Articles

Value of Settlement Analysis

The City's problematic undertakings in connection with the River Park Square project included backstopping or providing "credit enhancement" through its loan commitment to $22.65 million in HUD notes and $31.465 million in garage bonds: a total of over $51 million in debt. With the financial failure of the garage, shortfalls in repayment of its HUD loan and misleading disclosure in the sale of the bonds, the City found itself, as the Washington Court of Appeals would later put it, engaged in "damage control."

As summarized below, the litigation and settlement approach favored by a majority of City officials enabled the City to mitigate tens of millions of dollars in damages. Through its settlements with the bondholders and the Cowles, the troubled garage bonds and HUD notes were retired. If the federal court's decision dismissing the City's claims against Prudential is reversed, the City will have the opportunity to seek further contribution, from Prudential, toward its remaining cost.

(Note that this analysis does not account for cost or loss that would be equivalent under both scenarios, such as unrepaid PDA loans and defense fees and costs.)

Reducing realized exposure:

	City's position prior to settlements and trial	City's position following settlements and trial
Potential accrued PDA loan liability	-8,300,000	-6,049,724	At the time the City retired the garage bonds, it had collected and set aside $8.3 million in parking meter revenues, all of which the Cowles claimed were owed to RPS entities by the PDA. Under the terms of the settlement agreement with the Cowles, the RPS entities agreed to accept the lesser amount. The PDA also agreed to accept the City's payment of the lesser amount as fully discharging the City's obligation to make loans to the PDA.
Garage repair expense	-1,070,000	0	The City's engineering expert, Greg Jacobsen, testified that $1,070,000 was the "cost to cure" repair shortfalls from what the Cowles had agreed but failed to do prior to the 1999 sale of the garage to the Spokane Downtown Foundation. According to Jacobsen, the rebar in the garage was "cooking" and the repairs were urgently needed. The Cowles' expert agreed that the work identified by Jacobsen was supposed to have been done and had not been. He viewed the repair work as less urgent and testified to a lower "cost to cure."
Garage property tax liability	-1,774,120	0	This was the real estate tax liability owed Spokane County for the garage as of October 2005, according to the County's summary judgment submissions in the declaratory judgment lawsuit over the tax-exempt status of the garage. The City challenged the tax liability, and won.
Realized HUD loan losses	-1,500,000	-881,000	By December 2004, HUD had tapped something in the neighborhood of $1.5 million in City HUD loans for missed interest payments. The Cowles originally agreed as part of their settlement to repay $1.05 million in distant years. In connection with their later decision to defease the City's HUD loan, the Cowles prepaid that future obligation for the discounted price of $618,674.
TOTAL	-12,644,120	-6,930,724

Reducing future exposure:

	City's position prior to settlements and trial	City's position following settlements and trial
Potential future PDA loan liability	-26,794,749	0	This figure is derived from revenue projections prepared in Spring 2004 by Bruce Allen, the City's appraiser, based on five years' worth of actual garage operations. It reflects the fact that the PDA would remain obliged to pay rent under the terms of an onerous ground lease, absent settlement with the bondholders and bond insurer, and retirement of the bonds. If this amount did not prove to be loan liability, it would be securities loss liability to the City or others. The shortfall for which the PDA would have requested loans is discounted to present value using a rate of 4.5%, which is in the middle of the range of interest rates that is being paid on the City's settlement debt.
Value of ability to acquire garage	385,000	5,500,000	By acquiring the garage prior to the 2019 maturity of the bonds, it had a value that Bruce Allen estimated at $3.4 million if it were subject to the original, onerous ground lease and $7.5 million if the City were able to pay lower, fair market value ground rent. By acquiring the garage early, the City was able to trade it as part of the exchange for the Cowles' letter of credit backstop of the HUD loan. The Cowles disputed the City's figure for fair market value ground rent, so a $5.5 million mean value is attributed consistently in valuing the garage for both purposes. Bruce Allen calculated the present value of the 2019 "reversion" value of the garage at between $195,000 and $572,000. I have used a mean here as well.
Potential future HUD loan liability	-8,500,000	-5,500,000	There was a broad range of projected future exposure of CDBG funds to the HUD loan. At a minimum, there was a risk of loss as large as the value of the garage that the City agreed to exchange; its deemed value here (and consistently, above) is set at $5.5 million. Judge Shea found an additional $3 million value above and beyond the value of the garage in holding that the reasonable amount of the City's settlement of the bondholder litigation with the Developer was $5 million rather than the $2 million. The $2 million in released parking meter funds is reflected above. The $5.5 million garage value and $3 million additional settlement value found by Judge Shea are reflected here.
Liability to bondholders, at trial or in settlement	unknown	-29,800,000	$29.8 million is the amount the City was required to pay to U.S. Bank to settle the bondholders' and bond insurer's claims, after application of Walker's and Foster Pepper's contributions toward that settlement. In exchange for the $29.8 million payment, the bond trustee agreed to call and retire all of the outstanding bonds, thus freeing up the garage for transfer to the City and ending the PDA loan obligation. For the claims that were to be tried in April 2004, the potential liability was $27.4 million, although $4 million of the attorneys fees and costs recoverable by the bondholders would have been returned to the indenture trustee, to be available for debt service on the bonds or future attorneys fees. The approximately $18 million in bonds tendered by the bondholders would be transferred to liable defendants in proportion to their fault and liability. The approximately $14 million in bonds that were not tendered would have remained in the hands of bondholders. The City's co-defendants, the bond insurer and the Cowles would have continued their demand that the City make loans to the PDA until all of the bonds were retired.
Preston Gates settlement	0	1,300,000	Cash paid by Preston Gates to settle the City's contribution claim.
Elimination of income tax problem	---	---	No amount is attributed, but as a part of the City's settlements with the plaintiffs, the Foundation and Preston, it received assignments of tax liability claims and standstill agreements that helped ensure that Preston Gates would take care of the federal income tax liability issue, which Preston did in early 2006.
Foundation settlement	0	800,000	Cash paid by the Foundation's insurer to settle the City's contribution claim.
Perkins settlement	0	4,250,000	Cash paid by Perkins Coie to settle the City's malpractice claim.
St. Paul Insurance settlement of assigned claim	0	950,000	R.W. Robideaux & Company settled the City's contribution claim by assigning its rights under a $500,000 insurance policy issued by St. Paul, which had disclaimed any liability to indemnify or defend Robideaux against the City's claim. Bob Robideaux also agreed to waive the attorney-client privilege with respect to his communications about the RPS project. The City obtained summary judgment for bad faith against St. Paul and a determination that its settlement with Robideaux was reasonable, leading to St. Paul's agreement to pay $950,000 cash to settle. The $950,000 is not added into the totals below, because Judge Shea's attribution of a $5 million to the settlement with the Cowles also encompassed any recovery the City might obtain from the Robideaux settlement.
Developer settlement	---	---	The value of the Developer settlement is already reflected in the released PDA loan funds and the reduced exposure on the HUD loan.
Improvement in City bond rating	---	---	No amount is attributed, but the City's settlement of the bondholder claims was followed by Standard & Poor's raising its bond rating for city bonds from BBB to AA-, a five-step increase that has reduced the City's borrowing cost.
Potential recovery from Prudential	---	---	No value is attributed yet.
TOTAL	-34,909,749 PLUS any liability at trial or cost of settlement	-23,450,000 LESS any future recovery from Prudential LESS value of lower capital costs due to increased bond rating