Wednesday, July 30, 1997 - Page updated at 12:00 AM

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Corrected version

Criminal Probe Clears Rice Over Hud Loan -- But Application Process Under Question

Seattle Times Staff Reporter

Federal investigators found no evidence that Seattle Mayor Norm Rice, who was accused of misleading the U.S. government, committed criminal wrongdoing when he successfully obtained a $24 million low-interest loan to resurrect the vacant Frederick & Nelson building, according to documents released by the city yesterday.

But investigative documents did not resolve issues of possible violations regarding the loan-application process. An audit of the loan by the Department of Housing and Urban Development (HUD) is expected later this summer.

The special agent in charge of the HUD criminal investigation declined to discuss the case.

But documents released by the city indicate the investigation was closed at the end of last year.

In a December 1996 letter to U.S. Attorney Kate Pflaumer, HUD Special Agent Noel Tognazzini concluded no federal criminal statutes had been violated during the 1994 application process for the "Section 108" loan to buy the vacant 10-story building.

The city obtained the investigative file through a Freedom of Information Act request.

"I'm very glad to have this behind us," Rice said in a statement. "We used this loan program for exactly what it's intended for: community revitalization."

However, at least two HUD officials had expressed concern about the loan before the findings, investigative documents show.

Robert Duncan, deputy director for the Office of Block Grant Assistance in Washington, D.C., in a memo to HUD Inspector General Susan Gaffney, went so far as to suggest that the loan application was part of a pattern by Nordstrom to obtain money for its own benefit.

Nordstrom spokeswoman Brooke White called the suggestion irresponsible and untrue.

"Nordstrom has not nor will it receive any HUD money," White said. "We have not participated in the acquisition of HUD loans."

White said Nordstrom committed to each of the three projects before developers sought financing.

"We weren't involved in their financing at all," she said. "These developers sought HUD financing totally of their own doing."

In the $400 million, three-block project, the Frederick's store will be renovated as Nordstrom's new flagship. Pine Street Associates will renovate the existing Nordstrom - kitty-corner from Frederick's at Fifth Avenue and Pine Street - as a new retail development.

Completion of financing allowed Nordstrom to purchase the F&N Building for $26.72 million. Nordstrom transferred rights to its present site to Pine Street Associates.

Seafirst Bank agreed to back the $24 million loan from HUD used to help buy the F&N property. The loan will be repaid by Pine Street Associates over 20 years.

A complaint by longtime Rice critics John Fox and Jordan Brower of the Seattle Displacement Coalition prompted the inquiry.

The allegations stung Rice just as he was emerging as the front-runner to fill former HUD Secretary Henry Cisneros' post. Andrew Cuomo later got the job.

The complaint accused the city of inflating the downtown crime problem, misrepresenting the health of the retail core and disguising the true intent of the project.

The complaint also alleged that to buttress the case that the building was falling apart, the city relied primarily on a study done by the Callison Partnership, a private architectural firm employed by Nordstrom.

In his letter, Tognazzini said some of the information in the city's application "may have been misleading or questionable."

But the inquiry found no evidence the information was intentionally misrepresented to HUD by Rice or anyone else.

The Section 108 loan permits cities to borrow funds at a low interest rate. To qualify, a project must benefit low- and moderate-income families, eliminate blight or address urgent community development.

Seattle asserted the building, then vacant for two years, constituted "spot blight."

John Peters, acting director for HUD's office of Community Planning and Development in Seattle, raised two concerns about the Frederick & Nelson application in a 1994 memo to Cuomo, then an assistant secretary.

He said there was very little deterioration outside the building and that most of the work to be done would include interior upgrades.

His second concern was whether Seattle could meet HUD's requirement that the city spend at least 70 percent of the loan to help low- and moderate-income people.

In an interview included in the investigative documents, Peters said his memorandum was probably reviewed by HUD, but that to the best of his knowledge, his office never received any response.

The loan was granted to the city and the money was given to Pine Street Associates, saving the developers an estimated $3 million to $6 million in interest payments over 20 years.

In a memo to Gaffney, dated Dec. 5, 1996, Deputy Director Duncan said Nordstrom was involved with two other Section 108 proposals, in Norfolk, Va., and Spokane.

In Norfolk, the city proposed to use a $32 million Section 108 loan to build a 200,000-square-foot store that it would lease to Nordstrom.

HUD questioned whether the project would be able to meet the requirement that it benefit low- and moderate-income people. The city could not obtain such commitments from Nordstrom and did not follow through with the loan, according to the memorandum.

The $24 million Spokane proposal was to assist in the development of a shopping mall that would have Nordstrom as a tenant. The loan proposal was to assist the entire project.

Duncan said local groups raised issues about the loan. The loan was approved yesterday. In March, a King County Superior Court judge dismissed claims by the Displacement Coalition that the city violated the state constitution by acting as a conduit for the loan.

Published Correction Date: 07/31/97 - Because Of An Editing Error, The Times Incorrectly Reported Yesterday How A Low-Interest Federal Loan Was Used In Downtown Seattle. The U.S. Department Of Housing And Urban Development (Hud) Granted A $24 Million Loan To The City Of Seattle. Pine Street Development, Then Known As Pine Street Associates, Used The Loan To Acquire The Frederick & Nelson Building. Nordstrom Obtained The Building Through A Swap With Pine Street Associates. The Story Incorrectly Said Hud Was Not Proceeding With A Loan Proposal Involving Development Of A Spokane Shopping Mall. In Fact, That $24 Million Loan Was Approved Tuesday.

Copyright (c) 1997 Seattle Times Company, All Rights Reserved.


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