July 2, 2004 in City

IRS says deal netted excessive benefits to private interests

The Spokesman-Review
 

The Internal Revenue Service has determined that a $31.5 million sale of tax-exempt bonds used to finance the River Park Square mall renovation did not qualify as a public, tax-free enterprise.

In a 27-page report received by the parties in the case this week, the IRS said that under law, tax-exempt bonds must be used for “activities which are essentially public in nature.” In this case, the IRS said, “it is clear there was substantial and excessive private benefit derived by private interests.”

The report noted 15 reasons the bond issuer, the Spokane Downtown Foundation, is not qualified for tax-exempt status.

Among them:

“ The Spokane Downtown Foundation was established by the developer, River Park Square LLC.

“ The developer’s attorney established the foundation and served as its registered agent.

“ The developer initially approached, engaged and essentially hired bond counsel.

“ The developer initially approached and hired the board of directors for the foundation.

“ The foundation’s articles of incorporation, filed by the developer’s attorney, Duane Swinton, “did obfuscate the true nature of the corporation/issuer.”

“ The developer required an investment value, or “revenue stream,” analysis to determine the garage’s value for the bond sale. The developer “provided a number of the assumptions for the analysis (and) used the analysis as an appraisal with the knowledge that the analysis substantially overstated the value of the garage.”

“ That analysis used parking rates that were double the typical rate downtown at the time, assumed parkers would stay double the time of a “reasonable” expectation and ignored the validation program – “all of which have the effect of overstating the value of the property which ultimately (if the financing is to be paid) demand the garage to set rates much higher than would be necessary were this a true arm’s length transaction; higher parking rates is diametrically opposed to the purpose of the issuer/corporation established by the developer.”

“ The developer “benefited excessively” from an agreement to lease the land under the parking garage to the city, since the lease was based on “overstated” parking analysis and the lower financing rates from defining the bonds as tax-exempt.

“ When AMC Theatres threatened not to open in the mall before the garage was sold to the foundation, the developer “sought to conceal” that with confidentiality agreements.

“ The developer “required” the city to pledge parking meter revenues to cover garage shortfalls, “which increased the rating on the bonds and added to the overvaluation of the garage.”

“ The developer was promised too much money from remaining garage revenues after all the garage expenses were paid.

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