Taxpayers may find they co-signed store’s $11.75M loan

By Michael Yeomans and David M. Brown
TRIBUNE-REVIEW
Thursday, July 31, 2003

Could taxpayers be left holding the bag for an $11.75 million loan when May Department Stores Co. sells or closes its Lord & Taylor store Downtown?

That is what Mayor Tom Murphy and other city officials are trying to figure out in the wake of the announcement that May intends to leave the Downtown site as part of a restructuring of its Lord & Taylor division that will result in the elimination of 32 of its 86 stores.

It also raises the specter of what could happen if Federated Department Stores Inc. should decide to close its struggling, taxpayer-subsidized Lazarus store on Fifth Avenue.

Lord & Taylor’s so-called soft loan is the result of a complicated transaction engineered by Stephen Leeper when he headed the city’s development efforts for Murphy. Leeper now is executive director of the city-county Sports & Exhibition Authority.

To finance the store, the city’s Urban Redevelopment Authority bought two parking garages from the Pittsburgh Public Parking Authority. The URA then leased the garages to a Chicago company that paid $28 million up front and agreed to pay $172,500 annually for 50 years.

Of the $28 million, $12.3 million went to Kaufmann’s to buy out leases it had in one of the garages. May, the parent of Kaufmann’s and Lord & Taylor, received $2.3 million for improvements it made to a garage. Lord & Taylor received an $11.75 million loan, and handed $9 million to Mellon Financial Corp. to buy the former Mellon Bank headquarters.

Lord & Taylor has to make payments on the loan only when its gross annual sales Downtown exceed $35 million. It would have to pay 2 percent of gross sales over $35 million.

It couldn’t be determined whether that has ever happened in the store’s brief life.

Asked how the Lord & Taylor decision affects the loan, URA Executive Director Mulugetta Birru said, “Under the agreement, they are expected to operate the store as Lord & Taylor at least five years. If they don’t do that, they are in default of the loan.”

The store opened in November 2000.

Whether such a default would make the entire amount due and payable is uncertain, he said.

“We are reviewing that right now with the lawyers,” Birru said. “This came as a major surprise. They didn’t even call us.

“Six to eight months ago, I did speak to them and they had informed me that although their sales levels are low, they were considering they could still make the store work profitability.”

Leeper referred questions to the mayor’s office.

Pittsburgh Controller Tom Flaherty said he believes Lord & Taylor “never paid a dime” on the loan and could get out of town without ever repaying anything.

Flaherty said he will investigate the loan’s status.

“That’s something that we’re are certainly going to look at, and I would think it’s something that City Council may want to investigate,” he said. “Before the city acts, it’s imperative that the decision-makers know what the ramifications of this are. The ramifications to me don’t look good at all. It looks bad. There is a lot of public money invested in this department store, and it’s bad news that they are planning on getting out of Dodge.”

To build its Downtown store that opened in 1998, Lazarus received a $13 million loan from the city-sponsored Pittsburgh Development Fund. It has yet to reach the $41.7 million in annual sales that would require it to begin repaying the loan. In total, Lazarus received a $48 million public subsidy on the $78 million cost to build the store and a 500-car garage underneath it.

Lazarus officials could not be reached for comment yesterday.

Michael Yeomans and David M. Brown can be reached at myeomans@tribweb.com or (412) 320-7908.

This article appeared in the Pittsburgh Tribune Review © Pittsburgh Tribune Review