ego of individual developers, each of whom repeatedly predicted the failure of the others.
The buildings are still there, but most of the ownerships have come tumbling down.
The Gateway troubles follow the earlier dismantling, sale or loss of the office-space empires of Martin Selig; the commercial real-estate company Prescott and its owners, Dick Clotfelter and Gary Carpenter; and Unico properties.
Only Wright Runstad has survived substantially intact, in part because it never owned more than small slices of its buildings, real-estate insiders say. They speculate the company owns even less after last week's refinancing.
Gateway Tower was the last high rise built during the boom. The distinctive 62-story red granite skyscraper with a green glass top was designed by Fred Bassetti. The building has never been even close to fully rented. Even its anchor tenant, AT&T, has subleased most of its space.
Gateway, Columbia Center, US Bank Centre and Washington Mutual Tower all competed for tenants at a time when bank mergers, law-firm consolidations and a recession depleted the number of potential tenants.
The proposed lease by City Light of nine floors of high-rise office space at bargain rates is a good example of what happens in such a situation.
The proposed 10-year lease is at an average of $17.25 a square foot. Real-estate experts estimate that a premium downtown high rise should rent space for at least $20 a foot to make even a marginal profit.
It is little more than affirmation of what many people said for a long time - too many buildings were built.
The city of Seattle's rumored interest in buying Gateway is largely "theoretical" at this point, according to Norma Miller, the city's facilities director.
Any more serious consideration would depend almost solely on the building's price, she said.
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