| Secret Deal: The Story of Spokane's RPS Garage | |
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By Tim Connor |
6/2/2000 |
Part 1
The public and the city council find the River Park Square garage project maddeningly hard to follow, what with the developer insisting on confidentiality, and the developer's newspaper doing the reporting.
The public and the city council find the River Park Square garage project maddeningly hard to follow, what with the developer insisting on confidentiality, and the developer's newspaper doing the reporting.
Novak's Warning - "NO WAY"
In mid-January 2000, the days of reckoning that were about to test a divided city began not with a bang, but with a one-page memo. It was written by Terry Novak, and it warned Mayor John Talbott that, in effect, a bomb had been discovered in the physical and political heart of Spokane. The site of the impending implosion: the renovated garage for the glittery new River Park Square development.
As president of the agency set up to manage the garage, the Public Parking Development Authority (PDA), Novak wanted the mayor to know that after only four months of operation the garage was headed toward bankruptcy.
Novak, a seasoned public administrator who served as Spokane's city manager for 13 years until 1991, is a large man with a gentle voice and an agile sense of humor he uses to help navigate through difficult situations.
This was a difficult situation. In a matter of days the bad news and finger-pointing over the garage would seep into public view.
One of River Park Square's most stalwart proponents, Novak was now fixated on a problem that could destroy the PDA and thereby undermine the entire financial structure for the downtown redevelopment. In the memo he bluntly assessed the prospects for the PDA being able to pay its costs and handle its debt service in two words:
"NO WAY."
In the weeks to come, the public learned about the crisis of the numbers. What it didn't learn very much about is how and why Novak and other supporters of River Park Square had turned against the deal on the parking garage. They'd come to the conclusion that it was unfair and that the fair play needed to solve the problem had to come from the same family that publishes the city's only daily newspaper. The paper reported on the problem and gave space to well-known critics of the project to say their piece. But its reporting never approached the substantive issues that Novak and other insiders understood were at the heart of the matter.
An extraordinary public subsidy was carefully embedded in the transaction.
The deal about to unravel was not a simple one. It was, in fact, born to be complicated. While the sale of the River Park Square garage had something to do with parking, it had even more to do with money. An extraordinary public subsidy was carefully embedded in the transaction.
River Park Square's developer, Spokane's most influential family, publisher of the city's only daily newspaper, won't say how much money it realized from this transaction. Based on a statement made by one of the developer's attorneys at a June 1, 2000 press conference, at this writing it seems unlikely the public will be able to learn those details without a serious showdown-say an audit by the Internal Revenue Service, the Securities Exchange Commission, or an accounting mandated by a formal inquiry backed by subpoena power.
Nevertheless, because of the public subsidy involved, and because Spokane now finds itself in a position where its municipal credit is pledged in a way the mayor and several city council members say they don't understand, those elected leaders seem to be moving toward requiring a frank public accounting.
Based on available public documents, rough arithmetic is possible. It suggests that River Park Square's developer was able to take between $6.4 million and $11.5 million off the top of the $26 million sale of the garage. After that, if the garage does well, the developer will make even more money. If the facility continues to lose money, as it now is, Spokane has promised to loan funds from its parking meter collections to cover those losses. (See "How the City Gets Its Money Back.") Thus, even if the garage struggles under the weight of the debt created by its $26 million sale, the developer will still be able to receive millions of dollars for rent payments on the land beneath the garage-land which the developer still owns.
On the better end of this remarkable public/private partnership is the Cowles family. (See "How Much Did the Cowleses Make?") Cowles holdings include Spokane's NBC affiliate (KHQ), a regional daily newspaper in The Spokesman-Review, a paper company, and valuable parcels of real estate, including all of the land and most of the structures at the River Park Square mall in the heart of downtown Spokane.
City officials helped design and negotiate the garage transaction because they wanted to lend an assist to what they and the city's elected representatives thought would be a crucial downtown revitalization project. Most of them ardently believed, and continue to believe, that the revival of the Cowles' River Park Square mall would make or break the future of Spokane's downtown. A centerpiece of the mall's revival was the need to secure a long term commitment from the upscale Nordstrom department store. To keep Nordstrom downtown, city decision makers were told by their own consultants, the mall's developer was willing to make unusual concessions to the Seattle-based firm. Sweetening the garage deal for the developer was one way the city could compensate the Cowles for concessions the family was making to Nordstrom.
