Wednesday, June 30, 2010

Is ten-year AY schedule reasonable? Judge puts ESDC on the defensive as Development Agreement is scrutinized in 75-minute reargument

In an unusual reargument of a case that was argued January 19 and decided March 10, a lawyer for the Empire State Development Corporation (ESDC) was put on the defensive yesterday, forced to acknowledge that there are far fewer penalties for delays in completing the Atlantic Yards project as a whole than those for the first phase, which includes the arena and three towers.

Will it make a difference? It’s hard to predict a yes, given that courts generally defer to agencies like the ESDC.

But the fact of the reargument itself--and the uncomfortable facts in the belatedly-released Atlantic Yards Development Agreement--suggest that, at the least, New York County Supreme Court Justice Marcy Friedman will chastise the agency, if not order a Supplemental Environmental Impact Statement (SEIS) or otherwise throw a wrench into the project.

After all, in her March 10 ruling Friedman criticized the ESDC’s “deplorable lack of transparency” and acknowledged that the ESDC’s use of a ten-year timeframe for the project buildout in the Modified General Project Plan (MGPP) was supported “only minimally.”

The MGPP, approved last September, was amplified and modified by the Development Agreement, signed in December but released in January. And yesterday Friedman steadily put ESDC lawyer Philip Karmel through a careful cross-examination.

75-minute hearing

At the outset of the hearing, Friedman said she’d allow only 40 minutes of argument, but she spent 75 minutes listening to and questioning Karmel and lawyers for two groups of community petitioners. The latter had asked her to reconsider the ruling that the project's ten-year timeline was legitimate and that an SEIS was not necessary.

Key to the motion for reargument is the Development Agreement, which was not released until about a week after the oral argument in January--despite a pledge to release it earlier--and which Friedman had refused to add to the case.

Though Atlantic Yards may seem like a done deal--eminent domain was approved months ago and (perhaps not coincidentally) Forest City Ratner announced yesterday that concrete had been poured for the Atlantic Yards arena--attorneys for the ESDC and FCR evinced some tension, a sign that the courts remain a wild card.

The courtroom was less than one-third full, and even some of the people in the audience on the clock treated it like Casual Tuesday, a not unwise choice, given that the room had the barest of air conditioning.

FCR General Counsel David Berliner wore a blazer but no tie. ESDC Counsel Joe Petillo didn’t wear a suit or a jacket. (Neither did most of us not on the clock.) Friedman herself took off her robe fairly quickly to cool down.

But she was ready to drill down into the multiple sub-clauses of the maddeningly complex Development Agreement, so she and the lawyers batted around citations to “17.1(m)” and “17.2(a)(vi)” while they periodically paged through voluminous stacks of paper. (See documents embedded below.)

Friedman is an engaged judge; neither flamboyant nor warm and fuzzy, she maintains a default mien of skepticism and minor sourness, as if her morning cup of coffee had been brewed by incompetents. More so than in previous arguments, she yesterday pursed her lips frequently.

An interview with Jeff Baker



After the hearing, I interviewed Jeff Baker, attorney for Develop Don't Destroy Brooklyn and allied groups. He explained his contention that there are no significant damages for delays.

As for the general clause that the ESDC claims could impose penalties up to $10,000 a day Baker said that "only would apply to the section that they have to use commercially reasonable efforts. So it stretches the imagination to believe that ESDC at any point in the relatively near future could bring an action and say you’re not using commercially reasonable efforts."

Beyond that, he noted, "it is a minor amount of penalties, in comparison to the size of the project, and the size of the liquidated damages provision, which apply to Phase 1."

As for the claim that no SEIS is necessary, Baker noted that the ESDC's Technical Memorandum "only looked at a few year delay." (It was five years.) "It did not into account the blighting impacts [of a delayed project]... You can’t say they took a hard look at the issues, when they didn’t identify the issue.... and then finally, they didn’t consider the fact that, are they really alleviating blight?"

What happens if the petitioners are successful? "If she does that, she annuls the resolution, the question is, what happens in the meantime if they go back to reconsider it?" Baker said in the interview, musing aloud. "Might they have a legal basis to claim that the arena can go forward, that Phase 1 can go forward?... All the determinations by ESDC based on the purported benefits of this project were for the whole thing. They never divided this project and said, we’ll just do an arena."

