The legal dispute does not affect the building of the arena, nor the towers around it, but does address plans for and impacts of Phase Two of the project: the eleven towers east of Sixth Avenue, including those to be built on a platform over the Vanderbilt Yard.
On a broader note, the case, which should be heard in a state appellate court in Manhattan in February, addresses whether the state agency essentially cheated to ensure that Atlantic Yards would move forward.
As the plaintiffs--coalitions led by Develop Don't Destroy Brooklyn and BrooklynSpeaks--argue, had the ESDC been forced to conduct an SEIS, the agency, which approved a new Modified General Project Plan in September 2009, would have had to delay approval until 2010.
That would have forced Forest City Ratner to miss a crucial end-of-2009 deadline to get federally tax-exempt arena bonds sold. And that would have cost the developer at least $100 million more.
(BrooklynSpeaks issued a press release announcing the filing, and urging Governor Andrew Cuomo to end the cycle of litigation and produce housing and jobs--an intervention that is highly unlikely, given that Cuomo's administration is appealing the case.)
Key to the legal dispute are disagreements about guidance provided by certain legal precedents, as well as whether new analysis was needed of prolonged impacts, or whether impacts of an extended buildout could simply be pronounced no worse than a concentrated buildout.
The Development Agreement
The most crucial document in dispute is the Development Agreement, which was referenced vaguely in documents approved by the ESDC board when it passed that new Modified General Project Plan (MGPP). The MGPP was premised on a ten-year project buildout, though an accompanying Technical Memorandum did analyze a potential five-year delay.
Attached lease abstracts referenced a 25-year lease on site property, but the MGPP stated that the future "project documentation" (aka Development Agreement) would require Forest City "to use commercially reasonable efforts to achieve this [ten-year] schedule."
Not really. The Development Agreement, which was withheld until after the first oral argument in this case, in January 2010, clearly indicated that the outside date to finish the project would be 25 years, and that the penalties to enforce that timetable, at least for Phase Two, would be modest.
The sequence in court
Shortly after that January 2010 oral argument, Supreme Court Justice Marcy Friedman, refused to allow the Development Agreement into the case record. Then in a 3/10/10 decision, a day before the arena groundbreaking, she upheld the agency--just barely.
In that decision, 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.”
Both sets of petitioners asked Friedman to reopen the case, which she did, acknowledging a misapprehension--though not quite a mistake on her part--about the Development Agreement.
In November 2010, Friedman 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 is required or warranted."
The ESDC responded by issuing findings, including a new Technical Analysis, that said no such SEIS was needed. Friedman, after hearing oral arguments on 3/15/11, issued her ruling 7/13/11.
She ordered ESDC to prepare an SEIS “assessing the environmental impacts of delay in Phase II construction of the Project” and make “further findings on whether to approve the MGPP for Phase II of the Project.”
Friedman wrote that the ESDC's Technical Analysis does not provide technical studies of the effects of "significantly prolonged construction" but "appears to take the position that it is a matter of common sense that less intense construction will result in lower impacts for conditions such as traffic, noise, and air quality. "
Reasons for doubt
As the brief states:
By mid-2009, when ESDC determined that a modified project plan was required, the idea that construction of the Project would be completed in 10 years was not simply in doubt because of the precipitous market decline – it was totally undercut by the terms of the MTA Agreement extending the time to acquire the required land by 18 years to 2030, before taking account of the additional three years needed to construct buildings on it. Nonetheless, in its SEQRA Technical Memorandum assessing the environmental impacts of the changes wrought by and reflected in the 2009 MGPP, and purporting to rely on a self-serving real estate study that it had commissioned, ESDC adhered to the conceit that the Project would be fully built out 10 years after construction began. As a result, it evaluated the modified development on this basis, ignoring the aggregate and long-term effects that up to 25 years of construction would impose on adjoining neighborhoods.The "continued 10-year assumption was a fabrication that served an important purpose," according to the brief, allowing for tax-exempt financing.
But there were other reasons for doubt, including statements by the ESDC's leader:
Thus, on April 9, 2009 – five months before the MGPP was acted on by the ESDC Board – Marisa Lago, the agency’s CEO, responding to a question put to her regarding the build-out of the Project in light of the recession, recognized “that it is project that is scheduled to grow out over multi-years, decades, not months.” [Here's the link.] This statement alone makes it clear that within ESDC, it was well understood at the time that construction would extend for 20 years, if not longer.There were many problems with that opinion by the consulting firm KPMG, as I've detailed.
