Resolving River Park Square 08/23/01

Commentary by John Powers

By now, everyone concerned with resolving the River Park Square dispute knows that I want to mediate. Mediation can be a tremendous help to parties who see the importance of settling a dispute, but who are having trouble getting there on their own.

People also know that I view the River Park Square litigation as a business dispute, not an inquisition. I dropped the conspiracy claims against the Developers and unnamed "City officials" early in my administration because, until someone shows me some evidence, I don't buy it. I have encouraged everyone to set aside rancor and emotion. This dispute is not about a developer who lied, and it is not about a City that lacks honor. It is divisive and destructive to our community to describe it in either of those terms. This dispute is about equitably allocating tens of millions of dollars for unforeseen losses arising from shared mistakes.

I've not talked publicly before about my specific recommended approach to a negotiated solution or the particular challenges we face in getting there. When your objective is to solve a problem, it's important to be flexible. But as the Council members and I embark next week on meetings directed at developing a settlement consensus, some public discussion of our individual objectives and concerns is appropriate.

Before I describe my view of a solution, let's define the problem. According to the Walker Parking feasibility study, the parking garage was supposed to be self-sustaining. Based upon a preponderance of testimony at the public hearings conducted by the City Council, it appeared unlikely the City would ever have to make loans. The pledge was characterized more in the nature of a municipal vote of confidence viewed favorably by the financial markets. It is true that some risks were identified by Coopers & amp; Lybrand at the final City Council meeting when Council members approved a contingent loan pledge, but at the same time, proponents spoke about how those problems could be solved. Council members also observed that the due diligence process could be counted upon to identify any significant financial flaw, if there were one.

Eighteen months later, when the parking garage bonds were sold, Walker's feasibility study still was considered reliable enough by all concerned to be included as part of the prospectus used to sell the bonds. I do not accept the suggestion that the City nonetheless foresaw assuming a risk of substantial operating losses from the parking garage. After all, the City and others knew that bond purchasers were being invited to rely, in part, on the Walker projections.

There was a shared belief that the parking garage was financially feasible. Yet from the day the garage opened, actual operations have resulted in massive losses. The parking garage is losing between $1.5 million and $2 million a year, and based on revenue trends, losses of that magnitude can be expected to continue for the 20-year life of the bonds. According to the national experts hired by the PDA to evaluate parking garage problems last year, the problem lies with the amount of ground rent being paid to the Developer and the debt service on the purchase price of the garage. Both were based not on fair market value, but on a flawed assumption that the Walker projections were valid. Based on actual performance, the Developer was paid about double what the garage was worth and is collecting rent that is roughly twice fair market value rent.

Adding to the City's risk is the troubled HUD-based loan. In addition to the money borrowed from bondholders so the Spokane Downtown Foundation could buy the garage, the City made a separate, $23 million loan to the Developers, principally associated with construction of the new Nordstrom store. The City obtained the $23 million by borrowing that amount in the credit markets, with a federal guarantee by U.S. Department of Housing & amp; Urban Development (HUD). If the Developer fails to pay the City--and if the City can't pay the loan payments as a result--HUD collects the shortfall by holding back federal dollars that the City uses to improve low-income neighborhoods. Parking garage problems and Nordstrom's disappointing performance have contributed to shortfalls in the Developer's payments to the City. This loan now appears to be significantly under-collateralized. The City's Community Development Block Grant funds could be at risk as early as 2004.

The City of Spokane cannot afford to shoulder an unforeseen $1.5 million to $2 million loss each year for the next 20 years, and we cannot lose our HUD grant money. Two million dollars is more than the annual budget of our Planning Department and more than the budgets of our Arts, Youth, Neighborhood Services, Historic Preservation, and Human Services departments combined. The HUD grant money must be protected for additional projects in our low-income neighborhoods.

The garage losses, meanwhile, are not being compensated for by increased sales tax revenue. State law protects the privacy of tax records, so the City does not know on a store-by-store basis what additional sales tax revenue is being generated by River Park Square. But we have enough information by area to know that tax revenue increases coming to City coffers from the River Park Square area come nowhere near the magnitude of the parking garage losses.

So how do we approach this problem?

First, we call upon the PDA to assess operations of the parking garage to increase its revenues as much as possible, both to assure future payments of debt service and to determine the magnitude of the loss and the risk in going forward. Identifying people with these business skills has been and will be a key consideration in my appointment of board members to the PDA. I expect the Developer has been operating the parking garage competently. However, we need to make sure we're doing the very best that can be done with parking garage operations, to respond to any suggestion that we're dealing with mere short-term losses that would respond to a simple, quick fix.

Second, working with interested Council members, I want to continue an evaluation of risk and loss of future operations that we have already begun, and then share our honest assessment of that risk and loss with the public. This is a key consideration for me. In addition to solving a financial problem through any settlement, we have a civic tear to mend.

Third, we should use mediation through the federal court to look to Walker, Prudential and other professionals for financial contributions in accordance with their relative responsibilities. The bondholders also may be willing in that context to consider some extension of term or other structural changes to assure payment of the bonds, but on terms that facilitate settlement with other parties.

Finally, the City should share all remaining loss and risk equitably with the Developer. I do not favor any solution under which the Developer bears only known, quantifiable loss and expense, and the City bears the balance of the unknown risk. Nor do we have to be partners going forward in order to share risk. "Risk" can be cashed out. For instance, if the City assessed the risk of garage operations going forward at $12 million in present value terms and the parties were sharing risks equally, the Developer could (1) agree to share the risk going forward on a 50-50 basis; (2) assume the entire risk, and collect $6 million from the City for relieving the City of its share; or (3) pay the City $6 million, with the City then obliged to assume the entire risk. Alternatively, the Developer could put the values on risks and give the City the three choices -- in other words, "you divide the cookie, I'll choose the half."

When I say the City should share this remaining loss and risk equitably with the Developer, I use the word "equitably" intentionally and "City" broadly. I, like many, see a 50-50 sharing as the common-sense solution. But insisting on a 50-50 sharing simply invites debate over what counts and how it is valued. The Developer may have cash flow needs that warrant its contributions being made later, rather than sooner, and with the appropriate guarantees, the City can take those needs into consideration under my direction. The City has been setting aside the parking meter revenues, which were the subject of the City's limited loan pledge (the scope of which is disputed), so they will be fully available for resolution of this matter. I am willing to discuss the Developer's and others' suggestions of finding new revenue sources to apply to the financial problem, including net parking meter revenues, as long as we consider the interests of all of our constituents and can justify that allocation on grounds other than convenience.

In summary, how do we resolve the RPS dispute?

* Improve parking garage operations as much as

possible to shrink the size of the problem;

* Evaluate that problem carefully and share it

honestly with the public;

* Seek reasonable contributions by those

professionals who failed us; and

* Then, working with the Developer, identify

and commit to an equitable sharing of the risk

and loss that remain.

I remain hopeful that if the partners continue to pursue settlement and avail themselves of mediation services, we will resolve this troubled public-private partnership and heal our community.

John Powers is the mayor of Spokane.

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