Camas Magazine: View Article


Under the Influence

By Tim Connor and Larry Shook	8/16/2001

Part 1
An 11th hour crisis with AMC threatened to unravel the River Park Square deal. The "solution" didn't fix the problem. And insiders cooperated with developer Betsy Cowles to keep the public in the dark.

Documents recently obtained by Camas Magazine provide new evidence for how River Park Square developer Betsy Cowles and her advisors collaborated with public officials to prevent timely public disclosure of a serious flaw in the project's finances.

The records consist of memos, meeting notes, and correspondence involving the developer's attorneys, top city officials, the public agency operating the mall's parking garage, the non-profit that purchased the garage, and theater operator AMC. These documents reveal tense last-minute efforts in the summer of 1999 to keep the public from learning of a potential deal-breaking dispute between River Park Square and AMC.

While the AMC parking flap was previously reported in Camas Magazine's 2000 series, "Secret Deal," the records offer startling new insights into the dispute and its consequences for Spokane.

Ą The crisis, which surfaced less than two months before the scheduled opening, threatened the financial underpinnings of the entire River Park Square redevelopment.

Ą Among themselves, public officials acknowledged that millions of dollars of parking revenue losses seemed inevitable.

Ą While the public was told that use of the city's parking meter fund to subsidize River Park Square was unlikely, downtown leaders knew that wasn't true.

Ą In addition to Betsy Cowles and her development team, those aware of the crisis included city councilwoman Roberta Greene, former city councilman Orville Barnes, former deputy city manager Pete Fortin, former city bond attorney Roy Koegen, Spokane Downtown Foundation (SDF) counsel Mike Ormsby, and former Spokane Parking Public Development Authority (PDA) president Terry Novak.

Ą Ormsby copied a draft of a letter warning of the crisis to Jim McDevitt and Pete Fortin. (McDevitt, a partner of Ormsby's in the law firm Preston Gates & Ellis, has been nominated to be Eastern Washington's next U.S. attorney.) Camas Magazine's public records research shows that Ormsby's draft letter is missing from city files.

Ą Key public documents upon which this report is based were also missing from PDA files when we were allowed to inspect those files the first week in July 2001. These documents-crucial August 13, 1999 letters from Novak and Ormsby, as well as a critical "reimbursement agreement" that the PDA required in order to sign its lease of the garage-became available by other means. This raises questions about whether these documents were deliberately removed or simply never put in the files of a public agency in order to hide information that was embarrassing to River Park Square but crucial to understanding the risks to bondholders and the city.

Silent Crisis

The AMC dispute highlights the Achilles heel of downtown retail business generally, and River Park Square in particular: expensive parking. The problem existed long before the new mall. By 1997 downtown business groups had developed what they thought was the best solution, a program called "Easy Pass," which gave shoppers up to two hours of free parking.

The River Park Square redevelopment shredded "Easy Pass" and added a huge debt burden to the entire system. Between mortgage payments necessary to finance the $26-million check Betsy Cowles would receive from the garage purchase, and the approximate $1 million-per-year in "ground rent" to be paid to Cowles real estate companies, parking customers were supposed to be the source for nearly $70 million through the year 2019.

And there were still other parking costs associated with the garage transaction. Under the terms of the emergency "Off Street Parking Ordinance" that cemented the city's support for the deal, the city committed to increasing the number of parking meters and dramatically raising parking meter rates. This was necessary to supply an escalating cash reserve sufficient to loan funds if garage revenues fell short.

According to bond documents and consultant reports, the business that was to shoulder the most weight in paying off these enormous debts was American Multi-Cinema, Inc. Incredibly, AMC was the last to learn of this expectation. The company was preparing to open its ticket booths at River Park Square, expecting that its customers would receive free parking, when it had a rude awakening.

Recently obtained documents reveal that AMC informed Cowles in early June 1999 that the company had just learned its patrons wouldn't enjoy free parking. If theater customers were charged, AMC argued in a flurry of correspondence, it would be a disaster. Reason: nowhere in America do moviegoers like to pay for parking.

Though the crisis was hidden from public view, insiders were scrambling to deal with it. If AMC sank under the weight of a parking tariff, the entire River Park Square redevelopment would be jeopardized. The bond prospectus indicated AMC would account for nearly half of all garage revenues, yet AMC expected free parking. Because the City of Spokane's general fund and bond ratings were ultimately on the line, it, too, faced a financial catastrophe.

The AMC standoff was not the fault of the PDA or the city. Its cause was in inexplicable lapse by the contract lawyers for RPS.

How did this confusion come about? Cowles real estate companies secured AMC's participation in River Park Square with a lease signed on November 11, 1997. It was a curiously ambiguous contract. On the one hand, it promised that AMC "customers, employees and invitees" would have full use of the garage "without being required to pay any charge or fee whatsoever for such use." Two sentences later, however, it pledged AMC to "participate in a parking validation program in Downtown Spokane sponsored by the Business Improvement District, Downtown Spokane Partnership, or equivalent entity."

