On Tuesday, Tacoma City Council is expected to make a decision that could change the dynamics of Pacific Plaza downtown.

The high-rise, located at 1250 Pacific Ave., is earning much praise for its environmental design. Developers turned the former parking garage into a state-of-the-art “green” building with an additional 102 parking stalls to complement the previous 381 stalls; two new floors of Class-A office space; the reconstruction of the public hill climb connecting Pacific Avenue and Commerce Street; a green roof covering approximately 85 percent of the roof top; and a cistern which reduces rainwater runoff from the site and directs water to be re-used in the facility and irrigate the green roof.

But one issue has raised concerns among some councilmembers and downtown merchants: how will vacant, street-level space fronting Pacific Avenue be utilized?
An agreement between the co-owners — Pacific Plaza LLC and the City of Tacoma — states the space “shall be used for commercial retail activity.” For nearly three years, as the project was being planned and developed, many (including the City and Pacific Plaza LLC) believed small retailers a big-box merchant, or a grocery store would occupy the ground floor.

Finding retailers during a recession, along with more than 100,000 square feet of existing vacant retail space along Pacific Avenue, has made that goal difficult, according to Pacific Plaza LLC’s Dan Putnam. Instead, Putnam wants to lease a portion of the ground floor to the Washington State Attorney General’s Office.

According to a Nov. 17 letter from Putnam to Tacoma City Manager Eric Anderson, the attorney general wants to relocate from the Washington Building a couple blocks away to Pacific Plaza and lease approximately 33,000 square feet of office space for its 100 employees (the attorney general would occupy approximately 18,000 square feet on the eighth floor, and approximately 14,000 square feet on the ground floor; they hope to move in by July 1, 2010).

According to Putnam, it would still leave space for a grocer or big-box store to occupy the building’s ground floor corner spaces. But Tacoma City Council has heard from merchants who oppose the plan. They argue ground floor retailers, not office workers, would draw more shoppers downtown, thereby benefitting nearby merchants and perhaps building momentum for more retailers to move in to the area. Last week, the Downtown Merchants Group voted to send a letter to City Hall opposing the plan.

Another issue: lease rates for the attorney general’s office. Originally, the retail space was to be leased from the City to Pacific Plaza LLC for $1 per year in order to make it easier for the developer to draw retailers — a move that was deemed in the interest of the public good. Now that the space could be used for commercial offices, many (including City Manager Anderson) argue the lease rates should change to reflect the current market value. However, Putnam argues Pacific Plaza LLC has spent $8 million of its own money on upgrades to the space, and that should be considered in establishing a lease rate.

The issue will be revisited Tuesday afternoon during council’s committee of the whole meeting. A decision could be made as soon as Tuesday night’s council meeting.

Councilmembers and Putnam discussed the issue for nearly two hours on Dec. 8 during council study session. Here is some of the discussion from that meeting.

DAN PUTNAM, PACIFIC PLAZA LLC

Filling this building is critical to its financial stability and to the perception of future development in downtown Tacoma. One thing we didn’t count on three and a half years ago when we first met was opening Pacific Plaza in the most challenging of economic times in our lifetime. As we speak, we have been open for business for five months and we have 50 percent occupancy, of which 33 percent of that is owner occupied office in a pre-lease setting. We have zero percent retail occupancy. We are part of over 100,000 square feet of vacant ground lease space on Pacific Avenue downtown, according to Neil Walter, our leasing agent.

We’ve actually been surprised by some of the negative reactions to the announcement of Pacific Plaza as the location of choice for the Attorney General’s Office. While there has also been a great positive reaction, it seems the negative gets played a little bit louder. We went into the community to garner support and understand the concerns that were being raised. We found the City and Pacific Plaza have this public relations challenge. There’s perceptions and expectations by the public and resulting pressure on City Hall that caught us completely by surprise.

Here are some of the perceptions.

Some hold the perception that Pacific Plaza Development guaranteed we would fill the entire ground floor with retail and exchange that promise for what is perceived as a sweetheart deal of one-dollar a year lease for 99 years. We can understand that with this perception, our essentially free lease should enable us to offer the ground-floor sub-leases at very low rates and still profit. Why should the City allow us this parcel change in use just to allow us to make more money because office rents are higher than retail rents in this market — or retail rents, if there are any? Just hold onto that free space until you can attract the kind of retail we want and need. Those are some of the sentiments we have heard from the community.

So to clarify, the truth is that Pacific Plaza Development calculated the value of the ground floor lease rights at the top of the retail market three years ago. We actually paid $1.16 million up front to the City for the ground lease rights in addition to the $1.5 million air rights for the office. So that’s a total of $2.66 million. This is viewed as the creative funding source to supplement the property acquisition and parking garage improvements. It was all part of our win-win public private partnership. Pacific Plaza has spent another $4 million for first-class facade upgrades. And we actually have $2- or $3-million left to pay for tenant improvements, depending upon the tenant mix, totalling close to $8 million Pacific Plaza will have paid for the ground floor. This is in addition to $25 million in private investment in the office level. The City of Tacoma paid zero for the upgrades to the ground level and yet will own it.

