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Whistling Past the Graveyard

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.)

But not everyone's convinced. "The city has its neck stuck out a mile long for no real commitment," says John Mannillo, a downtown real estate owner and broker who also ran for mayor in '93. "I'm sure one of the reasons they couldn't get local financing is that software is a risky industry, and no one knows what's going to happen. That's why the risk goes way up after six years."

Mannillo wasn't always so sour on the project. "I'm not against corporate welfare," he says, "as long as we get a fair return. But you do have to examine what the return is and what else we could spend our money on. I'd like to have a Porsche, but I can't afford one right now. And I don't think St. Paul can afford this."

There are other problems, Mannillo says, with the deal's structure. For one thing, the city has yet to cobble together the financing for the other part of the project--clearing the land, building the parking ramp, and sandwiching in some retail shops. If things go well, all that will cost $37 million. Then there's the cost of future improvements and repairs, possibly major ones if Lawson or The St. Paul choose to leave after their leases run out. Mannillo estimates fix-up costs of up to $23 million for the building and ramp by the time both are 15 years old. City officials dispute that figure, saying any improvements are more than covered by $10 million in reserve funds. But parts of that same $10 million are supposed to cover a default, or buy down accumulated interest, or make up for construction overruns. "Every contingency you ask them about, they're using that $10 million," Mannillo says. "And if everything works out, they'll be fine. But if they run into more than one problem at a time, the whole house of cards will come crashing down on them."

It's happened before. In the 1980s, the St. Paul Port Authority was lending money left, right, and center for office buildings and glitzy retail projects, many of which eventually defaulted. To this day, the Port Authority is sitting on buildings developers gave up when the cash flow dried up. One of its bond funds is headed for default, and downtown lease rates are only now starting to rebound from their early-'90s slump.

So why is the city so anxious to jump back into the fray? Supporters of the Lawson deal say it's obvious: Redeveloping Block 39 will be the crown jewel of downtown's renaissance. Nearby property values will rise; other firms, especially computer companies, will move downtown; and a near-mystical optimism will spread over the river city. "The light is shining on downtown St. Paul once again," Coleman said in announcing the project back in January; the Pioneer Press editorial page echoed that Lawson's return "switches on a bright new light" in the capital.

But bright lights may not be the only thing guiding St. Paul's leaders this election year. Coleman's been doing well at the polls, but all politicians like to go into November with something concrete to show. A "Renaissance-style" tower on Rice Park might be just the ticket--especially if the mayor's other big accomplishment, landing an NHL hockey team, starts to look dicey after all.

Actually, the connection between hockey and the Lawson deal is more than just metaphorical. A few months ago, the St. Paul City Council voted to approve some $65 million for a new NHL rink; Coleman and Gov. Arne Carlson told council members the Legislature would give the city that money next spring. But lawmakers don't sound so thrilled about that idea. And while city officials still insist the state must come through, they're quietly working on fallback schemes. Under one of them, the arena would be paid for with a loan against property taxes from the yet-to-be-built Lawson tower; a vote to allow that is set for September 10.

Whatever the motivation, Coleman's gamble appears to be paying off. Through the six months Lawson has been in the headlines, no serious political opposition has materialized. Would-be critics were too busy trying to track the ever-shifting project details; community-group protests got lost in a tangle of City Council delays. Council President Dave Thune, who a few months ago griped that the city was taking a lot of risk for "a midsize office building and some retail space," has turned into the project's lead sponsor. DFL mayoral endorsee Sandy Pappas's efforts to raise a stink have fizzled. Right now, it doesn't seem as if anything will stand in the way of demolition on Block 39, which the city hopes to start before the deep freeze. Then construction will start, with a completion target of spring 2000.

 

Lawson Software will be watching from a safe distance. The company has been "trying to stay out of the political arena," says spokeswoman Nancy Harrower. "All we're interested in is a facility that will help us run our business and grow our business. And it just happens that what's been coming from St. Paul has been ideal." As Coleman put it after a last-minute negotiating trip to Northeast Minneapolis, "Bill Lawson is a smart guy. He gets it."


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