Wednesday, December 15, 2010

ESDC response in timetable case: no stay needed, since arena's on its way, and 25-year outside date was known (but was 10-year buildout likely?)

You wouldn't expect the Empire State Development Corporation (ESDC) to roll over, and the agency has responded to a request for a stay of Atlantic Yards construction with a flurry of arguments, notably that the arena is already well in progress, and that the 25-year outside date for project construction was long ago disclosed.

Supreme Court Justice Marcy Friedman, in her November 9 ruling on the Atlantic Yards timetable in favor of two community coalitions, did not resolve the issue. (The ruling came after an unusual reargument of a case that was decided March 10.)

Rather, she remanded the proceedings "to ESDC for findings on the impact of the Development Agreement and of the renegotiated MTA agreement on its continued use of a 10 year build-out for the Project, and on whether a Supplemental Environmental Impact Statement [SEIS] is required or warranted."

ESDC says no SEIS is necessary, and that the Development Agreement's not so meaningful. ESDC staffers have been working on the required analysis, and it's likely that the report will be approved by the ESDC's directors at a meeting tomorrow.

The ESDC's legal response, embedded at bottom, will be followed by reply motions from the two coalitions, led by Develop Don't Destroy Brooklyn and BrooklynSpeaks, and then oral argument before Friedman at noon on December 22.

A high bar?

The legal affirmation, by ESDC attorney Philip Karmel, opposes the motion to enjoin construction and supports the ESDC's cross-motion to appeal Friedman's order. In other words, the agency disagrees with her decision.

Given that the November 9 decision is an interim order, to the standard is that for a preliminary injunction, a high bar, Karmel contends.

Moreover, the decision to prepare an SEIS is discretionary, he says, and that appraisal of 25-year impacts has nothing to do with Phase 1 construction.

Then again, the petitioners may reply, the parking lot connected to the arena, which is part of Phase 1 construction, could last for decades, so there is a link.

A ten-year issue?

Noting that the ESDC did evaluate a five year delay, Karmel states:
Remarkably, the five-year legal battle over Atlantic Yards has thus come down to this: a dispute as to whether the 2009 Technical Memorandum should have assumed a 25-year build out instead of a 15-year build out in its analysis of the environmental impacts of a market-driven delay in the schedule for the Project's development.
He seems to be suggesting that ten years is an insignificant interval.

The essential argument

Karmel offers a summary arguing against a stay:
"ESDC's staff is working diligently" on the required analysis

"An injunction would harm the public and be contrary to the public interest for the reasons summarized in the affidavit of Peter Davidson, the Executive Director of ESDC, annexed hereto as Exhibit 1. An injunction would disrupt, delay, and make more expensive the ongoing construction of the Arena, new subway entrance and new rail yard."

"The requested injunction would also harm the public by shutting down a major job site"

"An injunction would instantly transform an active construction site on the Arena Block into a large, unsightly and inactive hole in the ground for an indeterminate period of time... [and] would also delay the removal of vacant and derelict buildings on Block 1129"

The injunction "would stop construction of Project elements that were all included in the 2006 MGPP--which was upheld in numerous prior court challenges--and are not properly part of this litigation challenge"

It "would imperil the relocation of the New Jersey Nets to Brooklyn for the 2012-2013 basketball season."

"The requested injunction would not provide any tangible benefit to petitioners."
Nowhere in the affirmation does Karmel estimate the number of construction workers, which is far fewer than previously predicted, as the Daily News reported in October.

Nor does he mention that for quite a while that the developer stalled construction activities--utility work and demolition--without an injunction, thus imperiling the relocation of the Nets, which had been predicted for years.

Delay in Phase 1?

While the case indeed focused on a delay in the project as a whole, there's new evidence, as I reported last week, of a delay in Phase 1.

The Recognition Agreement tied to a first mortgage on future development rights allows seven more years--19 years, rather than the 12 in the Development Agreement--for the completion of minimum square footage for Phase 1. That of course was not addressed by the ESDC during its deliberations last year.

Is it really 19 years? The document seems ambiguous, as a reader has pointed out, given that the cover letter states:
Nothing in this letter shall, or shall be deemed to, modify, amend or otherwise alter any term, condition or obligation set forth in the Development Agreement... The terms of this letter are solely for the benefit of Lender [the immigrant investors, via the New York City Regional Center] and Borrower [a Forest City Ratner affiliate]
The Recognition Agreement itself states:
Commencing on the date (i) Mortgagee or a Successor Leasehold Owner acquires Developer's interest as a tenant under the Leases or any new Lease and makes satisfactory arrangements with a Permitted Developer, and (ii), to the extent required by the Lease or any New Leases, ESDC approves such Permitted Developer (the "Reset Date"), the Successor Leasehold Owner shall have twelve 12 years... (the Mortgagee Outside Completion Date) … in which to construct or cause the construction and Substantial Completion… of the Development Work.
(Emphasis added)

That 12-year period would not begin for at least seven years, given the time it would take for the loan to go into default.


I queried the ESDC with my interpretation of a seven-year extension and asked the rationale for that or, if my timetable was incorrect, what the actual Phase 1 deadline would be.

ESDC spokeswoman Elizabeth Mitchell responded:
In reference to your question below, the project documents reflect extensive negotiations among ESDC, FCR and the lender. Lenders typically receive additional cure time in the event of a default by their borrower.
The background

Karmel lays out the background in the case, regarding the ESDC's approval in 2009 of a Modified General Project Plan. The principal change from 2006 to 2009 was to allow property to be acquired in phases, as well as new business terms with the MTA, with the outside date for FCR's last purchase of air rights is 2030.

