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Originally published Friday, January 23, 2009 at 12:00 AM

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Chase backs out of leased space at SAM

Seattle Art Museum is scrambling to find a new tenant — and avoid a big budget hole — after JPMorgan Chase announced Thursday it won't honor Washington Mutual's lease for about 240,000 square feet of office space owned by the museum.

Seattle Times staff reporters

Seattle Art Museum is scrambling to find a new tenant — and avoid a big budget hole — after JPMorgan Chase announced Thursday it won't honor Washington Mutual's lease for about 240,000 square feet of office space owned by the museum.

JPMorgan, which bought WaMu last year, tried to take some of the sting out of the bad news by announcing a $10 million grant for SAM. The grant will be paid in $2 million installments over the next five years.

But that will not make up for the $5.8 million a year WaMu has been paying SAM for the office space, developed as part of the museum's recent expansion.

If it cannot find replacement tenants, SAM faces a potential budget shortfall of $3.8 million a year — a sizable amount for an institution whose budget is $26.4 million.

"We're extremely grateful for this grant. It will help us meet, in part, the financial obligations on the space," said SAM spokeswoman Cara Egan. But "there definitely is a gap. We need a tenant in there as soon as possible."

JPMorgan will move out of the space by March.

The move means some risk for Seattle taxpayers because the city guaranteed $65 million in bonds for SAM's expansion. If the museum were to default on the bonds, Seattle would be on the hook for about $4 million a year in bond payments.

Dwight Dively, the city's finance director, said he sees no imminent threat of that. "That is not to say it couldn't happen over a longer period of time" if SAM cannot find a tenant or its financial condition deteriorates, he said.

To help find a new tenant, SAM has turned to Matt Griffin, the Seattle developer who arranged SAM's complicated expansion deal with WaMu.

In that deal, WaMu built a new 42-story downtown office tower, WaMu Center, alongside the museum expansion. In return, WaMu agreed to lease eight floors in the museum's expansion building for up to 25 years.

The idea was that SAM — which opened its initial four-floor expansion in 2007 — would eventually grow into those floors, too. Meanwhile, the rent from WaMu was supposed to pay off the construction debt.

That arrangement was upended by the abrupt collapse of WaMu last fall.

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Under normal circumstances any company that acquired or merged with WaMu would have had to honor its museum lease.

But WaMu was seized by the Federal Deposit Insurance Corp. (FDIC), which immediately sold it to JPMorgan. Under its agreement with the FDIC, JPMorgan had the option not to assume any of WaMu's current leases.

Griffin said SAM approached him two months ago about searching for new tenants and he is already exploring several possibilities.

Rumors that Microsoft was interested have quieted now that Microsoft has backed out of a tentative deal to lease 300,000 square feet at Vulcan's new 2201 Westlake building.

With 5,000 layoffs coming in the next 18 months, Microsoft might have downtown-space decisions on hold, local real-estate representatives said.

SAM has a shot at luring tenants away from other locations as leases expire, said Bill Pollard, co-founder and principal of Pacific Real Estate Partners.

"The good news is that a lot of tenants are looking," Pollard said. "Whether they end up moving and whether there's enough demand to fill all the market vacancies has yet to be seen."

SAM's advantages are its almost-new space and a good location, he said. "They should be able to compete, but they're going to be out there competing with all the other properties."

For SAM, Thursday's news comes at an already-challenging time.

Though membership is high and individual contributions are holding steady, its endowment is down 27 percent and corporate support is also down, Egan said.

The museum has cut about 5 percent of its staff over the past year through attrition, layoffs and restructuring, and it has a hiring freeze.

"We're doing everything we can to contain our costs," Egan said.

Staff reporter Melissa Allison contributed to this report.

Jim Brunner: 206-515-5628 or jbrunner@seattletimes.com. Janet I. Tu: 206-464-2272 or jtu@seattletimes.com.

Copyright © 2009 The Seattle Times Company

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