Tell it to the judge 07/27/00

Analysis by Ted S. McGregor, Jr.


The saga of River Park Square's disastrous parking garage has always been much simpler to understand than it might appear. It's the same story that was clear for anyone to see as far back as October, 1996, when officials with the Sabey Corporation, then owners of NorthTown Mall, started pointing out what they saw as problems with a seemingly innocuous traffic study done by an outfit from Indianapolis by the name of Walker. It's as simple as this: The City Council got advice on whether to join a downtown redevelopment project; the advice suggested the project would fly; now, four years later, that advice turns out to have been bad.


Ever since those days, theories have abounded about why Walker's numbers were off and why the City Council trusted the advice so dearly. That City Council clearly did not want to be on watch when downtown Spokane's death sentence was signed. So, one theory goes, under intense lobbying, the members of that council were not willing to question information that might jeopardize their ability to "save " downtown. Or, perhaps they did know the project was riskier than they were publicly admitting -- they realized, another theory goes, that a public subsidy would be required to keep Nordstrom in town. Whatever the specifics, such explanations generally regard the current problems as an unfortunate mistake, exacerbated by the hard bargain driven by the city's partners in the deal, Spokane's Cowles family.


But there were always other, more sinister theories, whispered at only in off-the-record conversations or hinted at in passing street-corner chats. Those theories held the notion that there's no way a firm like Walker could be so far off in its projections, and they explained the "mistake " as pure calculation on the part of the developer to extract the maximum possible financial participation from the city. But such theories are no longer whispered at. Just such a theory has been adopted by the City Council on behalf of the citizens as truth, in the form of a lawsuit against the developers of the mall, their agents, the various public entities responsible for the facility and others apparently to be named later.


The details of the alleged subterfuge are laid out in a 26-page complaint released earlier this month by the private attorneys hired by the City Council. The theory states that Bob Robideaux, the Cowles' property manager and River Park Square's manager, parlayed a cozy relationship with Walker Parking Consultants into an inflated report to the city, which not only set the price the public would pay for the garage, but also the amount of rent the garage would have to pay during its month-to-month operation. Proof is offered in the form of a report that Robideaux had Walker conduct in May, 1995, a year before the city hired Walker to produce a similar study. The trouble is, the lawsuit suggests, that the developer never disclosed its relationship with Walker to the city. And the projected revenues reported to the city in 1996 were significantly inflated over those found in the 1995 report.


The lawsuit's charge of civil conspiracy is further supported by the allegation that the Downtown Spokane Foundation, a key entity in the original financing plan and now the owner of the garage, was a creation of the developer and has done its bidding ever since. This civil conspiracy succeeded, the suit alleges, in forcing the city to choose a "highly unusual " appraisal method to set a price for the garage -- a price that jumped from $14 million to $26 million after Walker's 1996 report was factored in.


Although many think the city's legal action is designed to loosen up the developer's tough stance in negotiations over some kind of settlement of the garage's financial woes, accusing the city's most prominent family of presiding over a vast conspiracy designed to siphon public money to its interests is not something to be entered into lightly. So the fact that such a lawsuit has been brought at all is giving credence to another theory that is being espoused as an explanation of what's really going on here.


That alternate theory holds that the City Council's decision to seek a legal solution reflects the sensibilities of one of its newest members: Steve Eugster. Some say Eugster is still smarting over having lost his last legal battle over the River Park Square financial apparatus at the state Supreme Court. Now, the theory goes, Eugster has a new benefactor to fund his legal whims: the citizens of Spokane.


The decision to sue seems to reflect Eugster's mastery over the current council majority. Proof of his leadership can be found in the episode when Steve Corker, working on his own, negotiated an agreement with Robideaux. When Eugster heard about the plan, he verbally dressed Corker down, and Corker has never returned his support to the plan, which the developers have stuck with, in varying forms, through their recent negotiations with the city. Earlier, Eugster led the majority in replacing acting City Manager Pete Fortin (although he had another replacement than Henry Miggins in mind), then commented that it was done to get someone who would do the council's bidding, although such an arrangement dances along the edge of the city's charter (the council can fire the city manager if they don't like the job he is doing, but they aren't supposed to micromanage him). And now Eugster has led the council in hiring his old friend and legal associate, Yale Lewis of Seattle, to replace the city's own legal staff as the city's counsel on the case (no city attorneys' signatures are on the complaint).


But no matter which theory you subscribe to -- or if you choose none of the above -- the city's current course of action will have fallout of some kind, both legal and political.





Legal fallout


The basic question here is what it will take for the city to win its case against the developer and others. It appears to be an uphill climb. The legal side of the issue is perhaps as simple as the root of the problem that led to the impasse: It's a case of contracts. The city entered into a contract with the developer over the financial operation of the garage. If courts allowed anyone who didn't like the terms of a contract they signed to simply wiggle out of it, it would be impossible to do business, so getting out of contracts is difficult. The city is seeking to do so by proving that it entered into these contracts under false pretenses.


