Whistling Past the Graveyard

The St. Paul City Council's agreement to spend $101 million to bring Lawson Software downtown isn't as waterproof as Mayor Norm Coleman has promised.

You couldn't blame Bill Lawson for feeling like a lucky guy right now. Consider: In 1975, he started a little computer-consulting firm with his brother, Richard. Twenty-two years later the outfit has 1,100 employees worldwide and is considered one of the top three companies in its field, writing specialty software applications.

It doesn't stop there. Two years from now, if things keep going as planned, Lawson and his company will move from their slightly grungy headquarters off Minneapolis's Industrial Boulevard to a brick-and-glass tower in the heart of downtown St. Paul. They'll be able to walk to lunch at trendy cafes, burn off extra pounds on the running paths by the Mississippi, or stroll across Rice Park to check out the shows at the Ordway.

And it gets better yet. Lawson won't have to raise money for the new building or worry about what happens if business takes a nosedive. Nor will its developer, David Frauenshuh. The city of St. Paul will deliver a prime piece of real estate free, finance the building, and throw in a brand new parking ramp. All the software makers have to do is promise to pay rent for 15 years--and perhaps mug for the cameras a few times as politicians celebrate downtown's renaissance.

Even for a city that raised publicly financed development to a high art, the Lawson deal--approved by the City Council last week and set to close August 8--sets a new standard. Never before, it seems, has any city built, owned, and operated a whole building for a company. Unless, of course, the company was a sports team. "This is what we have been warning about for years," says Art Rolnick, an economist at the Federal Reserve in Minneapolis. "Sports franchises are just the most visible example" of footloose companies squeezing cities for ever sweeter deals, "but any mobile business can play the game."

So what exactly is the deal? That part is still a little vague; even as the City Council voted on the $101 million project last week, key details had not been finalized. What is known is that the amount of money involved has ballooned since Frauenshuh, a supporter and campaign contributor of St. Paul Mayor Norm Coleman, first approached the city. Back then, all he was looking for was the usual deal--free land, maybe a tax break, some "credit enhancement" to the tune of maybe $25 million.

But when word of the negotiations got out, Minneapolis officials complained that they violated an informal agreement between the two cities not to raid each other's companies. Talks heated up as both cities worked up bids, and by May the St. Paul City Council was voting on an offer Lawson and Frauenshuh could hardly refuse: Rather than helping finance the project, St. Paul would build it all. It would take out a $53 million loan, backed by its property taxpayers, and turn the money over to Frauenshuh for construction. It would also clear out the existing tenants on the block, demolish their buildings, and put up a brand-new parking ramp.

Frauenshuh's only substantial contribution was to be $300,000 in cash and a $5 million letter of credit. And Lawson's commitment consisted of a promise to lease two-thirds of the space for 15 years at above-market rates. Insurance giant The St. Paul Companies would fill up the rest of the space for six years. If all went well, the lease payments would cover the loans, the bondholders would make a profit, and the city would break even.

Just why the city took this unprecedented step remains something of a mystery. The official explanation is that downtown rents simply aren't high enough for the market to finance the kind of building Lawson and the city want: Only an investor who can forgo the profit, the reasoning goes, can afford such a project. An alternative theory suggests that the deal is too risky for private investors: What happens, critics want to know, if downtown takes another nosedive and rents plummet? What, for that matter, if Lawson goes belly-up?

The money people clearly have given this some thought. Canadian-based Newcourt Capital USA, the prospective lender for the project, considers only $23 million of the $53 million loan "investment grade"; that's the amount to be paid back during the six years when both The St. Paul and Lawson have committed to staying in the building. The investment firm washes its hands of the remaining $30 million to be paid off starting in the seventh year (by which time the accumulated interest brings the figure back to $46 million). If revenues from the building don't cover the payments for this amount, a letter from Newcourt to the city says, the city will be solely responsible.

That last detail doesn't show up in the city's description of the project. City officials say that's because there is nothing to worry about. A gorgeous new building in a prime location, they argue, can't fail to attract tenants or even buyers: "Actually, I'll be very surprised if by year 10 we even still own the building," says city Planning and Economic Development director Pam Wheelock. (Lawson and Frauenshuh both have options to buy the building.)

Next Page »