Cities

 

05/07/89

THE SEATTLE TIMES HIGH RISE — DIGGING THE HOLE — LATEST SKYSCRAPER RISES FROM ONE MAN’S DREAM, ANOTHER’S FINANCIAL PIT

TERRY MCDERMOTT

 

Behind the rising Gateway Tower is a story of risk and competition. Today The Times begins a series that, in the coming months, will examine the complex personal, economic and social forces that combine to create a skyscraper.

 

Before there was a Martin Selig, there was Henry Griffin. Griffin was – is, actually; he hasn’t died, only gone belly up – a Havana-educated architect with very little money and very big dreams.

He and an associate, Clint Hergert, in 1971 formed a company they called, with characteristic hubris, CHG International.

CHG for the first six years of its existence was an active if undistinguished developer of apartments and houses in the Puget Sound area.

Then, beginning in the mid-1970s, armed with Griffin’s imagination and – courtesy of a friendly lender – other people’s money, they turned downtown Seattle into their personal Monopoly board. In their first couple of trips around the board they bought everything they landed on.

In 1976, CHG owned nothing in downtown Seattle. A decade later, the company again owned nothing in downtown Seattle. In between, the partners purchased portions of two dozen blocks, more than 40 parcels of land. They bought property at such a frenzied pace and often at such inflated prices that it seemed they had either taken control of a bank or leave of their senses, or perhaps both.

Griffin had a vision of downtown Seattle as a crucial spoke on the speeding wheel of the Pacific Rim. The city center, he thought, would become home to an expanding service economy fed by automation and trade.

The foremost element of his vision was an ability to see where tall buildings would be built.

He was right about the buildings. He was wrong about who would build them. By the time Griffin disappeared under a pile of debt, a frenzied competition to build the high-rises he envisioned was under way. If anything, Griffin underestimated the growth that would occur.

Among the properties CHG acquired were all or parts of the sites on which today stand First Interstate Center, Washington Mutual Tower,  the convention center, Key Tower and two buildings now under construction – the Pacific First Center and the AT & T  Gateway Tower. In total, the company controlled real estate it claimed would be worth $1.4 billion when developed.

So quickly was it realized that Griffin’s vision seems almost passe today. But in 1977, when Griffin began acting to fulfill it, he was shocked to find he had little or no competition.

“There was practically no one in the market,” he says.

This wasn’t so surprising to anyone else, who might well have wondered what market Griffin was talking about. Seattle was moribund. It was a relatively small, essentially one-industry city stuck off in the upper left-hand corner of the country. The downtown had been dormant for what seemed like forever.

Downtown Seattle is not a large place. The land from the Space Needle to the Kingdome measures about 1,000 acres, hardly enough to make a living on if you were growing wheat in the Palouse country of Eastern Washington. But for decades the even-smaller downtown office core was more than enough to suit the needs of local commerce.

Local financial institutions, the largest users of downtown office space then, served local markets and, except for a small amount of business in Alaska, little else. Local professionals were similarly constricted by geography and even more by the relatively thin demand for  legal,  accounting and other professional services.

Out-of-town companies had typically tiny presences in Seattle. The average nonlocal downtown office tenant was a representative of an East Coast company. With himself and maybe a secretary, this sort of tenant didn’t demand much space.

As a result of the stagnant local economy, there was little demand from within. As a result of the minuscule outside presence, there was little demand from without.

Between 1930 and 1960, no buildings were built downtown. A brief flurry in 1960 brought the Logan, Norton and Washington buildings into existence. After 30 years of nothing, this had quite an unsettling effect.

“There were 500,000 feet (of office space) coming on the market. The same questions were being asked then as now,” said Dave Cortelyou, president of Unico Properties, a development company that manages the 10-acre Metropolitan Tract belonging to the University of Washington in the center of downtown.

It took three years for the city to catch up. Nothing was built until the glut was absorbed. In 1963, the United Airlines Building went up, followed the next year by the IBM Building.

Once again, this was more than the city could handle.

Five years passed before another building was built. This one, however, was a harbinger. The Seattle First National Bank Building on Fourth Avenue was an indication that the city might finally be moving beyond its narrowly based natural-resource and manufacturing economy.

The steel-and-glass box is 50 stories tall and was the first office building in town to take up a full block. So unaccustomed was the city to such dimension that local construction companies failed to take into account the amount of time they would spend just transporting  workers and equipment up the building as it was built.

Contractors lost hours each day as crews stood at the bottom waiting for the single construction elevator to take them to work.

“A lot of people learned on that building,” a local lender says.

Except for its size, however, the Seafirst Building did not alter the way development proceeded. As Cortelyou’s boss, Don Covey, likes to say, Seattle was “orderly.” When new buildings did go up, they did so one at a time. A builder might spend years quietly assembling a parcel, then wait longer for the right time to build.

Orderliness is not a quality the true real-estat e entrepreneur values. “Covey was a Marine, you know,” one developer says, not intending it as a compliment.

Orderliness certainly was not something Henry Griffin prized, although he came to see it as an ally. Let everyone else be orderly and wait his turn. Griffin would bet the bank.

Developers such as Griffin, one veteran financier says, are optimists by nature. Where others see problems, they see only opportunity.

“If you’re an optimist,” this financier says, “you see vivid imagery; you see opportunities everywhere you go. As soon as they get a few dollars in their pocket, these opportunities leap out at them. For every block, there’s a developer that’s got in the back of his mind: `I’ve got to get that block.’ ”

Griffin’s imagination was more vivid than most, even by the inflated measure of his vocation.

His dreams did not concern any particular block, but all of them. He set about buying property in a way that confounded other speculators and delighted property owners. When Griffin plunged into the market, many of the owners were descendants of the original families that had settled the city. Griffin was more than happy to relieve them of their inheritances.

Few prices were too high. Griffin didn’t believe in negotiating price, only terms. He didn’t care what the ultimate cost of a property would be; he cared about cash flow. Would you take a little more money stretched over a longer period of time? Would you take nothing down and twice the amount?

By 1980, CHG had become the largest landowner in the central business district.

One of the effects of CHG’s aggressive speculation was to anger other speculators, especially those who didn’t necessarily share Griffin’s fondness for heavy indebtedness, according to James Mason, a former city planner who went to work at CHG.

“I remember Jon Runstad saying to me one time, `You guys are screwing up the whole market,’ ” Mason says. “But we had the last laugh. Runstad had to negotiate with us to buy the northwest corner of the block where he was going to build First Interstate.”

Actually, of course, Runstad has had the last laugh. He’s still in business and, by all accounts, prospering, as a partner in the giant Wright Runstad development company. CHG went bankrupt, and its role in the collapse of  Westside Federal Savings and Loan is the subject of a federal investigation.

“Looking back on it, it had to be almost pure speculation,” says Mason of CHG’s incredible spree.

Having bet the bank and lost, Griffin doesn’t concede a mistake, at least not on his part. He blames his bankers, which makes a certain amount of sense. It was their money, after all.

“You have to have the staying power,” Griffin says. “And our banks were not able to keep up.”

He is reluctant to talk about that era now, except to say that it didn’t take great wisdom to see downtown real estate was undervalued. Growth was occurring throughout the nation. Its descent on Seattle was only a matter of time. What was remarkable, he said, was that he had the city virtually to himself.

Another developer says there are two sorts of risk in real-estate development: the risk that a market will fall and the risk that interest rates will rise. Everything else is simple arithmetic.

Griffin was absolutely correct in his evaluation of the Seattle market. It surged. Unfortunately for him, so did interest rates.

If it hadn’t been for Paul Volcker, chairman of the Federal Reserve Bank who led it through a series of interest-rate increases in the early 1980s, Henry Griffin could well be one of Seattle’s richest men today.

He is not. But Griffin’s vision for downtown Seattle has proved  correct in nearly every detail.

FIRST STEP, FIRST RISK

 

“If Henry had had more than his nerve keeping that stuff together, he’d have done very well,” says Herman Sarkowsky, a Seattle investor who was one of the victims – or perhaps beneficiaries; he isn’t quite sure – of Griffin’s rise and fall.

Sarkowsky had employed Griffin as an architect at United Homes Corp., Sarkowsky’s housing development and construction company, in the 1960s. They remained friends after Sarkowsky sold the company and Griffin started his own. Sarkowsky, in fact, invested in CHG.

But he was not enamored of CHG’s business practices, and by late 1979, when Griffin was looking for more money and Sarkowsky was looking for a way to get his investment out, they agreed to a swap. In exchange for his CHG stock and cash – a $920,000 package – CHG sold Sarkowsky the land at Sixth and Columbia.

The price on the face of it seems greatly inflated. Indeed, it had been offered for sale for just $90,000 five years before, a dime on the dollar that Sarkowsky paid.

The property was a parcel 120 by 127 feet on the northeast corner of the block bounded by Fifth and Sixth avenues and Columbia and Cherry streets. It wasFzoned for commercial development, but the lot was so small it was hard to imagine what you might build on it.

Besides its size, the lot had other problems. The express-lane ramps that emptied onto Fifth Avenue sliced through the rest of the block, cutting off access to both the west and the south. Interstate 5 itself cut the parcel off from anything to the east.

All that remained was a small bit of land that could be reached only from the north.

When Mason had worked for the city, his office overlooked the property. The only signs of nonautomotive life on the block were two dumpy old apartment houses, the Doris and Breslin, and a tiny, run-down patch of park in the elbow of the interstate ramps.

“I used to look out my window at City Hall and wish there was a way I could return that property to a productive use,” Mason says. “The block was wasted. It had little human use. It was underutilized. I described it as a pockmark on the cityscape.”

But Sarkowsky is fond of saying that in real estate you create value, and Griffin, to his credit, had seen the one way to add value to this plot: Put a lid on the freeway ramps and build above them. In essence, recreate the block that had been there before the freeway was built.

Armed with that idea, CHG paid $550,000 for the land in 1977, six times the amount it had sold for three years earlier. Once the company owned the land, it determined that the idea of bridging the freeway ramps was feasible. It was still speculative, but possible, to effectively quadruple the size of the lot, making the gamble taken in purchasing it worthwhile and, not incidentally, increasing the value of the property.

So this is what Sarkowsky bought: two apartment buildings that were losing money every month sitting on a quarter of a block that might or might not, depending on the willingness of the state Department of Transportation to have their freeway ramps enclosed, have any commercial value.

It was a speculative venture.

On the other hand, at the rate and direction CHG was going, Sarkowsky’s CHG stock had become highly speculative as well. It could soon be worth nothing. At least this way, he had something.

Just what, he wasn’t sure.

A DEEPER COMMITMENT

 

On Feb. 29, 1980 – Leap Day, as Fred Bassetti noted in his presentation – the Sixth and Columbia Associates met to interview architects. The associates were Sarkowsky; his daughter, Cathy Sarkowsky, and James Mason, who by then had gone to work as the sole employee of the Sixth and Columbia Associates.

The associates interviewed  3D/International of Houston and three Seattle firms: Bassetti/Norton/Metler/Rothschild, NBBJ and TRA.

The selection of the architect was not a formal competition in the sense that the architects were asked to submit designs for a building the owner wanted to build. The owner was hiring the architects in large part to tell him what he wanted to build. He really didn’t know.

The associates voted in favor of hiring 3D/I as the lead architect and Fred Bassetti as the local designer. There was one vote. Herman Sarkowsky cast it. The “associates” thing was a pleasant fiction at the time. Sarkowsky initially had a partner on the project, an old friend and mortgage banker named Del Balfoy, but Balfoy dropped out when the project grew larger than his appetite.

Choosing two firms to do one building was not all that unusual. It happens frequently that a developer will hire a local company to go with a more prominent  out-of-town firm. Normally, however, the out-of-town firm is hired to do the design and the local firm to produce drawings. Design is glamorous. Drawings are tedious.

There were particular reasons for the selections in this case. 3D/I was a well-known national firm. It had been subordinate architect  on several landmark projects and was the lead architect on the Seafirst Fifth Avenue Plaza, which in 1980 was being built directly across Columbia Street from the Sixth and Columbia site.

“They knew the area,” Sarkowsky said. They also knew Seafirst, which had yet to run into its big problems out in the oil patch and was in the market to become the lead tenant in still another new building.

Sarkowsky hoped to persuade Seafirst to rent space in his building, and he thought hiring an architectural firm that had already worked with the bank would help.

Bassetti also knew the area. He had been born – now 72 years ago – a block from Sarkowsky’s  site, and had once considered buying it himself. He was respected as an architect and as one of a handful of people who had become a part of the civic conscience.

“Bassetti had an in-town presence. That was important to Herman,” Mason says. However, “the other guy  had the background. It quickly became apparent that if Seafirst was going to do anything with us, it would be without Bassetti. It was nothing personal, but their guys thought he had a reputation for building expensive buildings. I kept telling them that maybe he did, but for every building he built he had a buyer. I couldn’t convince them; 3D/I was more a developer’s architect.”

What that means is that 3D/I behaved and didn’t do foolish things, such as put art before money, as Bassetti was accused of doing. Bassetti protests this vigorously. He has been an architect for more than 40 years, has always sought to serve his clients faithfully and cannot understand how he continues to have a reputation of being difficult to work with.

“We tried to emphasize we were not just designers. We were practical. We watched the goddamned money,” he says.

Bassetti, whose biggest project to date had been the 37-story Henry Jackson Federal Building, was fearful 3D/I would steal the design work even after Sarkowsky split the job. “We’re designers essentially, not staircase- and toilet-drawing people,” Bassetti says.

He met with Dick Krutze, a 3D/I vice president, at the  Olympic Hotel bar to work out the relationship: “We circled each other like sniffing dogs,” Bassetti says. “It turned out they were honest all the way. My suspicions were totally unfounded.”

And, as it happened, irrelevant. Several months into the job, 3D/I was fired. In the time since they had won the contract, the possibility of landing Seafirst had disappeared. The bank had announced it was going to go into a new building Martin Selig was planning – the 76-story Columbia Seafirst Center, to be built across Fifth Avenue from Sarkowsky’s site.

There was also the question of expenses. 3D/I had an office in Seattle when it  won the contract, but it later closed it. This meant its architects had to fly back and forth between Seattle and Houston, which they insisted on doing first class.

They also insisted on staying at the Olympic. Sarkowsky, who another contractor says is “a tiger on nickels and dimes,” would get irate every time he saw one of the 3D/I bills with  expenses on it. He asked them if they couldn’t travel more cheaply. They said no. He fired them.

Money was becoming an issue. Sarkowsky was buying a lot of drawings. He had already bought a lot of headaches in the form of a fight over the low-income housing he had inherited from Griffin.

With the purchase of the property from CHG, Sarkowsky had begun to dig himself a hole on Sixth Avenue. It got a little deeper with the housing fight. He didn’t realize just how deep it would get when the architects were interviewed and designs of buildings reaching as high as 40 and 50 stories were mentioned.

There is in structural engineering a phrase called the overturning moment. This is a mathematical description of the point at which the forces applied to the base of a structure overcome the structure. In other words, it falls over. It is hard to determine precisely when Sarkowsky reached the overturning moment, but it seems likely the day the architects were selected was the day he fell into the hole and committed himself to what would eventually become the AT & T Gateway Tower, the $195 million, 62-story, red-granite high-rise with a green-glass shower cap now coming out of the ground at Sixth and Columbia.

RISK: A WAY OF LIFE

 

Sarkowsky is a much more pragmatic man than Henry Griffin, but there are strains of Griffin in every developer. In contemporary downtown Seattle, that strain is closest to the surface in Martin Selig.

The chief differences between Griffin and Selig (regrettably, Selig’s critics say) are that Selig has actually built buildings and hasn’t gone broke yet. Living the entrepreneurial code, he has made something out of nothing.

Leverage is a time-honored way of life in real estate. It is embedded in practice and honored in thought. “We wanted to O-P-M it,” a developer might say, meaning to buy something with Other People’s Money. It is regarded as an admirable way of doing business.

“Give me a place to stand,” the Greek geometrician Archimedes once said, boasting of the power of the lever, “and I will move the earth.”

Financial leverage is no different. Given enough of it, you can pry open the door to a world of riches. Selig has for the moment achieved what Archimedes and Henry Griffin only dreamed.

Selig was late in moving into the downtown market. While he was still out building his reputation as King of the Denny Regrade, Wright Runstad, a newly formed partnership of Howard Wright’s money and Jon Runstad’s brains, had begun to buy and build along Third Avenue, west of the UW’s Metropolitan Tract.

About the same time, Unico, the Metropolitan Tract manager, had begun to explore the possibility of extending its reach beyond the 10-acre tract, which covers most of the area between Third and Sixth avenues and Union and Seneca streets.

Several Canadian developers also moved in. The Canadians, in the end, made plans but very few buildings. Most of them eventually abandoned town in the interest-rate run-up of the early 1980s, leaving their properties to be bought by, among others, Selig and Dick Clotfelter’s company, Prescott Properties.

In the past decade, these four companies – Wright Runstad, Prescott, Unico and Selig – have come to dominate downtown development in Seattle.

Each of the organizations reflects its leader.

Unico’s Covey, for example, is known for his stodginess. He once was in the market for a filing cabinet for his office. A salesman tried to persuade  him to buy a new credenza. He refused and insisted instead on having an old file cabinet painted to match his 20-year-old furniture.

Covey’s company is known for its caution, its low pay and its attention to tenant needs. It is by general description a highly efficient, faceless, management organization. Everyone knows and stays in his place.

“Unico isn’t slick, but they’re there,” says Geri Kraft, a local real-estate broker.

Selig, in contrast to Covey, has a multimillion-dollar modern art collection in his office and is famous for cutting costs in everybody else’s offices. But like Unico, everybody at Selig’s company knows where he stands – somewhere behind the high-profile boss.

“For many years, Marty was basically a one-man shop. I guess he has a Number 2 guy now, but for years there wasn’t one,” says Sarkowsky, a longtime Selig friend.

Runstad’s company is composed  of what appear to be legions of executive vice presidents. “Everybody at Unico looks like a Xerox salesman. Everybody at Wright Runstad looks like a Wall Street broker,” says one person who has worked extensively with both. The company is very corporate and is both profit and quality conscious, he says: “If it takes gold, they’ll go gold. They won’t go gold on the outside and plasterboard on the inside like Selig. But they’re very hardball players. They budget for a building and they don’t budge.”

Clotfelter is sort of an amalgam of all the others. Like Runstad, he has a background in finance and is civically involved. Like Covey, his company is gaining a reputation for property management. Like Selig, he is personally involved with almost all business decisions.

“There are vast differences between Prescott (Clotfelter’s company) and Martin Selig, although they’re similar in that they are the ones you deal with. When Selig or Clotfelter leaves the room to go to the bathroom, the meeting stops. With Wright Runstad, Jon Runstad might be involved in 20 percent of the meetings on a building,” says Gerry Gerron, an architect with the Callison Partnership.

“With Prescott, if Clotfelter isn’t there, you don’t have a meeting.”

One striking feature of this small club of developers is the degree to which its members are perceived by the general public to have the same interests, when, in fact, they are often at one another’s throats. They fight with the special bitterness exhibited by family members who know all of one another’s dirty secrets and bad habits.

The others dislike Selig, although not for the same reasons that seem to have made disliking Selig a sort of cottage industry in Seattle. That is: He is an egomaniac who builds ugly, derivative buildings. Office-tower development is a business of big egos, so the other developers can forgive that. And they have all built imperfect buildings, so it is hard for them to condemn Selig for that. No, they hate Selig because, according to their view of him, he is a dangerous businessman, living perilously close to the cash-flow edge where one little twist of the wheel could send him crashing over it.

That twist is forecast over lunch in the development community daily. Or over breakfast, or dinner, or cocktails, or just in idle conversation on the telephone; the development community is a beehive of rumors, especially about  Selig.

Most Selig rumors are of this one specific sort: He’s about to go broke, and soon, like today.

The problem to the other developers is not that Selig is close to crashing. The problem is that he has not. If he would, they could go back to business and maybe repair the market, get away from all these sales gimmicks Selig has initiated and forced them to follow.

