City was warned of RPS’ dire straits
Mall developer said bankruptcy was likely if city didn’t settle suit
The River Park Square mall has been losing between $3.7 million and $4.2 million a year since 2000, and bankruptcy by the companies that owned it was “the most likely course of action” if a lawsuit over its garage wasn’t settled, city officials were told late last year.
As the city worked on details of a proposed settlement with the Cowles development companies that own the mall, an attorney for those companies warned the mall was in dire financial straits. Even if the city did win a jury verdict in an upcoming trial over the mall’s garage, it might not be able to collect, attorney Michael Currin told Gavin Cooley, the city’s chief financial officer.
The mall had limited assets the city could tap and the Cowles family, which owns the development companies’ parent firm, could not be held liable, Currin said in a Dec. 1 letter obtained by The Spokesman-Review under a public records request to the city.
In “the unlikely event” that the city did win its case against the mall companies, he said, the companies “have no independent means of payment and any payment made by the parent company will be purely voluntary and must be based on sound practical and economic principals.”
Steve Rector, secretary-treasurer for Cowles Publishing and the development affiliates, said Thursday the mall continues to lose money, although the final financial statements for 2004 are not complete. But the companies are no longer considering bankruptcy, he said, because the legal settlement with the city has reduced one of the mall’s major expenses – legal fees – and cleared up uncertainty over the lawsuits.
The City Council eventually approved a settlement with the development companies that included the city receiving more than $8 million held in an escrow account and stronger security for the repayment of a $22.65 million loan that was siphoning off federal funds for programs in poor neighborhoods. The mall’s parent company received the garage.
Currin’s letter, supporting financial reports that list the mall’s losses and the notification that its bank was moving a $35 million loan to a special department for problem accounts, are among documents obtained by the newspaper under state laws governing public documents.
Some City Council members mentioned the threat of the mall’s bankruptcy when they approved the settlement on Dec. 11. Councilman Al French said at the time that talk of bankruptcy and its impact on any city claims made him feel he had a gun to his head.
“I took a look at them briefly, and I didn’t think they were bluffing,” French said Thursday.
Council members were allowed to read the documents if they wanted, but not make or keep copies, he said. The documents were not made public.
Currin’s letter was first mentioned during a Jan. 4 hearing in the federal lawsuit over the garage, but access to it initially was denied because it was tied to confidential settlement discussions that are limited by judicial orders.
After the settlement was approved by the federal court, the city released the documents after allowing lawyers for the development companies to review them.
Cowles Publishing owns The Spokesman-Review, but the newspaper used separate legal counsel in seeking the release of the records.
Consolidated financial statements from independent auditors with Ernst & Young of Seattle said the company that owns the mall, River Park Square LLC, had a net loss of $3.7 million in 2003, $3.8 million in 2002, $4.2 million in 2001 and $4.1 million in 2000. RPS II LLC, a subsidiary that operates the mall, also operates in the red, a separate cash flow statement shows.
The financial reports, which are usually not made public by a privately held company, were given in an attempt to show city officials the mall’s true financial picture, Rector said: “It wasn’t making money hand over fist; in fact, it was losing money.”
Between $1.2 million and $1.9 million each year were being paid for “professional expenses” – primarily legal bills connected with the lawsuits spawned by the disagreements over the garage.
“Now that the litigation is behind us, that expense should be smaller,” Rector said.
The city and the mall development companies started out in the mid-1990s as “partners” in the mall renovation as a way of rescuing the declining downtown retail district.
Through a complicated set of agreements, bonds were sold by a nonprofit organization to buy the mall’s expanded garage for $26 million, and the city borrowed $22.65 million guaranteed by the U.S. Department of Housing and Urban Development and reloaned it to the development companies.
The companies pledged some of the rent from the mall’s tenants and other payments from the garage to help repay the HUD loan, and the city passed an ordinance that promised to loan money from its parking meter money if the garage couldn’t cover some of its expenses.
Almost as soon as the mall opened in September 1999, it became clear the projections on garage revenue were overly optimistic, and revenues failed to cover many of its expenses. When the public agency charged with overseeing garage operations asked for a loan of parking meter money in 2000, the council refused, saying it might never be repaid. If that happened, the council argued, the money would become an illegal gift.
After a year of mounting lawsuits, investors who bought the garage bonds sued everyone connected with the project for fraud in federal court. Last April, the city settled with the investors, then began negotiating settlements with the mall owners and other co-defendants.
In December, Currin wrote to Gavin Cooley – the city’s chief financial officer – to confirm details of discussions Cooley had with Rector. From its beginning, the mall had lost money and had been “heavily subsidized” by its parent company, he wrote.
Last July, the mall’s “equity owners” – the real estate development companies which are in turn owned by the Cowles family – became frustrated because city officials expected any judgment against the mall or settlement would be paid by the family, he wrote. But they had no personal liability for the limited liability corporation that owned the mall, and began considering a bankruptcy filing on how to treat the mall’s creditors, which would include the city if it could win the lawsuit.
After the mall and the development companies lost a separate lawsuit by their former manager in August, bankruptcy discussions “took on an added urgency,” Currin wrote, and the company met with its main lender, U.S. Bank. The bank placed the company’s $35 million loan in its “Special Assets Group,” which handles accounts with problems or potential problems. They had drafted a plan of reorganization and were on track to file for bankruptcy in 10 days “unless all parties take a realistic view of settlement,” Currin wrote.
The city has yet to settle with its former bond counsel, Roy Koegen, and his former firm, Perkins Coie. A trial is scheduled to begin on April 21 on those remaining claims.