THE WATCHDOGS: City Hall's $62 million blunder

Ending a costly court fight that City Hall blundered into, Mayor Rahm Emanuel’s administration has paid more than $62 million to settle a dispute with the private operators of four city-owned parking garages downtown, records show.

The payment last month ended City Hall’s long and unsuccessful legal fight against claims from investors in the four privately operated garages under Millennium Park and Grant Park.

The dispute dates back six years. That’s when aides to former Mayor Richard M. Daley mistakenly approved a parking garage in the new Aqua building at 225 N. Columbus Dr.

Under the 2006 privatization deal, the Daley administration received $563 million to lease the parking garages for 99 years. As part of the deal, the city wasn’t supposed to allow any new competitors in a vast area surrounding the garages.

But less than three years after the Chicago City Council approved the deal, the Daley administration allowed the Aqua garage to open to the public just a block from the nearest of the privatized lots.

Arguing that that violated their deal, the operators of the garages filed a claim against the city, asking for at least $200 million.

The case went to an independent arbitrator, who ruled in 2013 that the city had breached the contract and should pay $57.8 million in compensation to the parking garage investors.

Emanuel’s lawyers took the fight to court, suing to overturn the arbitrator’s ruling. But first a Cook County judge and then the Illinois Appellate Court rejected the city’s arguments.

The Emanuel administration sued despite a clause in the concession deal dictating that it would be up to an independent arbitrator to decide any disputes with the private investors.

In ruling against the city in November, a three-judge appellate panel unanimously upheld the decisions of the arbitrator and Cook County Circuit Judge Sophia Hall and scolded city officials.

“This case involves two sophisticated parties that willingly chose arbitration as their preferred method of resolving their disputes,” Justice James R. Epstein wrote. “Now, with the result of that choice — a final and binding arbitration award it wishes to avoid — one of the parties turns to the court for relief.”

Epstein said the court couldn’t side with the city “irrespective of the unfortunate impact upon taxpayers.”

The payment is another blow to an administration facing a financial crisis.

It also offsets the gains the city received in what Daley once touted as “an outstanding deal for Chicago taxpayers.”

The Emanuel administration’s top lawyer, corporation counsel Stephen Patton, said Friday he was disappointed the city’s suit failed. But he defended the decision to fight the initial claim for more than $200 million.

“Through its dogged litigation of this dispute over the past 3-1/2 years, the city succeeded in drastically lowering an inherited liability,” Patton said.

He said the city got more than $5.2 million in free legal services from Bartlit Beck Herman Palenchar & Scott LLP, the firm that represented the city in its attempt to reduce the arbitrator’s award.

But on top of the $57.8 million awarded by the arbitrator, the city also had to pay about $4 million in interest that accrued during the Emanuel administration’s long fight against the parking company’s claim. The settlement payment was funded through short-term borrowing, city officials said.

The total amount the parking-garage operator ended up getting from the city last month was $62,404,000.

The money is a boon to the struggling garages, which have seen revenues decline since the private operators took over the city garages more than eight years ago. Unlike the city’s parking-meter system, which have seen ever-greater returns since private operators signed a long-term lease to operate them in 2008 and keep all the profits, the parking-garage business now marketed as Millennium Garages quickly proved to be a much less lucrative investment than anticipated.

With a total of nearly 9,200 spaces, its operators say, “Millennium Garages is the largest downtown public parking system in the United States and is believed to be the largest underground parking system in the world.”

But after reaping revenues of nearly $35.3 million in 2007 — the first full year of the deal — the company reported total income of less than $29.7 million last year. Adjusted for inflation, the garages’ revenues have fallen 26 percent in the first seven years of the nearly century-long deal.

A consortium of investors assembled by Wall Street financial services giant Morgan Stanley made the winning bid for the garages’ lease and held a 99 percent stake in Chicago Loop Parking LLC, the venture formed to run the garages. Chicago Loop Parking borrowed more than $403 million to finance the 2006 deal, according to company filings.

But it defaulted on payments it owed to its lender. And in January 2014 — while the litigation with the city was ongoing — Chicago Loop Parking handed over the garages’ lease to a new company called LMG2 LLC.

The Delaware-based LMG2 now operates the garages — and received last month’s $62.4 million payment from the city.

More than 90 percent of LMG2 is held by foreign investors, according to documents filed by the company with City Hall.

The biggest shareholder in the new garages’ company, with an interest worth more than 27 percent, is a subsidiary of French banking giant Societe Generale — the major lender for the initial, failed investment in the Chicago garages.

The government of Germany has a 25 percent stake through an agency that took over a failed bank.

Smaller stakes in the garages’ lease deal are held by the Milan, Italy-based banking and financial services company UniCredit SpA, J.P. Morgan Securities LLC of New York and Toronto’s Scotiabank, city records show.

LMG2’s chief executive officer, Michael J. Nichols, runs the firm from Northbrook. Nichols wouldn’t comment on the settlement.

In court filings, the original operators of the garages said they never would have invested as much as they paid the city if not for a non-compete clause in the lease agreement.

The Daley administration promised City Hall would never give a permit for public parking in the area bounded by East Wacker Drive, Harrison Street, Lake Shore Drive and State Street. In return, the private company could raise rates at the garages as high as it wanted.

That privilege was undercut after Daley aides gave a permit to the 1,288-space garage at the Aqua building. It offered cheaper parking than the four privatized city garages — and not just to those who live, work or stay in a hotel in the Aqua building but also to the general public.

The law firm of the then-mayor’s brother Michael Daley represented the Aqua garage’s operator, lobbying City Hall to preserve its city permit.

Before the downtown garages’ lease and the $1.15 billion privatization of the parking-meter system, the Daley administration also entered into a $1.83 billion, long-term deal with investors in the Chicago Skyway.

Attempts to privatize Midway Airport haven’t come to fruition, though, despite City Hall’s increasingly worse financial straits. Moody’s Investors Service recently downgraded debt issued by City Hall, the Chicago Board of Education and the city park district to junk status.