Erik Marks

Attorney. Strategist. Advisor.

2255 Harbo r Ave S W

Suite 203
Seatt le , WA 98126

206-264-4598
erik @eg mrea lesta te. com

September 19, 2018

VIA Email to council@cityofpa.us and nwest@cityofpa.us

Port Angeles City Council

Nathan West, City Manager
321 East 5th Street
Port Angeles, WA 98362

Re: Proposed Sale of Waterfront Parcels at 107 and 111 East Front St and 110 Railroad Ave (the
“Subject Property”)

Dear Nathan and Members of the City Council:

I have reviewed the proposed land sale (“Subject Transaction”) by the City of Port Angeles
(“City”), to the Lower Elwha Klallam Tribe (“Purchaser”), as reflected in a proposed Agreement
for the Purchase and Sale of Real Property (“Agreement”) that is attached to the Notice of Joint
Meeting published on the City website with respect to a joint meeting of the Port Angeles City
Council and Lower Elwha Klallam Tribal Council scheduled for 10:00am on September 20,
2018.

I want to make clear at the outset that I am not writing this letter to derail the hotel plans. In fact,
the hotel has my full support, and I think the Lower Elwha Klallam Tribe is an excellent party to
be the developer and owner of the hotel. I have met with City officials and Tribal officials
regarding this project. I alerted both parties by telephone that I would be sending this letter.

ABOUT ME

I divide my residence between Seattle and Port Angeles, and I recently became the owner of a
waterfront parcel in Port Angeles commonly known as The Landing. The Subject Property is
located roughly across the street from The Landing.

Professionally, I have 25 years of experience as a commercial real estate lawyer and 15 years
experience as a commercial real estate broker. I have been involved in hundreds of commercial
real estate transactions, including many contaminated-property transactions.
 Page 2

SUMMARY OF MY OPINION

I write this letter because (a) I think the current structure of the Subject Transaction does not
maximize the likelihood that the hotel will be constructed and (b) I think the structure of the
Subject Transaction creates unreasonable and avoidable risk to the City. I have come to this
conclusion on the basis of 3 fundamental areas of concern:

(1) Basic Structure of Subject Transaction Does Not Protect City Interests. Although
the City expresses in a range of documents that (a) redevelopment of its waterfront is an
important goal and (b) that part of its motivation for consummating the transaction is to have the
Subject Parcel redeveloped, there are zero provisions in the Agreement that require or even
promote redevelopment of the Subject Parcel. Rather, despite a scattering of non-binding
language that serves only to obscure, the true nature of the transaction is a simple and
unconditional sale of the Subject Parcel at a discounted price.

Here is one example. Although Section 5 of the Agreement discusses redevelopment of the
Subject Parcel within 5 years, that language is just filler, with no binding effect. In fact, the
Purchaser could let the Subject Property sit in its current unused and deteriorating state
indefinitely. And rather than a hotel, the Purchaser (or any other party to which it sells or leases
the Subject Property) can establish any of the uses for the Subject Property that are permitted
outright by the City Code in the CBD zone, including parking lot, vehicle rental, pawn shop or
liquor store.

(2) Errors in the Language of the Agreement Itself Render it Unprotective and
Litigation-Risky for the City. The Agreement has drafting errors, as identified in Schedule 1 to
this letter. In my opinion these drafting errors make it highly likely that the City will not receive
the benefits from this transaction that it anticipates in the ordinary course of business; and that if
the City elects to seek those benefits through the Court system, the City will find that the flaws in
the Agreement itself render it effectively unenforceable.

Here is one example. Section 26(g) of the Agreement has a fatal drafting error. It says that if
any of 11 different provisions in the Agreement are found by a Court to be invalid, then the
environmental release and indemnity that the Purchaser provides in Section 4 of the Agreement,
is also deemed to be “defeated, invalidated and void.” That means that the Purchaser would not
have any obligation under the Agreement to clean up the environmental contamination, and the
City could be sued by anyone for the environmental cleanup costs, with no protection from the
Purchaser, despite having provided the Purchaser with a $650,000 credit against the Purchase
Price.
 Page 3

(3) Procedural Flaws. Contracts with tribes are inherently challenging and risky
because of the complicated legal status of tribes within United States legal system. There are
steps that the City could take to mitigate and reduce its risk in this regard, but it does not appear
to have done so. It appears that the City may not be proceeding in a sufficiently cautious manner
in light of the challenges inherent in a tribal transaction.