In trying to fill the space he has built in Seattle, Selig has introduced a host of marketing ploys, things like free parking; free tenant improvements; free – this is the one that kills them the most – free rent in the form of what is called space pocketing, the practice of giving tenants free space to expand into in the future; and assumption of prospective tenants’ old leases in other buildings if they sign new leases with him. At one point, Selig had assumed so many leases of Wright Runstad tenants, he was said to be the single largest tenant Wright Runstad had.

His competitors regard all of this  as lunacy. Selig calls it salesmanship. The intent, so far as anyone can guess, is to do anything you can  to  lure tenants, fill up your buildings at whatever price to stem the negative cash-flow and go build more.

You can succeed at this if you catch the right kind of inflationary spiral. Assuming you’ve got a friendly bank and friendly terms, you can ride the spiral all the way up.

So far, so good. For Selig, anyway. Not so for many of the people he does business with. Selig rumors within the development community are nearly as numerous as Selig lawsuits. One local contractor complains that Selig’s basic method of doing business is to subcontract as much work as possible, avoid paying the subs for as long as possible, then litigate the bills in the hope they’ll settle for something.

“Selig is all float,” the contractor says, and tells of receiving a payment from Selig via a bank in North Carolina and wondering for a moment why Selig was banking in North Carolina. The answer, as nearly as he could figure, was that the time in the mail gave Selig that much more float.

No detail is too small for Selig when he is pursuing a potential tenant. He has hosted white table-cloth, candlelight dinners on the bare floors of high-rises under construction, complete with strolling minstrels and the tenant’s prospective offices spray-painted onto the concrete.

On the right kind of summer night, with soft bay breezes blowing through the naked steel girders, it is said to be mesmerizing.

Similarly, after a deal has been made, no detail is too small in Selig’s search to cut costs. Janitors in some buildings say they’re told to vacuum only common areas where there is visible dirt. If they don’t see anything, they don’t vacuum.

This is not something they teach you to do at the London School of Economics, where Jon Runstad polished his development act to a quite high sheen.

Runstad is heir to a fortune, not in money but in genes; he has a kind of lean, patrician look that makes him seem too good to be true.

His competitors think so, too. Their dislike of Runstad derives from the acclaim heaped on him and his most recent effort, known variously as Block 5 (a shorthand reference to its plat number, which is what the development community calls it), 1201 Third Avenue (its address, which is what Runstad originally called it and most people still do), or Washington Mutual Tower (its actual name, which only the Washington Mutual Bank executives who paid to have the building named for the company call it).

Runstad, to the horror of his competitors, succeeded with 1201 in bringing a building to market and filling it up as if there were no competition. The building’s highly decorative post-modern architecture touched off a still-continuing debate on the relative architectural merits of all the tall buildings in town and proved so attractive to corporate decision-makers that they couldn’t wait to sign leases.

1201 Third has become the city’s most distinctive corporate address in a way no building has enjoyed since the original Seafirst Building on Fourth Avenue was built as the city’s first modern post-war skyscraper in 1969.

This is not the way to make friends with your competitors.

Close behind Runstad in the good-guy developer sweepstakes is Clotfelter, who has parlayed a knowledge of the brokerage and investment communities into a succesful development start-up.

He has also extended the range of the Seattle high-rise into the retail core, building Century Square and now Pacific First Center smack in the middle of the downtown shopping area.

Other developers criticize Clotfelter for having done this because they think he has helped  antagonize the citizenry. In fact, they are angry because they wish they had done it themselves. With what one local designer termed the “incredible feeding frenzy” going on to lease space in it, Pacific First Center has disproved  the conventional wisdom, which held that corporate clients did not want to mix with downtown shoppers.

Unico is the longest-term developer in town. It has managed the Metropolitan Tract since 1954. The tract, originally given to the UW as a site to build its school on, had been retained as an investment after the university moved out of downtown to its current location in 1895.

The tract’s managers were for decades content to stay within it, manage their buildings and occasionally build a new one. By controlling their 10 acres  in the heart of the central business district, Unico to a greater extent than any other single entity – including the city government – determined the physical environment of downtown Seattle.

Mayors, planners, other developers all came and went, properties were sold and leased and re-sold and sub-let, and the tract remained. Its board of directors always read like a list of the upper echelon of the city’s establishment.

Unico’s singular mission changed – to the dismay of its competitors – when the company decided to break out of its 10-acre box in the late 1970s. The company had acquired most of the block between Sixth and Seventh avenues and University and Union streets as part of its deal to move Rainier Bank into the Rainier Bank Tower in 1977.

The bank, which had previously been on Second Avenue, had spent the better part of a decade looking for a place to build a new headquarters. In the process, the bank acquired three-quarters of three separate blocks, only to be stymied on each block by what one bank officer called “some holdup artist” who wanted more than the bank thought it ought to pay. Fed up, Rainier  jumped at the opportunity to move into a new building Unico proposed to build for it two blocks away.

As part of the deal, Rainier sold its Sixth and Union property to Unico.

Site in hand and faced with the threat of losing tenants to the newly competitive market, Unico began building new space of its own, starting with One Union Square, completed in 1981, and continuing with Two Union Square, now under construction next door.

Competitors complain that UNICO has put itself in an ethically questionable position. The development company is in the market competing for tenants who might otherwise be in offices managed by Unico for the university. In effect, the complaint is that Unico is stealing the university’s tenants.

Better us than them, Unico replies. And it seems likely that the competitors are less concerned with ethics than with the competition. The intensely competitive nature of the business is engendered by the relatively small universe of potential tenants and the large investments tall buildings require.

As a result, developers seek any edge they can get. The one used most frequently is the rumor.

Gerry Gerron – the designer of some of the biggest buildings in town, a native Southern Californian and a wearer of $900 suits, each of which qualifies him as evil to some people, sainted to others – has become a connoisseur of development rumors.

“Developers are fighting for a limited commodity – tenants,” said Gerron, the architect with Callison. “Every developer will either start or help fuel any rumor he thinks will help him.”

The gossip ranges from the merely speculative – say that some big out-of-town dealer has signed an option to buy one of the superblocks along University Street and is planning an 85-story job on it – to the malicious.

Of this latter variety, one of the best that made the rounds a while back was that a certain building was having serious granite problems. The South American stone being used wasn’t breaking or anything and it wasn’t going to fall on anybody. It was simply going to cause cancer.

The rock was said to have been impregnated with some sort of weird gamma ray or something. Nobody knew how, but they delighted in repeating it.

ENTER THE OUTSIDER

 

It was into this clubby, back-biting little world that Sarkowsky inserted himself when he took over the Doris and Breslin apartments and announced he was going to build a high-rise.

“Everybody in town snickered at that project. Herman was not really part of the development community. He was an outsider,” Mason says.

Says Sarkowsky:

“It’s a very small group and they’re very, very competitive and they’re really ego-driven. I really have nothing at all to do with them. I don’t consider myself a downtown developer at all. I consider myself an investor who happens to be building a downtown building. I’m very friendly with Jon (Runstad). I’m very friendly with Marty (Selig). I seldom if ever discuss any aspects of the business with them. With Marty, never. With Jon, very seldom.”

Before he could take the time to worry about other developers, Sarkowsky had other concerns. Most immediately what he had, he was to discover, was a problem. Part of Henry Griffin’s special talent to see what was possible was an ability to ignore what was present, in this case, the Doris and Breslin apartments.

Griffin had always intended to demolish the apartment buildings, agreeing with Mason’s description of them as “a wasteland.” Not everyone agreed.

There were 93 studio and one-bedroom apartments in the two old buildings. What Mason called a wasteland, John Fox, a low-income-housing advocate, called a community. Reality, as usual, was somewhere in between.

Marilyn McCraken, who lived at the Breslin until just before it closed, said many of her neighbors knew one another well and socialized frequently.

Parties were the rule rather than the exception.

If this sounds communal, it was. If it sounds idyllic, it was not. Marilyn McCraken lived there two years and found an average of one corpse a year on her doorstep. Granted, two years probably isn’t long enough to say for certain this was a trend, but two in two years does seem to beg coincidence.  The only thing that kept McCraken from leaving, she says, was her piano. She wouldn’t leave without it, and because she lived on the fifth floor and the elevator was broken, she couldn’t leave with it.

McCraken liked to play Chopin and Rachmaninoff until she was forced to gradually cut back, especially on the vigorous Rachmaninoff, due to the slow mystery of arthritis that eventually crippled her hands.

The piano might have disturbed her neighbors, McCraken recalls, but “they had so many wild parties they didn’t have cause to complain.

“The drinking was heavy. And the narcotics. And there was a lot of sickness. . . . I found it a very depressing situation. I was glad to be out of there,” said McCraken, who now lives on First Hill. “It’s a place I’d just as soon forget. It was one of the worst places I ever lived.”

Other former residents have fonder recollections, but they all acknowledge, as McCraken says, the apartments were places for people who had no other place to go.

When the apartments were built at the turn of the century,  they were part of a largely residential area that covered the western slope of First Hill. But when I-5 plowed through the city in 1965, the Doris and Breslin were orphaned, cut off from the residential community to the east and placed with the growing commercial and office area to the west. This separation changed the nature of the buildings.

The freeway effectively rezoned the neighborhood, and when the city formalized what the freeway had done by designating the land for office development, the handful of apartments along Sixth was doomed. The apartments were, as the city said in an analysis of the area, “being replaced with office space on the basis of market demand.”

The Doris and Breslin were on the last of the rezoned land, spared for a time by the difficulty of the site. But now the market was pressing its demands. Resisting was a group of people who thought the market had already demanded too much and given too little in return.

This group, headed by a young man named John Fox, was just beginning to emerge as a political force in downtown politics. Fox and his allies aimed to be a counterweight to developers, slowing if not stopping the conversion of low-income housing into high-income offices.

The Doris and Breslin battle was formative in the long-running war between housing advocates and developers. Because of the buildings’ location within sight of city hall – the same reason Sixth and Columbia Associates’ James Mason was first attracted to the idea of redeveloping the area – Fox and his allies in the Seattle Displacement Coalition chose to fight their closure, hoping to elevate the buildings into a symbol of disappearing housing.

There was much to symbolize. In 1960, 25,000 units of low-income housing existed in downtown Seattle. Today, fewer than one-quarter that number are left. A simple economic logic, often abbreviated in the phrase “highest and best use,” compels this conversion. Highest use does not refer literally to tall buildings, but it might as well.

The Doris and Breslin were  in an area zoned for the most intensive development in the city. Under the basic zoning code in 1981, an owner of the property would have been able to build a building with 152,240 square feet. Nearby office properties were renting at the time for about $20 a square foot.

The Doris and Breslin apartments were renting at $90 to $136 a month, or about $3 a square foot per year.

According to a city Department of Construction and Land Use analysis in 1981, the owner of the Doris and Breslin would have to at least double rents just to cover operating expenses and debt service. It does not take an MBA to figure out which of these paths a businessperson interested in making money ought to take.

“I don’t think I even looked at the apartments. I looked at the map,” Sarkowsky says. What he had not looked at, however, was an agreement CHG had signed with Fox and his group. The agreement stipulated that if the Doris and Breslin were ever to be torn down, replacement units would first have to be built within a half-mile of the site.

Sarkowsky had already taken control of the property and had begun to offer tenants $1,000 apiece to move. Several took him up on the offer. Others left on their own, including five who died, four who went to jail and three who went to the hospital. When Sarkowsky applied for a demolition permit, Fox cried foul and waved CHG’s signed promise to replace the units.

Griffin claimed the agreement was made under duress.

Sarkowsky claimed it did not, in any case, transfer to him with the property.

Fox claimed the sale of the property was a simple ruse to break the agreement.

He organized demonstrations downtown and, at one point, in front of Sarkowsky’s home. When this had no apparent effect,  the Displacement Coalition sued to halt demolition.

This was not what Sarkowsky had in mind when he bought the property. Neither was it what the city had in mind when it had earlier passed its first housing-preservation ordinance. Bob Royer, then an aide to his brother, Mayor Charles Royer, intervened.

Bob Royer at the time was trying to create what he called a family housing project along Sand Point Way on land the city had gotten from the federal government. Creation, in this case, meant money, which Royer was looking for and which he soon determined Sarkowsky had.

His goal was to bring the two together.

He worked out a plan whereby Sarkowsky could meet both the requirements of the new preservation ordinance and the spirit of CHG’s agreement with Fox. Fox would have to give up his insistence that the new housing be built downtown. Sarkowsky would have to give up a million dollars to build new housing.

“Everybody bought it,” Royer said. “Sarkowsky put together a joint venture called Emerald Trails to put up the housing, using federal funds for the elderly/low-income portions. They (Sarkowsky) financed the middle-income portion and built the whole thing.”

Everybody was happy, or at least mollified.

Fox still regrets losing the two buildings, but the total stock of low-income housing in the city was increased. Sarkowsky still regrets losing (at least temporarily) the million dollars, but the Sand Point housing has been up and rented for four years and is a profitable long-term investment.

Still, the hole just kept getting deeper.

`WHAT AM I DOING?’

 

Sarkowsky, by his own account and most others’, just sort of happened to be building the city’s second-tallest building. He didn’t set out to do it. He bought the property because it solved a problem, and each step thereafter compelled the next. Eventually, he admits, he became mesmerized by the high-rise, and not least by the fact he had poured $20 million into it before he ever turned a spadeful of dirt.

Sometimes, Sarkowsky says, the real reason a building gets built is that’s the only way to get your money back.

There was also some amount of ego and competitiveness involved.

“Maybe subconsciously what I wanted to do was to show that it could be done, that it wasn’t such a damn complicated process after all,” he says.

Sarkowsky is 63 years old and has been in business for himself for most of his adult life. He built thousands of houses and apartments in the metropolitan area in the 1960s and is accustomed to taking risks. He bought the Portland Trail Blazers basketball team on the strength of a single telephone call. He and businessman Ned Skinner assembled the group that began the Seattle Seahawks football team, thinking all the while they would probably lose every dime they put in it.

“Herman’s a homebuilder, and homebuilders tend to be intuitive,” says Mike R oach, another member of that strange breed and one of his partners on Gateway. “We tend to shoot from the hip.”

But it was not until he encountered the world of high-rise development that Sarkowsky began having what he guessed were anxiety attacks. He would wake up in the middle of the night and wonder, “My God, what am I doing?” (Clotfelter, a competitor, says he prefers to call his “thinkathons.” The fact that they occur at 2 a.m. is something you learn to deal with, he says.)

Sarkowsky’s wife, Faye, took to using the name of the Almighty in a slightly different manner than her husband. She began calling Gateway “the goddamned building.”

Sarkowsky says he violated every rule of personal financial exposure he had ever established for himself. The only way to fill the financial hole was to put a big building in it.

“How much value is there to the plans? The building was designed for that site. You can’t take those plans and hand them to Marty (Selig) and say, `Here, build this at Second and Columbia.’ It gets to the point you haven’t got anything to sell,” Sarkowsky says.

“You’ve got the ground, you’ve got the leasehold, the rest is down the drain.

“To me it’s a huge project,” he says. “I was in the homebuilding business for 17 years before I sold to ITT, the largest builder in the Northwest. In all those years, all the work that I did – I was building 500 houses a year, and say they average $20,000 a house, that’s $10 million – in 17 years, with all the apartments and everything else, I didn’t do $200 million.”

He has discovered that doing a $200 million building takes nearly as long as doing a few thousand smaller ones.

He first had to find out if, in fact, he could build a high-rise, if he could do what Mason had been investigating – put a lid over the freeway ramps and lease the lid from the state, giving him the whole block to build on.

After months of negotiations, the state in 1981 gave Sarkowsky a 77-year lease at $745,000 a year.

“They wanted the building. We wanted the money,” says Bob Peters of the state Department of Transportation.

The deal proved to be an eye-opener for the state. It has since instituted a marketing program to lease freeway rights of way. One customer is the state convention center. Another is Martin Selig. Ever on the lookout for an angle, Selig is paying $30,000 a year to the state to lease ivy, thereby satisfying a landscaping requirement on Metropolitan Park II, his new building at Denny Way and I-5.

Sarkowsky, for his money, had made it possible to build a building twice as large as he would have otherwise been allowed. The deal also allowed him to begin serious planning for what sort of building it would be.

Until then, architect Fred Bassetti had defined for him rough envelopes of what could be built at the site. Now design work could and did begin. With a design, Sarkowsky could go to the city, county, state and federal governments to begin acquiring the 20 separate permits and licenses required to build a building.

Here is how the design got under way, according to Bassetti:

“I asked a skyscraper what it would like to be. It said it would like to be tall. I like the view up here.”

THE SKYLINE FILLS UP

 

Downtown has become much more crowded with both developers and developments since Sarkowsky embarked on Gateway. The city Griffin had found so wide open has narrowed. Ten million square feet of office space has been built in the last decade. Five million more is coming.

Wright Runstad built its first building, 1111 Third Avenue, in 1980. Unico built its first building outside the Metropolitan Tract, One Union Square, in 1981. Seafirst built its Fifth Avenue Plaza the same year. In 1983, Wright Runstad finished First Interstate Center.

These buildings had all been under way when Sarkowsky, Selig, local architect John Graham and Unico began planning new high-rises.

“We knew Selig was working on something, because he was always working on something,” Mason says. The something was Columbia Center, the tallest building in Seattle. Selig had secured Seafirst as an anchor tenant and because of it was able to beat the others out of the ground. Because he did so with a building that was the size of two normal ones and because everybody else ran into problems of one sort or another – Graham had political problems, which translated into financial problems, and he ended up selling to Clotfelter; Unico couldn’t find financing; and Sarkowsky didn’t seem able to find anything – Selig temporarily froze everyone else out of the market.

“Marty is the real entrepreneur in the downtown development group,” Sarkowsky says. “He is the only real, true risk-taker, the only one who owns all of his buildings himself, the only guy who doesn’t look for partners, the guy who is juggling all these financial balls. I mean Marty’s a genius. With all the problems I had with this goddamned building, I think he’s built six buildings in that time.”

The market has never fully recovered from the shock of Columbia Seafirst Center. The building, with 1.4 million square feet of space, was a third larger than any other building in the city and looked like it would answer the market’s space demands for years.

Sarkowsky recalls running into Selig at a Downtown Seattle Association function at which models of all the proposed buildings were displayed.

Surveying the models, Selig said: “There are a lot of dreams here that are never going to get built.” Selig, it turns out, was wrong. They’re all being built. Whether they will all have tenants is still an open question.

To a developer, says architect Gerron, “The market is everything. The best award a building can win is having it full on occupancy. The story has to have an audience.”

A tall building has no other financial value. It does not, for example, have value as a capital asset as it is treated in tax law. “You can’t give them away if they’re empty,” one banker says.

A building also has no financial value as a work of art. No one collects them.

A high-rise is not the sum total of its parts – the stone and metal. It is worth the amount you can borrow against it. In turn, the amount you can borrow against a building is determined by the amount of revenue it produces. A high-rise in the end is a vertical revenue stream. It’s a good building to its owner if the stream is full. It’s a bad building if the stream is a trickle.

Gateway is described as a $195 million building. That does not mean it cost $195 million to build. In fact, it will cost about $105 million. But the building is intended to generate enough rental income to cover the debt service on a $165 million loan and to allow its owners to gradually withdraw $30 million in cash they have invested.

“That is the real challenge. We want to own the building and have no investment, which is what all developers are after,” Sarkowsky says.

Every developer is convinced, one banker says, that his project and his alone “is God-driven.” It’s the other guys who have – or are – the problem.

All developers distrust other developers’ ability to assess the market, but they all agree the market ought to be allowed to decide for itself who builds what. Solutions such as the proposed Citizens’ Alternative Plan (CAP), which would restrict the number and size of big buildings that could be built, are almost irrelevant, some say.

“CAP is a gnat compared to the market,” says Keith Riely, a local commercial real-estate appraiser. Riely thinks that with or without CAP – which is up for a public vote on May 16 – few buildings are going to be built soon, because the space supply is already excessive.

It is an argument made repeatedly in the development community: Let the market decide. It is not a lightly held notion. “You’re trying to disrupt supply and demand,” one developer says. “That’s unnatural.”

But the free market, when applied to city-building, has obvious complications. Classic free-market theory describes an economy in which the invisible hand governs, always correcting itself. This implies there is something to correct. And indeed, in the short term, even according to its staunchest advocates, a free market makes multitudes of mistakes, economic and otherwise.

