A federal judge wrestled Wednesday with the sharply dropping values being placed on the River Park Square garage, wondering how a garage that sold for $26 million in 1998 could be worth about one-eighth of that just seven years later.
U.S. District Judge Edward Shea also wondered whether the Spokane City Council was repeating a former council’s mistakes as it tries to get out of the ill-fated mall deal.
Millions of dollars are at stake, either for the city’s budget or some of its former advisers pitted against the city in a lawsuit. Before they go to trial in April, Shea has to decide whether the city struck a reasonable settlement late last year with Cowles development companies that own the mall.
“Ultimately, the issue is: What’s the value here?” he said during a daylong hearing in Spokane.
As part of a complicated transfer of funds and property, the developer would receive the garage in exchange for some $8 million currently being held in escrow and a firm guarantee that a federally backed $21 million loan would be repaid. But when totaling up the values, the city estimated the garage’s value at $3.4 million
“How can a $26 million garage in 1998 be worth $3.4 million in 2004?” Shea asked.
“It was never worth $26 million,” replied Laurel Siddoway, the city’s special counsel for River Park Square matters.
Although the City Council approved that price tag years ago, she said, it only did so at an emergency meeting, when the mall developer said a decision was needed that night, and financial experts said various questions would be answered as part of “due diligence” on the project.
But the city and other groups involved in the project told potential investors that the garage was worth $26 million when they went to the bond market in 1998, Shea said. The city has bought back those bonds, but who’s going to make up the difference of more than $22 million?
Siddoway suggested it should be all of the participants who had knowledge of potential problems with the deal, and didn’t disclose it.
“You mean, everybody that’s been sued?” the judge countered.
“Yes,” replied Siddoway.
No, argued Ralph Cromwell, attorney for the city’s former bond attorney. The city’s calculations on the garage’s value are too low, which would allow it to collect more from its former bond counsel and the bond underwriter, if it wins the trial.
Cromwell said the city is not properly valuing the benefits of being sure a loan backed by the U.S. Department of Housing and Urban Development will be paid off. The city borrowed $21 million and re-loaned it to the developer to help pay for renovating the mall; when the garage ran into financial difficulty and the project tumbled into a legal morass, some payments on the loan weren’t made. HUD took the money for the loan payments out of the city’s Community Development Block Grant money, which meant some of the city’s projects for low-income neighborhoods didn’t get funded.
At one point, Cromwell played videotaped excerpts from last December’s special council meeting that approved the settlement between the city and the Cowles mall development companies. Four councilmen who voted for the deal said they were doing it to save the HUD block grants.
Siddoway said there was no dispute that saving the HUD block grants was important. The disagreement is how to calculate the value of protecting those block grants over time, with different interest rates.
Another factor in the council’s decision to accept the settlement was that the mall development companies were threatening to file bankruptcy, she said.
The mall companies are affiliates of Cowles Publishing Co., which also owns The Spokesman-Review. Last fall, another Cowles firm that owns the former J.C. Penney building but is not involved in the garage lawsuits filed for bankruptcy when faced with a $6.5 million judgment in a separate suit. Attorneys for the Cowles affiliates told the city they would put the mall companies in bankruptcy within days if there was no settlement.
That sounds like the same tactic the developers used at that emergency meeting in 1997 when a previous city council agreed to take part in the project, Shea said.
“It’s the same old, same old. Either you do it now or it’s over,” the judge said. The bankruptcy for the other Cowles company was later dismissed, he noted, so perhaps “the threat wasn’t as real as they asserted.”
But the mall development companies did provide the city with documents showing the mall is losing money – approximately $3.7 million in 2003 and $3.8 million in 2002. Included in the mall’s expenses are about $1.8 million a year in legal fees resulting from the lawsuits. The parent company, Cowles Publishing Co., pumped $5.5 million into the mall companies in those two years, according to confidential documents displayed during the hearing.
In reaching the settlement, the city also gets a promise to pay off the HUD loan from Cowles Publishing Co., which has strong financial assets, rather than the limited guarantee from the cash-strapped development companies, Siddoway said. The garage is being transferred to the parent companies, not the development firms.
The settlement had other benefits for the city and the developer, including public relations and answering community concerns about the HUD block grants, Siddoway said.
“But it’s not a corporation that has altruistic motives, but an individual,” said Shea, referring to the development firm’s president, Betsy Cowles.
That was correct, said Siddoway, who later added that it would be ironic if Cowles’ offer of a stronger commitment to shore up the HUD loan wound up costing the city money in evaluating the settlement’s worth.
Shea didn’t rule on the settlement at Wednesday’s hearing, but scheduled another meeting with the attorneys on March 11.