Tuesday, January 19, 2010

Cases challenging ESDC's approval of AY go to court today; dispute concerns timetable, KPMG study, SEIS, affordable housing requirement

Today, the Atlantic Yards legal saga hits another flashpoint, with oral argument at 2:30 pm in state Supreme Court in Manhattan, combining two similar cases, one brought by groups led by Develop Don't Destroy Brooklyn (DDDB) , and another brought by groups in BrooklynSpeaks.

The last major case to go before a judge--though there could be more--challenges the Empire State Development Corporation's (ESDC) September approval of the Modified General Project Plan (MGPP), in part because the ESDC board was not (allegedly) told the details of how the deal for the Vanderbilt Yard was renegotiated, thus creating a 22-year timetable.

And while the case cannot formally stop the (now-postponed) condemnation plans, at least not without a stay or preliminary injunction, success could delay or even doom the project. The case will be heard by Justice Marcy Friedman.

"Rational" agency?

As I noted last week, the ESDC in court papers relies on a set of documents that has not been made public to argue that the ten-year timetable was viable.

In such cases, as the ESDC and developer Forest City Ratner remind the court, judges must defer to government agencies if its actions were "rational," which is generally a high bar. In this case, argue the petitioners, the ESDC's actions evaded rationality.

One example: the ESDC claims that a memorandum from then CEO Marisa Lago "summarizes the modifications" to the Vanderbilt Yard deal, but the document did not mention that the railyard acquisition could be extended through 2030.

Several other issues in the DDDB case are addressed below; note that, in legal papers, the petitioners challenging the ESDC and FCR get the last word.

Similar but not copies

The case brought by BrooklynSpeaks raises most of the same issues as in the case brought by DDDB and allies, though it adds the charge that the ESDC improperly delegated government power to Forest City Ratner.

The DDDB suit, unlike the other, points to the ESDC's failure to respond to an expert's report that it was unrealistic to build the AY housing in a decade and the belated acknowledgment, only in documents released September 17, that affordable housing subsidies were required to build the promised affordable housing.

Reasons for doubt

While the ESDC claims the project delay, three years, is solely due to litigation, the petitioners note that, if that were the case there would be no need to phase the acquisitions or extend the payments.

How important is the claim that FCR has made significant investments and thus has an incentive to reap rewards? First, respond the petitioners, ESDC did not previously consider that argument nor develop it in the record. Moreover, it's tough to analyze the $277 million spent for property acquisition and $83 million for demolition, utility work, and the temporary railyard:
However, Respondents do not explain and the record is silent on any explanation of an allocation of those expenses. What were they spent on and how much is attributabe to Phase 1 versus Phase II? How much of that money is part of the disbursement of the $200 million provided by the State and the City?
The Kahr report

Real estate analyst Joshua Kahr, in a report commissioned by the Council of Brooklyn Neighborhoods, emphatically declared that "the project cannot be completed anywhere near 2019."

The ESDC points to the market study it commissioned from KPMG and says that, in a battle of experts, the court must defer to the agency. And, beyond that, the ESDC criticizes Kahr:
Mr. Kahr accuses KPMG of using "projected population data over a 20-year period to support a development project over a 6-year time horizon." Mr. Kahr is wrong on both fronts: the KPMG report presented and considered population growth projections over the next 10 years (not merely over the next 20 years) and examined the feasibility of a 10-year construction schedule (not a 6-year schedule).
Well, not quite. Kahr, in his affidavit, wrote:
Furthermore, this projection is inconsistent with the conclusion reached by KPMG that most of the development will have been completed by 2015 and absorbed within the following 12 months.
(Emphasis added)

That's exactly what KPMG concluded:

Kahr did, however, exaggerate by claiming that the KPMG report asserts that all units will be absorbed by 2016.

The petitioners respond to the ESDC:
ESDC also never accurately summarized or responded to the August 2009 report from Joshua Kahr. ESDC claims it did consider and respond to the Kahr report at AR 7036, Comment 10. However that response is nothing more than a summary of the 2009 KPMG report and as noted in Petitioners' initial Memorandum of Law, there is no reference at all in the KPMG report to the Kahr report or that KPMG was even aware of the Kahr report.
The KPMG report, the ESDC admits, does not mention the new MTA agreement. Nor is the report, which analyzes the potential absorption of the AY housing, the same as the 2006 KPMG report that tried to analyze the project as a whole. The petitioners argue:
ESDC cannot get past the fact that KPMG did not undertake any analysis of the actual economic feasibility of the project, that it could be constructed in a timely and cost-effective manner to compete in the marketplace and that KPMG was unaware of the new MTA terms which should have been a material element of its analysis.
KPMG's suspect calculations

The ESDC criticizes Kahr for citing $600 per square foot as the upper limit of the quarterly average dollar per square foot sale price for residential condominiums in Brooklyn, noting that KPMG instead cited recent prices in neighborhoods near the project site.

Forest City Ratner is counting on sales prices of $1217/sf in 2015 up to $1369/sf in 2019. Even though the average high sales price in the three surrounding neighborhoods is $970/sf, the KPMG study stated that only a "modest inflation factor" would allow the expected prices to be reached.

That goes unrebutted in the petitioners' papers, but could have been responded to by pointing out that KPMG's figures were extremely unreliable, thus rendering its entire report suspect.

For example, the KPMG report claimed that Richard Meier's On Prospect Park is 75% sold; however, the New York Times quoted the developers as saying half the units have been sold and that StreetEasy.com documented only 25% the units as sales.

More recently, one of the high-end condos cited in the study as a comparison, the Forte (now 230 Ashland Place), has recently sold a spate of units by lowering prices below $500/sf, according to commenters on The Local. (Here's a discussion on StreetEasy.)