The market often does not know it has had enough to eat until it is overfed. It is not usually the first restaurant in a city that goes out of business. It is the last.

The market, in other words, will almost inevitably overbuild.

Big buildings are businesses. Unlike other businesses, when they go broke, they do not pack up and go home. They remain on the landscape. In many central business districts, in fact, they are the landscape. To a significant degree, the built environment in an urban center is the environment.

This built landscape is often invulnerable to the corrections of any hand, invisible or otherwise. Even if everyone had concluded, for example, that Columbia Center was a mistake, it is unlikely the market would soon correct it, that is, raze the building.

Many developers and architects say they recognize the social responsibility that derives from the relatively permanent and public nature of the things they build.

“You’re preempting  a certain space of the limited space on this Earth,” says Fred Bassetti. “You’re acting like a god.”

Beyond this, Bassetti says,  there is a special responsibility in building a big building: “We don’t know how long it’s going to last. They don’t tear them down. It might be here forever.”

The dilemma of tall buildings in many ways is embodied in Bassetti. Cities exist, he says, as places of exchange – financial, intellectual, sexual. For exchange to occur, you need commerce and dynamism. The questions to be asked ought to be whether the form of any city promotes or diminishes this exchange.

He will say, if pressed, that tall buildings disrupt the city, that they cause too much shadow, that they at once create too much density and sometimes remove vitality.

“I would prefer to see a city, I would prefer to see Seattle as it was. It was probably the most desirable city in the late ’20s, before maybe 1926, before the Northern Life Tower was built.

“You look at any photographs of those old times, you’ll see thousands of people on the streets, you’ll see people everywhere. A lot of buildings have been built (since) but you see fewer people on the streets. I like the excitement of the streets.”

On the other hand, an hour later, standing on the  erection deck on what will become the 50th floor of the tallest building he will ever build, surrounded by nothing but steel beams and girders, he can look west into the wind and tell you he can’t wait for the building to grow past the height of 1201 Third Avenue, which he does not admire. Then he says wistfully:

“If we had thought of it, we would have made the building thinner and taller. Could have made it taller than Columbia Center.”

THE SEVEN-YEAR SEARCH

 

When Bassetti delivered to Sarkowsky plans for a building that would be 62 stories tall and covered in granite and glass, he had maximized the site, “building what you could on it.”

By the end of 1981, Sarkowsky had begun to compile the necessary paperwork  to put such a building in place: a demolition permit, environmental-impact statements (draft and final), and an application for a master-use permit, the second most important document in the process.

The most important document – a loan agreement to pay for all of this – proved somewhat more elusive. It took the next seven years.

In the meantime, Sarkowsky would change lawyers three times, project managers three times, partners three times; he would acquire another master-use permit; he would lose his law firm of 25 years as a tenant; he would sell a football team; he would buy and sell a department store and his wife would continue to call Gateway the goddamned building.

The hole was very deep.

 

PUBLICATION DATE     07/09/89

NEWSPAPER            THE SEATTLE TIMES, COPYRIGHT 1989

HIGH RISE — MAKING THE DEAL — SEATTLE DEVELOPER DIGS INTO FOREIGN POCKETS FOR MILLIONS OF DOLLARS TO GET GATEWAY GOING

BYLINE               TERRY MCDERMOTT

 

 Consider for a moment horses, lots of horses. What image is called to mind by a quarter of a million horses gathered in one place, say, downtown Seattle?

To urban planners of the 19th century, that many horses meant mainly one thing: a great amount of horse manure.

Planners puzzled over the disposition of horse manure in much the same way we now wonder how to curb carbon monoxide emissions. Newspapers of the day ran frightening projections of the amount of manure produced as the population of horses mounted.

Contemporary urbanists, confronted with the seemingly overwhelming problems of the modern city, sometimes remind one another of the fate of that towering pile of horse manure. It was erased, of course, by the automobile.

There are those who wonder if we have not simply traded one pile of problems for another, but there is no debate that the automobile is one of a handful of inventions that have utterly transformed the shape and nature of cities in the past 100 years. The automobile allowed the city to grow out just as another invention – the elevator – allowed the city to grow up.

Together, the motor car and the elevator cab are examples of a fundamental force that historically has shaped cities: technology. In the modern era, however, technological change has been challenged as the paramount force in city building. The auto and the elevator have been much refined but are essentially unchanged in the past 50 years.

Many other recent inventions, most notably computers and telefax machines, would appear to be forces of disintegration in urban centers, not concentration. Yet cities such as Seattle have grown dramatically, and the pace of change has been particularly rapid in the past decade.

There are about 100 buildings in downtown Seattle. Twenty-six of those, called Class A buildings, are regarded as premium commercial office space. The 26  have a total of about 15 million square feet of space for rent. Three more buildings, each with about 1 million square feet, are under construction. By the time they are finished, the supply of office space that t ook 100 years to construct will have doubled in less than a decade.

Why? If not technology, what force was at work?

Judging from the recent debate in Seattle over a citizens’ initiative to restrict the size and number of office buildings downtown, many people suppose that simple greed has become the  driving force in development. But the evidence suggests that the latest crop of new buildings is not going to make anybody rich. Indeed, many of the most recent buildings are projected to lose money for several years.

A top executive in a local suburban-development company was talking recently about this phenomenon.

“How can these guys do it?” he asked, wondering how developers squeeze profit out of a market defined by high costs – interest rates – and low returns – rents.

“The answer is they can’t,” he said. “They keep borrowing money from the next deal to cover the last one. The bottom line is there is no bottom line.

“That’s why we don’t go down there.”

A month later, his boss bought two blocks in downtown Seattle. This proved not that the executive was wrong about the market, but that he was perhaps naive in thinking logic was one of the forces shaping it.

In a complex web of world and local politics, coincidence, growth, ego, human nature and competition, one force has taken a dominant role in building Seattle. It is not technological innovation or rational planning. It is instead a function of one of the oldest of man’s inventions: money.

Changes in who has money and how it is used are altering the landscape of downtown Seattle.

 

TAKE A PLOT, ADD CASH

Herman Sarkowsky is a rich man, but not, he discovered when he set out in 1979 to build a skyscraper, rich enough to build it and remain both rich and sane.

En route to this enlightenment, Sarkowsky poured more than $20 million into a seemingly insatiable plot of land at Sixth Avenue and Columbia Street in downtown Seattle.

The land had been purchased – maybe salvaged would be a better description – by Sarkowsky from the fading empire of an ambitious but underfunded development company, CHG International. The company, run by developer Clint Hergert and a visionary architect named Henry Griffin, had during the ’70s purchased options or titles to more than 40 parcels of downtown Seattle real estate. Griffin envisioned most of those parcels as the sites of future office towers. But CHG was unable to carry the burden of debt undertaken to buy the land, and was eventually forced to give it all up and surrender to bankruptcy proceedings.

Sarkowsky had been an investor in CHG, and as part of a deal to save what he could of his investment, he ended up with the land at Sixth and Columbia, on which sat two run-down apartment buildings. The small parcel, 120 feet by 127 feet, was not initially one of Sarkowsky’s major assets.

Sarkowsky, 63, is an independent private investor whose net worth is comfortably into eight figures. His varied holdings have included racehorses, computer software retailing, department stores (Frederick & Nelson), housing subdivisions, office parks and professional sports franchises (the Portland Trailblazers basketball team and a minority interest in the Seattle Seahawks football club).

The land at Sixth and Columbia was zoned for high-density commercial development. When Sarkowsky bought  it, the two old apartment houses there were the only buildings on the block. The rest of the land was carved up by a pair of on- and off-ramps for Interstate 5. The part of it that wasn’t roadway was what city planners called a passive recreation area, otherwise known as a vacant lot.

Because of its location near the traditional legal and financial centers of the city, Sarkowsky assumed he would build some sort of office building on it, but had little idea what sort. With the intent of putting a lid over the freeway ramps, thereby reconstructing the block and enabling him to build a much larger building, he began negotiations with the state Department of Transportation to lease the air rights above the ramps.

The state eventually said yes and, for three-quarters of a million dollars a year, gave Sarkowsky a 77-year lease on the air rights. He had by then already spent close to $1 million to buy the property, $1 million to demolish the apartment buildings and another $1 million to build replacement low-income housing.

In addition to the money, he was spending time. A dispute over demolishing  the apartments took two years to resolve. It took another year after that to slog through the city’s land-use planning process. In order to obtain a master use permit, Sarkowsky had to describe what he wanted to build. He discovered he had no idea, but he realized that any building put on the property would have to be of substantial size just to recoup his  investment.

Sarkowsky hired Fred Bassetti, a prominent local architect, to determine what it was possible to build on the site, and Bassetti soon came up with a rough plan to build a red-granite and bronze-glass, 62-story tower that would wear a distinctive glass-gabled roof and a stout price tag of $85 million.

If Sarkowsky needed to be convinced of the difficulty of the project, that price tag did it. He had neither the expertise nor the resources to build such a building by himself. Sarkowsky Investments, his company, consisted of little more than himself, his secretary and bookkeeper.

He had previously built hundreds of houses and small office buildings, but nothing approaching this scale. Only a few of the office buildings even had elevators.

Sarkowsky, the son of immigrant German parents, had started his professional life as a home builder. Graduated in 1949 from the University of Washington, he went to work (at $52.50 a week) for William Spivock, a northern California builder who was a friend of Sarkowsky’s father. Spivock purchased a plot of land near Tacoma and sent Sarkowsky back to the Northwest to develop it.

“ `If you don’t go, you’re fired,’ ” Sarkowsky says Spivock told him.  “That was not much choice.”  In return for accepting the new assignment, Sarkowsky was able to go home, get a raise  (to $75 a week) and run his own show. But the show was slow to open.

He built the first 25 houses of a planned 80-house subdivision and sat and waited for them to sell. And sat. And sat. For months, nothing happened.

“Spivock finally said, `Get my money back and you can have half the profits,’ ” Sarkowsky says. He chopped the price several times, and the three-bedroom, one-bath units finally started selling at $9,950.

“I ended up paying everybody back and ended up with the magnificent sum of $10,000. I blew about a third of it on my last trip to Las Vegas. I came back and (in 1952) started my building career with $7,000 . . . By 1969, I was the largest builder in the Northwest.”

At that point, he cashed out of the business, selling his United Home Corp. to International Telephone and Telegraph, a huge multinational conglomerate.

ITT under Harold Geneen, its chairman and chief executive, had developed a ravenous appetite for small, successful businesses that had nothing to do with telephones or telegraphs. In the period during which ITT bought out Sarkowsky, the corporate giant was swallowing a company a month, eventually ending up with 265 of them and 425,000 employees.

In Washington alone, in addition to Sarkowsky’s company, ITT bought pulp and paper mills, a bakery, a grass-seed farm and a business school.

Often, as in Sarkowsky’s case, ITT also bought the management expertise of its takeover targets. Sarkowsky went to work for ITT to manage the business he had sold them.

Companies were being acquired at such a rate that few people in the parent corporation knew much about the subsidiaries or the people running them. To help introduce them, Geneen decided at one of his annual meetings in Boca Raton, Fla., to have the head of each subsidiary give a brief synopsis of his division and its business strategy. When Sarkowsky’s turn came, he arose and told the assembled executives that his division built houses and small commercial buildings.

He told them how much business the division was doing and how it was doing it. In summary, Sarkowsky drew upon the success he had had as a home builder and the reasons for it. He knew, as did all developers, that there were in the world two kinds of money – your own and somebody else’s. The developer’s business strategy was to risk as much of other people’s money and as little of your own as possible.

“We build houses,” he said, “but, really, leverage is the name of our business.”

With that,  he sat down. The next day Sarkowsky was asked to a breakfast meeting with Geneen. The call to a division manager to meet privately with Geneen –  an imposing, almost mythic figure – was rare.

Geneen was routinely hailed as the reigning genius of American business. His aggressive acquisition of a broad array of subsidiaries was treated as the textbook means of diversification, a strategy to protect the parent company from the whims of business cycles endemic in any single endeavor.

In the elevator en route to the meeting, Faye Sarkowsky, Herman’s wife, turned to him and wondered if maybe the appropriate music to accompany their ride up to the chairman’s suite might be “Nearer My God To Thee.”

At the breakfast, Geneen, the consummate investor, asked Sarkowsky, the newly minted young corporate executive, what he would do if he were given $10 million of ITT’s money to invest any way he saw fit.

“I’m sitting there thinking, `What does he want me to say?’ ” Sarkowsky recalls. “Finally, thinking back to what I had said to the group about leverage being the name of our business, I told him I’d buy ten $10 million buildings, leveraging the $10 million into $100 million.

“He looked at me and said: `Herman, leverage is not the name of our business. Conservation of assets is the name of our business.’

“I knew then I was dead,” says Sarkowsky, and when his management contract expired, he left ITT and went back out on his own.

 

THE MANY USES OF DEBT

It is not through an idle choice of words that the specific forms of indebtedness traded on Wall Street – which is to say, bonds – are called debt instruments. Although seldom viewed as such by many ordinary people, who see it as an encumbrance, debt is a tool. In the right hands, it is powerful, enabling, among other things, young people to buy homes; younger people to buy cars; corporations to create jobs; shrewd people to buy wealth; and inventive people to invent.

If we still had the cash economy we had at the turn of the century, says Gordon Givens, vice chairman of Security Pacific Bank-Washington, “a lot of us would still have outdoor plumbing.”

As a home builder, Sarkowsky had learned to appreciate the power of debt, and the experience at ITT did nothing to alter his faith in it. He had no doubt he would use some form of leverage to build his skyscraper at Sixth and Columbia.

Sarkowsky had several circular tasks facing him. He wanted to build a building. To build it, he needed to borrow money. To borrow the money, he needed to convince a lender he knew what he was doing. To convince the lender, he had to find a tenant who would agree to move into the building. To find the tenant, he had to demonstrate he would have a building to move into.

A real-estate development loan is much like a leveraged buyout in which the buyer borrows against the assets of a company in order to buy the company. In a real-estate deal, the developer borrows against the assets of what he is going to build in order to build it. As Sarkowsky says: The objective of every developer is to own his building without having any investment in it. It is, in some sense, a search for a free lunch.

The question this might raise to an average individual is: Why can rich developers borrow millions with little or no existing collateral while a middle-class wage-earner has to mortgage his firstborn just to get a loan to send the kid to school?

In fact, the free lunch is available in some form to most of the middle class. The typical home mortgage is little different in concept from a development loan. The borrower pledges the house he or she is going to buy against the money he or she will use to buy it.

The cost of the loan, the interest, keeps lunch from being entirely on the house. But with the tax write-off of interest so deeply embedded in the tax code, it’s very close.

The primary difference between a home loan and a development loan is in how they are regarded. The homeowner frequently regards his home loan as a necessary evil. The developer frequently regards his loan as a liberation.

The difficulty, as Sarkowsky was to discover, is getting one.

“I was not a developer,” Sarkowsky says. “I was a home builder . . . If Bruce Nordstrom still calls himself a shoe salesman, I guess I can still call myself a builder.”

That, as it turned out, was part of Sarkowsky’s problem. He may, indeed, have been a builder for 20 years, but as he himself says, “I was never tempted to build anything tall.” Bassetti, the architect Sarkowsky had chosen, was not experienced in building tall buildings either. For those reasons, many lenders were not tempted to give Sarkowsky their money. He and his building were seen as a risk.

“Herman had never built a building like this. Neither had the architect,” says Jack Shaffer, a New York investment banker who helped Sarkowsky look for financing. “And Bassetti, let’s face it, he’s off the wall. There’s a hole in the screen somewhere. I mean his children’s zoo is lovely. It shows Fred’s talent. But it’s a children’s zoo.”

 

THE BIG BOOM BEGINS

The world was not exactly idle while Sarkowsky was, as one of his competitors describes it, “becoming more intimate with risk.”

Sarkowsky had plenty of company in the early 1980s when he began his search for money to build a skyscraper in downtown Seattle. The aisles of the capital markets were fairly teeming with Seattle developers. Included among them were four of the major local development companies: Martin Selig, Wright Runstad, Unico Properties and John Graham.

Each company had at least one new skyscraper, if not yet on an architect’s drawing board, certainly on its way there. Surreptitiously, each was making plans: Selig for Columbia Seafirst Center, a high-rise at Fifth Avenue and Columbia; Wright Runstad for a building at 1201 Third Avenue; Unico Properties Inc. for the second phase of its Union Square project at Sixth Avenue and Union Street; Graham for a project at 1400 Fifth Avenue that had been struggling through the city’s land-use approval process for years.

Seattle, a town that with few exceptions had grown, when it grew at all, at a very measured pace, was poised on the edge of a downtown building boom. The primary impediment to the boom was that very history of slow growth.

Downtown development long had been the province of a very few, very conservative people.  They were operating in a small market whose needs did not change rapidly. Unico, which as manager of the University of Washington’s 10-acre Metropolitan Tract in the middle of downtown was the oldest active developer in the city, did not build new buildings, according to its president, Don Covey, until its tenants asked it to.

The IBM Building, for example, was born between a Friday phone call from IBM inquiring whether Unico had any new buildings in the works – they hadn’t; at least not before the phone rang – and a Monday meeting at which Unico presented its plans to IBM.

“No-brainers,” one local lender calls such build-to-suit buildings, which involve relatively little risk. Seattle’s entire development history was filled with no-brainers.

That was about to change.

The modern era in downtown development began with a single event in 1983: Martin Selig’s building of Columbia Center, a 76-story building that dwarfed everything else in the city, as it would have in almost any other city in the world.

Before Columbia Center, Seattle development was stately. Afterward, it was frenzied.

Before Columbia Center, Selig was just another developer building office buildings on Queen Anne Hill and in the Denny Regrade. Afterward, he was Darth Vader, the devil encased in dark glass. The building’s scale so enraged the guardians of the local public weal that even before it went up they initiated an extraordinary effort to ensure nothing like it would ever happen again.

This effort took the form of an overhaul of the downtown zoning code, restricting what it would be possible for a developer to build. Unfortunately for those who desired the restrictions, the more immediate effect of the 1985 Plan, as the rezoning came to be called, was to ensure that several buildings nearly as large as Selig’s would be built.

Because several developers had already made significant investments in  properties they had acquired before the new code was enacted, they were allowed to proceed under the provisions of the old code. Those projects  included Sarkowsky’s plans for a Sixth and Columbia building, Unico’s Two Union Square and the John Graham project on Fifth Avenue, which would eventually be sold to Prescott Properties Inc., another local development company, and called Pacific First Center.

All three projects had been in the conceptual, maybe-yes, maybe-no stages when Selig secured Seafirst Bank as a tenant and with it the financing to build Columbia Center. As Columbia Center actually came out of the ground, the three other developers were forced to pause to let the market absorb it. But by precipitating the rezoning of downtown, Selig forced the hands of his rivals. In order to protect the investments they had already made, they all sought and were granted exceptions to the new zoning code, provided they built within a certain period of time.

Rather than pre-empting the competition, Selig helped create it. Doug Norberg, executive vice president at Wright Runstad, which threw its 1201 Third Avenue building into the fray with the three others, says the overbuilding of office space throughout the United States has been caused mainly by two things: oversupplies of both developers and money.

Selig unwittingly helped Seattle meet the first condition. The world economy was ready to address the second.

 

A MONEY SURPLUS? HOW?

In the past decade, there have accumulated throughout the world surplus supplies of numerous basic goods. Wheat, for example, is being grown faster than it can be sold.

The surplus of a product does not mean there is more of it than can be used. It means there is more of it than can be purchased.

Children die daily from starvation while piles of wheat build from Ritzville, Wash., to Melbourne, Australia. The malnourished do not lack a demand for food. They lack the means to purchase it, while those who have the means cannot possibly eat all they could purchase, and a surplus results.

The list of such surplus items is long. At its top, and with particular relevance to development, is money. This surplus has several sources, but for the purposes of development they are mainly two: the globalization of capital markets and the creation since World War II of a new sort of cash collective, the pension fund.

Pension funds essentially did not exist 40 years ago. They did not exist in anything like their current size even 20 years ago. As they have accumulated, they have acquired an enormous strength to alter the financial marketplace. This has been most notably evident in the stock market, where the decisions of pension-fund managers can send the price of an individual stock flying or dying. As was demonstrated in the fall of 1987, the fund managers can help send the entire market spinning.

