Tuesday, December 22, 2009

Did the ESDC board fully consider the changed terms and revised timetable of the MTA deal? Despite responses in pending lawsuit, the record says no

While some of the lawsuits challenging Atlantic Yards have been dismissed but face possible appeals, one extant lawsuit has not yet faced a judge and, as a "master closing" looms tomorrow, we shouldn't forget the serious allegations in that lawsuit.

The plaintiffs, Develop Don't Destroy Brooklyn and several other community groups, argue the Empire State Development Corporation (ESDC), rather than take a "hard look"--as required by state law--and delay its approval process, instead bowed to the developer's timetable to move the project forward so tax-exempt arena bonds could be issued by a crucial end-of-year deadline.

The suit charges that the ESDC did not evaluate the impact of Forest City Ratner's (FCR) revised deal with the Metropolitan Transportation Authority (MTA) for the 8.5-acre Vanderbilt Yard, which immediately conveys only an initial parcel needed for the arena block (for $20 million) and allows the developer "to extend the full acquisition of the balance of the MTA property beyond 2030" and to abandon the project "with virtually no penalty."

In fact, the suit charges, the ESDC Board was "never officially informed about the changed financial terms with MTA or the consequences of that change."

And that's the crux of the lawsuit, with the ESDC and FCR offering various responses and rationalizations, but not--to my reading--offering a credible refutation.

Possible impact

Should this lawsuit--which may see oral argument in a month and likely be combined with a similar lawsuit filed by BrooklynSpeaks--be successful, it would send the project back to the ESDC for reapproval--and perhaps, as DDDB asserts, doom the project, given that the ESDC's speed in approval was aimed at getting tax-exempt bonds issued by the end of the year.

So even if a "master closing" continues, we might not see major work begin on the project until this lawsuit is resolved.

ESDC: memo "summarized" terms

In its legal answer, the ESDC does not quite say what its board was told, an issue subject to debate in subsequent legal papers:
26. The ESDC staff also prepared a [June 2009] memorandum to the ESDC Board, which among other things, summarized the terms of the MTA-FCRC business deal negotiated in 2009 to address the terms under which FCRC would pay for the development rights over the nine-acre LIRR rail yard that comprises a portion of the project site.) The MTA-FCRC term sheet approved by the MTA board on June 24, 2009 modified the terms of the MTA board's previous approval of the Project on December 13, 2006.)
In another section of the answer, the ESDC argues that the business terms aren't firm:
69. Nothing in the MTA-FCRC agreement precludes FCRC from acquiring the MTA air rights needed for Phase II of the Project on a schedule that is more accelerated than the outer time limits set forth in the MTA-FCRC agreement.
FCR: payment schedule is not building schedule

The FCR answer says the payment schedule is not a construction schedule:
196. The new FCRC-MTA terms provide for the purchase of an arena block parcel first for $10 million payable in full at closing. An additional air rights parcel, which consists of six separate development parcels over the rail yard, may be conveyed any time after substantial completion of the "Upgraded Yard," upon full payment of the price of each development parcel. The total air rights parcel purchase is $80 million as of January 1, 2010, with interest at 6.5% per year. The revised terms also set forth a timetable for installment payments of the $80 million: $8 million payable in $2 million installments due June 1, 2012, 2013, 2014, and 2015, with the remainder to be paid in 15 equal installments of $11,033,357 each, commencing on June 1, 2016. This timetable is not a schedule for implementation of the Project, but rather ensures a revenue stream to MTA from installment payments that is not dependent upon the timing of FCR's actual purchase of any particular development parcel.
That last installment would be due in 2030.

FCR: intention to build in ten years


FCR maintains its pledge that it will build the project in a decade:
197. As FCRC purchases one or more development parcels, it will receive a proportional credit against the total purchase price for all of the development parcels. Stated another way, if development parcels are purchased prior to June 1, 2012, FCRC will pay the specific development parcel purchase price assigned to each parcel, and the installment payments will be proportionally reduced. Once FCRC has purchased all of the development parcels, it no longer will be obligated ot make further installments to the MTA. Because the entire Project is scheduled to be completed by 2019, FCRC expects and intends to acquire all of the development parcels over the rail yard before then.
It's worth considering--but unmentioned in the plaintiffs' papers--what Chuck Ratner, CEO of parent Forest City Enterprises, told investment analysts in March 2007: We are terrible, and we’ve been a developer for 50 years, on these big multi-use, public private urban developments, to be able to predict when it will go from idea to reality. All we know is that if we pick the right place and we’re in with the right people, that over time we’re going to create tremendous value.

