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MTA lawsuit, which might affect arena financing, charges that Public Authorities Accountability Act was violated

On the eve of the crucial court hearing on the eminent domain case, Atlantic Yards opponent Develop Don't Destroy Brooklyn, joined by four elected officials and the Straphangers Campaign, today sued the Metropolitan Transportation Authority (MTA) and Forest City Ratner to annul the June 24 revised deal for the Vanderbilt Yard, charging that a new state law passed in 2005 requires an independent appraisal of the property and seek out competitive offers--both eschewed in the three-day period in which the deal was unveiled and voted upon.

Even a successful lawsuit might not formally stop the project, but it could throw a wrench into Forest City Ratner's plan have the state sell tax-exempt bonds and for arena construction to begin this year. As Neil deMause observes on his Field of Schemes blog:
The real question now is whether another lawsuit will make it too expensive for Ratner to get bond insurance so he can start selling arena bonds this month as planned.

The MTA board members, as I wrote in August, got no written legal advice--other than a check-off on a Staff Summary--stating that their action was appropriate, even though board member Jeffrey Kay told fellow board members on June 24 that the MTA's "legal department has advised us that this is a legal transaction."

The MTA offered a boilerplate "no comment".

Multiple discounts

The 8.5-acre Vanderbilt Yard is the crucial piece of publicly owned land within the 22-acre footprint proposed for Atlantic Yards. In 2005 Forest City Ratner pledged to pay $100 million to build over the railyard, but said its package of improvements was worth hundreds of millions of dollars more.

(FCR actually bid $50 million at first; after rival Extell bid $150 million, the MTA board, controlled by a governor and mayor who supported Atlantic Yards, chose instead to negotiate exclusively with Forest City.)

However, the MTA's appraiser said the railyard was worth $214.5 million to a bidder who also included a replacement railyard. (The total value was $271.3 million.)

In June, however, the MTA--despite its need for both capital and operating funds--agreed to let Forest City Ratner pay only $20 million down and the additional $80 million over 22 years, at an effective interest rate of 6.5%.

While Forest City had agreed to build a new, more modern railyard to accommodate 76 cars, rather than the current 72, the MTA agreed to accept a railyard to hold only 56 cars--a savings to the developer of more than $100 million.

Elected officials on board

While the suit, filed in State Supreme Court in Manhattan, was the fifth filed (or organized/funded) by DDDB, it's the first to involve elected officials: State Senator Velmanette Montgomery, Assemblymember Jim Brennan, Assemblymember Joan Millman, and City Council Member Letitia James. While Montgomery and James are longtime opponents of the project, Brennan and Millman have been critics more than opponents.

Missing from the lawsuit were City Council Members David Yassky and Bill de Blasio. While de Blasio is the Democratic nominee (and shoo-in) for Public Advocate, Yassky--who testified critically about the land sale at an MTA meeting June 24--lost his bid for Comptroller and will leave office this year. Also missing was Assemblyman Hakeem Jeffries, whose district includes the AY footprint.

Also missing were Assemblyman Richard Brodsky and state Senator Bill Perkins, who have led the push for reform of public authorities. A representative of Perkins testified critically about the land sale on June 24, as well, while Brodsky has mostly steered clear of Atlantic Yards.

I don't know whether any of the above-named elected officials were asked to participate.

2005 law violated?

The petitioners charge that the MTA violated the Public Authorities Accountability Act of 2005 (PAAA).

A legal petition for the case, Montgomery et al. v. Metropolitan Transportation Authority et al., points out that that PAAA requires:
. . no disposition of real property, any interest in real property, or any other property which because of its unique nature is not subject to fair market pricing shall be made unless an appraisal of the value of such property has been made by an independent appraiser and included in the record of the transaction.

The suit notes that Atlantic Yards stalled:
due in large part to the worsening financial and economic climate and real estate market, which made it difficult to obtain financing for large real estate development projects.

In particular, by October 2008, Standard & Poor’s had lowered the corporate credit rating of FCR’s parent, Forest City Enterprises, and its rating on senior unsecured notes, into junk, or non-investment grade, status, and in July 2009, Moody’s likewise reduced Forest City Enterprises’ rating to junk grade status.

