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Sunday, March 28, 2004

Spokane

City, Cowles affiliated team up to expand mall
Public-private partnership soon grows sticky

Jim Camden
Staff writer

The River Park Square deal is complicated, but it didn't start out that way.

Like bind weed, the complexity grew over time, from a single shoot.

The deal put down roots in 1995, when officials from the mall owners, companies affiliated with Cowles Publishing Co., approached the city about a partnership.

Those companies, Lincoln Investment Co. and Citizens Realty, were planning to remodel the mall that was built in 1974 and expanded in 1978. Company officials said they couldn't pay the entire $80 million out of their cash reserves, couldn't find a business partner to share the costs and couldn't afford to borrow the entire amount.

They began talking with city officials about a public-private partnership that would boost a faltering downtown by expanding the mall. Both had a financial interest in working together.

The developer, a major owner of downtown real estate, was looking to keep Nordstrom and other key tenants downtown. City officials were worried about the loss of retail stores, which meant a loss of sales tax revenue and eventually a loss of property tax from lower downtown property values.

”We have a plan to benefit the entire community,” thenCouncilman Joel Crosby said after mall officials held a closed-door session with city officials and business leaders about the project in April 1995. ”We can either convince people based on the positive benefits -- supporting the police, parks, tourism dollars and jobs -- or the negatives. What is the cost to downtown and the city if we don't do this?”

That was where things started to get complicated, because in Washington state government entities are severely limited in the financial assistance they can give a business.

In June 1995, the Spokane City Council passed three resolutions that formally started the partnership. It agreed to vacate a one-block stretch of Post Street to accommodate the mall expansion, agreed to apply for a grant and a low-interest loan from the U.S. Department of Housing and Urban Development, and directed city staff to study buying the mall's garage.

Under a special HUD program for urban renewal, the city could borrow from a bank and loan the money to the developer to cover some of the renovation costs.

A complex web

In theory, the deal would work like this:

  • HUD would guarantee the money, which would lower the interest rate from the bank.

  • The developer would repay the city, which would repay the bank.

  • If the developer didn't repay the city -- and if the city didn't have other money to use -- HUD would deduct whatever was owed from what the agency gave Spokane in Community Development Block Grants -- federal money divided among the city's poorest neighborhoods for social services -- to make sure the bank got paid.

    Critics quickly pointed out that could lead to a situation where money intended for the poor was being used to pay for a fancy shopping mall and a Nordstrom.

    ”If they want a new downtown, they can pay for it themselves with their own money,” said John Talbott, who would later oust one of the project's early supporters, Mayor Jack Geraghty.

    To protect the HUD funding, the city eventually required the developer to put up collateral for the loan.

    As the paperwork for the loan wound its way through HUD reviews between 1995 and 1998, the deal got even more complicated.

    One piece of collateral the developer offered was the rent Nordstrom would pay in the new mall. To determine how much that was worth, the city ordered studies of the Nordstrom lease. To protect confidential information in the lease, the developer put limitations on who could see it. When critics argued the lease should be public, the dispute went to court. Eventually, a judge ruled the lease would be public as soon as the loan came through.

    In 1996, the city debated an additional source of funding for the project, and the developer offered additional collateral for the loan.

    And the deal got even more complicated.

    Tied together

    For much of 1996, city officials studied ways to buy the mall's expanded garage to give the developer additional money for the overall project.

    But the developer would still own the land under the garage and charge the city ”ground rent” each year. As collateral for the loan, the developer agreed to give 41 percent of the ground rent to the city.

    The ground rent would come from the garage's parking revenue. So would payments for bonds that were sold to buy the garage. So would the money to operate and maintain the garage.

    To assure Wall Street there would be enough money to cover all those needs, the city agreed to another complication. It passed an ordinance to loan money from its parking meter fund if the garage didn't make enough money to cover ground rent or operating costs.

    HUD grants were still shielded by money Nordstrom would pay the developer to lease its new store. A ”conservative” projection from experts hired by the city suggested the store's growing revenues would supply adequate money to protect the block grants.

    By the time HUD approved a $22.65 million federally guaranteed loan in 1998, the city, the developer, the mall financing and the garage financing were interconnected and relying on one another for support.

    But that meant that anything that shook one part of the deal sent shivers through the rest of it.

  • Monday: The city hires a parking consultant to project revenues for the garage. The projections, which proved far too optimistic, became the foundation for the deal to come.

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

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