Developer Dick Clotfelter, a partner in Prescott, first began approaching pension funds for real-estate investments when he worked for Coldwell Banker in 1971.

“It was a tough sell,” he says. “Most of the people we were trying to sell to knew nothing about real estate. They were stock analysts. That was their idea of an investment. All they knew about real estate was buying a house. And in New York, not even that. Maybe buying a condominium.”

Now, some pension funds seek to invest fully a fifth of their portfolios in real estate.

The growth of pension funds has been relatively straightforward. The same cannot be said for the globalization of capital markets, which has had more complex causes and results.

Money is what economists call a fungible commodity: Any one dollar can replace any other. Modern money has no loyalty, no conscience, recognizes no national boundary and knows no home. It is a footloose mercenary.

There is nonetheless a geography to money – not to its nature, but to its supply. Parts of particular countries have mature economies that generate more money than they need. They export money. The state of Washington does not. It is an importer of cash.

The same is true of countries. The United States used to be the world’s biggest exporter of money, sending it abroad in the form of overseas investment. In just the past decade it has become the largest importer.

According to most mainstream economic analysis, continued high U.S. government budget deficits through the 1980s were instrumental in altering the U.S. position. The government borrowed to finance the deficits, creating an increased demand for dollars, in the process driving up interest rates and the value of the dollar. The high interest rates in turn attracted a massive flow of foreign capital into the United States, reinforcing the dollar’s rise.

As the dollar rose, American goods became more and more expensive on world markets, while foreign goods declined in price here. The result was a huge and expanding U.S. trade deficit.

Japan, in stark contrast, has become a huge exporter of capital.

Japanese companies manufacture and sell to people all over the world, but most particularly to Americans, goods such as automobiles, cameras, videotape recorders, stereo equipment and television sets. The Japanese companies accumulate profits from these sales, creating one pool of capital. They use another large share of the money to pay their workers, creating another pool.

The workers, by American standards, are phenomenally thrifty. They save on average more than 17 percent of their income each year. Americans, by contrast, save about 5 percent of theirs. Because so many Japanese are so eager to save, banks do not have to pay them much for their money. Interest rates on savings deposits in Japan are less than half what they are here.

Japanese banks are able to pay these low rates to depositors, then loan the money in international markets where the interest paid is much higher than  it is at home.

Jack Shaffer, Sarkowsky’s investment banker, is managing director of Sonnenblick Goldman, a firm that specializes in real-estate investment. An investment bank is not, as its name might suggest, a storehouse of money. Shaffer does not lend  money; he finds it and puts it together with people who want it. As such, he has become a kind of geographer of money. Nine years ago, about the time Sarkowsky was discovering high-rise development, Shaffer was discovering Japan.

Sonnenblick was a subsidiary of Lehman Brothers, one of the premier investment firms on Wall Street. Lehman had opened a small office in Tokyo, and Shaffer used it as an outpost to investigate Japanese capital. He found a gold mine. One indication of the depth of the mine is Lehman’s office: It has grown from six people to 500.

“They had a lot of capital looking for a lot of places to go. There’s not a lot of deals there and yields are very low,” Shaffer said.

The United States has always been a destination for some foreign capital, and American real estate has always consumed a portion of that investment. The U.S. in general provides a secure environment in which to invest, and real estate in particular has proven over time to be a reliable hedge against inflation.

Claude Ballard, a partner in another investment bank, Goldman Sachs, tells a story that illustrates the allure of the U.S. as a safe haven.

A French client wanted to invest in an American project that did not promise a great return. Ballard advised against the investment, saying the return would be merely adequate. It would not make the Frenchman rich.

“Monsieur Ballard,” the Frenchman said, “I am already rich. I want to make sure I stay that way.”

The strategies for current overseas investment here are little different than the Frenchman’s. What has changed is the source of the capital. Europeans, notably the British and Dutch, and Canadians have always been active in U.S. real estate. The Japanese, with their burgeoning surpluses, were not.

A decade ago, total Japanese investment in American real estate was scant. At the end of last year, according to a study by Leventhal & Co., a Los Angeles real-estate consulting firm, it was $42 billion.

 

TIED IN A DOUBLE BIND

In development, or for that matter in any business, there are two distinct money markets – one for equity, another for debt. Among publicly owned companies, these markets are known as stocks and bonds, stocks being equity or ownership in a company, bonds being loans to a company.

The chief distinction between them is that raising money by selling equity dilutes your ownership. Selling equity reduces both your potential for profit and your risk of loss. Selling equity buys you a partner.

By 1985, when the pending downtown zoning changes prompted him to resume the project, Sarkowsky was in the unusual situation of pursuing both a partner and a lender – equity and debt – simultaneously. But because lenders frequently would like to know to whom they’re lending, the search for a partner took precedence.

Sarkowsky had no desire to rebuild the kind of development organization he had sold to ITT just to build a single building, and, because he had no intent of building more than one, he was determined to look for a partner who could bring a development organization to the project. That became his first task.

For a brief period, it seemed a relatively easy one. The Koll Co., a national developer of mainly low-rise office parks, in 1986 tentatively agreed to become a partner.

Sarkowsky says they parted company because Koll “didn’t want to be a real risk-taker,” which is to say the company did not want to invest any of its own money in the project.

Joe Shepherd, head of Koll’s Seattle operations, says the company simply decided “our plate was already too full. After we evaluated it, we just felt it wasn’t appropriate.”

That evaluation, unfortunately for Sarkowsky, occurred just as he was in the midst of his first genuine advance toward getting his building built. Geraldine Kraft, a real-estate broker Sarkowsky hired to help manage his project, had found a potential lead tenant for the building, which by this time had acquired the name Gateway Tower.

The tenant was a significant one: AT&T, exactly the sort of brand-name tenant Sarkowsky could take to a bank and exchange for money. AT&T is the third-largest office user in the United States, trailing only the federal government and IBM. The    company had just been dismembered by the Justice Department and throughout the United States was taking advantage of a glut of new office space to consolidate its rental space.

In Seattle, the company had 500 employees spread through four different locations. Consolidation made sense, especially when the amount of empty space coming onto the market made it an optimum time to make a deal.

The space glut caused by the combination of Columbia Center and four new buildings in various stages of development – Gateway, 1201 Third Avenue, Pacific First Center (the Graham/Prescott project) and Two Union Square – was pulling tenants into the market. Deals were being made at cheaper rents than people were paying a decade earlier.

Large tenants can make or break projects. By “anchoring” a building, they guarantee a long-term source of income to its owner. Such income is what a lender looks at in determining whether to lend. Tenants know this and use it as leverage against developers. AT&T was looking for 125,000 square feet, enough to qualify as what one broker calls a gorilla tenant – big enough to get almost anything it wanted.

AT&T was more sophisticated about this than most tenants. It is so large it has an entire division devoted to finding and leasing space. “Occupying buildings is a business to them,” one developer says.

They surveyed the Seattle market and invited the developers of each of the four new buildings to fly to New Jersey and make proposals. The competition was no secret. In fact, when Sarkowsky and Kraft flew back to make their proposal, Unico’s Covey was on the same airplane. When Clotfelter of Prescott was at AT&T’s offices, he ran into Wright Runstad representatives in the hallway.

Similarly, everybody had a pretty good idea what the others were offering because AT&T was challenging them to top one another. The competition narrowed to Gateway and Pacific First, and as the offers got better again, Gateway’s emerged as the best, says Tom Schiable, an AT&T spokesman.

The terms of the lease are confidential, but a variety of sources placed AT&T’s rent in the range of $17 a square foot per year, a substantial discount from the top rents in the market, which  are now at about $26.

AT&T reaped other benefits in addition to the low rent. The company’s name was added to the building’s signature and will be affixed somewhere on the exterior of the building itself, a not-insignificant advertisement considering 160,000 automobiles a day pass Gateway’s site along I-5.

More tangibly, AT&T received a $600,000 cash inducement to sign the lease. Finally, AT&T received what is called an enhanced lease, giving the company the right to share in the profits  if the building  is sold or to receive a fixed amount of cash after 10 years if the building is not sold.

Schiable, in a model of understatement, says the enhanced lease “gives you some of the benefits of participating in profits, but it doesn’t saddle you with the risk. It’s kind of a conservative way to enjoy the potential profits.”

Perhaps what is most astonishing about a lease like this is that there are better ones in town. Enhanced leases have become common for anchor tenants. Lead tenants in Pacific First Center, 1201 Third (now the Washington Mutual Tower), Columbia Center, Century Square and Two Union Square all have options granting them some profit from or ownership of the buildings.

Sarkowsky was in the midst of negotiating this deal when The Koll Co. called to tell him it was dropping out of the project. At that point, he still had no financing and no tenants. He needed AT&T. He was forced to call AT&T officials and tell them Koll was dropping out, but that he was talking with other potential partners.

AT&T officials said they could afford to wait for a while, but they told Sarkowsky they had a deadline by which time they would have to make other arrangements.

Even in a market where the supply of developers and cash – not demand – was the driver, Sarkowsky needed a lead tenant in order to get money. No lender in his or her right mind was going to lend  money to a building that had no tenants. (Actually, even this fundamental was eventually ignored in the space glut. Two Union Square found financing from the Washington State Investment Board, managers of the state employees’ pension fund, without any tenants. No one in the development community even attempts to explain this. They regard it as an unnatural act for which no explanation is possible.)

 

A LONG, LONG MATING DANCE

Sarkowsky in the fall of 1986 contacted Jack Shaffer at Sonnenblick Goldman for assistance. Through an intermediary, Shaffer introduced Sarkowsky to Neil Hokonson, a representative of one of North America’s wealthiest families, the Belzbergs of Vancouver, B.C. Hokonson very quickly determined that the Belzbergs’ company, First City Development, was interested in becoming a partner in the project.

“Herman felt he didn’t have the expertise. I turned him over to the Belzbergs. That part was easy,” Shaffer says. “The Belzbergs, though, wanted to OPM it, use `Other People’s Money.’ So we brought Kumagai Gumi in as a joint developer.”

Kumagai Gumi, a Japanese company, is the sixth-largest general contracting-development company in the world. Its annual revenues routinely exceed $5 billion. In 1980, when Shaffer first met Ryuichiro Katano, Kumagai Gumi’s general manager of North American operations, Kumagai had yet to sign a contract in the United States. By last year, the company had booked $3 billion worth of business here.

That quickly – after seven years of futile searching, after a lunch with Hokonson at the Rainier Club and a dinner with Katano in San Francisco – it looked like it was over. Sarkowsky had found his partners. With them, he was assured of keeping his tenant. With the tenant, he would be able to get a loan. With the loan, he was assured of building his building.

Katano detailed Mike Roach, one of his project managers, to work out the partnership agreement and sign a contract with Sarkowsky.

It took two years.

“After the initial contacts with Kumagai, within three months they said OK. That’s when I thought my problems were over. That’s actually when they started,” Sarkowsky says.

The difficulty was the sort of contract Kumagai wanted to sign. Having heard horror stories common in the American construction industry about partners suing one another, Katano wanted a litigation-proof contract. He wanted every contingency addressed and resolved.

Additionally, Roach found the Seattle lifestyle an impediment.

“It was extremely laid back . . . Our attorneys would draft language and send it up to Bogle (Bogle and Gates, Sarkowsky’s law firm). I’d come up to negotiate and the attorneys would say, `It’s probably OK, but I haven’t read it yet.’ So I would have made the trip for nothing.”

The contract eventually exceeded 100 pages. Sarkowsky estimated its cost at $5,000 a page. In the end, he says, it was worth it. The building would get built. The deal was beginning to get done.

Tall buildings like Gateway exist in many realms – as objects of art, as examples of an indigenous form reflecting the poetic vigor and rambunctiousness of American society, as expressions of ego – but you hear little talk of such things today, not even from the people who build the buildings.

The economic life of the buildings – the deals that are made to get them built – shapes them.

There is hanging over them what novelist H.B. Fuller described almost a century ago as “the incessant demon of the 9 percent,” a reference to the demand for return on investment.

The partners in Gateway reflect this.

Sarkowsky eventually came to see Gateway as a necessity, an inexorable consequence of other economic actions: “I was not mesmerized, but there was a point of no return, like trying to take an airplane off the runway. There was some point at which I couldn’t stop the process, couldn’t get what I had out of it.”

Hokonson of First City Development says: “This business isn’t building buildings. It’s a business of structure and evaluating risk. The physical building of this building is the simplest part of it. You get a bunch of construction guys, architects and engineers, put them in a room and tell them to bring out a building. Then you keep saying no until they bring out what you want . . . The rule is to never fall in love with anything.”

Roach of Kumagai Gumi says: “This company’s interest in development is in generating construction. We develop so the construction company has something to build.”

As Fred Bassetti, Gateway’s architect,  says: “There are no philosophers in that group.” Nor would any of them claim to be. The partners’ attitude would best be described as pragmatic. If you need a philosopher, hire one.

WOOING – AND WINNING

While Sarkowsky and Kumagai were engaged in their mating dance, Hokonson was trying to find $165 million. The estimated cost to build Gateway Tower was about $85 million. That much again was needed to pay non-construction costs – called soft costs in the business. These include architects’ fees, taxes, permit fees, marketing, building operations and, especially, interest. The total cost is estimated at $195 million. The partners were ready to invest $30 million of their cash and sought to borrow the rest.

Almost all office towers are financed in two stages:  an initial loan to construct the building, followed after construction by refinancing  at a lower rate and usually with a different lender.

Consortiums of banks typically issue construction loans, with one member of a consortium becoming the lead bank and taking most of the initial loan. Insurance companies and pension funds typically issue the long-term loans. The banks generally decline the lo ng-term loans because they are, in the words of one lender, “in the business of churning money.” Insurance companies and pension funds, by contrast, want long-term, secure sources of income.

Hokonson’s search for a construction loan was complicated more than a little by the fact that Kumagai was not yet formally a partner. It was further complicated by Hokonson’s insistence on a non-recourse loan, which is exactly what it sounds like: If for some reason Gateway Tower does not get completed, if for whatever reason the partnership defaults, the bank would be stuck with the building with no recourse to any of the partners’ other assets.

Non-recourse loans are common in the long-term market. They are almost unheard-of for construction loans, because construction is risky. One reason Martin Selig is able to secure financing so readily for so many buildings is that he offers lenders full recourse on every project, says Jim Kirschbaum, a commercial banker at Seafirst.

“Martin Selig steps up to the line for everything every time. There are no partners, no  dilution, no separate corporations. It’s just one guy. It’s a distinct advantage when you’re looking for money,” he says.

It is also a distinct disadvantage if something goes wrong, says Hokonson, who finds such risk unacceptable. Hokonson by training is an accountant, and he describes himself as “extremely risk-averse.”

Hokonson presented the Gateway proposal to about 50 potential lead banks, chosen mainly because of their size. The number of banks who at any given time might be willing to lend that much  varies. Lenders come in and out of the marketplace according to their own economic circumstances and desires. The potential lenders for Gateway were further reduced because of the non-recourse demand. That was “a deal-breaker” for several, Hokonson says.

Hundreds of hours are consumed in negotiations to arrive at the final structure of a large loan. Most of it has nothing to do with significant points, Hokonson says. Those often are settled early. Instead, the negotiations often involve such things as the size of the bank’s name on the sign at the construction site.

Of the 50 banks that looked at the Gateway proposal, three entered into negotiations. One of the three, the Canadian Imperial Bank of Commerce, negotiated for months, “right down to the deal point,” Hokonson says, but never gave in on the non-recourse demand.

Rainier Bank agreed to that demand but was not willing to assume a large enough share of the loan. “They weren’t voting with their money,” one local broker says.

All the while, competing developers snickered. Most assumed Gateway would never get the money and would never be built. Clotfelter says he was shocked when last year the Bank of Montreal finally agreed to head a group that included Rainier (since renamed Security Pacific Bank Washington) and five Japanese banks to make the loan.

“Some fundamentals (of the market) were ignored,” he says. “I assume Kumagai had to sign on the line.”

In fact, the wealth and reputations of First City and Kumagai made the loan possible.

Yutaka Hotta, deputy general manager of the Long Term Credit Bank of Japan,  says his bank took part of the loan for one simple reason: “We’re very closely related with Kumagai Gumi. They introduced us to this project. And we have a completion guarantee from KG Construction,” Kumagai’s building company.

In a bygone era, say 10 years ago, Gateway probably would never have been built. For that matter, after Columbia Center and 1201 Third Avenue beat them out of the ground, neither Two Union Square nor Pacific First Center would have been built, either.

The rules have changed. Seafirst’s Kirschbaum says it has gotten to the point that “you just don’t build here without foreign investment.

“All you’ve got to do is look around,” he says. “Deutsche Bank on 1201; C. Itoh on Bellevue Place and Pacific First Center. Kumagai is absolutely paramount to (Gateway) being built.”

In some sense, you can think of Gateway as a very big pile of color television sets: it represents excess capital at rest, waiting to earn money.

Although it sometimes might not seem like it to an individual looking for a used-car loan, lenders cannot just sit on their money.

They need to make loans.

“There is too much money chasing very, very few deals,” says Shaffer, the investment banker at Sonnenblick Goldman. “You have never seen cash backed up like this. There’s virtually no place to put it.”

American real estate, even in a glutted market, is a relatively low-risk investment, so money continues to flow toward it even as almost all American cities have overbuilt.

Investors are aware of the oversupply of buildings, says Keith Riely, a veteran Seattle commercial appraiser. “But what are they going to do? Buy stocks? Loan money to Brazil?”

SIGNED, SEALED, DELIVERED

When it all finally came together last summer, it came all at once. AT&T signed on for 125,000 feet. Kumagai signed on to build the building and stick $15 million of its own money into it as a 50 percent equity partner. Sarkowsky and First City signed on for the other $15 million between them. The Bank of Montreal agreed to make the seven-year, non-recourse loan for $165 million.

As all of this happened, Faye Sarkowsky sensed a change in Herman. Her husband’s anxiety, which had become oppressive, lifted.

“Gateway is the first time I’d seen anything affect his health. The hole just kept getting deeper and darker. I was worried about him. I didn’t want to end up the rich widow. Or the broke widow; whichever.”

She had taken to calling Gateway “the goddamned building.” That has changed, she says.

At a ceremony last month to hoist the final beam of the tower’s steel frame into place, she jokingly signed her name on the beam beneath the salutation: “To the G.D. Building.” That was for old times’ sake. Henceforth, she declared, it would be the god-blessed building.

Finally, Sarkowsky had filled the hole. The world economy had conspired to get the building built. Now the question is, will the economy produce enough paying customers to fill it?

 

HIGH RISE: Part Three

DRAWING THE LINES

——————————————————————–

By Terry McDermott

Herman Sarkowsky is a conservative, unemotional and at times bloodless businessman, “a man of incomparable business acumen,” one rival says, who has demonstrated an ability to make money, even when he isn’t trying, that borders on the eerie.

Sarkowsky says much of his ability is not calculated, it’s intuitive. At some level, this must be exciting – neurons whizzing all over the place, assessing and probing, accepting and rejecting – but Sarkowsky’s expression of the synaptic hubbub, his language and face, remain as laconic as an accountant’s. He retreats into the far reaches of an armchair and barely moves when he speaks. Even close associates find it impossible to determine what’s going on behind the poker face.

“He’s a good gambler. You don’t know if he’s won or lost,” says Faye Sarkowsky, Herman’s wife. Faye says there is a telltale “Sarkowsky smirk” when something pleases Herman, but it is so imperceptible that no one outside the family has ever reported a sighting.

Ten years ago this winter, Sarkowsky entrusted Fred Bassetti with what would eventually amount to $200 million of his and other people’s money, and asked him to design a skyscraper.

Bassetti was then a 62-year-old Seattle architect with the innocence of an 8-year-old and the energy of an adolescent. The only thing that has changed since is Bassetti’s age. He is as voluble and open as Sarkowsky is reserved. If you can’t tell whether Bassetti has won or lost, one or the other of you is dead.

“Fred sort of hits a wall, rebounds, then hits the other wall,” says Phillip “Skip” Norton, his partner.

Karlis Rekevics, another partner, says: “Once he’s said something, there is no way to talk him out of it. It can be frustrating, it can be humorous. Overall, it’s pretty exciting to work around him, even if it means you don’t speak to each other for months at a time.”