Here is one example. The Agreement purports to have 4 attachments, denoted in the Agreement
as Exhibits A, B, C and D. Each of the Exhibits is “incorporated into” the Agreement by express
language of the Agreement. Therefore the Exhibits are inseparably part of the Agreement. But
both the Lower Elwha Klallam Tribe resolution authorizing its execution of the Agreement, and
the Notice of Joint Meeting, attach only the main body of the Agreement and not the Exhibits.
The omission of the Exhibits renders the resolution and notice incomplete and likely ineffective.
And if the resolution and notice are ineffective, then the authorization of the Agreement by the
parties is ineffective, and the entire Agreement can be invalidated.

NEXT STEPS?

I recommend the following:

1. City Council consideration and discussion of the Agreement should be tabled. It will not
be helpful to substantively discuss and consider the flaws of the Subject Transaction in an
environment such as the Joint Meeting.

2. The current Agreement should be set aside. The City and Purchaser teams should meet
and begin negotiating a new Letter of Intent. The new Letter of Intent can retain the
basic business terms the parties have worked out over the past few months concerning the
purchase price and environmental-credit; but the Letter of Intent would reflect transaction
structures that are designed to promote the goals, and protect the risks, of the parties. In
particular, I recommend that consideration be given to structuring the transaction as
either an Option to Purchase, with a timeline and milestones, or as a conveyance with
reverter clause. These two approaches can be designed to maximize the likelihood that
the Purchaser will construct its hotel, and to minimize the risk to the City in the event that
the Purchaser ultimately is unable to construct its hotel for whatever reason (for example,
inadequate capital availability, inability to access construction financing, changing
economic climate, unknown site conditions, inability to attract development expertise,
internal political issues, etc.)

And in parallel with the foregoing, the City can ask the Purchaser to provide an Opinion
of Counsel, assuring the City that the Agreement was duly authorized, executed and is
enforceable against the Purchaser. Requiring such an Opinion Letter should be standard
practice when there is an entity with complicated and opaque internal organizational
structures, such as a Tribe.
 Page 4

PARTICULAR QUESTIONS AND ANSWERS

These questions and answers may help clarify why I believe the Agreement is not crafted in a
manner that advances the City’s interests.

May the Purchaser develop a casino on the Subject Property under the terms of the
Subject Transaction?

Yes

May the Purchaser leave the Subject Property vacant and in a state of disrepair
indefinitely post-closing?

Yes.

The City is providing the Purchaser a $650,000 credit in exchange for the Purchaser’s
agreement to clean up environmental contamination on the Subject Property. If the
Purchaser doesn’t clean it up, is there anything the City can do?

Probably not. See the discussion about Section 4 of the Agreement in Schedule 1 to this
letter.

If the Subject Property remains in its current eye-sore state 10 years from now, is there
anything the City an do about it?

No.

Could the City structure this transaction to prohibit a casino, require that the property be
kept up, establish enforceable remedies if the contamination is not cleaned up, and recover
the Property for beneficial use if it is not redeveloped as a hotel within the stated timeline?

Yes, the City could readily achieve these goals. But it did not. The City allowed flaws in
transaction structure and documentation to move forward, thereby failing to advance
acknowledged goals with respect to the streetscape, economy, business and citizens of the
City of Port Angeles.

*********************
 Page 5

I repeat what I said at the outset here, so that there is no misunderstanding. I want to see the
hotel built on the Subject Parcel, and the Lower Elwha Klallam Tribe is a good candidate to
build it.

Unfortunately, the Agreement was mistakenly conceived, and contains innumerable drafting
flaws, and therefore is a poor path forward. The Agreement fails to promote the likelihood of a
new hotel on the PA waterfront in 5 years. And the Agreement has terms that increase the City’s
risk of litigation and loss if it seeks to enforce the environmental cleanup covenants, for which it
is providing a $650,000 purchase price credit. I believe that a new agreement can be put in
place, using conventional real estate and legal transaction approaches, that appropriately
incentivizes the Purchaser to complete its hotel development, and appropriately protects the City
in the event that the Purchaser is unable to complete the hotel project. (I would be happy to meet
with Tribal and City staff and share my professional expertise toward this end, without charge.)

Therefore I recommend that the City Council decline to approve the Agreement at this time.

Very truly yours,

Erik G. Marks

Schedule 1 Flaws in Structure and Drafting of the Agreement

cc: Linty Hopie, Lower Elwha Klallam Tribe

 Page 6

SCHEDULE 1
FLAWS IN STRUCTURE AND DRAFTING OF THE AGREEMENT

Section 4.

Section 4 is the core of this Agreement. In exchange for a $650,000 credit against the purchase price, the
City received the covenants in Section 4. The City did not strike a good deal for itself. Section 4 has
flaws that render it toothless and unlikely to be practically enforceable.

Definitional Problems.

