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Sunday, October 19, 2003 - Page updated at 12:00 AM

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Spokane downtown-revival deal gone bad fans financial, political firestorm

Seattle Times staff reporter

Coming tomorrow


With millions of dollars and control of the city at stake, Spokane's mall fight pulls ordinary citizens into the fray, and The Spokesman-Review is thrust into a national debate about monopoly media ownership.
River Park Square — a legacy of litigation


More than a dozen lawsuits have been filed in connection with River Park Square, a public / private mall redevelopment in downtown Spokane. Most are on hold pending resolution of the largest lawsuits.

The trial: Securities-fraud suit
Jurisdiction: Federal district court, Spokane; Judge Edward Shea
Trial date: April 2004
Plaintiffs: U.S. Bank Trust, the trustee for bondholders and seven institutional investors, including John Nuveen & Co., Salomon Smith Barney and Vanguard Group.
Defendants: City of Spokane, River Park Square, LLC (mall-development company owned by Cowles family), numerous bond underwriters, consultants and law firms.
At issue: Whether city and mall developers fraudulently misrepresented financial risks in the mall deal.
Relief sought: Repayment of $31.5 million in bonds issued to remodel parking garage.

First of two parts

SPOKANE — From where she sits, in an expansive office suite atop the castle-like Spokesman-Review building, Elizabeth "Betsy" Cowles peers down into the streets and sees this:

She and her brother, W. Stacey Cowles — heirs to a publishing and real-estate empire that has ruled the Inland Northwest for more than a century — will be shaping Spokane's future for a long time.

But from where Cowles' critics stand — mostly on the north side of the Spokane River, a rough dividing line between the city's social classes — that's precisely the problem. Their view up into Betsy Cowles' windows reveals a new generation of royalty that finally has pushed its privilege too far.

Class tensions over who runs Spokane are nothing new.

"We're a pretty big, tempting target," says Cowles, 41, whose family businesses include The Spokesman-Review, the city's daily newspaper. "To some degree, that goes with the territory."

But those tensions have erupted into a full-scale feud, spilling beyond the city into federal courts and the national press. Barring a last-minute truce no one expects, a securities-fraud trial is set for April in federal district court in Spokane. Named in a series of suits and countersuits: the city, the Cowles family, the state's largest law firms and some of America's most prestigious consultants and bond underwriters.

The reverberations have echoed all the way to Wall Street, sullied the city's bond rating and made avowed enemies of former Spokane friends and business allies. The cost to the city, the Cowles family — or both — could reach tens of millions of dollars.

The feud is over River Park Square, the first and very likely last public / private partnership between the Cowles family and elected officials of their beloved city. It is a shopping-mall finance scheme gone sour; a broken deal that could siphon federal money from Spokane's poorest citizens to its wealthiest — to make up for slow sales at the city's glamorous new Nordstrom store.

The implications might reach far beyond Eastern Washington: Some observers say the tiff, centered around a wealthy family with a stranglehold on local print and broadcast journalism, should be Exhibit One in the growing national debate over the dangers of monopoly media ownership.

Back in Spokane, some folks are saying that it's time for an end to the city's storied power structure — a small cabal that has controlled much of the public's business in private for more than a century.

"It's going to take a bomb" to blow away that 'company town' legacy," asserts plain-spoken City Council member Cherie Rodgers. "This trial is the bomb."

The fuse: A humble concrete parking garage.

A history lesson

To understand how Spokane got so tangled up over parking spots, you have to look back and see why the city was so desperate for that garage — and the mall attached to it — in the first place.

Spokane, one of the first white outposts in the Northwest, was first settled by fur trappers in 1810 and built by the people who won the West: loggers, missionaries, farmers, miners, millers and soldiers. With the arrival of the Northern Pacific Railroad in 1881, the town sprouting alongside the tumbling falls of the Spokane River became a commerce center, way station and shipping point — the only truly big hub between Seattle and Minneapolis.

Ten years after the first train puffed into town, William H. Cowles rode one out from Chicago, quickly buying and merging Spokane's dueling morning newspapers, The Spokesman and The Review. In 1897, to solidify a growing media and real-estate empire, he bought the last competing daily paper, the afternoon Chronicle, which the family would publish until 1992.

