Schell Built Big, But Projects Lost Big
Seattle Times Business Reporter
IN THE '80s, mayoral candidate Paul Schell headed an ambitious development firm that made a mark on downtown Seattle and elsewhere. He credits it with resurrecting entire neighborhoods. But some buildings lost millions.
In the early 1980s, mayoral candidate Paul Schell had the financial backing to fulfill a vision.
As president of Cornerstone Columbia Development, Schell pumped $100 million into a dilapidated turn-of-the century neighborhood north of Pioneer Square.
The investment created beautifully crafted condominiums, offices and shops and saved a slice of local history from the wrecking ball.
But many of Cornerstone's properties ended up in foreclosure or selling at a loss, costing investors millions of dollars. In 1990, two years after its books reflected a $40 million drop in the market value of its properties, Cornerstone went out of business.
Cornerstone wasn't the only development company to lose money in the 1980s: Seattle's high-rise boom was a bust for most investors. Overbuilding created a glut of office space, and developers lost millions when rents plummeted.
Conceding the company had its successes and failures, Schell points out that he left Cornerstone in 1987, just as the commercial-real-estate market began to crash and the company faced serious financial difficulties.
Cornerstone made some risky investments that didn't always pay off, Schell acknowledged in an interview. In contrast to the calm, unflappable demeanor he often displays on the campaign trail, he bristled when pressed to recount the financial details of the company he headed.
Characterizing questions about Cornerstone as "mudslinging," he made no apologies for his helmsmanship or business sense. The developments resurrected entire neighborhoods and proved that urban renewal can be accomplished without public dollars, he said.
"If you try nothing, you live off the community instead of contributing to it. If you make the effort, you feel good about it even if you don't meet all your economic objectives," he said.
Today, the downtown real-estate market is once again hot, and most of the buildings Cornerstone developed are fully leased and profitable for their current owners.
Nonetheless, some in the downtown business community say Schell's visions often seem unbridled by financial realities, and watching the bottom line is not his strong suit.
"Investment builds a city, but it needs to pencil out," said Frederic Weiss, a developer and general partner of the Joseph Vance Building on Third Avenue. He is supporting candidate Charlie Chong for mayor in the Nov. 4 election. "Paul is a visionary, but I don't think he showed careful stewardship of the big bucks behind him. What would the city be like with a big checkbook in front of him?"
Big time for real estate
The story of Cornerstone reflects a time in Seattle's history when money talked, and the language it spoke was real estate.
In 1978, Schell and partner Jim Youngren formed Cornerstone Columbia Development to rehabilitate historic buildings - and create new ones - in the urban core, an idea that attracted the attention of Weyerhaeuser executives. Weyerhaeuser bought an 80 percent stake in the company to complement Quadrant, its residential development subsidiary.
By the early 1980s, interest rates had dropped from the economic malaise of the previous decade, making more capital available for big construction projects. The dawn of the Reagan era witnessed a rebirth of both the housing and office markets as the brighter economic picture unleashed pent-up demand.
Cornerstone built or restored many well-known buildings in Seattle, Tacoma and Portland. In Seattle, there was the National Building, the Watermark Tower, Hillclimb Court Condominiums and Waterfront Place. It developed the Alexis Hotel and had a financial stake in the Inn at the Market, and McCormick & Schmick's restaurant. It also owned Alexis Hotels in Portland and Denver.
In Tacoma, Cornerstone developed the Tacoma Sheraton, the Financial Center and the Cornerstone Building with several million dollars in loan money from the Department of Housing and Urban Development.
Under Schell's leadership, Cornerstone also created the Riverfront Place development in Portland, which included a marina on the Willamette River, condominiums and retail space.
Although most of the properties that Cornerstone developed are now fully leased, financial problems plagued many over the decade:
-- Waterfront Place, on the corner of Western Avenue and Madison Street in Seattle.
Cornerstone purchased two blocks along Western Avenue in 1982 for $7 million. One became Waterfront Place. Along with its partner, Glacier Park, a real-estate subsidiary of Burlington Northern, Cornerstone developed 19 condo units, 161,302 square feet of office space and 14,858 square feet of ground-floor retail space. The building sold in 1984 for $28.7 million to Waterfront Place Commercial Partnership, a group of investors that included Cornerstone, which continued to manage the building.
Selling the condos proved difficult. While the commercial spaces leased relatively quickly, Cornerstone didn't always get the rents it wanted.
In 1994, Equitable Life Assurance Society, which provided Waterfront Place Commercial Partnership $24 million in financing in 1988, began pursuing foreclosure after several commercial tenants moved out. The building was sold by the partnership one year later for $16.5 million. Today, the building is 100 percent occupied.
-- National Building, on the corner of Post Avenue and Madison Street in Seattle.
Cornerstone purchased the 133,298-square-foot building with office space and ground-level retail in 1980 for $1.8 million. One year later, it sold to Seattle Waterfront Associates for $2.1 million. Again, Cornerstone maintained a financial stake, and pumped $20 million of improvements into the building. But the National Building, too, faced foreclosure in the early 1990s when the rents would not cover the loan payments. In 1994, the building was sold to Kingwestern, a Singapore-based real-estate syndicate, for $9.6 million. The building is now fully leased, with retail and commercial tenants.
-- Watermark Tower, on the corner of Seattle's First Avenue and Spring Street.
Cornerstone bought the property for $10 million and built 95 condos, 56,900 square feet of office space and 9,782 square feet of ground-level retail. Schell and his wife, Pam, were some of the earliest tenants, moving into a 20th-floor unit.
For years after it was built, market realities butted against high expectations: High-priced condominiums wouldn't sell, payments fell behind, and, eventually, the bank foreclosed on commercial and retail portions of the building. Water leaked into office and residential spaces through tiles and balconies, pitting homeowners against developers and each other in bitter lawsuits that dragged on for years. By the time Schell left Cornerstone in 1987, only about 15 percent of the units had sold.
