Amazon.com Building

Seattle, Washington

Project Type: Commercial/Industrial

Case No: C031006

Year: 2001

SUMMARY The Amazon.com Building is an adaptive use of a former U.S. Marine hospital located in the Beacon Hill neighborhood overlooking downtown Seattle, Washington. Situated on 9.1 acres, this 314,400-square-foot historic art deco structure was renovated extensively to provide unique office space for Amazon.com’s corporate headquarters. When the government conveyed the building and grounds to the Pacific Hospital Preservation and Development Authority (PacMed), it required that the hospital building continue to be used for medical purposes, but that requirement was eased to allow a mix of office and medical uses with the stipulation that the profits derived from the office lease be used as a long-term funding source for health care and support services for the medically needy

FEATURES

Preservation of a historic structure on the National Register of Historic Places Adaptive use of an obsolete medical building by conversion into modern, state-of-the-art office space Public/private cooperation Catalyst for neighborhood revitalization Creative solution for providing medical funding to an underserved community Amazon.com Building

Seattle, Washington

Project Type: Mixed-Use/Rehabilitation

Volume 31 Number 06

April-June 2001

Case Number: C031006

PROJECT TYPE

The Amazon.com Building is an adaptive use of a former U.S. Marine hospital located in the Beacon Hill neighborhood overlooking downtown Seattle, Washington. Situated on 9.1 acres, this 314,400-square-foot historic art deco structure was renovated extensively to provide unique office space for Amazon.com’s corporate headquarters. When the government conveyed the building and grounds to the Pacific Hospital Preservation and Development Authority (PacMed), it required that the hospital building continue to be used for medical purposes, but that requirement was eased to allow a mix of office and medical uses with the stipulation that the profits derived from the office lease be used as a long-term funding source for health care and support services for the medically needy.

SPECIAL FEATURES

Preservation of a historic structure on the National Register of Historic Places Adaptive use of an obsolete medical building by conversion into modern, state-of-the-art office space Public/private cooperation Catalyst for neighborhood revitalization Creative solution for providing medical funding to an underserved community

DEVELOPER

Wright Runstad & Company 1191 Second Avenue, Suite 2000 Seattle, Washington 98101 206-447-9000; fax 206-223-8791 http://www.wrightrunstad.com

ARCHITECTS

Shell and Core: Zimmer Gunsul Frasca Partnership 1191 Second Avenue, Suite 800 Seattle, Washington 98101 206-623-9414; fax 206-623-7826 http://www.zgf.com

Tenant Improvement: SPACE LLC 1520 Fourth Avenue, Suite 400 Seattle, Washington 98101 206-464-9000; fax 206-447-0958 http://www.workplayce.com

CONTRACTORS

Shell and Core: Sellen Construction Company 227 Westlake Avenue North Seattle, Washington 98109 206-682-7770; fax 206-623-5206 http://www.sellen.com

Tenant Improvement: Turner Construction 830 Fourth Avenue South, Suite 400 Seattle, Washington 98134 206-505-6700; fax 206-505-6701 http://www.turnerconstruction.com

ENGINEERS

Mechanical: McKinstry & Company 5005 Third Avenue South Seattle, Washington 98124 206-762-3311; fax 206-762-2624 http://www.mckinstry.com

Electrical: Sparling 720 Olive Way, Suite 1100 Seattle, Washington 98101 206-667-0555; fax 206-667-0554 http://www.sparling.com

Structural: Andersen Bjornstad Kane Jacobs (ABKJ) Engineering 800 Fifth Avenue, Suite 3800 Seattle, Washington 98104 206-340-2255; fax 206-340-2266 http://www.abkj.com SITE DESCRIPTION