Arguments repeated, plus a key footnote

In memoranda of law, the ESDC and FCR repeat their arguments. From the ESDC Memorandum of Law,
p. 19: The dates in this schedule are outside dates, and there is nothing in the MTA term sheet that would precluded FCRC from making payments earlier in order to meet FCRC's commitments under the 2009 MGPP.

p. 21 Simply because FCRC will not be contractually bound to pay all sums under the agreement until 2030 does not mean it could not, or would not, do so sooner....Accordingly, the term sheet allows FCRC to acquire the MTA air rights on a schedule that conforms to the one anticipated in the 2009 MGPP. The MTA term sheet does not render ESDC's land use improvement finding irrational.
A footnote is key:
Petitioners criticize MTA staff for "mak[ing] absolutely no mention of the new deal with MTA in the materials submitted to the Board in connection with the approval of the 2009 MGPP." Petitioners' allegation is not consistent with the record. The memorandum of Marisa Lago to the Directors dated June 23, 2009, which summarizes the modifications to the transaction with MTA, provides details regarding the deferred payment of the purchase price.... see also memorandum from Dennis Mullen to the Directors dated September 17, 2009.
What exactly was said in those memoranda remains a point of contention.

The ESDC falls back on a law that is very deferential to agency decision-making:
No one has overturned an agency's SEQRA State Environmental Quality Review Act] determination on the basis of the Build Year selected for analysis.
FCR repeats its intentions

From the FCR Memorandum of Law:
p 13: Therefore, the timetable for installment payments to the MTA is an alternative payment schedule if the Project stalls, not a schedule for implementation of the Project. ... Since the Project is anticipated to be completed by 2019, FCRC expects and intends to purchase all of the development parcels before 2019--and not wait until 2030 as allowed by its business terms with the MTA.
Keep in mind a report from Crain's New York Business last month:
Initially, the project called for four office towers, but by early this year, only one was on the drawing boards. Asked when it will go up, [FCR CEO] Mr. Bruce] Ratner responds with a question: “Can you tell me when we are going to need a new office tower?”
Now, that building would be on the first development parcel, but the acknowledged delay belies the claim that "the Project is anticipated to be completed by 2019."

The petitioners' response

Several passages from the petitioners' Reply Memorandum of Law deserve a look, notably the charge, with evidence, that the ESDC board was not fully informed:
The fundamental issue in this case is whether ESDC properly considered the new agreement between the Metropolitan Transportation Authority (MTA) and FCRC which specifically extends the scheduled acquisition of the Vanderbilt Yards, the heart fo the Atlantic Yards Project, into 2030. Both ESDC and FCRC essentially admit that the ESDC Board was not aware of the new agreement. ESDC and FCRC try to confuse the issue by claiming the term sheet is being misconstrued. However, they cannot overcome the fact that the MTA term sheet was never fully disclosed to the ESDC Board and thus the ESDC Board never had an opportunity to make a rational basis on the actual timing or likelihood of completion of the Project.

By disguising that single salient fact, the entire decision-making of the ESDC Board became fatally flawed as it had no rational basis to assume that the Project would be completed by 2019, that it was financially viable as a plan to alleviate blight and that blight would not continue unabated for decades. By not referencing that clearly anticipated date for project completion, ESDC accepted a Technical Memorandum under SEQRA that utilized an arbitrary date and resulted in an environmental review premised on a knowingly improper timeline.

ESDC could have approved a project with an uncertain completion if it had undertaken an honest appraisal. Instead, whereas it had approved a single major project in 2006 that touted numerous benefits, in 2009, while pretending to be approving essentially the same project, it engaged in a classic bait and switch and approved a project which had so fundamentally changed its underlying financial assumptions that there was no reasonable basis to conclude that it would be completed anywhere near its claimed completion date of 2019.

Petitioners alleged that at the June 23, 2009 ESDC Board meeting the directors were not fully informed about the terms of the MTA deal and that payment for the MTA rights could be extended to 2030. ESDC denied that allegation and alleged that the staff memo summarized the terms of the MTA deal. However, ESDC's denials are simply not true.
What ESDC said

The memorandum continues:
ESDC points to the June 23rd memo from Marisa Lago as summarizing the terms of the MTA deal. However, that memo simply states that the prior agreement was for the full payment of $100 million and that it had been changed to $20 million for the Arena Block and that the balance of the $100 million would be paid in installments with interest. There is nothing in that memo which informs in [sic] the Board that the payments would extend into 2030.

