When I worked at the UW many years ago, I often heard references to the “metropolitan tract,” the original land the UW occupied before it took over the site of Alaska Yukon Pacific expo site. It never sold that land, holding onto it under rental agreements since 1909. I just walked past it and got curious about it.
According to the September 2007 Metropolitan Tract performance report presented to the UW Board of Regents, internal valuation of the downtown property was about $680 million.
That’s speculative or sale value, what some developer might be expected to offer for it (generally speaking, the assessed value is about a third of what land around here sells for). But that’s not the value we should be concerned about. Public institutions, be they school systems, cities, or universities, should never sell land. They are not in the business of making money and can never compete to buy land at market rates (which would be paid for out of public tax funds).
Reading over the piece at the link, I see that it generated about $9 million/year for a 9 acre parcel in 2007. Contrast that with the Mercer Megablock proposal that would have yielded $12 million/year (annualized against a $1.3B lease over 99 years) and I’m wondering if the UW is getting its money’s worth here.
If it adopted the same deal structure — and why not, as this parcel is right downtown, not in south lake union — it could be making a small increase to the base rate of $9M each year, say 2.5%. Over 99 years, the revenue alone — not the speculative value of the parcel — would be $3,789,207,694.03 or $38,274,825.19/year over a 99 year lease. And that backdates the lease to 2009. I have no idea what value it commands 17 years later. So without losing control of the land, the UW could spend or borrow against that $39 million annual revenue stream to fund whatever it needs, just as Seattle could use ground rents/leases to extract more value from land than simple property taxes will ever yield.
There are 500 acres set aside as “Downtown Seattle” in the city’s land use plan. Imagine if a majority of them — we could never hope for all — were under a ground lease model that reflected the true value of the land, as created by the economic activity if the city itself. No one would be able to buy any of that land because no one would be willing to part with it, if they weighed the revenue stream against the fee simple sale price. Imagine what it would to the value/price of land still in the speculative market.
Would you sell an asset for $680 million that was paying you $40 million a year for the foreseeable future? I’d ask what city would be foolish enough to do that but I am sitting in the heart of one that sold a $1.2B ground lease that would have paid $12M/year — for the equivalent of 13 years of the lease, leaving 86 years of income — more than $1 billion — on the table.
What’s interesting to me is that both Seattle Public Schools and the UW are smarter about land value than the city itself. Both institutions hold onto land, rather than sell it, meaning the taxpayer is not on the hook to replace land sold to reap a windfall. The city, on the other hand, doesn’t take the long view or manage its assets as well. I suppose that makes sense, as it is the only one that can tax directly.