“Environmental Conditions” is defined at Section 4a with a good definition. But that definition is
not in fact used in describing the cleanup obligations. Rather, Section 4b (which could have said
that the Purchaser must clean up the Environmental Conditions) says something else.

“Reasonable Time Period” is supposedly defined at Section 4c, but the definition does not
actually describe a time period. Rather, where the definition should appear there are two
covenants about remediation of sub-elements of the Environmental Conditions. This means that
when other areas of the Agreement use the term “Reasonable Time Period” (e.g. see Section 26b),
it cannot be deciphered what that reference means. Further, the final sentence in Section 4c says
that the parties may not unreasonably withhold agreement to “amend the Reasonable Time
Period.” To use the language of our times, wtf does this mean? It is indecipherable and subject
to numerous interpretations, and therefore creates significant risk of litigation and
unenforceability.

“Matters Addressed by the Credit” is defined in Section 4e as “the scope of Environmental

Conditions that fall within the Credit.…” The “Credit” is defined at Section 2 as being the sum
of $650,000. How can Environmental Conditions fall within a sum of money? This is terribly
confusing. Although I can figure out elements of what the drafters may have been trying to say, I
cannot figure out what the term actually means. And I really don’t understand how the definition
of “Matters Addressed by the Credit” differs from the definition of “Environmental Conditions” -
as far as I can tell they are intended to mean the same thing. Creating two defined terms with the
same meaning violates a fundamental rule of contract drafting and materially increases the risk
and uncertainty of litigation about that contract.

“remedial action costs” is a term that is used in Section 4h and should be defined but is not.
Section 4h is critical - it is the clause where the Purchaser agrees to indemnify the City against
cleanup costs. But Section 4h just says the indemnity is for “remedial action costs.” Such a term
absolutely needs to be defined. Here is a list of costs that would be included when defining such
a term; without a definition, who knows if these are costs that the City is or is not indemnified
against: investigation, drilling, testing, permitting, DOE fees, legal fees, insurance, engineering,
transportation and disposal, excavation stabilization, obtaining easements, post-cleanup
monitoring, etc.
 Page 7

No Environmental Agreement Signed at Closing. In almost all instances where an important

covenant survives closing, that covenant will be reflected in an Agreement that is attached to the Real
Estate Purchase Agreement and delivered at Closing. In this instance, the terms of Section 4 should
have not been incorporated into such an Environmental Agreement that the parties would sign and
deliver at Closing, and be bound to after Closing. The Environmental Agreement would generally be
recorded in the real property records as well, to provide assurances about future property owners and
long term property administration. What are the problems with the approach that the Agreement
takes in lieu of the typical documentation?

• Severability Clause. As explained above in this letter, Section 26g of the Agreement contains an
error, such that if any of 11 clauses in the Agreement are invalid, then the entirety of Section 4 is
invalid. If this were to occur, the City would have provided a credit of $650,000 and received
nothing in exchange.

• Litigation. If the City wishes to enforce any environmental cleanup provisions, it will have to do
so by suing on the basis of a Purchase Agreement that has for the most part terminated, with a
few surviving clauses. Such is a messy process and reduces the City’s chances of success.

• Attorney Fees. If the City wishes to enforce the provisions of Section 4 and prevails, you would
expect the City to recover its attorney fees. But such is not the case in this Agreement. The
attorney-fees clause appears at Section 26d. But Section 26d does not survive closing. And so
there is no award of attorney fees to the prevailing party for post-closing disputes. This
circumstance is particularly prejudicial to the City, because the City is the party that will have to
bring any action, or actions, post-closing to enforce the Agreement.

• No Recording. Section 4 survives as a cleanup covenant indefinitely post-closing - could be 5 or

15 years. But Section 4 is not recorded and is not binding on successor-owners. And so what
happens if the Purchaser sells the Property prior to cleaning it up? Well…nothing. The
Purchaser has a covenant to clean it up, but does not have a right of entry. That renders the
cleanup covenant impossible to perform, and covenants that are impossible to perform are often
deemed unenforceable.

• Removing the provisions of Section 4 to a separate document delivered at closing and recorded
would avoid the problems described above.

Language Choices in Section 4 - “Will” v “Shall”. First year lawyers learn that the correct use of
these terms is important in contract drafting. These terms are misused in Section 4. The term “shall”
must be used when there is a covenant by a party (i.e. a promise to perform a future act). The term
“will” does not create an obligation on a party, so it is not used in a covenant. Unfortunately Section
4 uses the term “will” for several covenants of the Purchaser, including the most important covenant -
the cleanup covenant at Section 4b. Other clauses in Section 4 that use the term “shall” for
covenants include the important clauses at 4f and 4h. It is a rule of contract interpretation that where
different words are used, they will be interpreted to have different meanings. Therefore the erroneous
use of the term “will” in Section 4, alongside the correct use of the word “shall” in some instances,
 Page 8

raises serious questions as to the enforceability of the environmental cleanup covenants in the
Agreement.