Bassetti is passionate, his ideas deeply held and richly delivered.

“I can’t tell you the contempt I feel,” Bassetti will say, beginning a critique of 20th century architecture that, left unfettered, will go on to include allusions to Hitler, Hamlet and pancake makeup.

“Well,” another conversation begins, “I fell in love over the weekend.”

This sort of psychological disrobing led one of Sarkowsky’s bankers to lament in print that Bassetti was “off the wall.” After quizzing a dozen people to find out what this meant, Bassetti concluded it was good.

“At least he didn’t say I was over the hill,” Bassetti said, and promptly ordered a set of vanity license plates inscribed OFFTHWL, a badge of enduring Bohemian artistry the sincerity of which is difficult to question.

“Fred’s architecture is a search for truth,” says one longtime associate.

Therein lies one of the wonders of contemporary city-building. It is carried in trains on separate tracks, defined by the developer’s search for money on one rail and the architect’s search for truth on the other.

 

THE INTERVIEW

A large display board at the offices of Bassetti, Norton, Metler, Rekevics notes the status of each project the firm is working on: A school is being bid; a house designed; a small office building built.

The status of the 62-story AT&T Gateway Tower, the biggest, most expensive and longest-lived project in the firm’s history, is described less specifically.

“Gateway:” someone has scrawled, “The Saga Continues.”

The Gateway project went on BNMR’s boards a decade ago when the firm, in the person of Bassetti, was invited to interview for the job. BNMR was one of four firms Sarkowsky asked to make proposals for an office building at Sixth Avenue and Columbia Street in downtown Seattle.

Two other local firms, NBBJ and TRA, were also on Sarkowsky’s “short list” for what was a very vague project. All were selected because of their local prominence and availability. Besides the locals, Sarkowsky interviewed architects from 3D/International, a Texas company with an office in Seattle. 3D/I was invited because the company had just finished designing Seafirst Fifth Avenue Plaza across from Sarkowsky’s property. Rumors hinted that Seafirst Bank needed still more space, and Sarkowsky thought 3D/I’s past work for the bank might help lure it into his building.

The architects’ presentations were not formal designs. No one actually had a building in mind yet. To a large extent, Sarkowsky did not know even what zoning laws would allow. That was partly why he needed to hire an architect – to determine what was possible, then begin slogging through the city permit process.

The presentations dealt less with a building that would be built than with buildings that had been built – in essence, discussions of the architects’ resumes.

TRA, it turned out, was not nearly finished with One Union Square, a high-rise being built by Unico Properties, and was quickly eliminated. Bill Bain, a partner in NBBJ, showed up with “three or four guys in beards, corduroy jackets and desert boots,” and made a thoroughly “underwhelming presentation,” according to one person who was there. It, too, was eliminated.

That left 3D/I and Bassetti. Dick Krutze, a 3D/I vice president, wasn’t particularly inspiring in his presentation, but 3D/I’s people seldom were. The firm was not in the inspiration business. It had a reputation as a developer’s architect: Produce a straightforward design; get in, get it built, and get out.

Its management expertise and the connection to Seafirst were valuable to Sarkowsky, who was inclined to hire the company but was unsure of its design abilities. Additionally, although 3D/I had a local office, it was not a local firm. It had little of the community presence that was important to Sarkowsky, who moved in Seattle’s highest social circles.

BNMR, on the other hand, was entirely local. And if it was inspiration you wanted, well, Bassetti on his best days could make you believe he was building a stairway to heaven. Bassetti was highly regarded as a designer, frequently honored by his peers, and a prominent figure, fully involved in the life of the city, but Sarkowsky wondered if BNMR could handle a job this large.

Architects for large commercial ventures perform a multitude of tasks, conceptual design being the most public, most honored, and most criticized of them. But conception of buildings, like conception of babies, is in some sense the easiest, most pleasurable part of a process that takes a long time. One burst of inspiration by some creative genius – a “Crayola designer,” one member of Bassetti’s firm calls such people – does not a building make.

Someone must determine what will fill the crayon sketch. Someone, for example, must flawlessly produce more than 5,000 drawings just to specify the structural steel in a typical high-rise.

The project architect functions as a sort of general contractor for design, making sure the sticks and stones match the paper and pencil. The architect often selects and sometimes hires many of the subcontractors – the structural, mechanical and electrical engineers, elevator consultants, window-makers, stonecutters, many of these perhaps scattered all over the country, if not the world.

BNMR was not noted for its work on speculative commercial buildings. Its design ability was never questioned, but its administrative capacity for a large private project had never been tested.

Bassetti emphasized his commitment to the building owner’s needs: mainly, making money. He noted he was ready to hire a “time and cost control consultant” for the project. His somewhat quirky presentation, peppered with exclamation points, concluded by promising to “serve the Client so well that he won’t be troubled with the need of an interview next time.”

Sarkowsky loved it.

Still, preliminary probing of Seafirst executives made it clear the bank did not trust Bassetti’s administrative abilities. Sarkowsky split the baby in half. He hired Bassetti to do the design and 3D/I to manage the project.

The obvious good sense of this quickly went the way of all obvious good sense in the development business. It disintegrated. 3D/I was gone before the first spadeful of dirt was turned.

“They hit the wrong button with me,” Sarkowsky says. The button had a dollar sign on it. Hired to watch the money, 3D/I was let go because in Sarkowsky’s view it was spending too much of it. After winning the job, the company had closed its Seattle office, and its architects were commuting from Houston.

“Herman is a financier, not a developer,” Rekevics says. “He makes his money on paper sitting in his office. . . . These guys would come here and give Herman three days of Olympic Hotel bills and a couple of first-class airplane tickets. Herman says, `I can’t bank that. What I need is a master use permit; I don’t need hotel bills.’ ”

Sarkowsky wanted to find a development partner to run the project so he wouldn’t have to worry about such things. While the architects were flying back and forth to Houston, he had been looking for a partner. He had yet to find one.

Sarkowsky, the passive investor, for now was Sarkowsky the developer. And Bassetti, the freewheeling designer, was suddenly Bassetti the project bureaucrat. The odd couple had been joined – like two teen-agers no one else would ask to dance – by attrition.

 

THE ARCHITECT

Bassetti was born in downtown Seattle just a block from Gateway’s site. His father was a dour Italian accountant, who published a group of community newspapers here.

Bassetti’s mother was a vivacious Norwegian, whose gregarious personality came through unchecked in her only son.

Bassetti graduated from Garfield High School and enrolled at the University of Washington, planning to become an engineer. He envisioned himself a man of action: “Look through a transit, wear a hard hat, brave the elements and build bridges or towers or something. But I found engineering, the way it was taught, to be rather dry and uninspiring.”

One day during his freshman year, he went to meet a friend at the School of Architecture. While waiting outside the friend’s class, he looked inside.

“I remember looking through the door . . . and seeing 30 freshman students doing watercolors. And I thought, `How can anybody do that?’ I could never draw even a stick figure,” Bassetti says. “But as I looked around the walls, here were these watercolors of lamaseries in the Tibetan Himalayas. And here was a picture of a restaurant cantilevered out over the rocks on the San Juan Islands. And there were men and women sitting out on the deck with martinis in their hands, seagulls were flying around.

“Seeing the romance of those drawings, it was the first time I became motivated.”

Thus inspired, Bassetti earned a degree in architecture and went to work designing government housing during World War II. After the war, he won a scholarship to graduate school at Harvard, where he was imbued with an intellectual framework to hang his enthusiasm on – Modernism.

Harvard at the time was one of the centers of the Modernist movement in the United States, and Bassetti studied with its master, Walter Gropius. The Silver Prince, as the painter Paul Klee called Gropius, had founded the Bauhaus School in Germany after World War I. From within its walls he engineered a revolution.

Modernism overthrew, then became, architectural convention. In place of the neoclassical, decorative fashions of the time, Gropius and his allies insisted on a strict formality in building. Geometry and function reigned. The spirit was captured exactly in the title of an early Modernist essay, “Ornament and Crime.”

Only “modern” materials, steel, concrete and glass, should be used. A building’s structure should be “expressed” by its form. Arched windows and doorways, pitched roofs and eaves were forbidden. Only flat roofs, pure rectangular doors and windows were allowed. The glass box became the standard form of contemporary commercial building.

Gropius eventually fled Hitler and came to the U.S. American architects flocked to Harvard to study with him. Being accepted into Gropius’ studio was an accomplishment in and of itself. The best young architects in the country wanted to be there. Philip Johnson studied with Gropius. I.M. Pei had the drawing table behind Bassetti in the design studio.

“It was very stimulating,” Bassetti says. “It was a little bit doctrinaire. We copied Gropius a little bit. We were not advanced enough to go beyond copying. We didn’t copy directly, but it all had that Bauhaus look.”

In 1947 Bassetti came home. He spent much of his first year remodeling porches and waiting for clients who never arrived. Eventually he began building homes, usually small homes on difficult sites. He built boxy, flat-roofed, correctly modern buildings, almost all of which, in addition to their Modernist lineage, had one thing in common.

They leaked.

 

 

`THE SLOPED-ROOF PEOPLE’

 

In a recent conversation, Skip Norton, referring to the stylish dress of a rival architect, made a disparaging comment about the fellow’s “double-vented suits.”

His partner Bassetti hadn’t a clue what this meant. Neither, really, did Norton, who was trying to make a point about the other architect’s pursuit of current style, which in men’s suits is marked not by double vents, but by no vents.

These are guys who have worn the same tweed sport coats for decades, who drive old MGs and regard reinforced concrete as one of the last worthwhile innovations. The firm in some ways is hopelessly out of date, which of course has always been Bassetti’s aim.

To Bassetti and friends, style implies the temporal, the passing fancy. This is bad in everything, but especially in big buildings, which are apt to be with us for a while. Gateway Tower, Bassetti says, might as well be permanent.

In contemporary design, a continuum runs from the cold intellectualism of Modernism to the sometimes sloppy, sometimes contrived, sometimes brilliant kitsch of Post-Modernism, which now occupies the popular middle ground, to the anarchistic notions of the Deconstructionists.

The degree to which these styles relate to popular taste ranges from outright hostility to downright pandering. The temptation to pander is enhanced by the curious position of the business of architecture. The architect doesn’t own what he designs. He does not have the freedom of a sculptor or painter. There are no patrons, only clients.

The architecture produced at BNMR is not neatly categorized. The partners were trained mainly in the Modern style, but they have evolved, not without difficulty, into something else.

The intellectual hold of Modernism was so strong that Bassetti can remember precisely the moment he began to question it:

He was on the roof of a house he had built for himself in Bellevue. It was night. It was raining. He was holding a flashlight in one hand, a bucket of tar in the other. He was wearing pajamas and a raincoat and an additional cloak of exasperation when the skies opened and something other than water fell out: This is stupid, he thought. This is Washington. It rains here. People would not have to get up in the middle of the night to patch leaks in their roofs if the roofs did not leak. Flat roofs leak. Hence: Build sloped roofs.

Bassetti had never been intentionally hostile to the people who would inhabit his buildings. His first house, for example, had such user-friendly features as a fireplace mantle set at precisely the height of its owner’s elbow, the better to lean on at cocktail time. The promise of perfection offered by Modernism was so powerful, however, that when clients would ask about the possibility of a flat roof leaking, Bassetti would tell them – and believe – that technology had solved the problem. Then he’d build the roof. And it would leak.

He sometimes went to extraordinary lengths to honor the creed. Before he came to his senses and put a new, pitched roof on the Hilltop house, he bolted a ladder to an exterior wall so he wouldn’t have to search for it in the dark when going up top for a midnight patch job. He was aware that the mounts he manufactured to secure the ladder, pieces of steel he bent into heretically decorative shapes, were violations of Modernism, but he went ahead with them, thinking himself something of a rebel, never realizing that the absurdity of putting the ladder there at all defined just how tiny his rebellion was.

“I don’t learn quickly, but, by God, when I finally do learn something, I don’t forget it,” he says. And from his last wet night on the roof onward, Bassetti began to think less of architecture as an imposition of his will on a building and more of it as a process of solving the particular problems of a particular site and use.

“Keep in mind that the building is a service, has to be usable, congenial to the user,” he says.

Bassetti can say these things and mean them. He’ll point out his favorite of his own designs is something as functional as a summer-camp shower house, then in the next breath begin talking in terms a building’s user hasn’t a hope of understanding. He will talk about the need for a building to declare itself, to tell where it is and how it got there, to speak the truth. He talks, for example, about the columns supporting Gateway as having a natural vitality not unlike a human hand, all hairy on one side and smooth on the other, sinewy, blue-veined, with bulging knuckles.

He talks about Gateway’s symbolism:

“The building is bilaterally symmetrical, like a person. It’s got a sloping roof. It says about the Northwest it rains here. It says about Seattle that it’s on a particular location and the hillside slopes down to the water. The terracing on the top of the building recalls the slope, stepping down to the water.”

His partner Rekevics says this somewhat less abstrusely.

“We’re all sloped-roof people,” he says. “That’s the way we see.”

 

THE FENG-SHUI MEN

People have been planning cities almost since there were people and certainly since there were cities.

One of the first things the Sumerians did after inventing writing 6,000 years ago was use it to invent bureaucracy. Scholars say bureaucracy could not exist without a medium to transmit its rules. Writing provided the medium, and among the earliest rules devised within it were prescribed designs for cities.

At the height of their era, the Greeks produced Hippodamus, the first great city planner and an early proponent of what would become a standard urban form – the street grid. In their day, the Romans, possessors of great military might and a keen desire to move it about, became transportation experts and as such the first regional planners.

In ancient China, buildings were not built without first consulting a scholar whose job it was to discern the preferential orientation within a city of each building. Practitioners of this folk science of urban design were called feng-shui men. Feng shui is based on natural and supernatural signs including topography, location of nearby bodies of water and position of the stars.

What often seemed to Westerners mere superstition has gained recent converts who claim that whatever feng shui’s sources, its application produces sound design. They say its practice is not all that different from what we do today. We follow superstitions and call it social science.

The feng-shui men of Seattle live at 600 Fourth Ave. They are known as city planners. The planners consult the zoning code, not the stars. The code sometimes seems as immutable as the firmament, but it has proven wildly variable over the years.

The planners have entertained jarringly dissonant visions of the city they were planning. They have codified height limits, then revoked them; commissioned grand designs of great civic spaces, then rejected them; restricted the number of parking spaces downtown, then multiplied them; advocated construction of awnings, then taxed them; mandated open plazas, then filled them.

In many ways the superstitions of the Chinese geomancers were superior at least in their consistency.

Part of the reason for this is an unresolved debate at the heart of American urban life. That debate is between concentration and dispersion, and between the bewildering benefits and hindrances accompanying both. The debate in Seattle is nearly as old as the city.

It raged for most of the first two decades of the 20th century in the form of a dispute over whether the city ought to build a spacious civic center a mile north of the central commercial district on Yesler Way or allow commercial forces to thrust the city up toward the sky.

Seattle city engineer R.H. Thomson, a man so opposed to heights he even disliked hills – and proved it by bulldozing Denny Hill, creating the Regrade – pronounced tall buildings “unwholesome and dangerous.”

Others argued sophistication could be reached only by building up to become the New York of the West.

The business forces won this early debate and kept the focus of the city south, expanding north bit by bit over the next 70 years. One unforeseen result of this piecemeal process is that the city, by the standards of a good feng-shui man or any other seeker of sunlight, is built backwards, with the tallest buildings at its southern edge, blocking the sun.

The debate over density has carried through the years. Occasionally, building limits were tugged earthward, but seldom did they remain. Economics, ego and planning assumptions returned to triumph. Their stamp on the city is the collection of tall buildings in what the planners call DOC-1, the downtown office core.

The core is 31 full blocks and parts of six others platted by the city’s early settlers in the middle of a crescent that curves from south of the Kingdome to the foot of Queen Anne Hill. The crescent follows the shore of Elliott Bay. Keeping streets parallel to the bay dictated an irregular street geometry, defined by separate grids, the avenue and street pattern broken three “ways,” at Yesler Way, Olive Way and Denny Way.

DOC-1 is most of the middle grid, from Jefferson to Union streets and from I-5 to Second Avenue. It is zoned to be the center of the center, the most densely developed portion of the city.

The city’s zoning is based on the notion that any given piece of land ought to support buildings of a prescribed size. The size is defined by bulk. A building could be as high as construction techniques made possible, providing its total bulk, or square footage, is within the land’s assigned load.

The formula for determining the bulk is the “floor area ratio,” commonly called the FAR. Each commercial district in the city is assigned a base FAR. To determine the size of a building, a developer need only multiply the assigned FAR by the dimensions of his land. The product is the amount of square footage permitted.

The land Herman Sarkowsky owned, upon which sat two run-down apartment buildings, was a 120-foot by 127-foot plot, 15,240 square feet. DOC-1, where the land is, had a base FAR of 10 when Sarkowsky bought the property in 1979. Multiplying the FAR times the size of his plot yielded 152,400 square feet, enough for about a 10-story building.

Whatever Sarkowsky had in mind to build, a 10-story building was not it. The size of American commercial buildings has generally been related to the price of the land beneath them, and Sarkowsky’s investment in the property – at this point almost a million dollars, with other millions committed – was more than he could expect to recover quickly with a 10-story building. He wanted something bigger. By manipulating the zoning code, he thought he could get it.

The code, while restricting capacity of a site, regards site and capacity to be tethered, not glued. The development rights to a property can be transferred to any contiguous property. A developer who is able to secure adjacent rights can pile them atop his existing rights, multiplying the size of his building.

The old apartments were the only buildings on Sarkowsky’s block. The remaining three-quarters of the block was owned by the Washington State Department of Transportation and trisected by on- and off-ramps to I-5.

Sarkowsky, acting through James Mason, whom he had hired to help develop his property, had begun trying to secure the rights to DOT’s land. Mason, a former city planner, thought the ramps could be turned into tunnels and the lids covering them could be defined as “land,” which, if leased by Sarkowsky, could be added to his existing parcel.

“What is land?” is not the sort of issue the city’s Department of Construction and Land Use was accustomed to addressing. The process of seeking an answer was somewhat esoteric, but was resolved by the department’s ultimately straightforward determination that land, for the purposes of the zoning code, was that portion of the earth’s surface not covered by water. The freeway ramps, on most days, were land, meaning they had development rights.

Those rights could be transferred if DOT desired. After years of discussion, it did, indeed, desire, especially after negotiating a 77-year, $747,000-a-year lease.

If the issue – what was land – seemed arcane, its consequences were not.

Leasing the state land quadrupled the potential size of his building to more than 600,000 square feet. He was able to acquire almost as much again by further plying the labyrinth that the city’s zoning code had become.

Seattle for 25 years has had a system of bonuses that grants developers extra space if they provide a changing variety of presumed social services ranging from baby-sitting to bagel stands. In 1980, in a display of development dexterity that astounded almost everyone, Martin Selig announced he had achieved sufficient bonuses and development rights to build a 76-story high-rise on the block south of Sarkowsky’s. He had no guaranteed tenants and no partner.

Selig had been Seattle’s most active commercial developer for a decade, but he had been doing most of his work outside the downtown core.

The results of his announcement and his subsequent ability to fulfill it were the reordering of both the private calculations by which developers did business and the public rules that governed them. Both changes had significant effects on Sarkowsky.

Selig’s building, Columbia Center, brought 1.4 million feet of office space into what had been a sleepy rental market. It forced every other developer to reassess the income prospects for his own projects. Sarkowsky concluded the market could not simultaneously absorb his own building and Selig’s. He would have to slow down. Fortunately, he had an ally at hand – the bureaucracy.

The geological portion of the environmental impact statement filed with the city for Gateway Tower goes back in time to the Ice Age when the clay, sand and glacial till upon which Gateway is built were formed.

Gateway’s file with the city Department of Construction and Land Use isn’t quite as old, but it has moved at about the same pace as the glaciers. One planner who worked on Gateway has had three babies since the file was opened 10 years ago. The department itself has had four directors, and the zoning code was radically changed three times.

Gateway Tower, before its doors can open, will require the issuance of 20 separate permits, approvals and licenses from the city, county, state and federal governments.