"We’re encouraged that she granted us this hearing," he said. "Obviously the judge had concerns the Development Agreement does not on its face provide the assurances that she was led to believe were there. We’re cautiously optimistic that she’ll agree that... she felt they barely met the legal standard before--they’ve now lost one of the legs of their argument--and now it’s not enough."

Leading off

Baker, leading off in court, reminded Friedman that she based her ruling on three separate factors: a study of the housing market by the consultant KPMG, the financial incentives for Forest City Ratner to recoup its investments, and the ESDC’s assurances that the Development Agreement would enforce “commercially reasonable” efforts to move forward.

The Development Agreement, actually, had been signed but not released, and that’s what Baker concentrated on. An attorney based in Albany, Baker’s short with a close-cropped beard and a deep-voiced delivery, a welterweight who, yesterday at least, threw consistent punches.

Phase 1 vs. Phase 2

For the purposes of the hearing, Baker said he’d concede that there are a variety of incentives to complete the arena and three towers of Phase 1, though FCR has 12 years--an outside date that, in itself, casts doubt on the ten-year timetable. “For Phase 2, there are no assurances,” he said.

(Baker did not mention what I consider to be powerful evidence of the ESDC’s obfuscation. While the MGPP included no timetable for the third tower in Phase 1, just "on or before a date certain," the Development Agreement says the third building doesn't have to start for ten years.)

He explained that, under Section 17.1 of the Development Agreement, there are various events of default that trigger “meaningful damages.”

But the developer has 15 years to begin construction of the platform over the Vanderbilt Yard, he said, and faces “no meaningful penalty” other than being unable to proceed with the rest of the project.

Similarly, if the project’s not completed in 25 years, then it can be terminated, without any financial penalties. Even with that, Baker noted, the ESDC has two years to serve the notice of termination.

He also noted that “abandonment” of the project is defined only as abandonment of Phase 1.

Friedman asked about the specific penalties in 17.2(a)(x)--from $1000 to $10,000 a day for default. Baker said it was a “general, catch-all” clause that did not apply to sections where damages and timetables were delineated. “Specific provisions in the contract trump a general term,” he said.

“This agreement flies in the face” of the statement that they expected to require commercially reasonable efforts to complete the project in ten years, he said.

FCR economics

“The whole deal is structured to allow Forest City Ratner to recoup its financial investment in Phase 1,” Baker said, noting that condemnation of the site, once planned in one phase, has been segmented into multiple phases.

Friedman asked him to explain the basis of his statement.

Baker said it was a common-sense analysis of the document. Given that there are no financial penalties for Phase 2, he said, “all they do is lose the right to develop the project.”

“Is it your position that there are no penalties in the Development Agreement if the project is terminated by ESDC?” Friedman asked.

“If it’s terminated after Phase 1, I don’t think so,” Baker replied.

Enter Butzel

Then Al Butzel, attorney for BrooklynSpeaks and allied groups, addressed the impacts of the extended buildout.

Butzel, tall and gray, won the Westway case and has cycled back to such public interest work. He speaks in a low voice, tough to hear in such a cavernous room without amplification, and Friedman had to urge him to speak up.

But he quickly built on Baker’s timetable points, noting that only one building has to be constructed on block 1129.

In sum, he said with a measure of incredulity, “it totally undercuts the reasonableness of the ESDC claim they could rely on a ten-year period.”

He noted that ESDC attorney Karmel had said that the petitioners should have brought the Development Agreement to the judge’s attention, but that’s exactly what they’d done, to no avail.

He said neither the court nor the ESDC directors could have understood the meaning of “commercially reasonable” without having seen the Development Agreement.

At oral argument in January, Butzel pointed out, Karmel had told the court that the ESDC was relying on the Development Agreement to enforce the timetable.

“He didn’t tell us that the platform didn’t have to begin construction for 15 years,” Butzel said. “In many ways, I feel it was suppressed.”

He noted that the unavailability of affordable housing subsidies and the catch-all term “market-financing unavailability” could further delay the timetable.

And he said that a penalty of $1000 a day “doesn’t mean anything in a project of this size.”

Though it is typically not the role of the court to require the ESDC to prepare an SEIS, Butzel said that in this case it was necessary.

Enter Karmel

Tall, and athletic, with a close-cropped red beard and a powerful voice that can verge on grating, Karmel comes off as a supremely confident advocate, at least when he's got the facts on his side.