The charges to AMC of that validation program were not specified. As a result, it seemed AMC had written a blank check. Why contract administrators for both River Park Square and AMC tolerated such uncertainty remains unclear. Whatever the reason, it set the stage for at least three serious and simultaneous conflicts.

First, there was the matter between AMC and its landlord. Would moviegoers get free parking or not?

Second, $31 million dollars of bonds had already been sold to finance the $26 million purchase of the garage. The bond prospectus, relying on projections from Indianapolis-based Walker Parking Consultants, told prospective bond purchasers that roughly half of garage revenues would come from AMC patrons. But how could any money come from moviegoers if the lease said they were to park for free? And how could the prospectus make such a firm statement about anticipated revenue from an unresolved validation program?

The final conflict, of course, was with the citizens of Spokane, who were told the project was economically sound and would not endanger city finances.

The AMC letter that triggered the showdown has not yet been provided as part of the public record. Its existence is noted in an August 13, 1999 letter from former PDA president Terry Novak to bond counsel Mike Ormsby.

"We now understand that AMC is asserting that on June 8, 1999, it learned for the first time that their patrons will not benefit from free parking," wrote Novak.

Even before learning of this incomprehensible misunderstanding, Novak and the PDA were worried about the new parking rates. The PDA had already quietly decided to make an enormous compromise in order to help theatergoers. The agency agreed to lower parking rates in evenings and on Sundays, and did so, Novak says, believing it had the full support of the River Park Square developer. Downtown Spokane Partnership president Mike Edwards confirms Novak's insistence that the developer supported these reduced parking charges.

Several observers, including Bob Glatzer, a former River Park Square contractor and current member of the PDA board, warned the 1997 city council repeatedly that garage revenue projections were wildly optimistic. Internally, city staffers quietly did their own discounted calculations of revenues, but even these turned out to be greatly in error.

What Novak's August 13, 1999 letter reports is a stunning financial blow. "Lastly, we have reviewed the Walker Parking Consultant revenue analysis dated June 12, 1999, as revised and received on August 6, 1999, that projects in the year 2001, as revised with flat-rate parking charges of $2.00 after 5 p.m. and on Sundays, revenues will be insufficient by approximately $1,240,000 [and] annual revenues are projected to be insufficient by approximately that amount into the future."

This was a big problem, and Novak's letter forcefully presented it.

In order to fulfill its obligations, he wrote, the PDA "Board believes the projections as stated in the [new] analysis are unacceptable and, unless a solution is found to this matter, is of the view that it will need to meet with the city council; and, that due to these unexpected changes, it will be unable to lease the Facility."

A Line in the Sand

There was nothing complicated about Novak's demand. Unless Betsy Cowles could offer some protection for the PDA in exchange for its help with the AMC problem, the PDA would not sign the papers, thereby withholding from Cowles the $26 million held in escrow. A deal worth nearly $50 million over 20 years to the River Park Square developer would not be consummated. Or so it seemed.

To protect the bondholders' investment, the PDA had to insure that the terms contained in the bond prospectus were honored. The responsibility for that fell on the shoulders of PDA president Terry Novak. It was a responsibility that came with considerable legal authority and no small amount of practical leverage.

Oddly, the only two solutions Novak suggested in his letter didn't make much sense weighed against the problem. They were: 1) reinstate the garage parking rates described in the 1998 bond sale documents (with theatergoers paying $4.50 to park), or similarly, 2) raise parking fees enough to cover the $1.2 million-per-year deficit that Walker had begun to project. But AMC was already registering sticker shock, threatening to leave the mall or urge its customers to park elsewhere. For this reason alone, Novak's ideas were impotent and conveyed that the PDA felt its back was up against a wall.

Within the legal confines of the deal Novak was trying to manage in August 1999, there was an important stipulation: city money could not be used to pay off the bonds but only to cover operations and maintenance. The bonds were PDA's responsibility.

Because of that, as Novak informed bond attorney Ormsby, the authority had to set parking rates high enough to retire the bonds. But the PDA had just lowered the rates, an action clearly undermining PDA's (and Spokane Downtown Foundation's) obligations to bondholders and others.

Would the PDA and the foundation call a time out in order to restructure the deal to ensure they could honor their commitments?

Novak never informed the council of the crisis. He reasoned this task belonged to Roberta Greene and Orville Barnes.

On the eve of River Park Square's grand opening, Novak's letter to Ormsby represented the last best chance to keep Spokane taxpayers out of the box canyon they're now trapped in. (See sidebar, "Box Canyon.") Ormsby's response to Novak appears to have been orchestrated with Roy Koegen (who drafted Novak's letter). It underscored the PDA's predicament and sided with the agency's efforts to bring some balance to the garage deal and square it with promises made to bondholders and the city of Spokane.