ESDC attempts to mislead the Court to believe that the Board had the MTA term sheet at its disposal at the June meeting by including it in the certified record. However, a careful reading of the Answer verified by Rachel Schatz [actually: Shatz], makes it clear that the term sheet was not provided to the ESDC Board as there is no allegation that it was provided to the Board. ESDC also claims that the September 17, 2009 memo from Dennis Mullen to the Board contains details of the MTA agreement. Again, the cited reference simply states that there was a modified agreement between MTA and FCRC regarding the commitments for the rail yard and a phased acquisition of the MTA air rights. There is absolutely no mention in that document about the time frame for the acquisition.
Is that argument correct? Take a look at the evidence, and click on graphics to enlarge.

From the June ESDC memo from Lago, at left (the entire document is not online):
Under the proposed 2009 MGPP, ESDC will initially acquire a portion of the MTA property interests (that portion necessary for the development of the Arena Block), for the sum of $20 million to be paid by Forest City. Forest City will agree to pay the MTA the balance of the $100 million purchase price, plus interest, in installments, in consideration for the balance of the MTA air rights which will be transferred to ESDC for development of subsequent stages of the Project.
The year 2030 is not mentioned.

Also see the September board memo, excerpted at right:
The MGPP had been modified to reflect certain changes from the prior plan, including a proposed staged acquisition of the Project site, modified commitments from Forest City related to the development of the new LIRR train Yard for the Metropolitan Transportation Authority (“MTA”) and a phased acquisition of the MTA air rights necessary to complete development of the Project site.
(Emphases added)

The year 2030 is not mentioned.

Why it matters

The petitioners' reply memorandum argues that the court shouldn't defer to the ESDC because its decision wasn't "rational," given that the potential delay wasn't disclosed:
Respondents argue variously that Petitioners are misconstruing the terms of the MTA agreement and that FCRC will be bound to take commercially reasonable efforts to complete the project by 2019. Alternatively, Respondents argue that there is nothing which bars FCRC from acquiring the parcels before 2030 and that FCR expects and intends to purchase all of the parcels by 2019.

Respondents' arguments miss the essential element of Petitioners' causes of action. The ESDC Board was not aware of these provisions when it made its decision to approve the MGPP and to not require a Supplemental Environmental Impact Statement ("SEIS"). The Board was not informed of the specific terms that did not require FCRC to fully acquire the parcels until 2030. The Board was not informed of the schedule of payments and the fact that significant payments on the MTA parcel would not begin until 2016.

The simple fact is that all of the rationalizing proffered by ESDC and FCRC in its papers finds absolutely no support in the record. There is not a single reference of any discussion even remotely similar to the arguments set forth in Respondents' papers. There is no reference to the likelihood of acquisition at any particular time and there is certainly no discussion of what would occur if the acquisition was delayed or the project abandoned. The rationale offered by Respondents is completely outside of and unsupported by the record and must be disregarded.

Besides the post hoc nature of the rationalization, it also makes no sense. While it is true that there is no legal bar to FCRC accelerating its payments for the properties, there is no rational expectation that it will. ESDC cannot seriously contend that it was rational for it to hold to the 2019 completion date simply because it was possible that FCRC could not utilize the full benefit of its negotiated installment purchase plan? To condone such an analysis would be to permit the height of irrational exuberance regarding the review of the project. If ESDC had actually disclosed and discussed the terms of the MTA agreement and discussed the possibilities and consequences of a 2030 or later completion date compared to the 2019 date, there might be grounds for the Court to defer to a rational decision to choose the earlier date as the basis for the findings. However, there was absolutely no analysis and the head-in-the-sand attitude to ignore the material terms of the MTA agreement cannot qualify as a rational determination.
(Italics in original; bold emphasis added)

One more reason

I would add that the 6.5% interest rate, which is quite generous, does not give Forest City Ratner a huge incentive to accelerate its purchase.

The Real Deal in August reported:
[David Schechtman, senior director for Eastern Consolidated, a real estate investment services firm] said that while the purchase price of the land may be high in today's market, "the built-in financing over a 20-year period, at a time when there is an absolute absence of construction and land financing, makes this a real coup."

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