Land Use Improvement Project

While the ESDC argues that a delay in the project does not require additional review and that there's nor equirement to identify a developer when a General Project Plan is approved, the petitioners respond:
ESDC's arguments might be valid if it had... designed and approved a project that consisted of a general plan for redevelopment. Instead, in contrast to the 42nd Street Redevelopment Project which was a multi-developer long term plan for the revitalization of an area, the Atlantic Yards project is a single-developer program that was not considered as long-term redevelopment strategy but as a short-term project.
No SEIS?

The ESDC and FCR argue that the petitioners did not identify specify environmental impacts caused by a delayed buildout, thus diminishing the argument for a Supplemental Environmental Impact Statement (SEIS)

They note that the ESDC prepared a Technical Memorandum to conclude that there wouldn't be material impacts and thus acted rationally in its discretionary decision not to require an SEIS.

The petitioners respond:
Similarly, by failing to consider the clear evidence of the delay and uncertainty in the project, ESDC violated SEQRA. This is not a question of whether a delay resulted in new adverse environmental impacts--but whether ESDC properly identified the issue before reaching the conclusion that an SEIS was not warranted. That is a threshold question. If ESDC had honestly assessed the timing and uncertainty of the project and then reached the conclusion that an SEIS was not necessary, that decision might be upheld as a rational determination.
In the BrooklynSpeaks case, attorney Al Butzel commented last November: "There are some cases on SEIS's, none of them particularly solicitous from our point of view. What I attempted to do is get the courts back to where they ought to be… the tests should be the same… the statute says you've got to prepare an EIS. I think it's a tough case to argue, to win, because of the attitudes of the courts about Supplemental EIS. A lot of stuff depends on how the judge feels about the overall situation."

Affordable housing

The petition states that the Development Agreement, a section of the Project Leases Abstract in part of a 9/17/09 ESDC memo, states that affordable housing is subject to provision of affordable housing subsidies. And that is inconsistent with the Modified General Project Plan which provides "no conditions precedent" to the affordable housing. The ESDC denies the latter.

The petitioners respond:
Respondents argue that affordable housing subsidies were always contemplated. That is not in contention. What is in contention is an MGPP which says there will be at least 2,250 units of affordable housing which are "expected" to receive government subsidies and a term sheet for the Development Agreement which says the affordable housing is "subject" to the availability of subsidies.
Timing

The petition states that ESDC Senior Counsel Steve Matlin "admitted [to reporters] the time line for completion of the project would be well beyond 10 years." In its legal answer, the ESDC denies that.

Here's what Matlin said: "The timeline, which people have pointed out, is going to be well beyond ten years, but there are incentives for the developer to build out the project in a much more expeditious way. And that's why we think the ten years is doable."

Incentives

ESDC claims it will require FCRC to "use commercially reasonable efforts"--not yet revealed--to complete the project in a decade. The petitioners respond:
However, "commercially reasonable efforts" are not defined.... Moreover, the ESDC term sheet includes the ground leases for all of the buildings to last for 25 years before a building is constructed, this providing further evidence that such a time frame has already been accepted as commercially reasonable.
A smaller project

The ESDC says there's no conflict between a requirement that Forest City Ratner constructed at least 4,470,000 square feet of buildings (other than the arena), because the announced project size of 7,125,000 is a cap while the other "provides for a minimum buildout."

Unmentioned is that the economic benefits of the project, at least, were premised on the full buildout.

The petitioners respond:
Respondents do not address how the term sheet condition which mandates only 4,470,000 sq ft of improvements, excluding the Arena, constitutes an obligation to complete the project as per the MGPP when it is 37% less than what is provided in the MGPP.
Impact of delay

The ESDC's June 2009 Technical Memorandum assumes completion of the project by 2019 but briefly acknowledges a Potential for Delayed Built Out, which is deemed immaterial:
Therefore, delay in the project resulting from prolonged adverse economic conditions would be expected to be accompanied by a delay in other study area projects, and future conditions in a delayed post-2019 Build year would be fundamentally the same as those described in this technical memorandum for 2019.
As for the issue of neighborhood character, one of the elements of the Final EIS, it depends on how you draw the boundaries:
The schedule change would not result in significant adverse environmental impacts with respect to neighborhood character that were not addressed in the FEIS. Under this delayed build out scenario, the temporary surface parking lot used for arena parking would be in place for a longer period of time than described in the FEIS. However, this would not result in a change to the conclusions of the FEIS, which disclosed that traffic, noise, and other effects of the active uses on the project site upon completion of Phase I would have localized adverse neighborhood character impacts on Dean Street. As with the FEIS, these impacts would be experienced in a small area adjacent to the project site and would not affect the character of the larger Prospect Heights neighborhood. Moreover, as the Phase II buildings come on line, the surface parking lot would be relocated below grade.

As described in the FEIS and above, construction activity associated with the Atlantic Yards project would result in significant adverse localized neighborhood character impacts in the immediate vicinity of the project site during construction. The construction activities would be substantially the same. The extension of the schedule would result in an additional period of time during which portions of the project site would be undergoing active construction. Therefore, the localized, significant adverse neighborhood character impacts at Dean and Pacific Streets would continue through the prolonged construction period.

In the delayed build out scenario, the nearby residential uses may not have the buffer from the arena use provided by Buildings 1, 3, and 4; however, this condition would be temporary and would be addressed by the construction of these buildings over time. On the arena block, Building 2—located on the southwestern corner of the arena block facing the residential district to the south—would be constructed with a predominantly residential use with street-level retail frontages along Dean Street and Flatbush Avenue. Temporary open space and public amenity uses such as retail kiosks, landscaped seating areas, plantings would be provided on the building footprints not under development, particularly Buildings 3 and 4. These amenities would enliven the street-level environment and provide a buffer between the arena and residential district to the south and north.

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