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Sunday, March 28, 2004

Spokane

Garage deal leaves city in tight spot
A look at the decisions behind RPS' snarl of trouble

Jim Camden
Staff writer

The River Park Square mall renovation was designed to save Spokane's withering downtown. It became a monument to Murphy's Law, the rule of life that decrees anything that can go wrong, will.The mall and its parking garage have spawned an avalanche of lawsuits, pitting the city against one of the community's oldest and largest businesses. In less than a decade, the city and the development arm of Cowles Publishing Co. went from a cozy, shared belief in the need for a major downtown project to public recriminations and open legal warfare.

The combatants are scheduled for a federal trial in April in a lawsuit alleging that the city, the mall's developer and a host of advisers, consultants and surrogates defrauded investors by not telling them the truth about the garage.

Outside the courtroom, the controversy has deepened some residents' natural suspicion about their government and business institutions.

As the trial approaches, the growing stacks of court files include sworn statements from participants and other documents that could bolster that suspicion.

Those depositions show:

  • Many warnings about the garage's potential financial problems were not included in the official document used to sell bonds that later bought the parking facility.

  • The nonprofit foundation that bought the garage had no role in determining the price. City officials who suggested that $26 million was too much to pay -- perhaps $8 million too high -- said their bosses took them ”out of the loop” for negotiations.

  • A study commissioned by the developer that projected lower revenue for the garage was not given to the city, to the public agency set up to oversee the garage or to the foundation that sold bonds to buy it. City officials would later say they should have been given that report; employees of the developer said they never asked but the city could have ”done the math” to figure out the lower revenues.

  • At one point, key officials in the garage development signed a document promising to keep mum about a secret offer by the developer to guarantee a portion of garage revenues. The developer promised to help the city-created Spokane Parking Public Development Authority fight any request by the public to see the guarantee, and even pay the fine if the agency were found guilty of violating state laws on open government.

    Problems pile up

    The problems with the garage extend beyond the bond lawsuit. The Internal Revenue Service is questioning the tax status of the bonds sold to buy the garage. The payments to investors shouldn't be tax-free, the IRS contends, because the city paid far more than fair market value for the garage and some of the bond money went for ”private use.”

    Spokane County is demanding $1.3million in unpaid taxes, interest and penalties for the garage, arguing that it is not a government building that would be exempt from property tax.

    The mall's former manager is suing the owner, and a consultant who issued a report on the garage has filed a claim against the city for damaging its national reputation.

    The mall development has been a major factor in every city election since 1997, when incumbent mayor and staunch project supporter Jack Geraghty was ousted by neighborhood activist John Talbott, one of its chief critics.

    Talbott, who headed a council that was split 4-3 against the project, lost his re-election bid in 2000 to John Powers, a political novice who promised to settle the dispute through mediation.

    Three years later, with the dispute still roiling, Powers himself was ousted in the primary, by challengers who had different ideas on how to solve the controversy. Mayor Jim West ordered a secret review of the legal entanglement but is holding to the city's current strategy of seeking a settlement but preparing for a trial.

    All this from a project that arguably delivered on some of its promises to revive retail trade and add evening entertainment options in a downtown that often was moribund by 7 p.m.

    The $110 million project preserved some retail jobs and generated new ones, although the numbers and value are still being debated. The mall developer and other supporters contend the overall project was the catalyst for an estimated $1.6 billion in downtown redevelopment.

    But since the renovated mall opened, the underperforming garage has been a storm cloud hanging over the project.

    Seven decisions
    Those not intimately familiar with the controversy might wonder: How tough can it be to make a garage work? Drivers come in. They park. They shop, eat or watch a movie. They pay. They leave.

    The Reader's Digest version of the garage problems has always been that too few drivers are parking for too short a time and paying too little. Because of that, the $26 million garage can't cover its costs, which include bond debt, operations, maintenance and rent.

    The garage's shortcomings have multiple causes. They build on one another to create a legal and financial tangle that developed over time.

    Starting in the mid-1990s, decisions were made that led to today's problems.

    Those key decisions include:

  • In June 1995, the city and the developer formed a ”partnership” to renovate River Park Square. City leaders obtained a low-interest, federally guaranteed loan, which would be loaned to the developer to cover some of the renovation costs. Over time, the finances of the loan and the garage would become intertwined so that when one faltered, the other was endangered.

  • In June 1996, the city hired a national consulting firm to estimate how much money an expanded garage would make. The revenue projections by Walker Parking Consultants became the basis of later estimates on the garage's performance and value. But they were much higher than the garage is experiencing.

  • In November 1996, the city and the developer agreed on a price for the garage: $26 million. That was $8 million more than some city officials thought it was worth, and nearly $5 million less than developers wanted. The appraisal method used to arrive at the price drew criticism, and the city's appraisers believed it inflated the price. The organization that would eventually pay that price had no part in the negotiations.

  • In January 1997, the Spokane City Council pledged money from city parking meters as a backup for garage revenues. In making that decision, the council listened to the developer and other downtown boosters about the need for the project to save the city's retail core, giving them more weight than the warnings from independent accountants and other experts who had concerns about the economics of the project.

  • In the summer of 1999, parking rates for night customers were lowered to keep a dispute between the mall developer and AMC Theaters from scuttling the sale of the garage. But dropping the rate undercut the old revenue projections. When the nonprofit Spokane Downtown Foundation balked at buying the garage -- and even suggested the facility was worth less than the purchase price -- the developer refused to renegotiate. But it did make a secret pledge worth millions of dollars if the theater chain backed out.

  • In April 2000, the City Council voted not to loan some $450,000 from the parking meter fund to cover garage expenses. Looking at the facility's dismal balance sheet, the council contended there was no guarantee the money would ever be repaid, so it would amount to an illegal gift, not a loan. Wall Street reacted quickly, saying that refusal was a cause for lowering the city's bond rating.

  • In May 2000, the developer asked the state courts to order city officials to make the loan. That lawsuit would wind through the courts for more than a year, with the developer winning the first round and the city winning the appeal, and was only one of many over the garage.

  • In June 2002, the key players in the federal case agreed to seek mediation in that lawsuit. Mediation is still an option, although the people involved in mediation are under orders from U.S. District Judge Lonny Suko not to reveal what's being discussed. Without a settlement, the federal trial will start in Richland on April 19.

    Waiting beyond the lawsuit are other legal fights in state court that a settlement or a jury verdict wouldn't automatically resolve.

    That means the legacy of the River Park Square ”public-private partnership” could remain clouded for the foreseeable future.

    Jim Camden can be reached at (509) 459-5461 or by e-mail at jimc@spokesman.com.

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