We just have a 99-year lease. Our projected retail rents three years ago that we used to calculate the Master Lease Value were in the low-20s triple-net. You have to strip away expenses and tenant improvements to get to the low-20s. You have to get to the high-teens just to break even. At this point, our prospects at best are rents in the low-teens triple net or even less. The ground level value has mirrored the national average at 30 percent loss in value due to the sick retail market this past year and a half.

No other retailers other than a grocer are in the wings at any price point even with our vigilant efforts to track every retail lead and rumor. Twenty-twenty hindsight would tell us from a purely financial standpoint we could have spent $1 million less on facade improvements. We could have had an OK-looking concrete facade with less storefront and fabric awnings, instead of the first-class limestone granite, maximum storefront middle awnings. With that said, I’m not sorry we went first-class even though as developers our wallets are sorry. I’m proud of what we’ve done.

The City did not strike sweetheart giveaway deal. In fact, you made a prudent deal at the high point of valuation. The developer took the risk and for the short-term economic cycle we have lost. However, we still believe in the long-term viability and are determined to make it work. We are owner-occupants of the building. We are in this for the long haul.
We ask you to allow Pacific Plaza to fulfill the letter of intent we have with the Attorney General for the following reasons:

1 — The Attorney General really wants to come to Pacific Plaza and thinks we serve their need best;

2 — The public benefits with better exposure for the [Attorney General’s] Consumer Protection Division front and center on Pacific Avenue and adds people to the street;

3 — The Attorney General’s limited exposure on Pacific Avenue, combined with the added retail opportunity on the 12th Street hill climb actually adds a net 50 feet of retail frontage in a prime pedestrian retail section instead of the possibility of an ugly, no matter how you dress it up, loading dock;

4 — The Attorney General and Pacific Plaza guarantees long-term parking revenue for the City that is at risk if they locate out of the city parking system. That’s about $2 million over a 10-year lease if they locate outside the city parking system.

5. — The lease essentially fills the rest of our building and stabilizes the financial situation so we can aggressively attract a grocer or large-format drug store to the south half of our Pacific Avenue frontage. A major retail anchor in this location will eventually help adjacent business and future retail expansion;

6. — The Attorney General lease stabilizes our financial position and removes the greatest risk to Pacific Plaza Development and the City of Tacoma from financial non-performance in this economy.

We don’t really have significant Plan B opportunities at this time and we know nobody wants empty storefronts, especially devastating to a new building that will be winning all sorts of awards this time next year. Pacific Plaza as a single project is creating the largest potential for retail built downtown in 30 years, other than the University of Washington Tacoma. The Attorney General occupancy is compatible with all of the city’s preferred street level uses and is a lifeline that creates a winning formula right now. So we are sincerely asking for your approval of the Attorney General lease at Pacific Plaza.

JAKE FEY, TACOMA CITY COUNCILMEMBER

For me, philosophically, I have a problem with this discussion as it relates to one tenant, one piece of property, and kind of doing precedent-setting things with respect to changing the deal and putting ourselves in a situation where we are crowning a victor in a private negotiation for lease property. I think we need to make sure, if this is going to be on the agenda next week, that we do have all the information on the table.

We’ve heard from Mr. Putnam today. We haven’t had the opportunity for the community to weigh in on this. I think we’re pressing this to make a decision. It isn’t a City Council emergency in my mind. I want to make sure we have ample time to hear from other members of the public.

MIKE LONERGAN, TACOMA CITY COUNCILMEMBER

What I’m trying to do is bend over backward to make this work. At the same time, I am here to represent the citizens of Tacoma, the interests of Tacoma. We have heard a number of explanations in other cases when conditions change that it is fairly standard for whatever the controlling party, be it the Foss Waterway Development Authority or whoever, to expect some adjustment in order to give relief to somebody from something they agreed to. I’m not trying to be opposed to the idea. I’m not trying to stick my head in the sand. It may not be a choice between retail and office. It may be a choice between empty space and office for some time to come. I’m not trying to shoot this down. I’m trying to represent the best interests of one side of the agreement. Those conditions have changed for everyone else in this business of commercial space lessor. We have to be reasonable and fair to everybody and answer to what we did. I’m trying to get there.

What I’m saying is give me something. Throw me a bone. I represent the people on one side of an agreement that was entered into voluntarily by two parties. Give us something. We know times are tough. We have to look to the future. I want to say yes. I really do. I don’t think every single square foot has to be retail. But we need to have something where we can look our constituents and the other people who are in this business in the eye and [not] say what we do is we make agreements and if the other party can’t meet the agreement we just cave. I want to be a good partner, but give us something.