Located on a hilltop two miles southeast of downtown Seattle, the property overlooks downtown, Puget Sound, the Olympic mountain range, and Mt. Rainier. The 9.1-acre triangular site is in Beacon Hill, a residential neighborhood on the east side of Interstate 5, populated largely by descendants of immigrant families. The entire campus is surrounded by a black wrought-iron fence with concrete posts. There are eastern and western entrances to the site, with the western entrance driveway lined with large birch trees and historic art deco streetlights. The Amazon.com building is situated in the center of a large open space, surrounded by mature trees and landscaping. Designed by the Seattle architecture firm of Bebb & Gould, the 16-story, 312-bed hospital was completed in 1932. There are six quaint houses, called the Quarters buildings, on the site’s perimeter that were built with buff-colored brick and copper rooftops. Originally developed as housing for the staff of the Marine hospital, they later were converted into additional space for medical and administrative offices. A new, freestanding four-story parking structure also was designed to mimic the brick pattern, color, and art deco architecture of the original building. The new parking structure, completed in December 2000, lies to the west of the tower building and augments the existing parking structure to the east.

DEVELOPMENT PROCESS

The developer, Wright Runstad & Company (WRC), learned that Amazon.com was actively seeking new office space and looked for an opportunity that fit its needs. Amazon had several choices for space, but it ultimately decided that the PacMed building best fit its corporate culture. Once the dot.com expressed interest in subleasing the retrofitted space, WRC began to complete the predevelopment and entitlements process.

When WRC approached PacMed with a proposal to convert its building from medical to office use, PacMed had been seeking a buyer or a tenant for seven years. A public development agency of the city of Seattle, PacMed administers 13 clinics throughout the Seattle metropolitan area. PacMed’s shift from large hospitals to small neighborhood medical clinics, however, obviated the need for the obsolete Marine hospital, which had been substantially vacant for almost ten years. The developer envisioned a 24-hour facility that not only would rescue a dilapidated art deco masterpiece listed on the National Register, but also would create a safer environment for the neighborhood and help secure Amazon.com’s long-term future in Seattle.

APPROVALS

Attaining neighborhood support was a long, drawn-out process, with dozens of meetings taking place during the two-year predevelopment stage. Although some community members opposed the project mainly because of increased traffic, the majority of the neighbors saw it as a positive addition to the community because it would bring more people to the area, thus stabilizing the neighborhood and providing economic stimulus in the area.

WRC worked closely with the community to catalyze economic development that would mitigate any negative impacts from the project. WRC committed its project resources to establishing and funding neighborhood residential parking zones, hosting an economic development conference on Beacon Hill, providing a meeting facility and funding for the local neighborhood group (which WRC continues as part of a community outreach program), plus distributing books of coupons for Beacon Hill businesses.

The successful rehabilitation of the PacMed tower required the cooperation and teamwork of public agencies, including PacMed, the U.S. Department of Health and Human Services (DHHS), state legislators, and the city of Seattle. Because development rights to the hospital were granted for medical use only, the developer needed strong support from all parties. They worked together until they reached a compromise to convert the hospital’s tower into office space and to give PacMed the minimum size and critical mass needed to satisfy its criteria, while still allowing enough space to accommodate a large office user.

FINANCING

Although some developers and lenders balk at the prospect of underwriting a building on a leasehold property, it was business as usual for the developer, who had experience structuring several landhold properties. The overall financeability of the ground lease is attributable to the lender protection it offers and its favorable economics. The leasehold payments to PacMed generally provide for a Consumer Price Index--based step in year 11 and a mark-to-market in year 20, subject to other market-related conditions favorable to the developer.