(While Karmel points out that the agreement allows the railyard acquisition "on a more expeditious schedule," he doesn't mention that the 6.5% interest rate makes the delay easier.)

Because the the MGPP did not change the schedule for construction, the Technical Memorandum used a similar 10-year timetable, just pushed back three years, Karmel notes. ESDC's consultant found that schedule "reasonable from a construction standpoint."

The impacts of further delay

However, because the economy could delay construction, the ESDC's 2009 Technical Memorandum analyzed whether further delay would result in new impacts that would warrant an SEIS.

Given that quantitative analyses of such things as construction noise and traffic were based on peak periods of construction, a longer schedule would reduce activity, with reduced intensity of impacts.

As for qualitative impacts of such things as noise, construction traffic, "ESDC found that a stretched-out construction schedule would prolong the construction activities at the Project site but would not result in new significant impacts during the construction period."

That begs a few questions, such as the qualitative impact of an indefinite interim surface parking lot.

A five year delay in the build year--to 2024--would not result in new significant adverse environmental impacts after project completion, Karmel states.

The housing market

Karmel notes that ESDC in September 2009 cited an the housing market as justifying its assumption of a ten-year buildout: Brooklyn's population growth, the borough's low vacancy rate, a large affordable housing component "largely impervious to market downturns," and a location at a transit-accessible site.

But what about the intersection of demand with Forest City Ratner's price projections? He states:
Moreover, recognizing that the economic downturn could affect the progress of the Project, ESDC commissioned an additional study by KPMG LLP, a highly experienced accounting and real estate consulting firm, to determine whether the market could absorb the residential units that would be constructed within a 10-year period. KPMG advised ESDC that it was not unreasonable to expect that the market could absorb the Project's units.
He cites page 39 of the KPMG Market Study.

But that study is very doubtful. As I've written, KPMG's numbers just don't add up, with both sales figures and price per square foot inflated.

Karmel adds:
Finally, ESDC noted that a delay in the 10-year construction schedule could occur due to market conditions, but that ESDC had determined that such a delay would not result in new significant adverse impacts warranting an SEIS.
He cites, in part, the Response to Comments document at at 14-15, which actually refers to delays on the arena block alone, and the potential mitigations.

The impacts

Karmel argues, not unreasonably, that petitioners would not be harmed by removal of the small number of remaining buildings on Block 1129; all but one are vacant, and not of historical interest or distinction. (The one that is of more value, long owned by Henry Weinstein, is being used as construction offices.)

Will most of the "purported benefits" of the Project arrive only near the end of the project, as the petitioners contend? Karmel responds, "The contention is baseless: the site will improve incrementally as the Project proceeds over the course of construction."

It's true that the site will improve incrementally, but benefits like open space and tax revenues won't necessarily arrive until a significant amount of the project is built.

Malfeasance by lawyers?

Karmel responds to the charge of malfeasance, which attorneys for the petitioners argue is behind the sequence in January and February that led to Friedman's ruling in an earlier version of the case in favor of the state:
Petitioners repeatedly allege that ESDC and my law firm, as ESDC's attorneys, have misrepresented facts to this Court. This is a serious allegation, and one would expect it to be followed by quotations of specific statements made to the Court followed by a demonstration that these statements were inaccurate. But no such demonstration is made, or even attempted. My representations to this Court have always been truthful.
He says it's speculation that progress on Atlantic Yards relied on Friedman's earlier decision, saying most progress cited occurred at the master closing in December or after Justice Abraham Gerges on 3/1/10 vested title with the ESDC for Phase 1 properties.

However, petitioners' attorneys likely will argue, the sequence preceding Friedman's decision--the approval of the project in 2009 without an evaluation of 25-year impacts--allowed the project to go forward without delaying the issuance of tax-exempt bonds in 2009.

What about the Development Agreement?

The Development Agreement was not in the record because it was not considered by ESDC directors last September when the voted, as it had not been prepared, according to Karmel.

At oral argument 1/18/10 in an earlier version of the case, says Karmel, DDDB attorney Jeff Baker asked either that the Court not consider the Development Agreement, or require that it be submitted and subject to an evidentiary hearing.

The Court held a telephone conference, during which Baker sought leave to submit the Development Agreement. Karmel objected, saying it was not part of the record, and the court agreed.

He says there's no reason to think ESDC kept the Development Agreement from the Court for strategic reasons. (That's questionable, given the time lag between the date promised and the date it was actually available.)

According to a footnote, that ESDC received a sanctions motion regarding legal misconduct from Baker, and that one is expected from BrooklynSpeaks attorney Al Butzel. ESDC will respond in separate filings.

Karmel states that Friedman erred in stating that ESDC held back 25 years at the outside date, as that date was used in a legal notice and in a description of leases. (Indeed, that number was released in September 2009.)

What's "commercially reasonable"?

Karmel states:
In response to petitioners' contentions that ESDC should have used the 25-year outside date for Project completion as the schedule for analysis in the Technical Memorandum, ESDC never denied the existence of the 25-year outside date for Project completion. Rather, it argued that a negotiated outside date appearing in a commercial agreement does not establish the construction schedule reasonably anticipated by the parties, and that ESDC had a rational basis to assume that the Project would be constructed on a more expeditious schedule.
At the hearing in January, ESDC said the developer would be required to use "commercially reasonable efforts" to complete the project by 2019.

So the next phase of the legal argument may turn on whether the Development Agreement's mention of "commercially reasonable efforts" has any meaning.

DDDB Lawsuit; ESDC Cross-Motion and Opposition to Injunction Dec 10, 2010

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