The Securities Exchange Commission does not regulate the municipal bond market as it does the stock market. In municipal bond sales, the bond counsel is the cop on the street. In this case, that was Mike Ormsby. It was up to Ormsby and his colleagues at Preston, Gates & Ellis to be sure the law was followed in order to protect bondholders' interests. It was also their responsibility to certify the deal complied with federal tax rules and securities disclosure requirements.

Ormsby passed along Novak's letter to River Park Square attorney Duane Swinton on the day he received it, August 13, 1999, and added a letter of his own.

"We feel obligated to pass this letter on to you and your client, and express our concern about the transfer of the Facility on or before August 20, 1999, unless the questions raised in the Authority's letter are answered and the Facility is completed and a Certificate of Occupancy is issued," wrote Ormsby.

Ormsby even offered a solution, one which required the developer to make a major concession. He wrote: "We certainly do not want to be presumptuous in suggesting to you or your client how these issues might be resolved, but in addition to the suggestions made by the Authority in its letter, there is at least one more option to consider. Since the purchase price of the Facility was based on the revenue stream expected to be generated by the Facility, it may be appropriate to consider adjusting that purchase price to reflect the revised revenue stream based on the most recent estimates developed by Walker given the change in assumptions."

In other words, the justification for the high $26 million purchase price Betsy Cowles was charging for the garage was the high revenue it was expected to generate. With that revenue estimate now being substantially lowered, the only way Ormsby could see to avert a financial meltdown was to bring costs into line with expected earnings.

Cowles's Reaction

Betsy Cowles apparently didn't like Ormsby's idea; nothing ever came of it. She clearly didn't like Novak's letter, now a public document, which risked public attention to this 11th hour crisis. What we know of her response comes from notes taken at an August 16, 1999 board meeting of the Spokane Downtown Foundation (SDF).

Present at this meeting was Tracy Richter, the executive director of the PDA. Also an aide of Roy Koegen's, she was asked to attend the key meeting because Koegen had a schedule conflict. Richter was used to taking extensive meeting notes.

Although her lawyers created the Spokane Downtown Foundation, Betsy Cowles insists that the organization that would give her the $26 million check for the River Park Square garage operates independently. Her regular attendance at SDF board meetings, she explained in an interview in April 2000, was to ensure the board stays "up to speed" on matters "vis--vis the city and the PDA."

"Ms. Cowles stated that she was upset about the letter from T. Novak now public record," wrote Richter. "T. Novak letter that makes it public and wants it protected from public... Asks that all future letters come from Roy Koegen." Also noted: "Cowles-Thinks PDA's request to have long term solution impossible."

Key documents about the AMC crisis are missing from both the files of the PDA and the City of Spokane

Judging from Richter's notes and a subsequent memo she wrote to Koegen, Cowles apparently assumed that if letters of PDA's concern came from PDA's attorney, Roy Koegen, they would be protected from journalists and the public by a curtain of attorney/client privilege. On the other hand, letters written by the president of a public agency were clearly public documents.

The irony is that Novak's letter was written by Roy Koegen, according to Novak, Koegen, and Ormsby. Because Cowles declined an interview request for this article, it is difficult to know what she meant by her reported comment that she considered PDA's request for a long-term solution to be impossible. Whatever it meant, Cowles's recorded directives raise several important issues, particularly in light of her other responsibilities. (Cowles is the top executive at Spokane's NBC broadcast affiliate and one of two board members of the company that publishes Spokane's only daily newspaper.)

For one thing, her reported remarks at the August 16, 1999 SDF board meeting suggest that she expected both entities to heed her wishes. But would they?

As Novak explained in his August 13 letter, his role with the PDA put him in a position to do far more than make suggestions. "The Authority is required to set parking rates in an amount sufficient to provide revenue to pay all expenditures...." If the PDA was going to approve the lease that Cowles wanted the agency to sign, the PDA would be contractually bound to enforce conditions of the lease, including a provision that revenues from parking customers be sufficient to provide a 25% cushion above minimum debt service requirements. Much hung in the balance of Novak's and the PDA's decision-bondholder investment, Spokane's fiscal health, and several millions of dollars in garage sale proceeds that Cowles planned to put into the mall.

Here was the showdown. Would these insiders exercise their legal and financial responsibility?

The record shows Betsy Cowles didn't blink. Novak and Koegen did. It was the PDA and the foundation who responded as though Cowles and her lawyers had them over a barrel, rather than the other way around. The PDA signed its lease and the foundation delivered its $26 million check without any concessions from Cowles and her development team to address the imminent revenue shortfall.

Continued...

Copyright 2001 by camasmagazine.com