The city's complaint does state that it has been damaged by Walker and others, but it asks for no specific figure; it does, however, ask that all contracts be voided. To prove their case, however, they must fill in some sizable holes in the web of conspiracy they describe. Central to their case is the allegation that Walker's 1995 study, and the fact that the company had worked for Robideaux, was never disclosed to the city. But some familiar with the case have suggested that a copy of that very report has resided in the city files since the two partners started working together. At the very least, city officials probably knew of Robideaux's prior relationship with Walker, even if they didn't known the details of the work in question. As for the inflated numbers found in the 1996 study, the developer will likely argue that the scope of the project changed significantly between 1995 and 1996, leading to higher numbers in Walker. A convenient explanation? Yes. Hard to disprove? Yes.


Perhaps a more difficult hurdle to clear is in proving that Walker's numbers were solely relied upon in making the decision to join the project. Certainly Walker is referenced in the official statement that went out with the bond issue, but the record clearly shows that City Council members were told again and again in 1996 and 1997 -- even by Eugster himself -- that Walker's numbers were faulty, and they still chose to join the project. The city's own 1997 feasibility study by Coopers and Lybrand raised big questions about Walker, yet the council still moved forward, suggesting that they were not completely relying on Walker's numbers in making their decision.


The city will also seek to depose witnesses and gather even more documents in its pursuit of this case, and one of the most interesting witnesses will be John Dorsett, principal with Walker Parking Consultants. Back in February, Dorsett told The Inlander that his firm in no way allowed Robideaux or any other party to tamper with his firm's report. Since that interview, Dorsett hasn't spoken to the press, but if his testimony remains the same, he will be of little use to the city's case in proving civil conspiracy. However, the city also alleges professional malpractice on the part of Walker, and that may be an easier charge to prove, as there are few other conclusions to draw about a report that is as far off and has led to as much financial pain as Walker's.


Through depositions and requests for documents, the city's attorneys will also try to prove that the garage's price jumping from $14 million to $26 million was also part of the civil conspiracy. Specifically, they refer in their complaint to the fact that a "highly unusual " valuation method was used to set the garage's price. While the method did drive the price higher, the developers should have no trouble producing witnesses who would testify that the investment value method of valuing property isn't unheard of in cases when a cash-producing business comes with a building.


The city may have better luck in sticking to the fact that the construction costs associated with the garage project were closer to $20 million than the $26 million the city paid. This is precisely the challenge that was made to the financing deal done between the city of Seattle and the Pacific Place mall project, except in that case the lag between what the public paid and what construction costs were was estimated at more like $23 million. That challenge, however, was unsuccessful, and the project remained unchanged.


Aside from proving its own case, the city's filing of the lawsuit may bring the need for even more money to spend on legal fees, as it may find itself on the defense from other suits related to its position on the issue. The wild card in all this is the bondholders, who, already angered by the garage's poor performance, now see their investment in even more jeopardy as the city refuses to fund the garage's shortfalls as it contracted to do. Bondholders have been known to sue in such situations, and their representative has been present at two of the legal hearings on the matter already, suggesting an active interest.


And, of course, the developer could countersue -- although they may wait to see what happens at the state Supreme Court this fall, when that body will rule on whether the city needs to start writing checks to the garage. That is when the question of whether the payments from the city to the garage constitute a gift or a loan -- a stickier issue than once thought for the developers to unravel. As for continuing to negotiate, if the developers have no guilt in their hearts, it's hard to imagine that they will see any benefit from continued discussions until later this fall (or after the elections, as will be discussed later). In fact, if the developers simply let the city's case run its course (which could rival the Gypsy case in quagmire quotient by taking a year or more and costing the city hundreds of thousands in legal expenses), and if they prevail, the city could wind up paying all the money that was originally contracted for, all its own attorneys' fees and, perhaps, be liable for damages from a suit brought by the bondholders. In court, it's an all-or-nothing game. If the city prevails, however, and proves the presence of a civil conspiracy, the contracts would be voided and the parking garage would become solely the developer's problem.


As for legal tricks up their sleeve, you can also expect the city to try to have Witherspoon Kelley disqualified as the developer's attorneys in the case, as firm members could be called as witnesses. Both Duane Swinton and Stan Schwartz, formerly of the city, were instrumental in the 1997 deal. If disqualified, some judges will allow the firm to handle the case right up to the time of trial, and then have to turn it over. But the developers could counter by asking for a change of venue, and perhaps move the case to a jury with fewer opinions on such matters.


But many are still hoping that the city's legal threat will persuade the developers to avoid a drawn-out dispute that could poison the waters in their efforts to lease out the rest of the mall and bring the project to the place they need it to be. Released with the city's complaint were copies of the letters back and forth between the attorneys trying to reach a settlement. When things left off, the two sides were still far apart. The city wanted to refinance the deal, by offering the bondholders a discounted buyout, and wanted the ability to unite the project by either having the option to purchase the land under the garage or by having the option to sell the garage back to the developers. While the discounted buyout is not an unheard of approach, and had even been vetted by Lehman Brothers prior to its inclusion in the deal, it may have been nixed by the bondholders' representative, who wrote a letter late in June stating that the bondholders would not participate in releasing their rights embodied in the existing contracts. But at last check, the idea of a discounted buyout was still alive and under discussion between the interested parties, so the plan could resurface if negotiations are rejoined.


