Does ESD have discretion over a potential transfer of development rights in foreclosure? Yes, but the conditions may not be onerous.

As I've written, the foreclosure auction of developer Greenland USA's interest in six development sites over the Vanderbilt Yard has been postponed twice, most recently until April 30.

It's likely to be postponed again. After all, there are a lot of complications, including a winning bidder's obligation to comply with project requirements--or to evade them--regarding affordable housing liquidated damages, and more.

That likely involves negotiation with Empire State Development (ESD), the state authority that oversee/shepherds the project. And yesterday, ESD reps said no developer has surfaced.

If a bidder does emerge, it's also worth looking at the conditions imposed by ESD on such a transfer.

One unit, or two?

First, note that, while the six development sites might be seen as a unit, they represent two separate auctions: one for the sites B5-B8, the collateral for the $249 million "Atlantic Yards II," and another for B9-B10, the collateral for the $100 million "Atlantic Yards III," loans offered by immigrant investors under the EB-5 investor visa program.

(About $63 million of the first loan has been paid back.)

Moreover, that's not an even division: B5-B7 are over the first railyard block, and B8-B10 are over the second block.

It would odd to have different developers involved, since they'd have to work together on the platform for the second block. 

Could a bidder for B5-B8 ignore B8, given the cost to built the platform on that second block? Well, it's a never-say-never project.

Keep in mind that, by my calculation, Greenland has already paid the Metropolitan Transportation Authority for development rights for B5-B7, so that cost is taken care of.

Also note that, as described below, ESD has imposed more conditions on the transfer of the second set of collateral.

Conditions imposed

According to a September 2014 Consent Letter that ESD required of parties to the "Atlantic Yards II" loan signed with ESD: 

Without limiting any other requirements set forth in the Project Documents, in the event the membership interests in Owner are transferred to Lender, or any other party, as a result of a foreclosure pursuant to the Equity Pledge, a transfer in-lieu-of such a foreclosure or otherwise (Lender or such party succeeding to the ownership of Owner being hereinafter referred to as the "Transferee"), such transfer shall comprise an Event of Default under the Interim Lease except to the extent such Transferee, prior to succeeding to the ownership of Owner, provides written evidence to ESD that such Transferee (x) is a Permitted Developer (as defined in the Interim Lease) or has engaged a Permitted Developer, and (y) is not a Prohibited Person, which evidence in each case is acceptable to ESD in its sole discretion (a Transferee who fulfills the requirements of (x) and (y), a “Permitted Transferee”).

(emphases added)

The June 2015 Consent Letter that ESD required of parties to the "Atlantic Yards III" loan imposed similar conditions.

They may not be too onerous.

After all, a potential Event of Default, which could mean loss of various rights and privileges, can be averted by the presence of a Permitted Developer, which, according to June 2014 ESD board documents, would include a "Person that is or retains (as Construction Manager) a Person with no less than ten (10) years of experience in the development and construction of high-rise residential office, hospitality and/or mixed use projects"... in an urban environment; or (ii) a Person that is reasonably acceptable to Landlord."

A "Prohibited Person," according to the project's Development Agreement, includes those in breach of obligations to the state or city, those who've committed felonies or crimes of moral turpitude, or those violating various federal rules.

Of course, when arena naming rights sponsor Barclays admitted a felony, it should have become a Prohibited Person, as I argued, but ESD made no attempt to unravel the arena naming rights deal.

Additional conditions

The 2015 Consent Letter also added new conditions. 

ESD would have no obligation to enter into an Interim Lease or a Development Lease with respect to the B9 and B10 sites until "such Permitted Transferee shall have obtained and delivered to ESD a fully-executed Air Space Subparcel Improvements Agreement... allowing such Permitted Transferee to construct the platform over the portion of the New Yard located directly below the Class B Properties,." 

Is that a big deal? Unclear. Why would any builder acquire a development lease without having a plan to build the platform?

As described in the 2014 Supplemental Environmental Impact Statement, the 2010 Air Space Parcel Development Agreement, involving MTA, LIRR and certain affiliates of original developer Forest City, "allows work on the new platform(s) over the Yard to be performed within up to three separate 'Platform Construction Periods,' with the work within each period being completed as a single coordinated development."

"The Agreement allows the Platform Construction Periods to be 'continuous with one another and [to] overlap in timing,'" the document states. 

Interestingly, the MTA preferred--but didn't require--that construction of the platform proceed from east to west across the rail yard, in other words starting with the B10 site flanking Vanderbilt Avenue.

That, of course, has not been the developer's plan, given the announced goal to start B5, at the west end of the railyard, flanking Sixth Avenue. After all, it's cheaper to build the platform over the western block, given the presence of terra firma.