He began, as if ignoring the opposing lawyers, by stressing that the Development Agreement requires Forest City Ratner to build the project as described in the 2009 MGPP and the 2006 design guidelines.

But he quickly got to the issue of the timetable: “Has the Development Agreement changed the schedule in such a way to require an SEIS?”

His answer was no, that the ESDC, in affirming the MGPP, took a “hard look”--as required under state law--that the ten-year construction schedule was reasonable, and that, if the project were delayed, the environmental impacts would not require an SEIS.

KPMG report

The ESDC’s analysis, he said, was based not on the 25-year outside date but the economics of the housing market, and KPMG said the housing could be absorbed in ten years, given the housing demand and population projections.

The KPMG report, he said, “was probably the most important factor” in the ESDC’s decision, and there’s nothing in the Development Agreement germane to the KPMG report.

Karmel's statement about the KPMG report was questionable, given that it was completed in a cover-your-butt way just weeks before the ESDC meeting last September. Moreover, it’s riddled with errors and lies regarding the current condo market.

Judge drills down

“Now it is true,” Karmel allowed, “that the Development Agreement does contain outside dates” that are considerably extended beyond the official timetable.

After Friedman queried him about the project effective date--when Phase 1 properties are cleared, which should be July 31--she drilled down, putting Karmel on the defensive.

“Do you take the position that there are any liquidated damages either for failure to commence Phase 2 work by the dates provided or the failure to complete Phase 2 by the outside Phase 2 complete date?” Friedman asked.

“Yes, Your Honor,” Karmel responded, his tone becoming more deferential. He cited the sections in 17.1 and 17.2, indicating the potential for penalties of $1000 to $10,000 a day.

“Is this the only provision that covers Phase 2 events of default?” asked the judge.

“It is the only provision relevant to liquidated damages,” Karmel responded.

Are there any other events of default regarding Phase 2 outside 17.1(m), Friedman asked.

“I don’t believe so, Your Honor,” Karmel responded.

She pointed to 17.2(a)(ii), which specifies liquidated damages. “It does not cover 17.1(m), correct?” she asked.

“That is correct, Your Honor,” Karmel responded.

Are there any other provisions in the Development Agreement that provide liquidated damages with respect to Phase 2, she asked

“Yes, Your Honor,” Karmel responded, pointing to 17.2(a)(vi).

“This is termination, not liquidated damages, correct?” Friedman asked.

“Yes,” responded Karmel.

“You agree with Mr. Baker, that with respect to default, termination is a penalty?” Friedman asked.

“It’s one,” Karmel said.

What else?

He pointed to the catch-all clause under 17.2(a)(x), which sets the potential for penalties of $1000 to $10,000 a day if Forest City Ratner does not use commercially reasonable efforts to complete the project.

“Are you also claiming that 17.2(a)(x) covers default under 17.1(m) with respect to Phase 2 work?” Friedman asked.

“I think it would depend on circumstances,” Karmel said, suggesting such penalties might kick in if Forest City Ratner walked away from the project or failed to try to complete it. But if the developer was using commercially reasonable efforts but falling behind, that would not be subject to penalties.

(Given that the Development Agreement allows delays for subsidy and market financing unavailability, that seems to be a lot of wiggle room.)

Friedman asked about the $1000 a day penalty under 17.2(a)(x).

“$10,000 a day is the basic penalty,” Karmel responded, but can go down to $1000 a day “if the default is trivial.”

If Forest City Ratner has walked away, and thus had “a material adverse effect on the value of or the use of the Project Site”--language in the Development Agreement--it would be $10,000 a day.

Friedman asked how that might work.

“It depends on facts and circumstance,” Karmel said, adding that “ESDC is closely monitoring the project,” a statement that drew some raised eyebrows from those in attendance.

He insisted that the outside dates were independent of the requirement that commercially reasonable efforts be used. And, he noted that, beyond the penalties, ESDC could go to court to obtain other relief, such as specific performance in the contract.

What the ESDC knew

Friedman asked what exactly the ESDC board knew when it voted last September. Did the MGPP mention the Development Agreement?

No, said Karmel, indicating that it did include the project lease abstracts, which gave up to 25 years to build and thus match up with the Development Agreement.