In 1994, the building was sold for $4.86 million to Kresendo Investment, a Singapore company.
The Watermark Tower is currently for sale for $8 million. The retail and commercial space in the tower is 96 percent occupied. Condo units now sell quickly, some for nearly $500,000.
"Visually, the building is considered quite attractive and the location, of course, is good and getting better all the time," said Bill Mann, associate broker with Williams Marketing.
The Schells still live in their condominium, but sold it last year.
-- Tacoma Sheraton, on the corner of Broadway and Thirteenth Street.
With a $4.5 million loan from the federal government and more from private investors, Cornerstone developed the 319-room Tacoma Sheraton, which opened in 1984. Occupancy rates never matched expectations, and the hotel encountered financial difficulties almost immediately. In 1988, Weyerhaeuser lent the partnership that owned the hotel an additional $5 million, but heavy losses burned through the cash in a couple of years. In the early 1990s, California Federal Bank threatened to foreclose to recoup some of its $21 million loan. The bank eventually sold the loan to another group of investors for $6 million, taking a $13 million loss. The partnership that now owns the project will continue to pay back the government for the next 16 years.
The hotel is now posting healthy occupancy rates and is considered a draw for downtown conventions.
Schell sold in 1985
In 1985, Schell and Youngren sold their 20 percent stake in Cornerstone to Weyerhaeuser, which in turn sold half of the company to Columbia Willamette Development, a subsidiary of Portland General, a utility company. Schell remained as president.
Schell would not reveal how much he made from the sale, but he said his 10 percent share fetched a sum in the seven figures, and the company was financially healthy at the time of the transaction.
Two years later, the market had changed, Cornerstone was in trouble, and the partners were starting to bicker.
"At that point, you could see the values weren't there," said Schell. "They decided to take the losses and run instead of staying in and waiting for the rebound. I left because I didn't want to do what Bill Weisfield had to do."
Weisfield, who had a reputation as a fix-it man, was hired as president in April 1988 to fulfill a simple mission: unload unprofitable properties, cut expenses and foster the comeback.
Before he began, Weisfield took stock of what was in the portfolio. What he found were beautifully constructed offices and condos priced above the market rate.
"We had some excellent properties that were higher-priced than they should have been. The amenities were first-class. You'd see granite floors and cherry wood in the elevators," he said. "The timing of some of the condos and office projects was just plain wrong."
Weisfield took the four directors of Cornerstone - two from Weyerhaeuser and two from Portland General - on a tour of the downtown properties. He then showed them comparable buildings that were charging much less for rent. The solution was obvious: To fill up the buildings and prepare them for sale, Cornerstone had to drop the rents, a move that lowered the overall market value of the portfolio from $175 million to $135 million.
"They were not tickled about it," remembered Weisfield.
Liquidation, and a legacy
Two years later, in 1990, Weyerhaeuser and Portland General decided to close down Cornerstone and liquidate all of its assets. The partners have since sold their interest in most of Cornerstone's holdings, including the Alexis Hotel and McCormick & Schmick's.
There were some Cornerstone properties that performed admirably. The Riverfront Place in Portland, for example, continues to grow as the Portland Development Commission considers adding a hotel, an office tower and an apartment complex to the project.
In retrospect, both Weyerhaeuser and Portland General would rather look past the financial failures and focus on Cornerstone's legacy of urban renewal.
"The projects were great projects, but they were not economic projects," said Frank Mendizabal, spokesman for Weyerhaeuser. "Obviously, there's always the hope that you'll make money, but the properties were great for the cities involved."
Moving on to the Port
Developing ambitious projects for reasons other than purely making money is a trademark of Schell's that followed him to the Port of Seattle, where he currently serves as one of five elected commissioners.
In July, the Port Commission voted to go ahead with a $27 million office complex on the Seattle waterfront called the World Trade Center. The project, to be financed initially by Port-issued bonds, will take shape across the street from the Bell Harbor International Conference Center on Pier 66.
The Port said it will try to fill the offices with trade groups, consulates and other international organizations, even if they cannot afford to pay market rates for rent. Schell is largely credited for pushing the project, an idea he first raised with the Port in 1988, when he was president of Cornerstone.
Privately, Schell, former dean of the College of Architecture and Urban Planning at the University of Washington, is a partner in three upscale hotels that were developed in the mid-1990s - Friday Harbor House on San Juan Island, Inn at Ludlow Bay in Port Ludlow and the Boatyard Inn on Whidbey Island - and he owns the Inn at Langley, also on Whidbey Island, which was built in 1989. All charge about $200 a night. Only the Boatyard Inn and Inn at Langley are currently making enough money to cover their debt service, said Schell, adding that the other hotels are close to being profitable.
Schell says he wants to bring to City Hall the philosophy that spending extra dollars reaps rewards in the long term. In the past, Schell says, municipal governments have suffered from buildings and projects that decay before their time.
"I don't accept that everything has to be done on the cheap. That's not always good economics - look at the Kingdome," he said. "Let's do it right the first time so we don't have to rebuild it 20 years later. You don't have to gold-plate it, but you do it right."
Although former colleagues and observers say Schell's ability to think big is one of his greatest assets, the memory of cherry-wood elevators and granite floors inside unfilled condos and office buildings leaves Weisfield hoping that the mechanisms of government will temper Schell's imagination.
"The city will benefit from his vision, but the City Council will be a more controlled environment than when you have corporate parents," he said. "I believe there are enough checks and balances that will get the best of Paul, but he will be frustrated and he won't be able to do something fast enough or good enough."
Seattle Times staff reporter Susan Byrnes contributed to this report.
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