Section 5 - Hotel Development. Section 5 says that the Purchaser intends to develop a hotel on the
Subject Property within 5 years of closing. This is 2 years longer than originally stated by the
Purchaser. The City should be circumspect about timeline forecasts from a Purchaser that does not have
experience developing commercial hospitality properties. And this provision has no enforcement
mechanism at all. If there is no hotel there in 3 years, 5 years, 10 years, there is nothing the City can do
about it. It does not have to be this way. If the Purchaser does intend to develop a hotel, the Purchaser
should readily agree to establishing milestones and deadlines that keep everyone’s expectations on-track.
Why is the City short-selling itself on such an important provision.

Sections 9 and 17 - Title Insurance. Section 9b calls for a standard coverage title commitment, but
Section 17d makes it a Purchaser’s condition to closing that the Title Company be prepared to issue an
extended coverage policy. While the inconsistency is more of an annoyance than a problem, the
condition for extended coverage at 17d is a material concern. Because a survey is needed to obtain
extended coverage, and because the presence or absence of a survey is within Purchaser’s control (not to
mention that in a property like this the survey is nearly certain to identify encroachments), the provision at
17d that makes extended coverage a condition to Purchaser’s obligation to close creates, at the end of the
day, a right for the Purchaser to terminate the Agreement at any time prior to closing.

Sections 20 - Closing Costs and Prorations. This clause just says that the parties will split “closing
costs.” What are these? No one knows if they are not defined. And they are not defined. The escrow
fee is a closing cost I am pretty sure. What about the title policy - is that a closing cost? I don’t know.
Nothing else in the Agreement says who is paying for the title policy. Appropriate language for a clause
like this can be found in any form contract.

As for pro-rations? They are mentioned in the heading for the Section, but are not addressed. Nothing in
the contract addresses pro-rations. Not a big deal because they probably are minor, but they should be
addressed.

Section 24 - Payment in Lieu of Taxes Agreement . This clause is an “agreement to agree”. Agreements
to agree are widely known to be unenforceable. Therefore the tribe is free post-closing to move the
property off of the tax rolls, with no offsetting agreement to benefit the City. This problem can be easily
remedied by establishing the form and terms of Payment in Lieu of Taxes Agreement today, as an
attachment to the Agreement.

Section 26d - Dispute Resolution and Waiver of Sovereign Immunity.

• There is no provision saying that Section 26d survives closing. (There is a sentence saying that
certain aspects of it terminate at closing, but nothing that says the remaining terms survive.)

• There is no consent to jurisdiction of Clallam County Superior Court. Although the Agreement
does place venue for any action in Clallam County Superior Court, there must also be a consent
by the Purchaser, as a sovereign nation, to the jurisdiction of the Court.
 Page 9

• There is no identified method for service of process on the Purchaser. The Tribe must agree that
legal process can be served upon it in a certain manner that can be readily achieved. Otherwise it
is not clear how one would serve process and begin a legal action.

• Enforcement of Judgment. Even if the Purchaser is subject to the jurisdiction of Clallam County
Superior Court, and if the Court issues a Judgment awarding specific performance or monetary
damages to the City, how will the City enforce that? Certainly there are political hurdles to
enforcement. There are also legal hurdles - there is no garnishment or seizure against a sovereign
nation for the most part. This is an aspect of doing business with a tribe that must be thought
through. The most effective approach is to design transactions so that enforcement through Court
action is highly unlikely. This proposed Agreement is quite the opposite - it hands all control
over the asset (the real estate) to the Purchaser, and the City’s only course of action if things go
sideways is to go to Court. And going to Court is likely to be expensive, frustrating and
unfruitful for the reasons identified in this paragraph and at other points above in this letter.

Section 26(g) - Severability Clause. This provision is supposed to ensure that if one element of the
Agreement is unenforceable, the remainder of the Agreement remains enforceable. But in this instance
there is a fatal drafting error. In fact, Section 26g says that if any of 11 different provisions in the
Agreement are found by a Court to be invalid, then the environmental release and indemnity that the
Purchaser provides in Section 4 of the Agreement, is also deemed to be “defeated, invalidated and void.”
That means that the Purchaser would not have any obligation under the Agreement to clean up the
environmental contamination, and the City could be sued by anyone for the environmental cleanup costs,
with no protection from the Purchaser, despite having provided the Purchaser with a $650,000 credit
against the Purchase Price.

__________________________________

END OF SCHEDULE 1