Cowles was one of a handful of civic titans who viewed downtown Spokane, which had been gutted by an 1889 fire, as a blank slate — a grand Western city waiting to be built from the ground up.

The civic renaissance began at the corner of Main and Monroe. A block away, Cowles' fortress-like Review building was, at century's turn, the tallest structure in town, complete with a penthouse residence for its owner and his wife.

Historians say the next three decades defined the early character of Spokane — and cemented the Cowles family's place in it. Rowdy, often-desperate workers regularly clashed with their well-heeled employers — industrialists who occupied showy mansions on oak-lined streets in southside neighborhoods such as Browne's Addition or, once the Indians were finally chased out, the South Hills.

The Cowles-owned newspapers hand-picked conservative politicians to control union Wobblies, drunken miners and other riffraff. Some measures were extreme: The city passed laws prohibiting most free assembly and public speech. Thousands of "radicals" were jailed for offenses such as the reading of the Declaration of Independence on street corners.

But in the boom years after World War II, the class wars cooled and Spokane blossomed into the heart of the "Inland Empire," the vast, largely unpopulated region between the Cascades and the Rockies. It came to boast a major airport, modern hospitals, ample shopping and a pair of notable universities.

For much of the 20th century, the geography of the interior Northwest was simple: You could pick up a Filson hat in Missoula, Boise or Walla Walla. But if you needed heart surgery or a master's degree, you headed for Spokane.

By the 1990s, mainstay logging and manufacturing industries had faded, leaving Fairchild Air Force base, schools and hospitals as the leading employers. A younger generation was lured by a slower pace and more affordable housing, surrounded by wide-open spaces and ringed by the beauty of the Cascade, Selkirk and Bitterroot Mountains.

But others were lured west by the high-tech fever gripping the Puget Sound. Growth in Tacoma threatened to knock Spokane into third place for state population bragging rights, each hovering below 200,000.

In the new jet-and-information age, Spokane no longer remained a must-stop for people in the mountain West. Too many retail dollars were skipping right past downtown Spokane, into suburban malls and on to Seattle, which was breathing new life into its downtown retail core.

From the sixth floor of the Spokesman-Review building, where the fourth generation of the Cowles empire was taking the helm, the future of Spokane didn't look nearly as secure as the past.

Primed for change

Betsy and Stacey Cowles were in their early 30s when their father, William Cowles III, died of a heart attack in 1992. They inherited a family business that now includes Spokane's NBC-TV affiliate, the local Journal of Commerce, insurance and advertising businesses and a feature-film special-effects company.

Stacey, now 43, succeeded his father as publisher of The Spokesman-Review. Betsy walked away from a Seattle law career to run the broadcasting and nonpublishing businesses, and manage the real estate.

She came home to what she calls a decaying, crime-pocked downtown that hadn't had a major facelift since the Expo '74 World's Fair. Two of four anchor retailers were gone, Nordstrom's lease was expiring and even The Bon no longer seemed a sure bet.

"We were at that brink of being the next Tacoma," she says. "In the bad way you used to look at Tacoma."

So she looked to Seattle, where developers, business owners and political leaders had teamed to build Pacific Place, a towering downtown shopping mall, anchored by a gleaming, remodeled Nordstrom store and subsidized by its own controversial, public / private parking garage.

The Cowles' siblings decided downtown Spokane needed a similar rebirth. And they saw no better place to nudge Spokane into the next century than the very spot their forebears had thrust it into the last.

Just a block from the corner where Spokane rose from the ashes in the 1890s stood River Park Square — a decidedly nonglamorous shopping center owned by the Cowleses. They would rebuild it around a glitzy new Nordstrom store which, in turn, would attract a high-tech movie theater and other plum tenants.

It was an expensive proposition — more than $100 million. The Cowles family, whose net worth is not publicly known, had never borrowed money to build anything, Betsy Cowles says. But this was "an all-new scale" for the family.

They explored private financial partners, she says, but the projected returns penciled out to half what most wanted. So, borrowing a page from the Seattle deal, they turned to the city, which had reason to support a downtown revival.

Given their conflicting roles — landowners and developers on one hand, media owners and public watchdogs on the other — the Cowles' kids knew they were stirring up what Betsy calls "a magic mixture" for criticism.