Meanwhile, the developers expanded on an earlier offer made to Corker by agreeing to participate in the garage's shortfalls throughout the 20-year life of the bonds. The total amount they offered to share in the pain was $3 million. In light of the amount many say the city overpaid for the garage -- about $8 million -- the offer doesn't seem far from fair. But when you compare it to the potential cost to the city of the garage over the next 19 years, it could be a drop in the bucket. Keyser Marston Consultants, which studied the garage in April, estimated the facility will lose anywhere between $8 million and $20 million by 2019. So if the $20 million figure comes to pass, the developer's offer wouldn't reflect a true partnership. But the developers, in an apparently newfound skepticism for consultants' numbers, remain unconvinced by Keyser Marston's numbers and point to the fact that the garage has been outperforming those numbers in recent months as proof.


And even though a clear majority of the citizens, perhaps sensing that too many hard feelings are preventing productive negotiations, would like to see the matter settled by binding arbitration (as shown in the KXLY/Inlander poll of May), neither side is willing to submit.


Finally, the city, which will rely on drawing logical conclusions between the behavior of the key players and the final result as part of its case, will have to overcome some simple logic that seems to contradict their conclusions. If this civil conspiracy was in place in 1996, why didn't the City Council simply accept the developers' first proposal? Instead, the city changed the plan significantly to include what they said at the time would be more protections for the public. Also, if the developers knew they were peddling false numbers, why would they be taken by surprise four years later? Wouldn't they have had a plan in place for when those bogus numbers came home to roost?


But perhaps most chilling to those who believe a deception was undertaken is this: If the developers are smart enough to conceive of a conspiracy that involves independent consultants, various public officials and even City Council members, would they be dumb enough to leave any proof of it?





Political fallout


On the political front, this issue, again, is simpler than it looks. The political turmoil that has accompanied the parking garage issue since 1997 can be traced to a simple, hard rule: If you violate the people's wishes, you can lose your job. City Council members of 1996 and 1997 have learned this, as the decision to use an emergency ordinance to sneak through the garage deal without a public vote loomed large over the mayoral election in which Jack Geraghty lost.


But that rule remains, and it could just as easily apply to members of the current majority, if their behavior is seen as a violation of the public's desire to see a resolution to the mess. In the battle of public opinion, it's not altogether clear where the people are, although that KXLY/Inlander poll suggested that people like the new mall, but want a new deal for the garage. The developers, therefore, may be better off to take their chances with the election, when the balance of power on the council could shift again, with the garage serving as the lever.


Since John Talbott will be off the council whether he wins or loses the strong mayor election, the new split could be three-to-three. If either Corker or Rob Higgins win their bid for council president, the split stays at three-to-three, with those six council members having to choose the council's newest member to serve out either Corker or Higgins' term. That would be a challenging piece of political wrangling to be sure. And if an outsider is elected as council president, the new balance will depend on that person's positions. If that outsider is against the lawsuit, the council could tear it up on January 1, 2001. So the recently installed majority is not only risking the city's coffers on its lawsuit, but it also could be risking its very existence and the agenda of reform that it rode into office on.


The issue will likely figure prominently in the strong mayor race, too, as the incumbent's point of view is already clearly known. John Powers would like to see the matter mediated professionally, and Jim West would seek to continue negotiations on a settlement. But whomever wins may find himself hamstrung by the lawsuit when they enter the office, as it may take a City Council vote to rescind the complaint. So not only could the current council's agenda of reform be impacted by an issue that looms so large, but the new strong mayor may also be impaired in realizing his vision.


In the end, it's all a matter of political honesty. Back in 1997, most agree that the City Council was not as honest with the people as it should have been. The emergency ordinance was only part of the problem. Council members likely knew the risks better than the rote "we won't ever need that parking meter money " statement reflected. Perhaps they were too scared to violate the unspoken code of the pro-garage forces, or perhaps they thought a firewall would emerge somewhere else in the process that would get them off the hook for calling the Walker study what they rightly should have know it to be.


It is interesting to see how other cities' elected leaders deal with similar issues. In Pittsburgh, for example, where business leaders are currently trying to lure a Nordstrom, public officials started the debate with the word "subsidy " rather than "partnership. " Now Washington state has some things in its constitution that preclude such subsidies, but political honesty on what was really being done here would have made a big difference in the political outcome. Pittsburgh, incidentally, is considering a $50 million public subsidy to bring in Nordstrom in the name of downtown redevelopment.


The new majority could learn from the mistakes of its predecessors, as now appears to be another time for political honesty. What are the real risks of launching this lawsuit? Instead of frank answers, the fact that the city's bond rating could tumble again is disputed with the naive notion that the city could somehow sue the bond rating agencies if they continue to punish the city for failing to live up to its contracts.


It's easier to talk about the benefits of winning the lawsuit and getting out from under this onerous deal, but it was also easier for members of the earlier majority to talk about how nice downtown would be with all the shiny new stores instead of what would happen if the deal went sour. The harder discussion, but the more politically mature one, is on the real risks associated with the lawsuit, and, before it, the project.