Notwithstanding the Brooklyn extreme market decline, ESDC was able to purchase the opinion of a real estate firm that it “was not unreasonable” to assume that that market could absorb 6,400 units of housing over the next 10 years. This “opinion” defied the realities on the ground. Moreover, it took no account of the fact that real estate financing had dried up and there was no way FCRC would be able to finance construction of the 16 buildings needed to complete the Project. Indeed, even today, two and a half year later, FCRC has yet to secure financing for a single building beyond the Arena.
What the Development Agreement said
The brief notes:
But ESDC did not advertise this, much less disclose that (i) FCRC would be given 25 years to complete the Project, (ii) no required “start” dates were provided for 10 of the 11 Phase II high-rise residential buildings, and (iii) that 10 buildings, which were assumed in the Technical Memorandum to be finished in 10 years, would not have to be completed for 25 years. Instead of presenting this critical information to the Court below, either in the papers it submitted or at oral argument, which took place after the agreement had been executed, ESDC suppressed the documentation, persuading Justice Freedman [sic], in a conference call following oral argument, not to consider that agreement and thereby keep it and its implications from the Court. These implications were that Project construction would continue far longer than the 10 years that ESDC was insisting was reasonable for the analysis of impacts it made in connection with the 2009 MGPP, even at the same time that it was negotiating a development agreement allowing 25 years for the buildout.The 2010 response
The brief describes the ESDC's late 2010 response to Friedman:
Instead, ESDC came forward with the Technical Analysis, which it had compiled in five weeks or less. In this, the agency purported to analyze the impacts of a 25-year build-out, concluding that they would be no different from, or would be less than those associated with, 10 years of construction. This Analysis was silent on the critical question of the effects of 25 years of overhanging construction on the adjoining neighborhoods, and it took each area of impact in isolation, rather than assessing their cumulative effects.Was ESDC's 2009 approval arbitrary?
One key legal question is whether the ESDC's approval of the 2009 Modified General Project Plan was arbitrary and capricious--the threshold at which judges, who typically defer to agency decisions, can overturn them.
According to the brief:
This is not an instance where an administrative body made a reasoned decision that might or might not be correct – a decision of the sort that courts are not empowered to second-guess. Rather, it is an instance where before it acted, the agency, by the admission of its own CEO, knew that the position it was taking was wrong, endorsed it nonetheless and then, when challenged, sought to cover up that reality and hide it from the court. In such situations, the judiciary alone stands between lawfulness and lawlessness.The brief details elements of "the sham":
- the decision to adhere to the 10-year construction schedule despite Lago's comments
- the KPMG report "that effectively denied the market collapse"
The "sham was converted to a cover up," according to the brief, when ESDC told the court that it wasn't the MTA agreement, which extended the purchasing term of railyard development rights to 2030, that governed the buildout schedule but rather the Development Agreement--even though the terms had not been disclosed.
Let's go to the oral argument transcript from January 2010. During the hearing, at p. 44 of the transcript (or p. 265 of this filing), ESDC lawyer Philip Karmel stated:
From the standpoint of my client, the Empire State Development Corporation, we're relying on the contracts that we are negotiating with Forest City to implement the General Project Plan. We have a development agreement. We have many other contracts with Forest City. They are outlined in the record. They did not exist at the time of the 2007--of the 2009 approval. And they're not in the record and properly so. But ESDC is not relying upon MTA to force Forest City to do something. ESDC is relying upon its contracts to implement this project. And if you look at the development agreement, the principal terms of which are outlined in the record, and this is a development agreement between ESDC and Forest City, in that agreement, Forest City is required to build the entire project--Friedman interrupted:
Where in the record is this development agreement?Karmel responded:
The abstract of the terms, your Honor, as I mentioned, the development agreement itself did not exist as of September 17th, 2009. But the terms of the development agreement are described on page 7070, 7070 of the record. And it says that the development agreement will require the Forest City affiliates involved in this project to construct the project described in the Modified General Project Plan, including, and then it summarizes many of the salient elements of the General Project Plan there. So it is the Development Agreement between ESDC and Forest City that ESDC is relying on to say, yes, this project is going to get built in conformance with the Modified General Project Plan. The fact that Forest City has negotiated a property acquisition agreement--What's on p. 7070 of the record?