CONNIE LADENBURG, TACOMA CITY COUNCILMEMBER

I think a further discussion needs to happen in regards to the policy of this. We are talking about this as a project and making changes to this project. But what we are really talking about is change to our policy of retail development downtown. I have a little grief over just working on a project-by-project basis. If we are going forward with this, we need to expand that to a full policy discussion. Do we want retail downtown or not? Or even limited to a certain area? That discussion, though, has not taken place. We’re not blind to the fact we have a lot of empty storefronts downtown. I wanted to go on record to open up that door. I know that doesn’t help specifically for this project. But we cannot look at this alone in a vacuum. We have to be cognizant of other businesses downtown as we look forward.

MARILY STRICKLAND, TACOMA CITY COUNCILMEMBER AND MAYOR-ELECT

We all agree that we want downtown to succeed and we have a vision for what we want downtown to be. I guess I’m going to get hung up on the semantics. The term ‘shall have commercial retail activity.’ To me, commercial retail activity involves something being bought and sold. I don’t see the attorney general’s office meeting that requirement. There’s a much broader conversation about the entire climate downtown and how this would impact other projects and other retailers.

We understand you put a significant investment into this building. You took an eyesore and made it very functional and very elegant. We appreciate that. I think many of us are just grappling with what the overall retail environment will be in downtown Tacoma, not just on your block and in your building. That’s why we’re asking these very thorough questions.

When I look at the building you designed, it didn’t look like it was designed for a grocery store or a government office. It looked like it was designed for higher-end retail I see in other cities I have to travel to when I have to go shopping sometimes. If there is a way for us to hold steady and fulfill that, that’s going to be the catalyst. When you look at downtown Tacoma right now — and I live a block from your building, by the way — it’s a hodgepodge. There’s no rhyme. There’s no reason. It’s very random. I don’t want to see us step in that direction and make a bad long-term decision. I think there’s a broad picture we have to look at. I don’t know if we can make that decision in one week.

DAN PUTNAM, PACIFIC PLAZA LLC

We are committed. If we are granted this, we are committed for the rest of this project to bring retail. We have had eight meetings with a grocer who loves this location and thinks it would work well. There’s a demographic study that shows a grocery store in Tacoma can work. We got down to bare numbers last Friday. We have three alternatives on the table. We’re reviewing those. None of them show any positive economic immediate return. It’s a three- to five-year process. Having this building financially stable for the rest of the building gives us every opportunity to make a deal with the grocer. We told them at the time if we cannot get approval for this lease, we’re put in a financial position where we could not move any further with them because we don’t have the resources because it is definitely a subsidy situation. They would like to shift the risk to us. That’s what the market is like right now. Retailers are shifting all the risk to landlords as possible. We’re glad to take that on, but we have to have the rest of the building working for us.

The challenge is 100,000 square feet of vacancy on Pacific Avenue. If we can stabilize building, Tom Absher and I will do everything we can in our power to bring forward a grocer or large-format drug store. We’ve had conversations with both. We know it’s a subsidy issue. We need an anchor tenant downtown. I think that was the whole discussion. We’re going to build the finest block in Tacoma and draw big-box retail. That was the goal. In any development, you need an anchor.

SPIRO MANTHOU, TACOMA CITY COUNCILMEMBER

We are partners with Pacific Plaza. For me, this is a catalyst for the additional retail we do have boarded up along Pacific Avenue. I think we need to show the successes that we are working with our partners instead of having a sign up that we are not available to work with them. I think we need to take every opportunity and look at every detail. I know there are concerns. But we’ve got a lot of boarded up storefronts. But to me, this is the catalyst that is going to give us the shot in the arm as the economy picks up to bring people downtown and retail downtown. I hope we go into this next week with open minds as to what this could do for us in the future. I would have to see this building sit for three years when we have an opportunity to help make it successful.

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For earlier Tacoma Daily Index coverage of Pacific Plaza, click on the following links:

1. City leaders cut ribbon for downtown Pacific Plaza project (09/22/09) — http://tacomadailyindex.com/portals-code/list.cgi?paper=88&cat=23&id=1628350=0

2. PHOTOS / Pacific Plaza Tour (09/02/09) — http://i.feedtacoma.com/TDI-Reporters-Notebook/photos-pacific-plaza-tour-inside/

3. Inside Pacific Plaza: From blight to beauty, a $30 million downtown high-rise sets a new standard (09/02/09) — http://www.tacomadailyindex.com/portals-code/list.cgi?paper=88&cat=23&id=1616760&more=0 or http://www.wahmee.com/tdi_inside_pac_plaza.pdf

4. Outside Pacific Plaza: A garden grows high above downtown Tacoma (09/03/09) — http://www.tacomadailyindex.com/portals-code/list.cgi?paper=88&cat=23&id=1617518&more=0 or http://www.wahmee.com/tdi_outside_pac_plaza.pdf