3 months, 2 sales, 1 huge tax windfall

A series of billion-dollar sales involving the region's tallest office tower and other prominent buildings has produced an unexpected windfall of tax money for state and local government.

The multi-step deal began in February, but it wasn't until this month that municipal finance officials tallied the full impact.

For Bellevue, taxes collected from the sale of this one large portfolio almost match what the city had expected to take in all year from commercial and residential property sales.

For Seattle, the take tops $13 million.

The bounty highlights the boost state and local treasuries have enjoyed from a strong commercial real-estate market the past few years.

But while officials celebrate this one-time budget surprise, they say slower house-price appreciation ultimately could offset the gains from record office-building sales.

Nearly three months ago, the Blackstone Group of New York bought Chicago-based Equity Office Properties Trust, then the area's largest office landlord.

Equity Office, which owned more than two dozen local office buildings including the 76-story Columbia Center, valued its Seattle-area portfolio at $2 billion when it transferred ownership to Blackstone.

Just two months later, Blackstone turned around and sold most of the local buildings to real-estate investors in Boston and Texas for $2.76 billion.

Here's how that benefits the state and local governments:

Each time a commercial or residential property changes hands, it's taxed at 1.78 percent of the value or sale amount. Most of the revenue goes to the state, the rest to cities or counties where the building is.

Bellevue received $4.5 million in tax money from Equity Office, and soon it will receive $5.7 million from Blackstone, said finance director Jan Hawn. The city had 16 properties change hands twice in as many months.

That $10.2 million nearly covers the $11.5 million Bellevue had projected it would receive from the real-estate excise tax during its entire fiscal year.

"We're going to way exceed budget" in this category, Hawn said.

A strong market drives sales

The state puts revenue from real-estate excise taxes into the general fund, which primarily pays for education and social services. Local governments use the money for capital projects, such as road and park improvements.

Seattle is due $5.6 million from Equity Office and $7.8 million from Blackstone, according to documents filed with the King County Recorder's Office and the state Department of Revenue.

That's a quarter of the city's expected real-estate excise tax collections for 2007.

Six buildings in Seattle changed hands twice, including the Columbia Center — which alone is bringing in nearly $5 million for the city.

"We've been looking at it and saying, 'Damn!' You really realize how much property is being sold around here," said Seattle City Councilman Richard McIver, who chairs the budget committee.

Mercer Island, with one building sold, will get $293,374.

The state's take: a whopping $61.5 million. That could cover a year's worth of salary and benefits for about 880 Seattle-area schoolteachers, or buy 770 new school buses.

Real-estate investors have shown they are willing to pay top dollar for Seattle-area office buildings. They are attracted by a diversified economy, solid job growth and favorable market conditions.

Office-vacancy rates are below 10 percent in the central business districts, and asking rents are growing by double digits year over year, signifying a landlord's market.

Blackstone would not comment on the tax impact of its deals, and the buildings' new owners, Boston-based Beacon Capital Partners and the Archon Group of Irving, Texas, did not return phone calls.

"We've supersized meals. Now we've supersized deals," said former investment banker Stephen Blank, a senior fellow at the Urban Land Institute in Washington, D.C. "Everyone wants to be in real estate. The returns have been great, and investors view Seattle very positively."

Even before the Equity Office sell-off, local governments were collecting more money from the real-estate excise tax, thanks to investor interest.

Seattle took in more than $50 million in 2006, up from about $20 million in 2001.

Bellevue's annual take also more than doubled over the same period, to $13.8 million in 2006.

Not accounting for the double windfall, money from the tax makes up slightly less than 2 percent of Seattle's $3.3 billion annual budget.

In Bellevue, the amount collected from the tax last year was about 3 percent of a $490 million annual budget.

"We've had pretty sizable increases in our tax revenues, but this one is pretty remarkable," said George Emerson, an economist for the city of Seattle, referring to real-estate excise-tax collections.

The area's strong housing market also has helped. Although housing markets elsewhere in the U.S. have slowed in the past year, home prices locally are holding up.

Tax take could decline next year

But the state has begun to notice a monthly decline in home sales, and soon it will see less house-price appreciation, said Chang Mook Sohn, executive director of the Economic and Revenue Forecast Council.

At the very least, he said, tax money from the Equity Office sell-off will lessen the impact of a local housing-market slowdown.

"Even though our area's real-estate market is not as bad as Florida or Southern California, we are experiencing the same general trend of weakening here, too," he said.

Seattle's finance department predicts the city's real-estate excise tax collections will drop to $51.8 million in 2008 from $54.1 million in 2007, partly because the Equity Office sell-off will be hard to top.

The department's forecasters also note in a recent report that "residential sales are projected to cool for 2007 and pick up again for 2008. Condo sales are expected to drop somewhat and then level off."

Investors have yet to cool on the area's office market, however, and buildings continue to be sold at jaw-dropping prices.

"There are a lot of properties on the market in addition to what Equity Office sold," said Greg Johnson, president of Wright Runstad, a Seattle real-estate development company that owned local buildings with Equity Office.

"I think we're going to see many other owners cash in on record-high prices. It's not over yet."

Amy Martinez: 206-464-2923 or amartinez@seattletimes.com