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December 02, 2016

Port in a storm: Hanjin's Terminal 46 operator could bail on its lease if Chris Hansen builds his arena

Puget Sound Business Journal

Andrew McIntosh

The Port of Seattle could lose as much as $93 million if developer Chris Hansen builds a sports arena in Sodo - and the port put itself on the line for that loss.

The Port of Seattle provided the private company that runs container shipping operations at Terminal 46 an escape clause in its lease that would allow Total Terminals International (TTI) to walk away if its waterfront business is disrupted by the $490 million National Basketball Association and National Hockey League arena Hansen proposed nearby.

TTI signed a deal in 2012 to extend its lease until the end of 2025. The port packed the agreement with incentives to enctice the company to sign.

The port gave TTI a one-time payout of $4 million related to disruptions from the Alaskan Way Viaduct replacement project, sold the company five taxpayer-owned cranes for $1 each, lowered the minimum annual rent and pledged to spend $20 million on capital improvements to the docks, documents show.

Four years after the 2012 agreement, though, the future of TTI - and Terminal 46 - are up in the air, raising questions about the lease extension deal and why the port continues to oppose an arena in Sodo.

Terminal 46 is directly across First Avenue South from CenturyLink Field. Port officials estimate it is responsible for 3,200 direct and indirect jobs on the docks and generates about $370 million a year in economic activity.

The most urgent risk to that economic activity, though, is not Hansen's arena (which faces its own challenge from a potential Key Arena renovation).

TTI majority owner Hanjin Shipping sank into bankruptcy this fall, capsized by an ocean of debt including $54 million worth of unpaid bills to TTI, bankruptcy court records show.

As Korea-based Hanjin's difficulties piled up, TTI has been repeatedly late paying its $858,379 monthly rent in Seattle this year, documents show.

Hanjin is not alone. The world's container shipping industry is taking on water as freight volumes dwindle and giant shipping companies struggle to survive.

The global shipping industry is in the midst of major consolidations. Japan's three largest shippers are preparing to merge and several other smaller companies are being acquired by larger shippers. Global trade is expected grow only 1.7 percent this year, the lowest rate since 2008, according to the World Trade Organization.

Terminal 46 is also used by two other shipping giants - MSC and Maersk. The latter company reported a 43 percent drop in profit in the third quarter, dragged down by its shipping unit, which reported a loss of $122 million. Shipping rates fell by 16 percent in that quarter, Maersk reported.

"With 20/20 hindsight, you might question whether this was a good deal for the port," said Port of Seattle Commission President John Creighton, who was among the five commissioners to unanimously approve the TTI deal four years ago.

"I was relying on staff to make sure we weren't completely giving away the store," Creighton said, "while keeping Hanjin in Seattle."

Hanjin's collapse has cast a shadow of uncertainty over TTI's operations at Terminal 46. TTI's leasehold operations in other regions have already been affected by Hanjin's bankruptcy. The company's operations at the Port of Long Beach, California, for example, are up for sale.

TTI's Seattle operations may also be up for sale, but port officials were not sure whether that was the case. TTI did not respond to multiple requests for comment.

Lawyers for TTI painted a dire picture of the company's finances in a bankruptcy court document filed late on the day after Thanksgiving.

Hanjin's failure and unpaid debts to TTI, as well as the loss of container shipping volumes, has left TTI "at risk of default on leases, rental agreements, debt facilities and payments to employees and suppliers," lawyers stated in the records.

The terminal operator needs "equity contributions" in 2017 - exact amounts were redacted but the space is at least 10 digits long - to continue operations and service debt obligations.

"Unless its immediate and longer term liquidity issues are addressed, the ability of TTI to operate and continue as a going concern is at obvious risk," the lawyers wrote.

Arena deal looks more likely

The picture is brighter for the Sodo arena group, which received a boost last month when Seattle Seahawks quarterback Russell Wilson became a business partner and ambassador for the project.

Hansen's group has already invested more than $123 million just for the real estate on which the facility would be built. Fans of the defunct Seattle SuperSonics NBA team are cheering for the group even after the Seattle City Council in May declined to vacate a street near the terminal that is necessary for the stadium project.

Since then, Hansen's group has said it will move ahead with the project without public financing if the stadium can get some tax breaks and private use of that street.

His group's memorandum of understanding with the city and King County calls for up to $200 million in public financing for the arena, but it expires in November 2017. Hansen now says private financing of the arena is possible due to "a changed economic climate."

