Five Key Documents 12/13/01

by Ted S. McGregor Jr.


The Ordinance -- Adopted by the city council on an emergency basis on Jan. 27, 1997, this document guides the city's participation in the downtown redevelopment project. Most agree that the city contracted to pledge its parking meter fund -- usually around $1.6 million per year -- to help the garage deal in times of need. But now that time of need is here, and no one can agree on what the ordinance says.


The city now argues that its parking meter fund should only be tapped to fund the garage when it fails to cover its rent and operating costs -- not when it fails to cover its bond payments, rent and operating costs, an arrangement that would put the city on the hook pretty much every month for the next 18 years.





The Walker Report -- Hired by the city, Walker Parking Consultants wrote the central document about the deal back 1996. In its report, Walker predicted that the garage would generate enough income to cover a purchase price for the garage of $26 million. Today their projections have come under fire as overly optimistic and based on suspicious assumptions. Since much of the rest of the deal was based on Walker's numbers, the faulty report may have tainted everything it touched. Additionally, Walker may not have disclosed that it worked for the developer prior to taking the assignment from the city, which raises conflict-of-interest issues.


Others say that projections are just that; no project is guaranteed to succeed. Mistakes were made, but if you tore up contracts every time mistakes are made, the world of business would grind to a halt. Still, if it is proven that Walker was so far off as to be outside the realm of honest mistakes, it could be liable. Walker's name is on the official statement that went out to potential bond buyers, meaning it was being relied upon to a degree higher than usual for a consultant. Millions of dollars rode on their opinion. Attorneys on all sides are eagerly awaiting the depositions of Walker officials.





The Appraisals -- After the city was asked to purchase the garage as its part of the public-private partnership, it hired two Spokane real estate appraisers, Scot Auble and Daniel Barrett, to confirm that the garage was in fact worth the $26 million the city would ultimately agree to pay (although it was finally the Spokane Downtown Foundation that bought the garage). Both appraisers were instructed by the city to do their work using the "investment value" approach, which can inflate prices when variables are taken into account that normally don't factor into an appraisal.


A good way to think about investment value is if you wanted to buy a tiny strip of land to give your retail business access to a main arterial. To you, that lot is worth more money than it would be to a buyer without such an interest. In other words, investment value is often more about justifying what you're willing to pay than what the property is actually worth.


Clearly Auble and Barrett were uncomfortable with the term "appraisal" being attached to their work; instead, they each labeled their documents as a "consulting assignment." Their work did confirm the $26 million price tag, but a complication arose later, when the term "appraisal" was attached to their work in the official statement bond buyers used to evaluate the investment. Whether that distinction adds up to a failure on the part of the underwriters of the bonds -- Prudential Securities and the law firm of Foster, Pepper and Shefelman -- to warn potential investors adequately remains to be proven in court.





The Coopers and Lybrand Report -- To answer criticisms about the project in late 1996, the city council voted to hire Coopers and Lybrand of San Francisco to study the overall project. This was not a feasibility study on its own, but a critical analysis of the feasibility studies that had been done up to then. A rush job from the beginning, the document was delivered on Friday, Jan. 24, 1997. When the developer saw it, however, objections were raised about its contents; they claimed it contained confidential financial information. Finally the report was ready for public consumption on Monday, just before the meeting when a decision was to be made.


There's no telling how much time elected officials had to review the document, but it was characterized by some at that evening's city council meeting as confirmation of the soundness of the deal. Today that appears to have been a generous reading, as Coopers and Lybrand, even under a tight deadline, succeeded in pinpointing problem areas that did emerge later. Coopers and Lybrand also suggested that the garage may not have been worth $26 million. Most significant, the report identified the garage's problem with validation; if the existing validation program was continued, Coopers and Lybrand stated that significant amounts of money would have to come from some other source to allow the garage to meet Walker's projections. The city council waded through such red flags and officially joined the project on Monday, Jan. 27, 1997.


As an on-the-record document that raised the specter of additional risks, the Coopers and Lybrand Report is legally significant. Its warnings perhaps should have been emphasized even more in the official statement.





The Official Statement -- When bonds are sold, an official statement is prepared that outlines the risk associated with the investment. Some language is boilerplate from deal to deal, but other wording is specific to the deal in question. In his 44-page decision rejecting motions to dismiss the bondholders' case against the city, the developer and others involved in the garage deal, U.S. District Judge Edward Shea spent quite a bit of time discussing the official statement. While a jury, not Shea, will decide the outcome of the bondholders' lawsuit, his thinking suggests the official statement may be a problem for the defendants. Specifically, he points out that if the facts as presented by the plaintiff are proven, the use of the term "appraisal" for the work of Auble and Barrett could be misrepresentation. He also suggests that although the statement is filled with disclaimers, as official statements tend to be, there may not be enough specific information about the specific risks associated with the deal -- risks that were known to the parties involved via documents like the Coopers and Lybrand Report and even via testimony from the Sabey Corporation, which criticized the deal in 1996. Additionally, if the city prevails in its current interpretation of the order in which the garage must pay its bills, the way that issue is presented on the official statement will be inaccurate.


The official statement was put together for Prudential, the underwriter, with the help of Foster, Pepper and Shefelman, and a working group that included Roy Koegen, the city's bond counsel.