Seattle Club Is Weighted Down With Debts, Claims

The Seattle Club - the prestigious health club for young professionals - faces more than $5 million in overdue debt and has been forced to give up its lease in the new AT&T Gateway Tower downtown.

The 10-year-old club, with gyms in Seattle and Bellevue and 3,300 members, is involved in at least four legal claims with creditors. Club owner Gary Gaffner has arranged payment plans in two of the cases and is challenging one; the fourth remains unanswered.

Club members, who pay a $500 initiation fee and $72.50 a month, would not be eligible for refunds if the club had to close. A state law provides for refunds of health-club payments in some cases, but not when members pay a one-time non-refundable fee as in the case of The Seattle Club.

Gaffner, though, said that shouldn't be a concern. He can explain all the debts and could pay them off if he wanted to, he said. He added that his debts have been exploited by Gateway's developers, whom Gaffner is suing.

Gaffner's debts, detailed in lawsuits and court judgments, include:

-- $2.5 million to Washington Mutual for a mortgage on the club north of Pike Place Market. Gaffner is paying the debt according to a plan specified in a court order.

-- $2.2 million to owners of the 10-story Bellevue Place office building, where Seattle Club Bellevue is located. This debt, too, is being paid according to a court-ordered plan.

-- $400,000 to the Internal Revenue Service. Gaffner said he is paying on this debt.

-- $235,190 to owners of the AT&T Gateway Tower, where The Seattle Club was building a new facility. Gaffner's lease was canceled because he had not paid the bill; he is challenging the case in court.

-- $175,000 to Washington state for back taxes. So far, no payments on this debt have been made.

"We owe lots of people lots of money. So do all businesses," Gaffner said. "I certainly don't think we'd be in business if we didn't pay our bills. We might pay them late . . . "

The club raised monthly dues in January, from $69 to $72.50. But the increase, the first in two years, was needed to cover rising operating costs, not to pay off debts, Gaffner said.

Gaffner, a local property investor and historic-preservation advocate, started The Seattle Club north of the Market in the early 1980s. He also owns the Cafe Sport restaurant next door and opened a club and restaurant in Bellevue in 1988-89.

He was scheduled to open a 25,000-square-foot club in the Gateway Tower last fall, a date that was pushed back initially because of construction delays. Gateway billed Gaffner $235,190 for his share of construction costs in December, but he failed to pay, disputing the amount and timing of the bill.

Gateway canceled the lease in March, and Gaffner sued, claiming his lease was canceled without just cause.

Because of the dispute, the spot remains empty. About half of the 100 people who bought memberships have canceled.

Gaffner claims Gateway wouldn't have canceled his lease unless it wanted to extract more rent from him or lease the spot to another health club offering a better deal.

Gaffner negotiated a good deal on his first two years' rent at Gateway: 81 cents per square foot the first year and $4.80 the second year, far lower than market rents of $18 to $27 per foot. Rent under the lease would rise to $14.28 the third year and $18.12 by the final year.

Industry observers say it is common for developers to offer discounted rent to health clubs, restaurants and other businesses that help draw other tenants.

Gateway officials said they feared Gaffner couldn't keep up with the lease payments, even with the discount. Court papers state that Gaffner admitted he was seeking a $13 million bank loan to pay off debts. Gaffner said he is continually in negotiations with lenders.

Bradley Keller, Gateway's lawyer, said, "Gateway's only goal here is to get a competent health-club tenant."

Leasing agents have had "preliminary negotiations" with several clubs interested in the spot, Keller said.

Gaffner said the Gateway case is the only lawsuit, debt or default agreement he has that isn't "friendly."

The others, he said, were debts - even defaults - he knowingly took on so he could continue developing condominiums near the Market and a restaurant in Bellevue without taking out new mortgages or selling other assets.

Gaffner said that in the real estate business, liens and lawsuits are "tools of the trade, like a barber has his clippers and tonic."

Bellevue Place and Washington Mutual drafted agreements recording the original debts and payment plans.

Bellevue Place developers were not available for comment. Washington Mutual officials would only say they were "seeking a resolution of Mr. Gaffner's financial situation" that is acceptable to both sides.

Gaffner said, "I can always marshal other assets - by selling other property or selling some stock or something - to pay all of (the debts) off."

But then he would have to pay capital gains tax, and that doesn't make good business sense, he said. He'd rather arrange "workouts" with his creditors, as he has done with Bellevue Place and Washington Mutual.

Gaffner likened his situation to a person charging too many purchases on a credit card, getting behind in payments, then agreeing with the credit company to pay off the debt a little at a time.

"There's no way I'm overextended," he said. "You're never overextended until you can't make payments."