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Originally published Saturday, February 16, 2013 at 8:00 PM

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Smith Tower hits a milestone on the road to recovery

Once mostly empty, the historic Smith Tower is filling up with tenants. Also, Seattle tech firm’s sellers sue buyer over $62 million payout.

Seattle Times business staff

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Seattle’s landmark Smith Tower — not too long ago a poster child for the downtown office market’s woeful state — quietly passed a milestone recently:

Half the office space in the 42-story tower is now leased or has leases pending, according to commercial real-estate database Officespace.com.

That’s a big comeback from a year ago, when occupancy in Seattle’s oldest skyscraper stood at just 19 percent — if you included the Chinese Room, rented out for weddings and parties, and the one-of-a-kind apartment on the tower’s top.

Cavan O’Keefe, of CBRE, one of the building’s leasing brokers, says more deals are in the works, and the tower could be two-thirds leased in a month or two.

“We’ve gone from zero to 60,” he said. “I’d like to say it’s because we’re such a great team, but there was probably some pent-up demand from the tech companies down there” around Pioneer Square.

The 99-year-old tower suffered more than most buildings in the real-estate downturn. Tenants left while former owner Walton Street Capital embarked on an ultimately unsuccessful bid to convert the building to condos.

Rent from remaining tenants couldn’t cover the building’s operating expenses. Maintenance was neglected.

Walton Street lost the much-loved tower to foreclosure last March. The new owners — affiliates of CBRE Capital Partners — gave the building a face-lift and began marketing it again.

Now it’s paying off, O’Keefe said: “It’s not just the tech companies. We’re getting law firms and engineering firms, too.”

The picture is brighter now for landlords all over greater downtown, where vacancies have fallen from their recession highs.

Pioneer Square’s improvement has been especially dramatically. The neighborhood’s office-vacancy rate was 25 percent at the end of 2010, according to Office
space.com.

Now it’s down to 14 percent.

— Eric Pryne: epryne@seattletimes.com

Tech firm’s buyer and seller fight over $62M earn-out

A Seattle technology firm’s former owners are suing the company to which they sold out, claiming it undermined the operation’s subsequent performance and deprived them of a potential $62 million earn-out payment.

The suit by stockholders of
Cequint, whose caller ID services are used on millions of cellphones, shows how such earn-out arrangements may bridge the gap between buyer and seller over a firm’s value but can later erupt into fresh disputes.

As an American Bar Association newsletter article put it a couple years ago, “the parties often have diverging interests during the earn-out period.”

TNS, a data-communications company based in Virginia, bought Cequint in 2010 for $50 million in cash plus up to $62 million in additional payments if the acquired operation hit certain targets.

During some quarters after the sale, TNS reported that Cequint’s revenue was growing at a healthy clip of 29 to 33 percent year-over-year.

But the four earn-out stages were pegged to Cequint’s gross margin and net-income contribution, and TNS filings suggest Cequint has been losing money and hasn’t hit those specified targets.

A group of Cequint shareholders recently sued, claiming TNS “has unlawfully interfered with
Cequint’s ability to achieve the financial goals” needed to earn the extra payout. This past week TNS moved the suit from King County Superior Court to federal court.

According to the suit, top executives including Cequint’s president, CEO, CFO and chief technology officer were given major responsibilities at the acquiring company, while “the entire Cequint sales team” was assigned to TNS. Those changes proved “a significant distraction” from increasing Cequint’s sales, but the salaries of those top execs were still billed to the Cequint unit, says the suit.

Those actions and others “had the primary objective of avoiding, circumventing or minimizing the opportunity to achieve the earn-out consideration,” the suit claims.

It’s unclear from the lawsuit whether those top Cequint executives, who presumably were among its shareholders, are participating in the suit. Attorneys on both sides declined to comment on the suit.

To investment banker Bill Hanneman, president of Seattle investment bank Zachary Scott, who was not involved in the Cequint sale, the dispute illustrates the potential pitfalls of such earn-out deals.

“Do they tend to be problematic? Sure,” says Hanneman, whose company helps arrange business sales. But ordinarily, he said, “most of these things get settled before they get to court.”

He tells clients it’s best to base earn-outs on benchmarks high up on the income statement, like revenues, as opposed to criteria such as margins or net income that involve more variables, because that leaves less room for disagreement.

Hanneman also tells them that an earn-out typically should be 15 to 20 percent of the whole deal — “as long as that’s the gravy of what you’re getting, but you don’t want to put a huge portion of your payment in the earn-out.”

TNS itself is in the process of being taken private by an investor group for approximately $860 million. There’s no sign that deal includes an earn-out.

— Rami Grunbaum: rgrunbaum@seattletimes.com

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