It's the Lease Abstract document below, on the second page, under the category "Non-Arena Development Leases":
Terminates upon completion of construction of the improvements to be located on the parcel of land leased thereby, but no later than the 25th anniversary of vacant possession of the Arena Block and any other properties acquired in the first taking (subject to force majeure).From the 2009 MGPP
The terms of the Development Agreement--"commericially reasonable efforts"--are actually described with more specificity on p. 9 of the Modified General Project Plan, which states:
Sponsors expect to commence construction on the first non-Arena building within six months of ESDC's delivery of vacant possession of the Arena Block to the Project Sponsors, but in all cases, on or before the third anniversary of ESDC's delivery of vacant possession of the Arena Block to the Project Sponsors; the second non-Arena building within six months following the commencement of construction on the first non-Arena building, but in all cases, on or before the fifth anniversary of ESDC's delivery of vacant possession to the Arena Block to the Project Sponsors; and the third non-Arena building within six months following the commencement of construction on the second non-Arena building, but in all cases, on or before a date certain agreed to by ESDC and the Project Sponsors. The Project documentation to be negotiated between ESDC and the Project Sponsor will require the Project Sponsors to use commercially reasonable efforts to achieve this schedule and to complete the entire Project by 2019. The failure to commence construction of each building would result in, inter alia, monetary penalties being imposed upon the Project Sponsor.Back to the argument
Excuse me. Has the Development Agreement been negotiated as of today's date?Karmel:
Yes, it has, your Honor.Friedman:
It is not in the record; is that correct?Karmel:
That is correct, your Honor. The master closing occurred, as set forth in the papers submitted in connection with the preliminary injunction motion before the Court, the master closing occurred on December 23rd, 2009. And it was on that date that ESDC and Forest City signed the Master Development Agreement, numerous leases pertaining to the project. Other agreements require letters of credit to provide security that Forest City will pay for their just compensation awards in eminent domain proceedings. ... But the salient terms are outlined in the record.Friedman:
And there are penalties for failure to build Phase II of the project?Karmel:
And what are they?Karmel:
Well, the penalties are not set forth in the record. Obviously it would be a breach of the contract between ESDC and Forest City. If Forest City does not proceed as required by the contract, and the contract does set forth a variety of remedies, including monetary remedies and remedies with respect to forfeiture of development rights, ESDC has the right to demand specific performance of the development obligations set forth in the contract. And there's a series of penalties set forth in the contract. So ESDC does have a contract with Forest City and that really is our [sic] the main thing we're relying on to guarantee that the project will be completed.But those penalties were quite minor.
But going back to the law, there's nothing that requires such a guarantee...
The Development Agreement in court
The new brief describes the ESDC's arguments before Friedman:
Finally, when the MDA [Master Development Agreement] was at last brought before the Court, ESDC persisted in the denial of its relevance and, in spite of everything, including its acknowledgment that the Project could not be completed in 10 years, continued to assert that the use of that schedule was rational at the time the 2009 MGPP was approved. In this, of course, it had little choice; to have admitted anything else would have been to acknowledge that it acted arbitrarily and capriciously in selecting and adhering to that schedule. The agency was hoisted on its own petard and the only way out was to deny the realities or cover them up. It was for this reason, presumably, that ESDC, going beyond the requirements of the remand order, came forward with the hastily-prepared and totally-wanting Technical Analysis in an effort to patch the hole that its sham conduct had left. That, we submit, was not only too little – it was a continuation of the sham.Did the approval violate SEQRA?
The fundamental illegality in ESDC’s conduct, and that on which the Court below based its decision, was the agency’s arbitrary and capricious adherence to the use of a 10-year construction schedule and its consequent refusal and failure to evaluate the environmental impacts of a build-out that would likely extend for 25 years. This is a relatively straightforward issue of administrative law that, as discussed more fully below and as Justice Freedman found, required ESDC to go back and do it right.
....It is one thing for an agency to make a mistaken determination; it is quite another to make a determination that it knows is based on an error or false information. The latter is what the Petitioners believe happened in this case and what they submit should result in this Court’s affirming July 19 Decision. There is precedent for this in the opinions issued by the United States District Court and the Court of Appeals for the Second Circuit in the lawsuits challenging the Westway megaproject on Manhattan’s Lower West Side waterfront.
The other important legal point at issue is whether ESDC's approval of the 2009 Modified General Project Plan, without preparing an SEIS, violated the State Environmental Quality Review Act (SEQRA).