The project was financed with a 90 percent construction loan and 10 percent developer equity. The net operating income results in an annualized cash-on-cash return in excess of 11.5 percent for the first five years of the lease, increasing to 12.7 percent in years six through ten. The construction loan was made by Key Bank, despite the single-tenant nature of the building and reservations about Amazon.com as a going concern. The bank weighed several other factors in its decision to finance the property. These included 1) the strength of the market in a re-lease scenario; 2) the relatively low cost to the developer to fill the property with multiple tenants as needed; 3) the receipt of a satisfactory security deposit posted by Amazon.com; 4) the project’s ability to provide sufficient returns at below-market rents; 5) the value-added nature of tenant-paid improvements; 6) the financeability of the ground lease; and 7) the sponsorship of the developer. The construction loan was taken out in May 2000. DESIGN AND CONSTRUCTION

Amazon wanted an interior design aesthetic of high-tech overlaid on an industrial space, in homage to the company’s beginnings in the founder’s garage. Elements include exposed concrete and brick, and mechanical ductwork visible in the ceilings. The walls, desks, and office doors are surfaced in birch and trimmed in stainless steel; some office doors slide sideways, similar to barn doors. Each floor has bathrooms that allow workers to enter and exit without touching a door handle.

Because the structure is on the National Register of Historic Places (designated a historic place by the federal government in 1979), all exterior and main lobby interior renovations needed to be approved by the state’s historic preservation office. The city of Seattle had an interest in preserving the building’s architectural integrity as well, since the city designated it a landmark in 1991. A chief concern of these two overseers was that the renovation maintain the historical integrity of the hospital’s extra-wide hallways.

The stately front entrance lobby has 14-foot ceilings, two adjoining waiting rooms, terrazzo stone floors, and art deco lighting. A brass and leaded-glass hallway divider separates the lobby elevators from “the zone,” which is what Amazon.com’s employees call the social space containing an interactive media wall, an espresso bar, and wide stairs to the cafeteria.

The construction process, which commenced in November 1998 and ended in June 1999, was completed on time and 4 percent under the estimated $2.1 million construction budget. The scope of work included demolition of interior walls, removal of asbestos, roof and exterior waterproofing repairs, and replacement of core electrical and heating systems that were obsolete. The existing elevators were updated and four new ones were added as well as new plumbing fixtures. All windows were made operational, and some nonoriginal windows were replaced with historically correct designs.

A second-phase addition comprising 220,000 square feet—more than two-thirds of the gross building area of the entire PacMed tower building—was scheduled to break ground in 2001. However, the dramatic weakening in the market valuations of the dot.com industries during 2000--2001 has had a domino effect on all sectors of the high-tech industry, particularly on not-yet-profitable Web-based retailers like Amazon.com, and the building currently is on hold.

TENANTS

To tackle this type of project on a speculative basis is beyond a level of risk deemed acceptable by most developers. Preleasing to Amazon.com (first through thirteenth floors), PacMed (basement and ground floors), and Gentle Dental (first floor), however, gave the project merit. Anchor tenant Amazon.com is a pioneer in the Internet industry. Because the company is high-energy and cutting-edge, it wanted a high level of attention to detail. Amazon required ample parking, with ease of ingress and egress from the property. And the building is pet-friendly, which allows employees to bring their dogs to work.

Amazon wanted to differentiate itself from old-economy companies. The aim of any high-tech firm is to build or lease a facility that attracts high-quality employees. The design of a building must be “cool” and sexy looking and allow for onsite recreation and relaxation.

The overriding concern of any developer is the risk of subleasing a large amount of space to a company in the volatile high-tech industry. Though difficult to put this deal together then, it would be almost impossible to do a similar one today. Currently, Amazon is focused on its core business—selling books—and also on being the retailer of the Internet.

The developer felt confident that of all the dot.coms, Amazon would be left standing after an industry shakeup. Wright Runstad & Company lessened the risk by securing a sizable deposit that is kept in escrow and provides instant liquidity in case of default. Amazon also paid for the building’s costs of above-standard tenant improvements.

EXPERIENCE GAINED

In adaptive use, one never can know too much about an older property. These buildings are obsolete for a reason. Although the developer conducted an investigation of the structure, a more thorough one should have occurred. For example, opening up the walls to reveal hidden conditions during the space planning phase would have reduced the number and cost of change orders during construction phase.