Bassetti’s staff began going to Department of Construction and Land Use meetings to discuss a master use permit, an acknowledgment that a design meets the code, in the spring of 1980.

A permit was actually granted in 1983, but Sarkowsky’s various delays slowed the project. By the time he was ready to resume full speed, Columbia Center had caused people other than developers to re-examine the city’s office market. Objections to its construction prompted a rezoning of the downtown office core. Gateway, because it had been under way before the new rules took effect, was given a partial dispensation from them. Sarkowsky’s right to build it was grandfathered into law, but precisely what he could build was not.

Planners required Gateway to get a second permit, reinterpreting the bonuses it had been granted under the old code to see how they fit into the new one.

The shotgun marriage of the two codes often proved absurd, says Rekevics, the Bassetti partner whose job it was to acquire the permit.

“They had to bureaucratically realign the system with the building. It gets kind of ridiculous sometimes. It’s a line on the floor, and on one side of the line it’s a roof garden and on the other side it’s a plaza.”

Jon Hall, a former BNMR architect who worked on the permit process, says the city was particularly emphatic about “adjacency issues,” ensuring that pedestrians could get to the plazas that the bonus system encouraged. This was especially difficult because the freeway ramps sliced through the building’s civic front door on Fifth Avenue. Putting “lids” over the ramps had raised the project above street level. The resulting problem was “how to make it seem as though it were street level when there was no street,” Hall says.

City planners were not the only people seeking to influence the design. John Hempelmann, Selig’s attorney, wrote to the city asking without a hint of irony that Gateway’s permit be denied because it would block the views of Columbia Center tenants.

At one point, late in the process of seeking the second permit, agreeing to yet one more city-requested alteration, one of the BNMR architects scribbled in the margin of the city’s letter, “My God, let this be the last change.”

In the end, the city granted virtually everything Sarkowsky could have dreamed.

A series of shopping arcades set in and around a plaza at the building’s base – shops Bassetti says he would have built regardless of the bonuses – and a stairway between the plaza and Fifth Avenue would be built. In exchange, Gateway qualified for bonuses that totaled almost 400,000 square feet. The bonuses came to more than twice the square footage of the original building allowed by the law. These numbers, while measures of space, are also measures of money. The top rents in the office building, when it is finally occupied, are expected to be near $30 a square foot.

Gateway was growing into a big building. It had leaped on paper to 1,007,490 square feet.

There was only one way to use that much space.

Go up.

 

THE FOUR-MINUTE MILE

Fred Bassetti is no special fan of tall buildings. He thinks Seattle has too many of them. He thinks they create too much shadow and too much congestion. But he also thinks the commercial life of the city makes the rest of its varied life possible, and he hungered for the chance to do a big building.

“I recognize the dichotomy and I wonder have I done a horrible thing,” Bassetti says.

Like everybody else, Bassetti has to earn a living. Contrary to popular belief, architecture is not a particularly lucrative profession, “at least not the way we do it,” he says.

In his best years, Bassetti’s income has been near $50,000, a good living but a fraction of that earned by many professionals. A high-rise like Gateway provides a source of income for an architectural firm for years.

Based on a percentage of construction cost, BNMR will take in somewhere in the neighborhood of $5 million on Gateway. This is by far the biggest fee the firm has ever earned. As a lump sum, it would have been a bonanza, but the firm has been working on Gateway for 10 years. Often, more than a dozen architects were devoting all their time to it.

Given the chance, Bassetti sought to make Gateway as tall as possible. “Make no mistake,” Bassetti has written. “Height is money.”

A skyscraper’s owner is selling space and view. The taller the building, the more of each he has to sell. This means going as high as the law allows.

By simple calculation, the million square feet would produce a building of about 50 stories, given a standard floor size of about 20,000 square feet. This figure is not entirely arbitrary. Tenants prefer it because it produces reasonably efficient interior spaces.

Efficiency aside, a floor of 20,000 square feet also provides exterior offices – that is, views – to all executives. This is not an idle concern for developers. The executives are the ones who decide where they will rent space. The floor size was thus set, and if Bassetti wanted more height he would have to get it by some other means.

He found it in the garage. “I originally thought of putting the garage underground to get the damned thing out of the way,” Bassetti says. “But the deeper you go, the costs increase geometrically. The bottom corner parking stall probably costs $100,000.”

Bassetti faced the additional complication of the freeway ramps, which cut through the site at exactly the place where the garage would naturally have been. Digging under the ramps meant going even deeper, so to save money, the garage was placed up the sloping site from the ramps; six of its 12 stories are above ground.

Bassetti says this had several serendipitous effects: The partly-above-grade garage cuts the drive time to the bottom floor in half; it is a buffer from the freeway; and it pushes the building higher. With the garage, a seven-story atrium and a health club sandwiched between the ground and the main portion of the tower, the actual office space does not start until the 16th floor.

This hoists the top of the building 700 feet and 62 stories into the air, taller than anything in town except Columbia Center. Once Bassetti knew how tall the building would be, the first person he went to see was structural engineer John Skilling. His firm, Skilling Ward Magnuson Barkshire, has engineered most of the high-rises in Seattle as well as hundreds of other structures elsewhere: buildings, bridges, tunnels, towers, runways, hangars, water tanks and warehouses, something on every populated continent, from projects as famous as the twin-towered New York World Trade Center to the Yakima Post Office.

“In nature,” Skilling will say, speaking as if buildings were indeed natural occurrences, “things like a tree or a building have good strong foundations.”

Sometimes, Skilling says, an architect will hand an engineer a building design and say, “Here it is. Make it stand up.” Bassetti’s approach was the opposite.

“I asked him what was the strongest, most economical structure for a tall building. He said steel tubes with concrete pumped into them. That’s where we ended up,” Bassetti says.

There are four such tubes on Gateway, each 9 feet in diameter, running more than 600 feet up the building. The tubes bear most of Gateway’s weight, and are an example of the sort of ingenuity for which SWMB is famed. The ingeniousness of the columns lies in their ability to join the advantages and mitigate the weaknesses of two dissimilar materials – concrete and steel.

Concrete, which is relatively cheap, has great compressive strength. It will bear tremendous weight with little deformation. It has, however, less tensile strength than paper. When bent, it breaks.

Steel, which is relatively expensive, has much greater tensile strength. It bends, but its compressive strength per dollar is much less than concrete. If loaded with too much weight, it buckles. This can be avoided by using heavier steel to bear more weight, but the cost can grow to be prohibitive.

If the two could be combined, the material would have the strengths of both and the weaknesses of neither. Thus, the invention of reinforced concrete, or concrete with steel rods in it. The great columns that hold up Gateway operate on the same principle, but with a special high-strength concrete on the inside surrounded by the “containment steel.”

The ingenuity rests not on mere technical expertise. It is based at least as much on cost. Structural engineers, like architects, don’t eat if their in-baskets are empty. Skilling is a constant salesman. What he’s selling is his firm’s ability to deliver a structural plan that will be at least as safe as anyone else can deliver, and cheaper besides.

There is a sort of four-minute mile in contemporary high-rise engineering. The goal is to reduce the pounds of steel per square foot of space in a building (or any structural substitute converted to the cost of steel). The barrier is 10 pounds per square foot.

Skilling eagerly distributes a slick graphic displaying the weight of the steel in every high-rise building in the world for which he has been able to obtain the information. The weights exceed 40 pounds per square foot in the older buildings. Most of the 118 buildings on the chart are between 20 and 30 pounds per square foot. In a yellow band on the chart’s far left are the lightest buildings. Ten of the 11 buildings in that band are Skilling’s. None of the high-rises has breached the 10-pound barrier yet. None but Skilling’s is close.

Gateway’s steel weighs 11.5 pounds per square foot, contributing to a total weight of 129 million pounds. The next-lightest high-rise of equivalent size is a 63-story building in Tokyo. It’s 28 pounds per square foot.

The significance of this to a developer is substantial. Steel commonly is the most expensive single material in a high-rise, as much as a third the total construction cost. For equivalent load-bearing capacity, steel can cost more than 20 times as much as high-strength concrete.

There are fundamentally two types of forces to be addressed in making sure a building stands up: a vertical force, gravity, which seeks to pull it down; and lateral forces, wind or earthquakes, which seek to push it over.

The effects of gravity, because they are constant, are easier to predict and overcome. The composite columns do most of the work themselves. The great compressive strength of the concrete allows the four columns to bear much of Gateway’s total weight directly into a 10-foot-thick concrete foundation.

The lateral forces, because they vary unpredictably, present a greater challenge to an engineer, Skilling says.

At first it seems unlikely that anything weighing 129 million pounds would be susceptible to the wind, but that weight is distributed throughout an extremely large object, most of which is empty. Gateway’s overall density is slight, nine pounds per cubic foot, the same as balsa wood. Consider what the wind might do to a 700-foot-long piece of balsa.

Most of Skilling’s analysis is aimed at engineering comfort. When he won the contract to engineer the 110-story World Trade Center, he found that no one had thoroughly studied the discomfort tall buildings inflict on their inhabitants. Many tall buildings sway several feet. This is much more likely to upset psyches than the building, but it can become a significant factor to tenants.

Skilling and architect Minoru Yamasaki set out to determine at what level of acceleration an occupant feels a building move. They built a room on a hydraulic pad and advertised free eye exams. People would come in for their exams, sit in a chair, and psychologists, hidden behind two-way mirrors, would start moving the room “in a figure eight, which is how a building moves.”

The reactions varied dramatically. Some people would complain at the slightest acceleration. Others would grip their chairs as if they were riding a tilt-a-whirl, yet never utter a sound. Skilling and the psychologists eventually established “a threshold of awareness . . . We determined the rate at which 2 percent of the people seriously objected and set that as the upper limit.”

To meet this threshold with Gateway, Skilling designed a simple square with a composite column at each corner. Joining the columns are a series of steel girders that cut across each plane of the box on a diagonal once every 10 floors. The result is a set of six giant X’s stacked from ground to roof.

The braces tie the columns together, making Gateway extremely rigid for a high-rise. In the fiercest gale expected to blow in the next century, Gateway’s top ought to sway about 8 inches, in a 7.5 Richter scale earthquake about 9 inches.

Because of the wide spread of the large columns, Bassetti likens the building’s ability to resist wind or earthquakes to a boxer’s broad stance. He could as easily compare it to a child’s lead-bottomed punching bag. The columns finish in a 44-million-pound concrete foundation, giving the building the structural characteristics of the world’s largest Tommee Tippee cup.

 

THE UNSEEN SPACE

One of the ways in which structural engineers reduce costs is to reduce floor-to-floor height. With shorter floors, more of them can be built for the same cost. This results in either offices with lower ceilings or a reduction in the space between the ceiling of one floor and the bottom of the floor above it.

This space is known as an interstice, a space between spaces. It’s Art Sirjord’s office.

Sirjord is the chief mechanical engineer on Gateway Tower. As in all social organizations, there is in the development community a hierarchy. At its top are money people, developers, and idea people, architects. In the next strata are the structural engineers.

Down several layers, beneath the glamorous ironworkers and the flashy brokers, not even on a layer of their own, but sort of threaded through the entire structure, like their work, unseen, living in the cracks, are the mechanical and electrical engineers.

They are responsible for heating, lighting, cooling, plumbing and ventilating high-rises. This is not particle physics. The systems are well-understood. As Sirjord says, “All you have to know about plumbing high-rises is the terminal velocity of falling fecal matter.”

More difficult than designing the systems is finding a place to put them. The easiest way to hide something in a building is to bury it beneath the floor, but mechanical systems depend on gravity to work. They must slope. Thus the battle for the interstitial space is joined.

“The structural engineer has become so persuasive on floor-to-floor height because it allows him to reduce the steel, I don’t think they ever take into account the cost caused by us having to work in small areas with limited access, beam cutting, simple inefficiencies,” Sirjord says.

The great shame of what he does, as Sirjord sees it, is that nobody appreciates it “until something goes wrong.” Developers will spend millions on grand marble lobbies and granite facades. They’ll coat elevators in mahogany, but ask for an extra inch in the interstitial space, and they’ll tell you to forget it.

Gateway is unusual in that Sirjord won more battles than he lost. In part because of Bassetti’s taste for problem-solving and his willingness to sacrifice design options in its service, and because Sarkowsky was willing to pay for it, Gateway has the most advanced mechanical system Sirjord has ever put in a high-rise.

The main feature is a separate ventilation system for each floor that allows occupants to dial in as much fresh air as they want. The system is capable of 100 percent fresh-air exchange. Many buildings exchange as little as 5 percent, and most office occupants live on recycled air. Sirjord’s system was conceived in response to a phenomenon called “sick building syndrome,” a condition in which poorly ventilated offices, filled with chemicals for copying machines, wood glue, paper dust, recycled air and who knows what-all, have been blamed for inducing illnesses.

The syndrome was first identified 20 years ago, but little has been done to alleviate it because it costs money. Proponents say fresh-air systems pay for themselves with increased efficiencies over time, but developers live on borrowed money.

“They’re stuck on first costs,” Sirjord says. “The genius of this system was the willingness of the owner and the architect to place the mechanical rooms on the outside walls. Most owners and leasing agents go nuts if you even mention this.”

Many people in the development community around town think Sarkowsky was nuts to place a mechanical room on the eastern edge of each floor, in prime view space. “It’s like giving money away,” one broker says.

 

THE WHITE PAGE

The design of Gateway Tower began, as Bassetti says design always begins, “with the terror of a white page.”

Gateway’s page, however, was far from untouched by the time it fell into Bassetti’s hands. A great deal had been scribbled on it by a wide variety of hands. The developer’s budget had sliced corners off the page. The city’s history, planners and politics had filled much of what remained. The peculiarities of the sloping site itself posed as many problems as everything else combined.

All of this produced what several people have described as the most difficult high-rise site in town. The task of building Gateway – challenging enough in purely financial terms – grew to require elements of urban reclamation, of engineering wizardry, of political will and, for the designer if for no one else, of art.

Bassetti is not an overly modest man, but he was more than willing to give up large parts of his design to other concerns. He gave Sirjord the view-blocking mechanical rooms. By placing half the parking garage above ground, he gave the base of the building over to automobiles. He proudly gave Skilling’s structure the most expressive elements of the design.

In many instances, Bassetti sought to make virtues of necessity. Fighting the freeway ramps at its feet, Bassetti realized Gateway wouldn’t work as a rectangle. By pulling the southwest corner of the rectangle back, he escaped the ramps and, suddenly, Columbia Center wasn’t dead ahead across the street. The view angled around it to the south. When he pulled back the northwest corner, the view opened to the north. All four corners were pulled back and Gateway became an elongated hexagon.

“Please bear in mind,” Bassetti wrote in one essay on the design, “that everything about Gateway Tower, where it stands on the site, its size, the materials used, its shape and appearance and color, have grown out of the process of problem-solving. Almost nothing is arbitrary.”

There is nonetheless little question that the guiding hand on the not-so-blank page was Bassetti’s own.

Gateway would become his: a tall building built by a man who dislikes tall buildings; a skyscraper built in the Post-Modern era by a man who despises Post-Modernism; a structure elegant in its efficiency, elegant in the way a mathematical proof is elegant, if not in the more popular sense of being pretty.

Following BNMR’s normal procedures, Bassetti, the partner who brought in the work, became the partner-in-charge and principal designer. Unresolved in-house arguments would have one solution – Bassetti’s.

Because it was Bassetti’s, Gateway would take on a certain shape. It would not have a flat roof because the first house Bassetti ever built for himself had a flat roof that leaked. Gateway came to have a distinctive arched gable roof that has appeared in building after building of Bassetti’s design, as if he were trying to exorcise some flat-topped Modernist demon.

Partner Skip Norton, who is not enamored of the roof, says the arch was inevitable. It has followed Bassetti for decades, from the design of a gate for the 1962 World’s Fair (a gate, by the way, that fell over shortly before the fair was set to open), to the roof of a library in Ellensburg, and now to Gateway.

At one point Sarkowsky had entered a partnership with The Koll Co., a Southern California developer. Koll wanted to know if everybody couldn’t save a few million dollars by flattening the roof.

Bassetti and the Sloped-Roof People were offended.

“Sure,” Bassetti says, recalling the debate. “You could do this.” He grabs a pen, draws seven quick lines in the form of a cube and labels it “El Cheapo.”

Bassetti had determined Gateway would have the arched roof as its most distinctive feature. He had plans for the roof. It would form not just a shape but a grand space.

The plumes you see coming from the tops of most high-rises are typically not caused by furnaces providing heat but by cooling systems extracting it.

High-rises, because of their immense sealed glass areas, accumulate heat. The top two floors of most of them are stuffed with cooling and ventilation equipment. This is the equipment Sirjord wanted to distribute to each floor and to the garage.

When Bassetti realized the mechanical equipment didn’t have to be on the top floors of the building, he was determined not to let it be.

With the equipment packed off to other destinations, it became possible to plan offices in the top. These grand offices, Bassetti decided, would be covered by one of the world’s largest skylights. He would cover the entire roof of the building in green glass, the same shade of green as the Washington Mutual Tower’s pyramid top, “so they can wink at each other across town.” Sarkowsky thought the idea a little far-fetched. They argued about the roof for months. Sarkowsky yielded. “Fred’s the kind of guy who’ll say: `I won’t have my name on it.’ I respect him for that,” he says.

Once Bassetti had settled on the sloped roof, a roof he says tells an observer it rains here, he had to decide what to do with the rainwater the building was talking about.

Most high-rises do not have a problem with rain. On a high-rise, unlike a house, that is one of the advantages of a flat roof. Usually, an architect will extend the exterior walls above the level of the roof. This mock wall, called a parapet, traps rainwater. The water is funneled into rooftop drains and carried into the building’s interior plumbing.

“You can hide a multitude of sins doing that, but it’s rather unexpressive,” Bassetti says. In any case, on a sloped roof with eaves overhanging the walls, there was no place to build a parapet.

Martin Selig had faced a similar problem with his Fourth and Blanchard Building, which is characterized by sharply angled roof lines. His designers chose to let the water run off the side. That works fine as long as the water remains water, but when it turns to ice in winter, it slides off in great sheets. At times the city has had to close the alley behind the building to protect pedestrians from the falling ice.

Bassetti didn’t have the luxury of an alley. Also, his ice would be 700 feet in the air. Allowing it to fall would turn Columbia Street into a missile range. That meant he had to carry the water off, and that meant gutters. Oh, my, did that mean gutters.

Karl Rekevics recalls Bassetti asking how big the gutters should be.

“The mechanical guy says take an 8-inch tube and cut it in half and that’s how big it should be.” Bassetti nodded. He made the gutters 5 feet wide.

They’re precast concrete, and each 18-foot section weighs 13,000 pounds. They look precisely like what the construction workers call them – pig troughs.

“It doesn’t have to be this size,” Bassetti admits. “I felt it was important that it have a presence that shows it does catch all this water.”

As big as the gutters are, it is difficult to tell what they are from the ground. Sticking out from the building more than 600 feet in the air, they mark the end of the roof. The combination of arch and gutters creates a mushroom effect, forming a cap on the stalk of the tower. Some people are reminded of something other than mushrooms, however.

Bassetti often talks about Gateway in feminine terms, likening his design intent to the act of capturing the natural beauty of an honest woman’s wrinkled face.

But Gateway is hardly feminine. Even Bassetti says it’s a “gutsy, masculine building, don’t you think?”

Masculine, certainly, although buildings are inevitably criticized as phallic. Given their nature, it is difficult to escape such a shape. It is equally difficult to recall another building so much that shape. Jokers at the construction site have christened the building “Fred’s Last Erection.”

The tower’s overall shape, whatever it reminds people of, was determined in large part in response to its site. That is less true of its color. Unlike almost every other aspect of design, color is a matter of nearly unlimited choice; and in the case of Gateway, nearly unlimited debate.

Years ago, Sarkowsky requested a model to display at a Downtown Seattle Association event.

Models are built endlessly in architects’ offices, usually out of whatever happens to be on hand. In this instance, that was white cardboard. It was hard to tell afterward exactly what anyone at the DSA meeting thought of Bassetti’s building, but one thing was clear. They loved the cardboard.

Person after person at the meeting came up to Geri Kraft, who was marketing the building for Sarkowsky, and commented on the model.

