F–13 STANDING COMMITTEES Finance and Asset Management Committee

F–13/205-19 5/9/19

Fairmont Olympic Hotel – Approve Ground Lease Extension and Delegate Execution of Documents RECOMMENDED ACTION It is the recommendation of the administration, the Advisory Committee on Real Estate (ACRE), and the Finance and Asset Management Committee that the Board of Regents: 1. approve a fifty-six-year ground lease extension and related documents for

the continued operation of The Fairmont Olympic Hotel and subsequent required capital improvements funded by IC/RCDP Seattle Hotel, LLC (the Tenant); and

2. delegate to the President the authority to execute all documents related to

this transaction. BACKGROUND The Fairmont Olympic Hotel was constructed in 1924 and was originally owned and operated by Community Hotel Corporation It has since been through multiple owners, operators and renovations. In 1980, JMB Realty signed a sixty-year ground lease with the University, hired the Four Seasons as operator and completed a major remodel including converting the hotel from 850 to 450 rooms. In 2003, ownership was sold to Legacy REIT and Fairmont took over hotel operations. In 2007, LHCS LLC, an entity majority owned by Ivanhoe Cambridge, a division of Caisse de dépôt et placement du Québec, purchased the remaining leasehold interest and retained Fairmont as the operator. In 2014, LHCS LLC became IC/RCDP Seattle Hotel, LLC (the Tenant) and added minority owners Rockwood Capital, and DiNapoli Partners to asset manage the property. In 2016, the Tenant made over $30 million of improvements to all of the rooms. The existing ground lease expires on October 31, 2040. Over the past three years, the Chief Real Estate Officer and ACRE have been in discussions with the Tenant over the possibility of extending the term of the ground lease. They eventually came to terms that they feel are fair and ultimately beneficial to the University. The ground lease agreement will extend fifty-six years to 2075. This is thirty-five years past the current expiration in 2040. The agreement requires the Tenant to

STANDING COMMITTEES Finance and Asset Management Committee Fairmont Olympic Hotel – Approve Ground Lease Extension and Delegate Execution of Documents (continued p. 2)

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initially invest $25 million in the renovation of public spaces and meet subsequent scheduled capital improvements. The agreement includes early reversion of the garage ownership to the University in 2040, a raised rent floor and keeps the existing base rent formula. Further, extensive revisions were made to the lease language to provide more clarity and objectivity. The Fairmont Olympic Hotel has always been an important asset to the Metropolitan Tract, the University and the City of Seattle. This agreement assures that all parties are invested in keeping the Fairmont Olympic in its proper place of prominence among Seattle’s great hotels. PROPERTY DESCRIPTION The Fairmont Olympic Hotel site is located at the south central portion of the Metropolitan Tract. It is bounded by Seneca Street to the south, University Street to the north, 4th Avenue to the west and 5th Avenue to the east. The site totals 61,269 square feet and contains a 542,000 square foot hotel with 450 rooms. In addition, the parking garage site is located further south of the hotel. It is bounded by Stewart Street to the south, Seneca Street to the north, 4th Avenue to the west and an alleyway to the east. The site totals 29,000 square feet and contains a 279,000 square foot garage with 787 stalls. (Attachment 1 – Site Plan) TRANSACTION STRUCTURE • Document

o Amended and Restated Hotel Ground Lease • Parties

o Landlord: The Board of Regents of the University of Washington o Tenant: IC/RCDP Seattle Hotel, LLC

• Land Parcels

o Hotel block described above o Garage site described above

• Primary Terms of Agreement

o Unsubordinated fifty-six-year lease extension from 2019 o Absolute net lease

STANDING COMMITTEES Finance and Asset Management Committee Fairmont Olympic Hotel – Approve Ground Lease Extension and Delegate Execution of Documents (continued p. 3)

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o Participating gross rent structure unchanged (12 percent of room revenue, plus 9 percent of office revenue, plus 12 percent of retail revenue, plus 4.4 percent of garage revenue)

o Minimum base rent floor adjusted to $3.5 million plus CPI o Capital improvements required of Tenant (Initial renovations of

public spaces not less than $25 million. Subsequent required and scheduled improvements every seven and fifteen years)

o Hard costs of initial renovation are bonded o Garage ownership reversion to University in twenty-one years

(2040) • Additional Terms of the Agreement

o Periodic and defined process for hotel quality standard review o University participation in all ownership and re-financing transfers o Increased reporting requirements o Clearly defined and objective dispute resolution o Increased Tenant capital reserve requirements o Clearly defined gross revenue definitions o Amended and restated environmental protections o Amended and restated insurance requirements o Reputational risks provision protecting the University o Amended and restated University approval of ownership and

operations transfers o Non-compete clause revised to allow for diluted ownership of

competing hotels o Non-compete clause restated to prevent operator from managing

competing hotel o University continued parking rights in garage o University required to replace hotel operational and parking needs

if garage demolished o Clearly defined University approvals of major capital

improvements PROJECT SCHEDULE • 2019 – Lease execution and initial renovation design approvals • 2020 – Entitlement and start of construction • 2021 – Target completion for initial renovation • 2022 – Outside delivery date for initial renovation

STANDING COMMITTEES Finance and Asset Management Committee Fairmont Olympic Hotel – Approve Ground Lease Extension and Delegate Execution of Documents (continued p. 4)

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REVIEW AND APPROVAL This item has been reviewed and recommended for approval by the Chief Real Estate Officer, the UW Advisory Committee on Real Estate, and the Vice President of Facilities. Attachments 1. Fairmont Olympic Hotel – Site Plan 2. Fairmont Olympic Hotel – Photo

Fairmont Olympic Hotel – Site Plan

ATTACHMENT 1F-13.1/205-19 5/9/19

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Fairmont Olympic Hotel – Photo

ATTACHMENT 2F-13.2/205-19 5/9/19

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