"We're a family that's been here a long time, a relatively big business in town, and we happen to own the newspaper," she says. "We asked ourselves, are we sure we want to do this? But the other part of it was, well, if we don't do it, nobody else would have."

In 1997, the City Council approved a historic deal: a $114 million, public / private partnership to rebuild River Park Square, sell its revamped parking garage to the city, lock in Nordstrom — and save downtown.

Two years later, the first shoppers waded into the shiny glass-and-steel mall, which now anchors a visibly revitalized downtown. Precise calculations aren't possible, but the Cowleses claim the new mall has spun $1 billion in additional downtown development.

"On a number of levels," Betsy Cowles says, "it's been a phenomenal success."

But for one major flaw:

The parking garage — in many ways, the financial cornerstone of the mall deal — was all but destined to lose money. Today, it is essentially bankrupt.

Plenty of fine print

The full story of what went wrong is hotly contested by the phalanx of lawyers, some under gag order, who are sifting through rooms of documents and exhibits to prepare for next April's trial.

But the short answer is simple: The main difference between Spokane's mall deal and Seattle's was that in Seattle, everybody got paid.

Almost every facet of River Park Square financing now is disputed in court. But interviews, city records and court depositions offer a glimpse of how the deal was supposed to work, and why it collapsed.

First, consider the two-prong public "participation."

• The city would borrow $22.65 million from a federal Housing and Urban Development fund targeted at urban blight. That money would then be loaned to the Cowleses to build the new Nordstrom. The Cowleses would repay the loan to the city — and the city to the feds — from a variety of sources, primarily Nordstrom rent, which is pegged to gross store sales.

• The city and Cowleses would create a nonprofit corporation to buy the mall's renovated and expanded parking garage from the Cowles for about $26 million. That money would be raised by issuing $31.5 million in tax-exempt bonds. Bondholders would be repaid with revenues from the garage.

Simple enough. But critics say the public never saw all the fine print:

• The city issued $31.5 million in bonds for a parking garage most parties agree was worth less than half that. (In a 1998 memo filed with the city, building inspectors agreed with the Cowleses' contention that they had been wrongfully charged for building permits for a $26 million project whose true value was about $14.5 million.)

• After 20 years, the city will own the garage — but not the land it sits on. Instead, the city must lease that property, valued at the time of the deal at about $2 million, for an additional $18 million over 20 years — then renegotiate the lease.

• The consultant's garage revenue forecasts were, in retrospect, completely unrealistic. Spokane's lukewarm reception to hourly parking rates, coupled with the garage's sky-high purchase price and ground lease payments, has kept the garage from breaking even.

But the city had agreed to cover any shortfalls by reimbursing the Cowleses with money from citywide parking-meter revenues. The result: The public is on the hook for about $2 million a year — as much as $40 million in street funds over the life of the package.

• A profitable parking garage also was key to repaying the HUD loan that built Nordstrom. In an odd circular arrangement, the city was to pay its garage ground lease payments to the Cowleses from garage revenues. The Cowles companies were then to pay a portion of this rent back to the city, as one of three sources of repayment for the HUD loan.

But with two of those sources now tied up in court battles and the other — Nordstrom rent — proving insufficient, the loan is on the brink of collapse.

If the shortfall continues, who pays?

Eventually, the people of Spokane — perhaps the poorest ones. The city pledged its annual HUD grant as loan collateral in lieu of a full guarantee by the Cowles companies. This money normally pays for roofs, siding, sidewalks and other home improvements in a city where more than half the children in public schools qualify for free or reduced-price lunches.

Just how much HUD money might be diverted by the federal government to pay off the Nordstrom loan is unclear. But the city ultimately is obligated for the entire $22.65 million, plus interest.

City officials estimate repayment shortfalls of $6 million to $14 million over the life of the loan.

If the gung-ho sales projections for the mall and garage had held true, everyone would have been paid — and all this fine print would have remained just that.

But financial cracks began to show as soon as the mall opened. Nearly everyone with a stake in the deal quickly sued everyone else, hoping to shift blame and limit financial exposure.

And on the streets of Spokane, the more ordinary folks learned about the Cowles family's "gift" to the city, the angrier they got.

Ron C. Judd: 206-464-8280, or rjudd@seattletimes.com

Copyright © 2003 The Seattle Times Company

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