“It’s beautiful,” one said. “It just gleams.”

“Why don’t we have more of these,” said another.

Well, why don’t we have one, Sarkowsky said. No decision on color had been made. Bassetti wanted something colorful, not colorless, something to warm the cool winter skyline. But the white model created a life of its own. Suddenly, everybody wanted white. The market demanded it.

Bassetti reluctantly succumbed. An earlier decision had determined the building would not be a glass box and would be sheathed in stone. So a search for white stone ensued.

There is, it so happens, a geography to the color of granite, the most commonly used building stone. Grays tend to come from the United States, yellows from South America and darker reds and blacks from Scandinavia. Within those areas, each quarry might have a different color, depending on the specific mineral content of the stone.

Patrick Gordon, one of the designers of the Washington Mutual Tower at 1201 Third Ave., recalls traipsing over half of Brazil looking for yellow granite for that building. When he finally found it, he scrambled up the side of the quarry wall and painted out exactly the sections he wanted.

So the quarries of the world were scoured for Gateway.

“We had rocks here from every part of the planet,” Rekevics says.

There is, alas, no such thing as white granite. Bassetti was hardly chagrined to report these findings. “You can get some nice grays that are marketed as white, but you can’t get white,” he told Sarkowsky and Kraft.

What about marble then? they asked. Marble comes in white. There are white marble buildings right here in Seattle. Off Bassetti went in search of marble, which does, indeed, come in white. But the use of marble on high-rises, he discovered, has had a somewhat litigious history. It falls off.

In modern high-rises, exterior walls are not part of a building’s structure. Called curtain walls, they are essentially decorative. If stone is used, it is not used in thick blocks, but is cut into thin strips, normally less than an inch thick, and attached to the steel structure beneath.

Such thin sheets of stone expand and contract as they heat and cool. Cooling marble, however, never fully contracts to its preheated shape. Over thousands of heating and cooling cycles, this can become a problem. The marble bulges. If it bulges enough, it cracks. At worst, it falls.

BNMR’s Norton says the problem could have been solved simply by using white ceramic tiles. “I’m not a great fan of natural products cut into thin sheets and hanging 60 stories up in the air,” Norton says. Tiles would have given the owner a white building while also being, to use Bassetti’s language, more honest.

There is a suspicion, however, that for every proposed solution Bassetti would have found a problem. He did not want a white building. He wanted something warm. He wanted red. And that is what he got.

Sort of.

A Finnish granite, known commercially as Cardinal Red, was finally chosen. But even after Bassetti won the debate, the color continues to bedevil him. Cardinal Red is not, it turns out, very red. On the building it looks brown.

At some firms a great deal of effort would have been spent to eliminate this sort of surprise. Endless color studies would have been done. Photo collages from every conceivable angle would show the proposed new building in its surroundings. Some firms use a device called a magniscope that, by shrinking the viewer’s perspective, allows its user to view an architectural model as if it were full size.

Bassetti goes through the same processes but often intuitively, inside his head. He trusts his instincts and welcomes some surprises, providing as they do a sort of intellectual entertainment. He recently delighted in an unforeseen benefit of the building’s freeway neighborhood. The brown granite picks up thousands of reflections from cars as they move past it. In the right light, the whole tower sparkles.

This was a surprise but not entirely an accident. Gateway’s base, given its site, was naturally distinctive. The green-gabled top was not just distinctive, it was provocative. Bassetti sought some means to give similar variety to the main part of the building, the tower. He worked to vary its texture.

As a result, Gateway’s curtain wall is not a sheer face. Most of the windows are recessed and have granite sills. The only exceptions are the windows that front the structural X-braces behind the walls. Bassetti marked the presence of the braces by bringing these windows flush to the granite. The flush windows form a pattern of faint X’s, echoing the braces.

The combination of the flush and recessed windows, the sills, the brown granite and bronze glass give the walls a faceted surface intended to catch, fracture and reflect sunlight. That the hundreds of thousands of cars cruising past the building contribute to this makes Bassetti almost giddy.

The building — any building, Bassetti says — is composed of a mountain of such detail and the criticism from developers that he lacks attention to it infuriates him. Architecture is all detail, some intended, some not, some chosen, some discovered.

 

 

The green glass is going on the gable this week. Workmen are putting the last pieces of granite in place and soon the activity will move inside, where a final rush to finish the building by its spring target date will commence.

At this point, doubts about Bassetti have been made irrelevant by the building. Some 20,000 individual drawings were drawn — a damned fine set of drawings, Bassetti says. From them, a building — damned fine, as well, he hopes — has been nearly built.

What might have been a 10-story white marble building with a crew cut sits a 62-story reddish brown tower with a green-glass shower cap, the object of almost ten years of the most intense effort Bassetti could give it. He has had his chance to pre-empt space, for a time to play God. But when done, the building will no longer be his. It will belong to Sarkowsky who started it, to the banks that underwrote it, but even more people who didn’t ask for it and might not even want it — the citizens of Seattle.

Bassetti understands that any judgement of Gateway is not his to make, but theirs. Architecture in practice amounts to “a large subtle argument seldom understood,” he says. With a big building, the resolution to the argument sits off somewhere in the future.

“It’s like growing your kids up,” Bassetti says. “They’re all wonderful at six, but at 16? . . . I know there’s going to be plenty of surprises, I see them everyday. How the hell did that happen? Jesus Christ, how’d that happen?”

 

 

 

12/17/89
THE SEATTLE TIMES
HIGH RISE — PAYING UP
GATEWAY’S SELLING SPACE WHEN SUPPLY IS SKY-HIGH – AND PRICE IS DIRT-CHEAP
TERRY MCDERMOTT