As a result, the Project underwent dramatic, substantial changes, which sufficiently altered the Project so as to require ESDC to issue a new Modified General Project Plan dated June 23, 2009.
Only one housing tower is scheduled, and an office building is put on indefinite hold, with Phase Two "postponed indefinitely."

The suit charges:
In effect, MTA agreed to finance 80 percent of FCR’s purchase of the Yard at a generous 6.5 percent interest rate, while Forest City Enterprises had a junk bond rating.

Moreover, the transaction was structured so that FCR could, in effect, stop making payments to MTA, keep the portion of the Vanderbilt Yard on which the arena would be built, and abandon the rest of the Project, with minimal penalty.
MTA concession

The suit notes that MTA Chief Financial Officer Gary Dellaverson acknowledged that the transaction had to be approved quickly--the board had 48 hours--because, as he said, "it really relates to Forest City's desire to market their bonds as a tax-exempt issuance [by a December 31 deadline]."

While the MTA claimed it did not need to follow a public bidding process, because the sale was allowed by the PAAA as furthering the public interest, there's no evidence, the suit charges, that the MTA conducted "any actual analysis of the public benefits to be gained by the sale of the Vanderbilt Yard to FCR," nor did it acknowledge the "diminishment of the Project’s anticipated public benefits."

No independent appraisal was obtained, even though the MTA Staff Summary implicitly suggested the 2005 appraisal was outdated, stating that "the Brooklyn real estate market has markedly deteriorated." Nor was the fair market value of the property every discussed.

The suit charges that the MTA did not ask Extell for a competing proposal nor did it entertain DDDB's announced bid, at the meeting, of $120 million.

Deeper into the legal issues

According to the Memorandum of Law:
Notably, the amended PAL [Public Authorities Law] does not provide any exception to the requirements... that where the property being disposed of cannot “because of its unique nature” be valued in the open market – such as the Vanderbilt Yard – the authority must first obtain an independent appraisal of the property’s value, and include the appraisal in the record of the transaction. Further, even where the authority is permitted to dispose of property through negotiation and for less than its estimated market value, it still must conduct the transaction “subject to obtaining such competition as is feasible under the circumstances.”

MTA failed to meet any of these three requirements...
Standing issue

Anticipating a likely challenge by the MTA to the petitioners' right to bring the lawsuit, the memorandum argues that DDDB, as a potential bidder, has been directly injured, and that it has organizational standing, given that the interests at issue are sufficiently germane to the association's purposes that it is an appropriate representative of those interests."

The PAAA has changed the game, they argue:
Although the First Department, in Matter of Madison Square Garden, L.P. v. New York Metro. Transp. Auth., found the individual petitioners’ close proximity to the site at issue insufficient to confer standing, because the environmental impacts they feared were unrelated to the issue before the Court of whether MTA received the highest price for the site, the intervening enactment of the PAAA distinguishes the circumstances of that case from those of the case at bar. Here, petitioners do not complain that MTA failed to obtain the highest possible price for Vanderbilt Yard; to the contrary, petitioners acknowledge that the PAAA did not require MTA to do so. Rather, petitioners assert that MTA blatantly ignored the express procedural requirements of the PAAA in order to carry out a backroom deal made years earlier with FCR and State and City officials, and that petitioners were thereby denied the accountability, transparency, and ethical standards on the part of MTA which the PAAA was intended to ensure. Those interests are well within the zone of interests protected by the PAAA.
So too the Straphangers has associational standing, given its interest in MTA operations, and the elected officials represent districts encompassing or near the Vanderbilt Yard.

The three state legislators voted to pass the PAAA, "and are interested in ensuring that their votes are not rendered meaningless by MTA’s violation of the PAAA."

The final paragraphs say it's up to the courts to not let the new law become meaningless:
Finally, it is significant that no party other than petitioners is in a position to challenge MTA’s unlawful action. Simply put, denial of standing to all of petitioners herein would effectively preclude any judicial review of MTA’s unlawful action...

This is not a case in which petitioners seek “to substitute judicial oversight for the discretionary management of public business by public officials.”... Rather, petitioners seek enforcement of the procedural safeguards which the Legislature has enacted in order to make this State’s public authorities accountable to its citizenry, and have standing to assert that MTA violated the PAAA.

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