Biotech cashes in on real estate: ZymoGenetics sells, leases back HQ

ZymoGenetics has sold its historic headquarters, including the City Light Steam Plant along Lake Union with the famous smokestacks, for $52 million to a publicly traded real-estate company.

ZymoGenetics, Seattle's oldest biotech company, says it sold its buildings to raise cash and isn't moving anywhere. It has signed a 15-year agreement to lease back the steam plant and two other buildings from its new landlord, Alexandria Real Estate Equities of Pasadena, Calif.

Under the deal, which was announced yesterday, ZymoGenetics agrees to pay about $1.2 million per quarter in rent on buildings it used to own; in return, it gets a $52 million cash infusion, enough to run the company for nearly a year. The cash is important because ZymoGenetics wasn't able to raise as much money as it hoped through its initial public offering in January, and it is facing a market in which investors are in little mood to fuel biotech companies for the future.

So instead of going to investors, ZymoGenetics turned to real estate, and was able to fetch one of the highest prices ever for West Coast lab space, about $330 per square foot for 158,000 square feet.

ZymoGenetics Headquarters: Seattle, South Lake Union. Founded: 1981. Employees: 350. Chief executive: Bruce Carter. Cash and investments: $225.7 million as of June 30. City Light Steam Plant 1914: Built along South Lake Union to satisfy the growing city's need for power and electricity. 1987: Steam plant, in deteriorating shape, is decommissioned. 1988: Steam plant and the adjacent Hydro House are designated historic landmarks by a city panel. 1993: ZymoGenetics purchases both buildings from the city, and invests $25 million to turn them into a state-of-the-art biotech research center. Fake smokestacks, shorter than the originals, are erected in memory of the building's heritage. 1998: Another ZymoGenetics research building, named after company co-founder Earl Davie, is built across Eastlake Avenue from the steam plant. 2002: ZymoGenetics sells the steam plant and two other buildings for $52 million to Alexandria Real Estate Equities. It signs a 15-year lease to stay as a tenant.

The price was so high mainly because of location — the property is wedged between biological hotbeds at the University of Washington and the Fred Hutchinson Cancer Research Center, plus it has lake views and visibility from Interstate 5, said Bob Mooney, president of The Staubach Co. office in Seattle, who represented ZymoGenetics in the transaction.

ZymoGenetics was in the unusual position of owning such valuable property because its former corporate parent, a Danish drug company called Novo Nordisk, helped it buy the old power plant from the city of Seattle in 1993 and invested $25 million to transform it into a state-of-the-art biotech research center. ZymoGenetics then took over the buildings and some adjacent land in 2000 when it spun off as an independent company.

The new owner, Alexandria, specializes in biotech and pharmaceutical lab space. It adds the ZymoGenetics properties to a portfolio that already includes Seattle biotechs Dendreon and Corixa.

"We're a biotech company, not a real-estate company," said ZymoGenetics spokesman Charles Hart yesterday. "What this does is provide us increased access to cash to run our business, and in the current economic environment, more cash is better."

The sale provides ZymoGenetics with flexibility for the future, including options to build more on adjacent land it still owns, said Chief Financial Officer Jim Johnson. The company has said it wants to build a $50 million manufacturing plant and do a $20 million expansion of the Earl Davie research building that was finished in 1998. Both of those moves have been on hold for months as the company has sought to conserve cash. At the end of June, ZymoGenetics had $226 million in cash and investments, at least enough to run until mid-2004 or mid-2005.

Last month, ZymoGenetics filed its first application with the U.S. Food and Drug Administration to begin testing a new drug in clinical trials, a process that typically takes seven years or more and can cost hundreds of millions when considering the fact that most drugs fail. ZymoGenetics' first attempt at a drug is Factor XIII, a genetically engineered copy of a protein that strengthens blood clots, which ZymoGenetics believes will be useful for people deficient in the protein and for post-surgical bleeding in heart-lung bypass patients. Mooney said the potential landlords who bid on the property were enticed by the location, the fact that the buildings are 100 percent leased and a belief that ZymoGenetics is well-run and will be able to make steady rent payments for years.

Johnson said Alexandria will inherit ZymoGenetics' agreement with the city of Seattle over liability for any lake-contamination issues stemming from the building's days as a power plant. If any further contamination is found, Johnson said the city remains liable because it happened under its ownership.

Luke Timmerman: 206-515-5644 or ltimmerman@seattletimes.com.