Coming into Seattle from the south, the collection of tall buildings rising from the Duwamish plain is an imposing sight.
The land where the first of those buildings sits is part way up an area once known as Profanity Hill, a name unkindly if not unreasonably applied by those who had to walk up it from the city center on Yesler Way. When it is cursed now, it is not for the size of the hill, but for the size of the buildings upon it.
The 76-story Columbia Seafirst Center is the tallest man-made object a northbound traveler would have seen since Los Angeles. Its new eastern neighbor, the 62-story AT&T Gateway Tower, is not much smaller. In addition to their sheer size, critics object to the cars, smog, shadow, congestion and wind the fancy towers bring with them.
Some of these problems of tall buildings could be eliminated – indeed many of the buildings themselves could be eliminated – by following some Shakespearean advice: Kill all the lawyers.
Most high-rise office buildings are filled with representatives of the professional classes: accountants, insurers, bankers, brokers and, especially, lawyers.
There are more than 15,000 lawyers in Washington state, twice as many as there were 10 years ago when neither Columbia Center nor Gateway Tower existed. More than half of those 15,000 lawyers are here in King County and, according to a recent census of the downtown Seattle tenant population, law firms rent nearly a third of all high-rise office space. Among the few things that have grown as fast as the number of lawyers are places to put them. By the time Gateway is finished next summer, the supply of office space in downtown Seattle that was a century in the making will have doubled in a decade.
The reasons for this are complex and many, but the result for the people building the space has been singular bedlam. The enormous growth of office space has outstripped demand, pitting high-rise developers in a high-stakes competition for tenants and survival.
Columbia Center and Gateway were conceived at about the same time, and they sit across the street from one another, but the six-year period between their construction might as well be an eon for the changes that occurred within it. They are bookends to an unprecedented era.
LOST IN SPACE
Martin Selig owns more office space than anyone in Seattle. Depending on where one draws the boundaries of downtown, he controls as much as a third of the market, space estimated to be worth a billion dollars. But this fall, desperate for cash, Selig was forced to sell Columbia Center to avoid foreclosure proceedings against other properties. And it isn’t clear that his profits from the $354 million deal will be sufficient to put him right.
Among other demands, Selig must pay off outstanding mortgages of $260 million, and he faces a potentially crippling capital-gains tax payment that, by rough calculation, could be as large as $90 million. That would leave only $4 million (only?) in after-tax profit – and New York Life Insurance Co., the lender threatening foreclosure, is demanding payment of $64 million.
There are those in the city who think this is only the beginning, that Selig will have to sell off his empire piece by piece to satisfy creditors.
Others in the real-estate community are fearful of stomping too hard, yet, on Selig’s grave, lest he climb out and stomp back, and they tell Selig stories with a special awe reserved in some societies for deities, which of course he is in theirs. The picture competitors and brokers paint of Selig’s style is one of calculated recklessness. Whether Selig recovers or not, they say, he has no one but himself to blame.
Seattle’s space wars began six years ago when Selig built Columbia Center, then did everything but kidnap tenants to fill it.
A new, premium office building should rent space for an average of at least $22 a square foot per year simply to meet mortgage payments, taxes and operating costs – more if the developer hopes to make a reasonable operating profit. Selig has rented space in Columbia Center for as little as $12, according to brokers.
Cerissa Merritt, a commercial broker with the firm Cushman and Wakefield, recounts one lease negotiation with Selig in which they had agreed on every point but the rent. Commercial leases can routinely be scores of pages long, addressing everything from the brand of carpet to the quality of wallboard in the bathrooms, so getting down to the rent is a more significant achievement than it might seem.
Merritt wanted $12.50 a square foot, and Selig was holding out for $14. Finally, Selig said, “Let’s flip for it.” Merritt was taken aback, but she agreed.
Selig tossed, looked at the coin and announced, “That just cost me $283,000.”
Merritt burst out laughing.
“What are you laughing at?” Selig said. “You just lost $7,000 in commissions.”
Selig, despite his reputation for aggressive deal-making, is a notoriously bad negotiator. He agrees to everything. A prospective tenant will run through a list of demands, Selig nodding, yes, yes, yes. When the tenant is done, Selig will peer out over the top of his half-height reading glasses and say, “Is that it?”
“I must have done something right,” Selig says. “The buildings are all filled up.” Selig says.
Selig’s business philosophy is simple: Pack the tenants in at whatever rate of return you can get, and let the banks cover the negative cash flow. His “profit” is supposed to come as the value of the buildings inflates over time and he is able to borrow more and more against them. An acquaintance says Selig once described this strategy as being similar to that of a heavily indebted Third World nation:
“Get the banks to loan you enough money, they cannot afford to let you fail.”
It amounts to a sort of pyramid scheme whereby he continues to expand his base to feed everything above it. He expands his debt, borrowing from past deals to finance new ones.
The pyramid began to topple, however, this summer when one of his lenders, New York Life, sued Selig for attempting to pay mortgages with checks that bounced all the way from Seattle to Manhattan. Selig publicly maintained the suit was a misunderstanding in the midst of a loan renegotiation, but in court documents he has acceded to all of New York Life’s demands. An army of lawyers and business-school graduates has descended and is combing through his accounting ledgers in search of whatever crumbs they can carry off.
Selig remains stoic. He continues to disparage his competitors, especially those who choose safety by taking on partners, thereby diluting their risks.
He also continues to deal. Just two weeks ago he received the city’s blessing to build a new building at Fourth Avenue and Vine Street.
“Deals walk in here every day,” he says. “In the business I’m in, your money will always run out before your deals do.”
Selig’s competitors follow his travails with a mixture of regret and glee. Although they had long forecast his demise, they are sorry to see one of their kind stumble, if only for what it says about their own chances of survival. But they greet his temporary absence from the marketplace as a window of opportunity.
Selig’s aggressiveness has set the terms in the downtown market, and the terms have not been favorable to the developers.
“Martin went into his war chest to the bottom on every deal,” Merritt says. Other developers had to match his deals or lose tenants. With Selig sidelined, they hope to redefine the market. Keith Riely, a veteran commercial appraiser, wonders if it might not be too late to do that.
Cheap rents have made the office-building market largely unprofitable, Riely says. “A building has its best income-producing capacity when it’s new. When it’s not new, it’s not new. People won’t pay as much to be in it.
“Some of these buildings will never catch up.”
Starting with Columbia Center in 1984, more than 8 million square feet of premium office space has been built downtown. In a roundabout way, Selig created much of his competition. The construction of the 1.4 million-square-foot Columbia Center was greeted unenthusiastically by many critics who regarded the huge black tower as out of scale with the city. They led an effort to rezone downtown to restrict further high-rise development, but three already planned high-rises, were allowed to proceed under the old rules, provided construction began within a prescribed period.
All three properties – Herman Sarkowsky’s Gateway Tower, Unico Properties’ Two Union Square and Prescott Properties’ Pacific First Centre – met the deadlines. Two Union and Pacific First opened this year. Gateway is scheduled for completion next spring.
Additionally, Wright Runstad, another developer, sensed an opportunity to pre-empt the market and rushed a fourth building, Washington Mutual Tower, into existence in the hopes of halting at least two of the other three others – Two Union and Gateway.
The pre-emptive strike backfired. All four buildings were built.
“We thought the money would be there for two of the buildings, possibly three. Never four,” says Barbara Dingfield, a Wright Runstad vice president. “We think somebody’s going to lose an incredible amount of money.”
“Why we had four buildings go up at once is because we keep changing the goddamned zoning, and people were trying to protect their property rights,” says Dick Clotfelter, president of Prescott, which is rumored now to be facing critical cash-flow shortages.
No one had anticipated the accumulation of surplus capital, particularly in booming economies abroad and pension funds at home, that has altered lending criteria and caused loans to be made that once would never have been considered.
“It’s my specialty, and I wonder sometimes if I know what’s going on,” Riely says.
Seattle developers were not unique in their overzealousness. Virtually every city in the United States has been overbuilt in the last decade, says Michael Beyard, an analyst with the Urban Land Institute, a national development association. Such speculative building is hardly new, Beyard says.
“In the Depression, when the Rockefeller Center was built, people wondered if there would ever be a market for the space. What is new is the sheer volume of speculative space in the ’80s. It was caused by a shift in the ’80s to the service economy and encouraged by the large quantity of money available. We’ve ended up with speculative buildings that may never be needed,” Beyard says. “They sort of went off the deep end.”
`NO HEAVY LIFTING’
As manufacturing employment has declined in the United States, service employment has increased. Skyscrapers have replaced lumber mills. This is not entirely bad. As U.S. Sen. Bob Dole, during his pursuit of the vice presidency, was fond of saying, “It’s inside work and there’s no heavy lifting.”
If his choice of profession is any indication, Judge W.H. Bogle was no fan of heavy lifting, either. Bogle, a lawyer, who so far as anyone can tell never lifted anything much heavier than the title “judge,” which he appropriated without the bother of having been one, moved to Seattle in 1897 after a two-year exile in Yakima – having been sent east of the mountains by his Tacoma physician in search of a cure for consumption. In the 92 years since he arrived here, his law firm has occupied space in four buildings, each in its time one of the premier business addresses in the city.
In the fall of 1986, Bogle and Gates, which by then was the second-largest and fourth-oldest law firm in town, began investigating a move from the Bank of California Center upon expiration of its lease three years hence. Bogle was hardly alone. By the end of next year, only one of the 10 largest law firms in the city will inhabit the same building it was in 10 years ago.
The wayfaring nature of those firms contains within it much of the recent history of the American economy.
The growth of the service economy has been a primary reason law firms in Seattle are playing hopscotch across the downtown skyline. Although it sometimes might not seem like it, law firms do not exist to serve their own purposes. They serve clients and have grown to address the needs of those clients.
The shift away from manufacturing is one of many changes that underlie the physical transformation of downtown Seattle. Urbanization, the growth of new economies in high technology and medicine, the increase in international trade and general good times have all caused law firms to grow.
Even manufacturing itself has played a role. The largest law firm in Seattle not coincidentally has as its principal client Boeing. As Boeing has grown, so has that firm, Perkins Coie. Perkins led the charge into new quarters, not just taking premium space in the Washington Mutual Tower but taking an ownership stake in the building as well.
Many firms, Bogle included, simply outgrew their old premises. Just since the firm decided to move from the Bank of Cal, its needs have grown by a third, and when the firm moved last month, it took 160,000 feet.
The Bogle partners were not entirely eager to move. The Bank of Cal was new when the firm moved there in 1974. Its offices were comfortable, richly appointed, lawyerly spaces. The Bogle partners liked them so much that at one point they had tried to buy the building.
The location at Fifth Avenue and Madison Street in the heart of the traditional financial-government center was ideal: three blocks from the county courthouse, two from Interstate 5, just across the street from from the federal courthouse and the Rainier Club, which had become a kind of second office for many of the lawyers.
This last consideration seems casual but is the sort of thing that often plays a crucial role in determining business locations. The firm had been within the same three-block area for 80 years, and its members had acquired well-worn favorite places. There was “a lot of psychological inertia,” says James Tune, who as Bogle’s managing partner was charged with overseeing the firm’s office arrangements.
Initially, Tune says, the firm considered a new lease for more space in the Bank of Cal. In the midst of that investigation, the building was sold. The new owners, Continental Realty Corp. of New York, wanted Bogle to stay, but their lease proposal was the most expensive one Bogle received. Bogle could move to one of the more commodious new buildings and save money.
“I found it absolutely stunning,” Tune says. The cost, the lack of space and the need for technological renovation all helped persuade Bogle to move.
Even with the firm’s misgivings, the expiration of its Bank of Cal lease was fortuitous. The lease was expiring at a moment unlike any other in the city’s commercial real-estate history, a time when an office tenant the size of Bogle could very nearly dictate terms to a prospective landlord.
“Having made the decision that we weren’t going to be able to structure a deal with the Bank of California and were going to move out of that building, then I think it was very clear – and I think our behavior reflected this – that all things even being remotely equal, we would move into our client’s building,” Tune says.
All things turned out not to be equal.
The client was Herman Sarkowsky, Gateway Tower’s developer. Irwin Treiger, Bogle’s chairman, is one of Sarkowsky’s closest friends. Over 25 years, Bogle had worked on countless Sarkowsky business deals – his real-estate investments, his purchase and sale of Frederick & Nelson, the Egghead Software retail chain in which he is a significant investor, even Gateway Tower itself.
Over this past Thanksgiving weekend, Bogle moved into its latest Seattle quarters, the striking blue and alabaster tower called Two Union Square, owned not by Sarkowsky but by one of his competitors, Unico Properties. Before moving, Bogle listened to more than 60 offers and revisions of offers from six different prospective landlords. The firm was pitched everything from parking stalls to tax shelters. In the end, they lost a client and signed what is described by one of the people involved in the negotiations as the best lease in the history of the city.
THE MARKET
Selig, the zoning laws and capital surpluses created the supply. The booming local economy created a demand. Together the two form a market, which, by classic free-enterprise theory, will at some point reach equilibrium. It hasn’t happened yet.
Supply has swamped demand. The developers say free enterprise within the local economy has been corrupted by the revamping of the zoning laws, forcing them to build when prudently they might otherwise have not.
Whoever is to blame, there is no question who benefits: downtown office tenants. The market became so enticing, the deals so rich, especially for big tenants, many planned moves into new buildings simply because of what they were offered. Led by Selig, developers were literally giving away the only thing they had to sell – space. “Free rent,” despite the oxymoronic nature of the phrase, became common as long-term leases typically included some initial free period.
One broker recalls sitting in a negotiation with a developer when the tenant asked for a period of free rent. The developer said: “I can’t do that. How about I write you a check for $150,000 instead?”
Such signing bonuses, which except for their size are equivalent to factory rebates on new-automobile purchases, were sometimes used as a way around restrictions a lender might have placed on rents.
“You get into just pure imagination. . . . The softer the market, the more complicated the deal,” says Craig Kinzer, a broker with the Norman Co., which Bogle hired to help it find new space. In a hard market, developers say, here’s the rent, here’s what you get.
Kinzer says the market was driven by the excess supply. “Maybe tenants that wouldn’t have thought to move, or wouldn’t have thought to expand, began to be lured into the promised land by all these developers,” he says.
The deals fed upon themselves, encouraged by the circulation of what Kinzer calls “cocktail rents.”
Accountant Jones, for example, might ask Lawyer Chang what his firm is paying for the three floors it is about to lease in the Bothell Bank World Headquarters. Chang says $24 a square foot. Jones is incredulous.
“You’re paying 24 bucks in that fleabag? We’re only paying 16 in the new, gold-plated Atlantic West Tower.”
Rents are a complicated subject. They are typically scaled to increase dramatically over the length of a lease and up the height of a building. A quoted rate might or might not reflect cash inducements; it might or might not include free parking, lavish interior finishes, renewal options or guaranteed expansion space.
These complexities notwithstanding, the next day Chang, unaware that Jones is in the basement of the Atlantic Tower subleasing uncarpeted space with a view of the garage, is on the phone to his broker, wanting to know why Jones is only paying $16 a square foot.
Developers went to elaborate lengths to sell their buildings, courting the tenants and the brokerage community at breakfasts, lunches, dinners and cocktail parties, giving gifts, presentations and tours. Some built lavish marketing centers with huge models and video presentations.
They also went to elaborate lengths to denigrate the competition. If a law firm was looking at Pacific First Centre, which is in the retail center of downtown, Selig would say, “Do you really want to be in the garment district? In turn, everyone questioned Selig’s financial stability. And if some prospective tenant said he was thinking of moving to Gateway, a competitor might ask when, “Do you really think it will actually get built?”
Competitors did such a masterful job of introducing Gateway into the market as “the building behind Columbia Center” that some prospective tenants are surprised, once they tour the building, that the entire western horizon isn’t blacked out. Karlis Rekevics, one of Gateway’s architects, says designers were forced to find a way to make their building “a little different than everyone else. It becomes marketing.”
“We agonized over what would make Gateway unique,” he said. “So Fred (Bassetti) cut a notch out (of the top), and I said, `Well, why do you have to mutilate something to make it unique?’ Moshe Dayan had one eye, but that wasn’t what made him unique. And he didn’t cut his own eye out.”
Gerry Gerron, designer of Pacific First Centre, says architects and developers “construct a series of little edges.” First Interstate Center, for example, was the first high-rise in town to have granite counters in the restrooms. “Formica obviously makes much less a statement,” Gerron says.
Obviously. If you didn’t have granite johns, you might as well have had outhouses.
This little series of edges is examined in great detail by prospective tenants, or by brokers on their behalf, and developers build their buildings knowing they have to pass those tests. Gateway’s marketing people stress the building’s efficiency, it’s distinctive glass-roofed design and amenities that include an athletic club and conference center.
Dave Cortelyou, chief operating officer of Unico, says the design of Two Union Square was “market-driven entirely,” based in part on the results of a survey of Unico tenants. It is hard to imagine any tenant telling Cortelyou she wanted a blue and alabaster building shaped like a Bic lighter with yellow stripes down the side. And, in fact, none did; but many expressed a desire for diversity, and thus the color scheme was chosen. They also said they liked as many corner offices per floor as possible, and a typical floor in Two Union has 10 of them.
“There is an impact of keeping the corners open,” says Don Covey, Unico’s president. “Who makes decisions about renting office space? It’s the people who are in the corner offices.”
FILLING IT UP
A 63-year-old neophyte in the high-rise development business, Sarkowsky admits to sort of wandering into this arena without any clear ambition or plan other than to diversify his investment portfolio.
He had spent 25 years as a builder of homes and small commercial properties before leaving the development business in 1974. He has since shown remarkable instincts as a broadly based investor in everything from stocks and bonds to Thoroughbreds and linebackers. He acquired the site Gateway Tower is being built on at Sixth Avenue and Columbia Street as part of a deal to salvage one of his rare bad investments. With it he also acquired more headaches than he had ever imagined. Low-income-housing advocates picketed his house. Banks shied from his project. Friends snickered he had gotten in over his head.
To a certain extent, he agrees. He began spooning money into the project in 1979, and the spoons soon turned to shovels. Eventually, he had sunk almost $20 million into what at that point was a parking lot leased to Joe Diamond. The money, spent on the land, low-income housing replacements, lawyers, architects, plans and permits, forced Sarkowsky to build the building.
“Sometimes,” he says, “buildings are built because that’s the only way the developer can get his money back.” Getting that money back was delayed greatly by the difficulty Sarkowsky had finding financing for the project. The financing, in turn, was difficult to find because the project had no tenants.
Commercial lenders typically require at least a quarter of the space in a building, and sometimes as much as 40 percent, be leased before they commit to a project. Rent is the only income a high-rise has, and without tenants a lender risks not getting paid.
Geraldine Kraft, a broker Sarkowsky hired to help develop and lease Gateway, says Sarkowsky had no enthusiasm or special talent for selling the building.
“Herman would do only what he had to. He had no feel for it and no desire to do it,” she says. She cites as an example a dinner presentation she had arranged for Lane Powell Moss & Miller, a law firm.
“I had reserved the Rainier Club from 5 to 7. All the (law) partners were going to be there. It had been set up for weeks. That afternoon Sarkowsky says, `Well, how long do I have to stay? Can I be home by 6 because we’re having company for dinner?’ ”
“We always seemed like a mom-and-pop operation,” Kraft recalls. “One presentation with Fred Bassetti (the lead architect) had Fred up there with a sample of the red granite when the marketing materials still showed it as a white building.”
Sarkowsky showed somewhat more enthusiasm when Kraft was courting AT&T. The communications giant wanted to consolidate operations it had scattered in four locations. The company was looking for 125,000 square feet, which would amount to a sixth of the office floors at Gateway.
“In a new building, somebody who rents 1,500 feet has no clout,” says Jack Emick, a partner in Emick/Howard, a local space-planning and design firm. “When you get around 4,000 feet, the whole world changes. It changes again at about 8,000 feet, changes again when you get full-floor tenants (13,000 to 20,000).”
Tenants the size of AT&T are not even in the same universe. Called anchor tenants, they legitimize projects and in many cases give lenders the assurance they want to lend money. AT&T looked at five buildings in Seattle: Gateway, Columbia Seafirst Center, Washington Mutual Tower, Pacific First Centre and Two Union Square.
One of the things the company was looking for was a building that could wear its name. Since Columbia Center already had a name tenant, Seafirst, it was quickly eliminated. Washington Mutual Tower, which at that time was known as 1201 Third Avenue, was eliminated in part because AT&T wanted what is known as an enhanced lease, the ability to share in the ownership of the building, and 1201’s anchor tenant, Perkins Coie, had already extracted that benefit from developer Wright Runstad.
Two Union Square had given away nothing, and it had no tenants. It demonstrated why not in its proposal to AT&T. Unico, the developer of Two Union, had for three decades managed the Metropolitan Tract, a 10-acre parcel in the middle of downtown owned by the University of Washington. For 40 years, Unico did not own properties, it managed them. And when the company decided to begin developing properties outside the tract, competitors say, it was slow to catch up to the competitive realities of the times.
The AT&T competition narrowed to Gateway and Pacific First Centre (then known as Stimson Center). AT&T liked Gateway’s location adjacent to Interstate 5, which it saw as both convenient and a significant advertising benefit. Gateway also made the best – that is, cheapest – proposal, according to Tom Schiable, an AT&T vice president.
According to information compiled from various sources, AT&T was given rent at an initial average cost of about $17 a square foot, the right to a share in the profits of the building if it is sold (or a straight cash payment one competitor estimated at $6 million if the building is not sold within nine years), and a $600,000 cash bonus to sign the lease. The company was also given the right to put its name on the project.
AT&T, Schiable says, made a heckuva deal. “Fortunately for us,” he says, “we usually do.”
COURTING A LAW FIRM
Bogle and Gates’ 72 partners were well aware of the activity whirling around them. You couldn’t spend 10 minutes at the Rainier Club without somebody talking about some new deal. The firm began receiving unsolicited offers from Gateway and Two Union Square in the summer of 1986, three years before its Bank of Cal lease expired.
The Seattle real-estate market had functioned as an old boys’ network for generations. In the pre-Selig era, personal relationships had predominated, so it was not out of the ordinary for Sarkowsky to pick up the phone, as he did in February 1987, and call his friend and lawyer, Irwin Treiger, to ask what it would take to get Treiger’s firm as a tenant.
Kraft, Sarkowsky’s broker, had been pursuing Bogle and Gates for six months without progress. The call from Sarkowsky was an attempt to short-circuit the courtship and move directly to an arranged marriage.
“We never assumed it was automatic,” Kraft says. “We knew the deal had to be competitive. We started out strong and it deteriorated. It wasn’t handled real well on our part.
“Herman had a relationship with certain members of the firm, but there was a group of young Turks who he didn’t even know. Treiger early on presented the case for Gateway: The firm should, because of the relationship, move there unless there’s some significant reason why not. That’s the way the deal started out.
“But Bogle knew all the problems because it was handling all the legal work for the building. They knew all the problems with the financing.”
Gateway might have seemed like a mom-and-pop operation to Kraft largely because it was. While other developers were producing videos extolling their products, Gateway’s marketing center was a room with blank walls up until this summer. Sarkowsky says he was never particularly worried about the marketing. He was more concerned with getting the building built.
For more than a decade, Sarkowsky Investments’ payroll consisted of Sarkowsky, a secretary, a bookkeeper and at most one or two others. It is not a development organization, and Sarkowsky did not intend it to become one.
Recognizing that he had never undertaken anything the magnitude – in size or value – of a skyscraper, Sarkowsky recruited as partners First City Development of Canada and Kumagai Gumi of Japan. First City’s job was to obtain financing and to market the building. Kumagai’s was to build it.
By the time they entered the project, it was clear to everyone involved that Gateway, if built, would enter a tough market. Despite the growth in the local economy, says Jack Shaffer, a New York investment banker who helped put the Gateway partnership together, “you are a one-industry city. Your second-biggest industry is what, a university?”
“But what you’ve got here is staying power, which is what you need.”
The staying power Shaffer refers to are the deep pockets of the partners. First City is controlled by the Belzbergs, one of the wealthiest families in North America, and Kumagai is the sixth-largest general contracting-development company in the world. With Sarkowsky, they combined to contribute $30 million to the project, a commitment sufficient to persuade a consortium of Canadian, American and Japanese banks to lend them $165 million. The total $195 million is supposed to be sufficient to build the building, market it, pay interest on the loan and cover operating losses until the building is filled with tenants.
This is anticipated to be a five- to seven-year process, and at times it seems the partnership intends to use every day of it.
Gateway’s problems notwithstanding, Bogle’s leadership agreed with Treiger. Unless there was a compelling reason to go elsewhere, they would move to Gateway. With the Norman Co.’s assistance, Bogle developed what it called an “acceptable offer,” an estimate of the type of deal that could be struck in the market. It was “aggressive, but not ridiculous,” Kinzer, Bogle’s broker, says.
If Sarkowsky would agree to it, Bogle, without soliciting offers from anyone else, was his. Bogle detailed Jim Norman, the Norman Co.’s president, to present the offer to Neil Hokonson, First City’s representative in the Gateway ownership. Norman got “half, maybe a third of the way” through his presentation when Hokonson told him he had heard enough. The “acceptable offer” was ridiculous, Hokonson told him.
Fine, Norman said. Bogle would “go to the market.”
Fine, Hokonson said. See you there.
Bogle then set about soliciting proposals from a half dozen different developers, including Sarkowsky. An exhaustive Norman Co. analysis of the offers, festooned with computer modeling, charts and graphs, cut the list of buildings to three – Gateway, Two Union and Pacific First Centre.
Pacific First was rated the best deal financially, but the space Bogle would take in the building was beneath that occupied by Lane Powell, another large law firm. This didn’t sit well with some partners who disliked the image of being below another firm. Also, Pacific First’s views were not as good as the two others, and any future Bogle expansion within the building would require renting space on a separate elevator bank, an inefficient arrangement.
View is not an irrelevant consideration. Building rents typically increase from a quarter to 50 cents a square foot for each floor as one goes up in a building. As a result, Covey says, “any building generally leases from the top down and the bottom up. The middle floors are last to lease. People are either price-conscious or view-conscious.”
Bogle was both. Since none of the three buildings was actually built at the time of the negotiations, Kinzer hired photographers and chartered helicopters to hover above each site at precisely the altitude of Bogle’s floors. Then he began to negotiate high-rise views at low-rise rents.
Two Union, which was offering the top floors in the building, had the best views, a virtually unobstructed 360-degree panorama. The building was rated about equal with Gateway on several other subjective measurements, but Gateway’s financial package was somewhat better, Tune says. That, plus the fact that Sarkowsky was “a valued friend and a valued client,” led a committee of Bogle’s senior partners to recommend signing a letter of intent with Gateway.
The full partnership of the firm met on a rainy Saturday morning in December 1987, and debated the recommendation for six hours. In a vote weighted according to the number of shares in the firm each partner owned, the partners narrowly endorsed the recommendation and instructed Tune to draft a letter of intent with Gateway, provided Gateway could assure the firm the building would be done by the end of November 1989, when Bogle’s Bank of Cal lease expired. Failing that, Gateway would have to guarantee it would cover any costs Bogle would incur in extending its lease.
“This was the first time we began putting things in writing for Herman,” Tune says. “We’re talking about big, big dollars that would impact us.”
Big dollars, indeed. The total value of the leases Bogle was negotiating, with renewal options up to 20 years, was in excess of $75 million. Sarkowsky was happy to receive the news from Tune but was displeased by a phrase that said Bogle would proceed with him “absent a material change” in any other offers.
“When you think you have a deal and the guy says, `Let’s get a letter of intent drafted,’ and then the letter of intent, the last paragraph, says we reserve the right to look at any other deal provided there’s enough of a difference. I should have never gone along with it,” Sarkowsky says.
“That’s like a guy going out to bid and saying my bid is one dollar lower than the lowest bid you’re going to get. Why bother? . . . It seemed to me that they were going through the process without any real class. I thought it was a lousy exhibition of how you do these things, and I helped the process and I never should have. And I kick myself for that.”
Three weeks later, a material change did in fact occur. Two Union, which at this point was still looking for its first tenant, revised its proposal, offering what the real-estate grapevine said was a huge cash payment and an unheard-of 15 years of free parking.
The new offer got Bogle’s attention, and Tune scheduled another partnership meeting to discuss it. Politicking within the firm was intense. Senior members exerted strong pressure to go with Sarkowsky. A lot of the junior partners weren’t so convinced. They didn’t know him, didn’t much like his building and thought free parking for most of their careers wasn’t a bad idea. Once again, however, the vote favored Sarkowsky. But this time the condition that Sarkowsky provide assurance on the Bank of Cal lease was worded even more strongly. The vote was held Feb. 29, 1988, and it was clear by this point that Gateway would not be finished in time to meet their move-out date.
A week later Tune met with Sarkowsky, who reviewed and, Tune thought, agreed to the terms. On March 11, Tune met for the first time with Hokonson.
“I came out of that meeting a bit shaken, and I was shaken because for the first time I heard someone say to me, `Well, gee, we’re not sure we can offer you that sort of assurance on the Bank of California lease,’ ” Tune says.
“I guess my view is that perhaps Neil felt that the general terms that had been discussed were discussions, and everything was still up to be negotiated. Whereas, what I had in fact presented to our partners was what I had perceived to be a fairly solid deal that had been negotiated.”
A month later, still not having gotten what it perceived to be satisfactory assurance on the Bank of Cal lease, Bogle through Norman reopened negotiations with Unico about Two Union. At this point, Bogle began negotiating directly with the developers’ banks, seeking assurances on the Bank of Cal lease. The Bank of Montreal, Gateway’s lender, never agreed. Two weeks later, on April 25, Bogle and Unico signed a letter of intent to draft a lease.
Gateway’s final proposal to Bogle was actually a somewhat better deal for Bogle than Bogle’s “acceptable offer” proposal made a year earlier. Gateway had moved millions of dollars in that year, but by the time they arrived, it was too late.
Bogle was gone and Sarkowsky was left at the altar.
`OUT OF LEFT FIELD’
Jack Shaffer, Sarkowsky’s investment banker, says, initially not intending it as a compliment, that Hokonson uses “accounting techniques on a deal that’s emotional.” Shaffer then ponders for a moment and adds: “But it’s a good thing. He became the mortar that held the bricks together.”
Hokonson is an accountant by training. He does not attempt to paint himself as anything other than cold-blooded when it comes to real estate.
“Success is the ability to define risk and return and to structure a deal that will deliver it,” he says. “I try to take the emotion out of real estate altogether. It’s a business to me. Real estate just happens to be the medium.”
Some who have negotiated with Hokonson say there is very little negotiation involved. He sets a deal in his mind, then refuses to budge, they say. One person who has done other business with First City says Hokonson is simply doing his masters’ bidding.
“The Belzbergs are not that easy to deal with,” this person says. “You say you want a dime, OK, here’s a dime. Then they say, `What we really meant was we want 12 cents.’ So you give them 12 cents. They say, `Actually, what we meant was 15 cents.’ ”
In a sense, Sarkowsky didn’t lose Bogle to Unico. He lost them to Selig, who had defined a market Hokonson refused to deal in. But what Selig took away, he also gave back.
If, as Woody Allen says, 90 percent of greatness is showing up, Curt Ghan, Gateway’s marketing director, did a helluva job of coming to work last Feb. 21.
Ghan received a letter that day from Cerissa Merritt, the Cushman and Wakefield broker, who said she had a client with, as they say, “a large requirement,” 100,000 square feet.
“We didn’t know who it was and couldn’t figure it out,” Ghan says. A week later Ghan was giving Merritt and her client, Key Bank, a tour of Gateway.
“Key Bank,” Ghan thought. “Nah, they’re not moving. They’ve got a building named after them.”
Key Bank is the anchor tenant in a Martin Selig building, Key Tower, built expressly for the Seattle Trust bank on Second Avenue three years ago. Before Seattle Trust ever moved in, it was purchased by Key Bank of New York, which inherited the lease Seattle Trust had signed with Selig. The lease called for the bank to pay $25 a square foot, which its new officers thought was too much. The lease was written as a five-year commitment with options to renew for up to 30 years.
Selig admits the rent is above market rates but says he and the bank agreed to above-market rent as a means of offsetting Selig’s purchase of the property on which the high-rise was built. He says he had an oral agreement with Seattle Trust that the renewals were mere formalities. He threatened to sue the bank if it failed to exercise its first renewal.
What Selig did not tell Key officers was that he had developed acute cash-flow problems and for the first time was going to sell one of his high-rises. Key Tower, fully leased at high rents, was an excellent candidate. Japanese buyers, in fact, came to town to investigate the building.
When Key Bank went through with its threat to look for other space, the buyers fled town and Selig sued.
Within a month of the lawsuit, Gateway’s new lawyers – not Bogle and Gates – were drawing up a Key Bank lease. The key to the deal, Merritt says, was Sarkowsky. Key Bank officers felt wounded by Selig’s treatment.
“They needed a little romance,” she says. “Herman’s personality really solidified the deal. The bank needed a personality. They felt abused.”
“Key Bank came out of left field,” Ghan says. “I didn’t really think they were moving and wasn’t making an active marketing effort. . . . I guess I’m an optimist or I wouldn’t be doing this, but after we signed Key, I thought: If we hadn’t gotten them, who would we have gotten? Who’s left out there?”
Rob Swartz, a broker with Coldwell Banker, says the real art of selling space is in knowing the market.
“The guy who meets the market soonest is the guy who makes the deal,” he says. He recalls Daon, a Canadian development company, trying to resist the downward slide of rents. When presented with lease proposals tenants were getting from Selig, Daon representatives “kept sitting there saying, `Selig’s crazy.’ Every time he made another deal, they’d say, `Selig’s crazy.’ Well, he might be crazy, but they’re the ones who went broke, sitting there not making deals.”
Daon didn’t actually go broke, but it accumulated huge debts and eventually sold its major office projects here at what is presumed to be a loss. Of course, the Daon representatives might also have been right about Selig, whose wheeling and dealing, given his current circumstances, does not seem to have made much economic sense.
Hokonson, too, might be right. With recently enacted limits on the amount of new office space that can be built downtown, Gateway might be the last high-rise to be built for some time. It might, through a combination of luck and courage, have weathered the glut and be perfectly situated in the market.
On the other hand, the same thing that happened after the 1985 rezoning could happen again. Before another rezoning earlier this year, another group of buildings was allowed to proceed under the old rules. They could all be rushed into the market not because of demand, but to protect development rights.
But with all this other space still available, lenders wouldn’t give anybody money to build more, would they?
The new zoning laws allow only a certain amount of new downtown office space to be built each year. Early this month, the city made the award of that space for the first year under the new law to Martin Selig.
With all of his problems and all this other space available, lenders wouldn’t give him the money to build, would they?
Would they?

 

 

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