Another crucial lesson that WRC learned only after the February 28, 2001, earthquake is the importance of earthquake insurance. Without it, the earthquake could have wreaked havoc on the project as well as all parties involved in it. Seattle experienced an earthquake that registered 7.9 on the Richter scale that caused an estimated $10 million in damage to the Amazon.com building. The top three floors became unoccupiable due to the damage, and Amazon had to consolidate its resources to lower floors. It currently does not pay rent for the floors that were damaged.

Because every project is unique, valuable knowledge gained cannot always be applied to the next project. The developer should assume that the project will be difficult and put together a team of exceptional people to work toward the well-defined goal of restoring a historic treasure, which was Wright Runstad & Company’s central focus. As a high-rise office developer, it found out that adaptive use is emotionally and financially satisfying and therefore is willing to tackle other such projects. PROJECT DATA LAND USE INFORMATION Site area (acres/hectares): 9.1/3.7 Gross building area: 314,400 square feet (29,208 square meters)

Land Use Gross Square Feet (Square Meters) Office 283,200 (26,309) Medical/dental clinic 30,800 (2,861) Total 314,000 (29,208) Gross leasable area 259,700 (24,126) Office net rentable area 234,200 (21,757) Medical/dental clinic 25,500 (2,369) Parking 459 spaces Floor/area ratio 0.79

LAND USE PLAN Use Acres (Hectares) Percent of Site Buildings, including two garages and six accessory buildings 1.8 (0.7) 20 Streets/surface parking 2.6 (1.1) 28 Landscaping/open space 4.7 (1.9) 52 Total 9.1 (3.7) 100

OFFICE INFORMATION Percent of net rentable area occupied: 100 Number of tenants: Three

Average tenant size, square feet (square meters) 185,000 (17,187) - (Amazon.com) office use 71,000 (6,596) - (PacMed) medical use 3,500 (325) - (Gentle Dental) dental use

Annual rents: $18.54-19.38 per square foot ($200-209 per square meter) Average length of lease: Ten years Typical term of lease: Triple net

DEVELOPMENT COST INFORMATION Site acquisition cost: N/A Ground rent during construction: $69,000 Construction costs: $17,217,000 Soft costs: $4,014,000 Total development cost: $21,300,000 Total development cost at completion: $20,550,000

DEVELOPMENT SCHEDULE Site purchased: N/A Planning started: February 1997 Sales/leasing started: April 1997 Construction started: October 1998 Phase I completed: May 1999 Project completed: June 1999

DIRECTIONS

From Sea-Tac International Airport: Head north on Interstate 5, past the Interstate 90 interchange, and take the James Street exit (164A); turn right on James Street. Continue east on James Street, going up and over the hill. James Street becomes East Cherry Street at Broadway. Turn right onto 12th Avenue and continue on 12th Avenue for approximately 0.4 mile. Go through the traffic light at Yesler Way to the west entrance, on the left, of the Amazon.com campus.

Driving Time: 20 minutes in nonpeak traffic.

David Takesuye, co-editor, Development Case Studies Nanette Watson, report author David James Rose, copy editor Joanne Nanez, online production manager

This Development Case Study is intended as a resource for subscribers in improving the quality of future projects. Data contained herein were made available by the project's development team and constitute a report on, not an endorsement of, the project by ULI-the Urban Land Institute.

Copyright © 2001 by ULI-the Urban Land Institute 1025 Thomas Jefferson Street, N.W., Suite 500 West, Washington D.C. 20007-5201 The Amazon.com building sits in a parklike setting high above downtown Seattle and affords 360-degree views. The art deco motif of the southern entrance lends a timeless quality to the international headquarters of new-economy company Amazon.com. Amazon.com displays its company logo above the glass and bronze front doors at the main entrance. The interior of the main lobby was refurbished in accordance with the guidelines of the state historic preservation board. Exposed concrete and ductwork in the hallways are a reminder of Amazon.com's humble beginnings—in the founder's garage—as a startup company. "Barn" doors allow for a flexible work environment. Site plan. Floor plan.