Friedman rubbed her eyes.

“So, what we have, in the Development Agreement, from a contractual standpoint,” Karmel said, “is a schedule and outside dates.”

Environmental impact and need for an SEIS

Karmel switched gears and gained momentum as he addressed the question of whether the ESDC had taken a “hard look” at environmental impacts from a delay.

In Chapter 17 of the 2006 Final Environmental Impact Statement, the ESDC--via its environmental consultant, the ubiquitous AKRF--examined construction impacts, in a 113-page chapter.

Then a Technical Memorandum last year provided an independent basis for the ESDC to decide not to prepare an SEIS, he said.

Karmel said there would be quantitative and qualitative impacts and that the peak impacts of such things as noise and air quality would not increase over a longer buildout.

As for impacts on such things as historic buildings and neighborhood character, he said, the impact was disclosed and mitigated to the extent possible.

“These conclusions would not change if the construction took longer than ten years,” he insisted, suggesting a localized impact of individual buildings would be low.

(The ESDC, in court papers, likened the Atlantic Yards site, to Battery Park City, which is an enormous stretch, given that the latter is more than four times larger.)

Actually, the Technical Memorandum is pretty fuzzy, since it only looks at a Build Year delayed until 2024, not 2035. The latter date was simply not studied.

And, Karmel insisted, the petitioners had not specified the what environmental analysis the ESDC was supposed to do.

Beyond that, the preparation of an SEIS is discretionary, he noted, even if significant environmental impacts had been identified.

FCR: project's moving along

Forest City Ratner attorney Jeffrey Braun, who’d been sitting at the table with colleague Richard Leland taking notes and taking in the entire argument, rose for a brief contribution.

Braun, tall and balding, can have a pit-bull-like intensity, but he carefully dialed it back in front of Friedman.

The project, he noted, has continued to progress since the parties had been in court in January: not only have there been a decision and settlements in the eminent domain case, construction has begun, demolitions have occurred, the MTA deal has closed, and steel for the arena has been ordered and is under fabrication.

“We have not been stagnant in any way,” he said, respectful but precise. “We’re not where we were in January. We’re much farther along.”

Of course had FCR released the Development Agreement before that January hearing, things might have been more complicated.

He also noted that the petitioners had not gone to the court to ask for a stay--which has been denied in previous cases.

(See Baker’s not-quite-comfortable answer on video, essentially acknowledging he felt that was a lost cause but arguing that there's still time to change or stop the project. )

Rebuttal

Butzel got back up for rebuttal. The ESDC, in its Construction Impacts chapter, he noted, studied only a ten-year buildout.

As for Karmel’s complaints about the lack of specificity in the petitioners’ charges, Butzel responded with a sense of grievance: “the length of construction itself” as an impact.

Baker got the final opportunity to counter-punch. “I think it was evident [Karmel’s] admitted there are no financial penalties for failure to commence Phase 2 and complete Phase 2,” Baker said, contending that 17.2(a)(x) is not applicable.

The ESDC was not fully informed of the details of the modified deal with the MTA, much less the provisions of the yet-to-be finished Development Agreement, he said. Had the board known of the timetable, they would’ve been obligated to take it into account.

Blight and remedies

Moreover, Baker said, the extended timetable calls into doubt one of the fundamental justifications for the project--the elimination of blight--given the continuation of interim surface parking and construction staging over what could be 25 years.

As for Braun’s statement that the project is already moving ahead, Baker said most of the investments are for general utility work, or could be used for a revised project, one that is smaller and does not have as many community impacts.

(The irony is that Forest City Ratner got the project approved based on a certain size that projected affordable housing and tax revenue, but already has permission to build a smaller project.)

Should Friedman rule for the petitioners, he said, she should hold another hearing on what work should be enjoined, whether it be the arena or Phase 1.

“The fact that they purchased steel is not a vested rights claim,” he said.

And that was it.

Bottom line

Give Friedman a few weeks or months to decide.

As I wrote in May, Friedman, in her earlier ruling, said the horse had essentially left the barn, and that any relief regarding Atlantic Yards should rest with the political process.

So it's doubtful she's going to stop the arena. And an SEIS is an open question. But it's not unlikely she'll have something to say about the Development Agreement.

Atlantic Yards Development Agreement Section 17.1

Atlantic Yards Development Agreement 17.2

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