The brief states:
In this case, ESDC chose not to do so, issuing the equivalent of a Negative Declaration finding the environmental impacts that grew out of the 2009 MGPP would not be significant. As already discussed at length, the conclusion was reached on the basis of a 10-year build-out that the Petitioners believe, and the Court below found, was arbitrary and capricious....The brief suggests a significant difference between the two cases:
The Appellants [ESDC and Forest City] contend that a different standard applies when it comes to negative declarations, such as that involved here, made in connection with the modification of project that has been the subject of an earlier EIS. Indeed, the Appellants read Matter of Riverkeeper and the SEIS regulations issued by the Department of Environmental Conservation... as effectively making the decision whether or not to prepare an SEIS lie entirely within the discretion of the agency. But that reading would eviscerate the statutory mandate of SEQRA that actions that “may have a significant impact on the environment” require the preparation of an EIS.
In Riverkeeper, while many years had passed since a previous SEIS and the later determination to approve the project without an additional SEIS and there had been numerous changes in relevant laws and permit requirements, the applicant in that case had modified the project to reduce impacts and included other mitigation measures to meet the changed circumstances.(Emphasis in original)
In contrast, in this case, as more fully discussed below, ESDC went out of its way to deny the full time-frame for completion of the Project and failed to undertake a complete qualitative or quantitative analysis of the new impacts resulting from 25 years of construction (as compared with the 10-year build-out).
The longer buildout
The state essentially said no new significant impacts would be found, a conclusion emphasized in the ESDC brief, which went to significant length to argue that, in various categories of environmental review, a longer buildout would be no worse--though the question remains as to whether prolonging the impacts changes their nature.
The new brief states:
But as the Supreme Court observed and found, no studies were undertaken to analyze the impacts of 25 years of construction. To the contrary, to the extent that ESDC bothered to address these impacts at all, it was on a subjective basis only, with the undocumented conclusion that any construction impacts would simply be “prolonged” and in any case would be “temporary,” because at some undetermined future date the Project would be complete and the disturbances associated with the build-out would cease.Forest City's argument
This was far from the “hard look” that SEQRA required. In some cases, no doubt, the impacts of construction can be passed off as “temporary,” because they are relatively short term and the normal incidents of living in an urban area. But when the subject is the construction of a massive project that is likely to extend over many years, the impacts imposed during the build-out become even more significant that the impacts from the completed project.
Nor is it sufficient to say, simply, that whatever the impacts, they will be “prolonged” by a longer build-out. Impacts accumulating over time can and often do have far more serious negative consequences than ESDC ever suggested, much less identified, in either the SEQRA Technical Memorandum or the belated Technical Analysis.
The brief criticizes a "strange theory" promulgated by Forest City:
It takes the position that the 2009 MGPP did not make any changes in the Project; the modifications that it approved were simply the reflection of economic conditions and did not change the Project components. The latter claim is wrong in its own right – for example, creating a huge open parking lot that would be in place for 12 or more years rather than the four years originally promised, or providing publicly accessible open space 10 to 15 years later than had been represented – were certainly changes in the Project components. But more to the point, FCRC’s position runs counter to ESDC’s, which recognized the 2009 MGPP as effecting a sufficient change as to require the modification of the GPP and undertake a SEQRA review of that action. It also completely ignores the reality that the extension of time for property acquisition approved by the MGPP laid the adjoining communities open to an extension (and probably an expansion) of negative environmental impacts for up to 25 years. So, too, did the extension of the construction schedule inherent in the 2009 MGPP but not disclosed by ESDC. However FCRC may characterize the changes wrought by the MGPP, those changes had the potential of inflicting severe and negative environmental impacts. As a result, ESDC should have prepared an SEIS to evaluate those impacts, taking into account, among other things, the examples of project delays and long construction schedules elsewhere....Unlike ESDC, the brief notes, Forest City argued that the Supreme Court erred by considering the Development Agreement:
FCRC’s position is disingenuous at best and would make a mockery of the role of the courts at worst (which may be why ESDC did not choose to make an issue of the point). To begin with, if strictly applied, FCRC’s position would sanction fraud and lack of disclosure.What's the worst-case scenario?
Second, it is also disingenuous for FCRC to argue that the terms of the MDA could not be considered, because the crucial one was in fact before ESDC when it approved the 2009 MGPP. That critical term was that construction could extend for 25 years. This was contained in the lease abstract (or summary) that was made part of the MGPP. If, as is the case, it was not called out to the directors, it was nonetheless before them.