"The recession is behind us and we are deep into this new economic cycle," Hansen wrote in a letter signed by former SuperSonics president and player Wally Walker and Nordstrom co-presidents Erik and Pete Nordstrom, all of whom are part of his group. "Interest rates have declined and the NBA has completed its new national television contract, creating more financial certainty in the industry."

But Hansen still wants the city to give his group private use of Occidental Avenue South, which has so far been an insurmountable hurdle. City Council members have cited potential traffic interference with nearby freight shipping terminals.

"You can always build an arena, but you cannot build a deepwater port," Councilmember Debora Juarez, who represents North Seattle, said in May when the council voted 5-4 to reject the street vacation.

Terminal 46 is certainly not the only deepwater port in Seattle, but it has been cited as the the facility that would feel the greatest impact should the arena deal move forward.

Port has long opposed arena

Since the lease extension deal in 2012, the Port of Seattle has been instrumental in trying to block the sports arena project from going ahead, insisting the facility would interfere with traffic in and out of Terminal 46 despite studies from the city and others that have concluded otherwise.

If the port were to lose its tenant at Terminal 46, the Port of Seattle and its Northwest Seaport Alliance partner stand to lose $10.3 million in minimum annual guaranteed rent a year - or nearly $93 million by 2025 - documents show.

Tay Yoshitani was the Port of Seattle CEO at the time the Sodo arena lease termination clause was added. He said the potential arena was a big issue when TTI and the port were negotiating the lease extention. Hanjin first leased the space and facilities at Terminal 46 in 2003 and had never had this kind of terminal clause in its lease before.

"They said, 'If the arena comes and totally screws up our access to the port, then we want the right to walk away,'" Yoshitani said. "I thought it was a legitimate concern."

Why include a walk-away clause in a deal already packed with incentives? TTI wouldn't sign without it, he said.

Rollin Fatland, a spokesman for Hansen's group, declined to comment on the Terminal 46 lease amendment deal in 2012, the termination clause added to it, and whether the substantial loss of revenue might be motivating the port to oppose the arena.

"We believe our arena project will stand on its own merits," Fatland said, noting a series of studies concluded there would be little or no impact on port operations or traffic and parking.

Hanjin struggled before 2012

Total Terminals and the port included language in the 2012 lease extension that states the construction of a sports arena was "a potential threat" to TTI's operations. Hansen's group has strongly denied that its project would have any negative impact on port operations.

The lease amendment says Total Terminals and the port can "mutually agree to terminate the lease if the arena activities and associated traffic cause significant financial and direct negative impacts on the lessee's use of the premises."

The lease went on: "The port and the lessee will work together to protect lessee's efficient operations at the premises that are affected by the arena."

There is no language or definitions in the document to suggest how or when a lease termination could happen. Nor is there any language in the lease describing what would constitute significant financial and direct negative impacts.

A 2012 Port of Seattle staff report said retaining TTI as a tenant at Terminal 46 was critical for the facility to remain an "active cargo terminal."

Given the global economic downturn in 2012, port officials added they likely would not have been able to find a replacement tenant for five to 10 years had TTI not renewed.

"We had no idea that Hanjin was in such bad shape at the time," Yoshitani said. "Twenty-twenty hindsight would be a great thing."

There were indications in 2012 that Hanjin was having financial difficulties, however. Yoshitani was sent a detailed eight-page Port of Seattle staff memo about Hanjin that included one section titled "credit risk."

That section warned of the company's fragile finances and stated Hanjin was "more highly leveraged than other comparable companies, which will give it less flexibility in the event of market downturns."

Yoshitani said he does not remember that particular memo.

Other uses for Terminal 46

Port officials quietly hired real estate consulting firm Kidder Mathews in July 2015 to assess possible redevelopment of Terminal 46, port records show, including the potential relocation of the port's headquarters to the 82-acre property and converting the terminal into a cruise ship facility.

Some of those changes would require the city to rezone the terminal for other uses, and port officials have said they haven't seriously considered the options because they have already have a lease-paying tenant: TTI.

The port has been examining its investment in Terminal 46 and the facility's future for years.

A 2013 report from consultants hired at Mercator International, global experts in logistics and infrastructure, suggested the port minimize further investment in Terminal 46.

The facility has no dockside rail services and is too small to handle increasingly larger container cargo ships, the consultants said. Adding rail service at a space-constrained downtown terminal would be "prohibitively expensive" if not practically impossible, they said in the report.

Creighton said Northwest Seaport Alliance officials - the Seattle and Tacoma port commissioners who co-manage Terminal 46 - intend to continue using it as a maritime cargo facility.

"We remain confident," Creighton said, "in the underlying strength of that terminal."

For the full story, go to Puget Sound Business Journal.

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