The main reason for the unraveling of the River Park Square garage deal is that it served its purpose too well. The transaction was so weighted with advantages and profits for the Cowles that it undermined the civic structure that was supposed to hold it all together.
When Terry Novak's PDA took over responsibility for the garage last fall, the authority found that three of every four dollars the PDA needed just to break even were pledged either to financing the inflated purchase price of the garage or to paying "ground rent" to the Cowles. It was a recipe for bankruptcy.
As the crush of these commitments descended on the PDA, Novak tried to remind two of the authority's board members, Orville Barnes and Roberta Greene, of what they'd done three years earlier. Along with former Mayor Jack Geraghty, Barnes and Greene had served on the city council's finance committee which took responsibility for the city's negotiations with the Cowles. They'd been involved in numerous briefings with city staff and River Park Square representatives about the garage transaction and its purposes.
"As Roberta and Orville know," Novak wrote in a December 14, 1999 memo to the PDA board, "the larger goal of getting this project going for the 'total benefit of the larger community' required some compromises."
The city used an appraisal method that valued parking spaces at three times what it actually cost to renovate them. -Terry Novak
Foremost among those compromises, Novak reminded them, was an agreement by the city to use an appraisal method on the garage that would value the parking spaces in the garage at three times what it was actually going to cost to construct and renovate them.
Professional appraisers expressed great discomfort with that decision; their objections are reported here for the first time. (This reporting was the basis of the June 1, 2000 KXLY-TV broadcast of the appraisers' concerns.) The city actually ignored the advice of its real estate projects manager, Dennis Beringer, by specifying a controversial appraisal method which ensured that the appraised value of the garage would come in at a price considerably inflated above what the building would sell for on the open market. This was a conscious decision, quietly made, and it served only one purpose: to create a cover for the transfer of excess cash to the Cowles real estate companies with the understanding that these profits would be reinvested in the River Park Square mall. The cost of inflating the parking spaces would then be amortized with the rest of the mortgage on the garage, as translated into the debt service on the tax-exempt bonds sold to finance the garage purchase.
Through this arrangement, Novak recounted in his December 14th memo, "the parking program became the city's contribution to the public/private partnership. That may well be fine in the larger picture. It left us [the PDA] with over inflated expectations and limited flexibility."
Novak asked Barnes, Greene and the two other board members not to interpret his review of the problem "as criticism of previous decisions." What he wanted was to enlist their support to try to accomplish the major changes he thought would be needed to avoid breaking the PDA.
"We need to openly re-negotiate this set of contracts, without causing the structure to crash. We also need to get out in front of the Wolves on this suggestion, lest we appear to be responding to others who have other motives. I hope I'm not being melodramatic when I say the 'total benefit of the larger community' is at stake."
In the coming months, the efforts of Novak and others to avoid that "crash" would create some remarkable alliances and encounter some of the most bitter conflicts in Spokane's history. Novak was on the side of those who were firmly committed to helping the Cowles pump new life into downtown Spokane through River Park Square. But he also held the view that in order to solve the problem with the garage you had to have the will and sobriety to deal with it openly and honestly.
That would be difficult.
"They were afraid they couldn't sell that concept on the street... so it was sort of hidden and muted." -Terry Novak
The tangle of deceptions and "compromises" engraved in the River Park Square deal existed for a reason. As Novak saw it, the council of 1997 had lacked the "political courage" to tell the community that it was purposely allowing the price of the garage to be inflated as a way to provide financial assistance to the downtown retail project. "They were afraid they couldn't sell that concept on the street," Novak observed in a recent interview, "so it was sort of hidden and muted."
While there were lots of reasons to defuse the time bomb at the corner of Main and Lincoln, it wasn't clear you could do that without accounting for how the explosive problem had gotten there in the first place. To come clean about the transaction would involve publicly owning up to several mistakes. There would be political consequences to such an accounting, and because bondholders along with the public had not been told everything, possibly legal consequences as well.
In many ways, the saga of the River Park Square garage crisis is the defining story of modern day Spokane. The story's most resolute and outwardly calm character is River Park Square developer Betsy Cowles. Her message is: a deal's a deal.
But was it a legal deal? The city's bond counsel, Roy Koegen, is no longer sure about the answer.
To be continued
Secret Deal Sidebars:
How Much Did the Cowleses Make?
How the City Gets Its Money Back
Is the Garage Really a Public Facility?
What the Council Knew . . .
The Murky Role of the Spokane Downtown Foundation
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