ESDC argues that it was reasonable worst-case scenario to consider the impacts of a buildout limited to ten years, and a five-year delay--and that a 25-year analysis would have been criticized for not addressing a concentrated ten-year timetable.
The community groups, however, argue that the agency never initially considered a 25-year buildout:
In fact, however, neither the MGPP nor the SEQRA Technical Memorandum addressed the question of what constituted such a case; nor could they have, given that they denied that there would be a construction schedule possibly extending to 2035."Intensity" vs. "duration"
Moreover, ESDC disregarded the section of the CEQR Technical Manual that explicitly identifies “Duration” as one of the elements that must be taken into account in evaluating construction impacts [CEQR Technical Manual, Chapter 22, pp. 1, 6, 9, 10]. In the case of the Project, the reasonable worst case in terms of duration, as reflected in the MDA, is 25 years (and it could be longer). Thus, even if ESDC had had a rational basis for believing that the Project would be completed in 10 years – and we do not believe it did – it was obligated to analyze and consider the impacts of the longer construction period before it acted on the MGPP. This it failed to do.
One of the big questions in the legal battle is whether it is worse, for neighbors, to experience extended, if intermittent construction, or, as the state contends, a more concentrated ten-year buildout. The new brief criticizes the latter position:
The Appellants argue that the “intensity” of construction impacts at a particular point in time is a more appropriate measure of worst case impacts than the duration of the impacts. But there is nothing in the record to support this position or the asserted choice, which clearly was made only in response to the Petitioners drawing attention to the CEQR Technical Manual directives.What's the "build year"?
The brief notes that the appellants, citing Wilder v. N.Y.S. Urban Dev. Corp. and Fisher v. Giuliani, argue that judges should not "second guess the agency’s choice of the “build year” – the specific point in time when a project is expected to be completed and generate the most substantial operational impacts."
While this is generally true, the choice must still be rational. The brief adds:
The more pertinent point in this case, however, is that the irrational action involved here was not ESDC’s choice of the “build year,” but its failure to take into account the impacts of construction over as many as 25 years. ESDC has never disputed that it was obligated to assess the environmental impacts of construction, but it did so on the basis of a 10-year build-out. If, as we have discussed above, construction is likely to last as long as 25 years, then the agency needed to evaluate the impacts of that much extended build-out. This has nothing to do with the selection of a “build year”...Was the Technical Analysis legit?
The issue is whether ESDC acted rationally when it adhered to the 10-year build-out. If, as the Petitioners submit is the case, the 25-year deadline was under discussion (and, more likely, agreed to) at the time the MGPP was approved, that clearly bore on the question.
The brief argues that the 2010 Technical Analysis was part of a pattern of concealment, failing "to consider the long-term cumulative effects of 25 years of ongoing construction on the health of the surrounding neighborhoods."
The brief notes:
Expanding upon the approach taken in the 2009 Technical Memorandum, the Technical Analysis dismissed many adverse impacts resulting from the extended construction schedule as simply being “temporary.” For example, in assessing the impact of the extended build-out on open space and the requirements of the GPP and 2009 MGPP that eight acres of publicly accessible open space be provided, the Analysis justified its assertion that no new impacts were involved by stating that “the temporary impact identified in the FEIS would extend longer, but would continue to be addressed by the incremental completion of the Phase II open space.” In this case, however, the “temporary” negative impact would last up to 15 years longer than assumed in the FEIS – 15 years in which the adjacent neighborhoods would be without the promised open space benefits of the Project. Three years without adequate open space is an impact that might be characterized as “temporary;” 15 years is clearly something else.Similarly, Block 1129, the southeast block of the project site, could remain as an 1100-vehicle surface parking lot not for just three or four years, but 12 years or more.
Does mitigation work? In a footnote, the brief says no:
ESDC lays considerable emphasis on the mitigation plan that it is required to implement, suggesting that this will work to mitigate any additional impacts of the extended build-out. But that plan does not address such impacts as long-term cumulative effects, since these were never identified, nor does the plan consider mitigation that might offset or reduce the loss of open space or the extended duration of surface parking on Block 1129. Furthermore, while not a matter of record, the current mitigation plans as set forth in the Amended Memorandum of Environmental Commitments are not being effectively enforced.That's clear from a look at Atlantic Yards Watch.
2009 ESDC Atlantic Yards Lease Abstract
Friedman Case Respondents Brief