Thursday, December 24, 2009

AY fight in final stages, but not over, says DDDB attorney; bond, documents wait in escrow until eminent domain completed

So, is the Atlantic Yards fight over, now that the "master closing" has been completed and the site bears "branded signage"?

Well, no, which is why various documents and proceeds from the bond sale were put in escrow, but it's even more of a David-and-Goliath fight.

The risk of litigation was priced into the bonds, and the appetite for the bonds suggests that buyers were comfortable with the risks.

However, according to the Barclays Center Preliminary Offering Statement (POS), prepared by underwriter Goldman Sachs, various documents, such as leases and mortgages, won't be released from escrow until various "Vacant Possession Release Conditions" are satisfied, including the delivery via eminent domain of the properties necessary for Phase 1 of the project.

(Photo by Tracy Collins)

DDDB's take

An unsurprisingly pugnacious statement yesterday from Develop Don't Destroy Brooklyn insisted that it's not over, pointing to pending lawsuits: one challenging the Empire State Development Corporation's (ESDC) approval of the Modified General Project Plan (MGPP) and another, yet to be filed, challenging the issuance of arena bonds by the Brooklyn Arena Local Development Corporation (BALDC).

I asked DDDB attorney Jeff Baker what could happen. "The bond proceeds and the closing documents are in escrow," he replied. "It is my understanding that they have 'completed' the closing to meet the requirements of the IRS ruling for the tax-exempt bonds."

"If we are successful on the MGPP suit, then it will void the ESDC resolution authorizing ESDC to sign the closing documents," he said. "I am not a bond expert, but I think that would have the effect of voiding the bonds and result in returning the proceeds to the bond holders–but they took that risk on the bonds by buying them with the litigation pending. Same thing goes for a challenge to the BALDC–if it was an illegal transaction , the bonds would be in jeopardy."

From the POS

Indeed, according to the Barclays Center Preliminary Offering Statement (POS), prepared by underwriter Goldman Sachs, bond buyers were warned:
If any of the proceedings described under the heading “LITIGATION-Litigation Related to the Arena Projects-Environmental and Related Matters” are decided in favor of the plaintiff-petitioners there may be delays in the Arena Project and the public parties may have to recommence the public approval processes or prepare additional analyses. There can be no assurance that such approval processes will be successful and that the Arena Project may proceed. In addition, additional actions may be brought against the Issuer or ArenaCo or their affiliates, the outcomes of which may not be predicted but which if adversely determined, in the aggregate or individually could have a material adverse effect on the Issuer or ArenaCo, the issuance of the Series 2009 PILOT Bonds or the development, design, construction and operation of the Arena Project.
So, what could happen? The POS explains that bondholders would take a hit:
As further described herein, in the event that the Vacant Possession Release Conditions have not been satisfied prior to the Outside Commencement Date [tentatively 1/15/11], proceeds of the Series 2009 PILOT Bonds will not be applied to the construction of the Arena Project, and the Issuer will be required to redeem the Series 2009 PILOT Bonds at a price equal to 101% of (i) with respect to the Series 2009 Current Interest PILOT Bonds, the Amortized Value thereof plus accrued and unpaid interest thereon through the Outside Commencement Date, and (ii) with respect to the Series 2009 Capital Appreciation PILOT Bonds, the Accreted Value on the Outside Commencement Date. See “THE SERIES 2009 PILOT BONDS—Redemption—Extraordinary Mandatory Redemption.” If such a mandatory redemption is made, Bondholders will not obtain the expected return on their investment in the Series 2009 PILOT Bonds, and Bondholders may not be able to reinvest the proceeds from such a redemption in an investment that results in a comparable return.
Faith in the courts?

"Obviously this fight is in its final stages, but it is not over," Baker said, noting that the challenge to the MGPP will be heard in state Supreme Court in Manhattan on January 15. "ESDC has fudged the numbers and the process to help a favored developer by engaging in a trumped up blight finding, condoning a bait and switch and avoiding the review of the PACB [Public Authorities Control Board]. We are placing our faith in the courts to protect the integrity of the process."

Well, the pending legal challenges are, like the other ones, uphill battles, given the general deference courts show to administrative agencies like the ESDC. And the significant momentum for AY may carry over into court.

But a court's willingness to stop--for now--the ESDC's pursuit of eminent domain for the Columbia University expansion shows that judges aren't necessarily rubber stamps.

Also,, given that the ESDC board never was told that the revised Metropolitan Transportation Authority deal for the Vanderbilt Yard allowed payments until 2030, there's a strong argument in the MGPP case for the Court not to "defer to a rational decision" by the ESDC.

State Senator Bill Perkins may also place a new focus on Atlantic Yards, given the questionable processes for both project approval and the issuance of bonds, contrasting with the spirit of the Legislature's successful effort to reform public authorities--an effort Governor David Paterson ultimately supported.

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