• Lee Roth

A Really Bad Agreement


A woman I had done a little legal work for in the past, and who served on a committee of which I was the chairman, asked me to read an agreement between the Borough of Flemington and Jack Cust relating to the redevelopment of the property in the center of the Flemington business district on Main Street. She said she wanted to be prepared to ask some questions at a meeting of the Flemington Borough government and wanted some guidance. She wanted to know if the agreement was a good agreement from the standpoint of local tax payers, of which she is one (she did not think it was). I agreed to give her an hour of my time and to offer her a few general and preliminary thoughts that she could consider in putting together her questions. My review of the agreement, as presented to her, follows:

A Really Bad Agreement For The Flemington Taxpayers

The Mayor, and other elected leadership of the government of the Borough of Flemington, have entered into an agreement on behalf of the Flemington taxpayers and voters with a limited liability company, Flemington Center Urban Renewal, LLC. In the introduction to the 50+ page agreement, they recite that by resolution adopted June 14, 2010, the Borough designated the Union Hotel property at 70-76 Main St. in Flemington as an area in need of redevelopment. This is the Union Hotel agreement.

At the request of a failed second redeveloper, the Mayor (who has been part of selecting three successive redevelopers) and other leadership of the government of the Borough of Flemington, expanded the area to include the properties at 78 Main Street, 80 Main Street, 82 Main Street, 90-100 Main Street, 104 Main Street, 110 Main Street, 7 Spring Street, 19 Spring Street, 3 Chorister Place, and 6 Chorister Place, which they now call the 2014 redevelopment area.

I submit that the second redevelopers requested this expansion to stall for time when they could not entice investors to their proposed project. They could not show investors experience they did not have. We now know they failed. They filed for bankruptcy on behalf of their limited liability company and walked away. They had no personal liability and they had provided no proof of financial or development ability to the Borough.

The current agreement points out that by resolution adopted April 2017, the Mayor was authorized to sign the current agreement. It is not an agreement between the Borough and Jack Cust, as is often said, it is an agreement between the Borough and a limited liability company of which Jack is a member or principal.

The Current Agreement Itself

On page 10, the redeveloper is given the option to develop the project “in whole or in part”. Any part not developed by the redeveloper can be handed off, by the redeveloper and only the redeveloper, to a person or affiliate of the redeveloper, subject to review by the Borough, according to the agreement.

On page 12, the redeveloper, Flemington Center Urban Renewal, LLC., represents that it is qualified, based on the two pages of criteria set out in the agreement, and the Borough says it relies on that representation. There is no indication of any verification or confirmation of any meaningful criteria.

On page 17, the redeveloper is responsible for up to $2 million in costs to increase the amount of available water required for the project. Does this redeveloper, this limited liability company, have $2 million? The agreement provides that the project will utilize the current reserve capacity (how much is that?) and will require the construction of additional wells and infrastructure (how many and at what cost?). There is no indication or schedule of detail as to what is required for the proposed project, and the rest of the community, and no cost study is provided.

On page 19, the redeveloper is required to make a “good faith” effort to preserve and salvage for reincorporation in the project where, in the redeveloper’s opinion, it is cost-effective and feasible to do so and to match architectural elements or other historically relevant objects or elements. The agreement provides that the redeveloper is to cooperate with the Borough to document the buildings and historic artifacts prior to demolition, destruction or removal. What is the measure of “cost-effective and feasible”? How far can demolition be taken?

Page 19 and 20 require an escrow deposit of $15,000 for the payment of costs incurred by the Borough in relation to the project. Has that been paid and is there a provision for accounting and renewal of the deposit? The agreement is a year old. An accounting is in order now if not before now. Is the amount sufficient? How does the amount compare with the total escrow required for, for example, the Cut Glass project?

Page 20 also requires that the Borough, on request, issue redevelopment bonds in an amount not to exceed $1 million. The bonds are to be secured by the project and a financial agreement. I do not find a provision for a personal guarantee by the people behind the redeveloper, or for a bond or letter of credit, to provide for the payment of these bonds. The redeveloper represents it has the needed financial capacity to acquire the redevelopment area if the Borough issues the bonds. Has a financial statement of the new limited liability company been verified or certified to confirm the represented financial capacity?

Page 22 provides that if the redeveloper is unable to acquire title or control of the redevelopment area within the time period set forth in the project schedule, the Borough may make demand for completion of the purchase or site control (when is that deadline? A year has passed — has it been met?) In the event the Borough does not grant an extension of time, or assist the redeveloper with property acquisition through condemnation, then either party may terminate the agreement. Has the Borough demanded completion of the purchase? I read in a local publication that the redevelopment committee, or two of its members, had facilitated an agreement between the Hotel property owner and the redeveloper. Does the Borough have a copy of that signed agreement and is such agreement now a matter of public record?

On page 24, the redeveloper represents that it is experienced and qualified to undertake the work provided for under the agreement and it is in good financial standing. It represents its undertaking is for the sole purpose of redevelopment and not for speculation in land holding.

The redeveloper further represents on page 25 that it will use commercially reasonable efforts to complete each phase of the project on or before the timeframes set forth in the project schedule. What is a “commercially reasonable effort”? I see no definition or standard built into the agreement. Is there a plain clear timeframe that all can understand?

On page 26, the Borough represents that it has sufficient sewer capacity and easements to support phase one and two of the project as to water and sewer. What will it cost the taxpayers if it does not? There is no indication or measure or schedule of that need or capacity. The Borough further represents that the redevelopment plan has been adopted in compliance with all applicable laws. Has it? I understand that there are pending law suits that challenge this Borough representation. What if the plan has not been properly adopted?

Page 30 provides that in the event of a default by the redeveloper, and the failure to timely cure any event of default, the Borough can terminate the agreement and de-designate the redeveloper. The second and failed redeveloper was given a time within which it was to acquire the real estate that is the redevelopment area. Has the now and third redeveloper been given a time within which it must acquire the property? Has that time requirement been met?

The Most Critical Provision

Page 31 contains a most critical paragraph entitled “Limitation of Liability,” which says, “The Parties agree that if an Event of Default occurs, the Parties shall look solely to the Parties hereto and/or their respective property interest in the Project for the recovery of any judgment or damages, and [they] agree that no member, manager, officer, principal, employee, representative or other person affiliated with such party shall be personally liable for any such judgment or damages. In no event shall either Party be responsible for any consequential or punitive damages.”

Of course this paragraph means that the Borough is not relying on the character or deep pockets of any individual, but only relies on the newly formed limited liability company that has no experience to execute, finance, and carry out this project. Such a provision raises the issue of the extent to which the leadership of the Borough of Flemington has investigated the ability of the party to this agreement to carry out the terms of this agreement. Deep pockets on the part of any member, manager, officer, principal, employee, representative or other person affiliated with the redeveloper has no meaning under the agreement.

On page 36, we find an indemnity provision. The redeveloper and the Borough agree to indemnify and hold each other harmless from any and all demands or suits. The Borough has the ability to collect taxes from its property owners and can thus make good on it being able to indemnify the redeveloper. We the tax payers will pay the bill. What is provided from the redeveloper to show the ability of this limited liability company to indemnify the Borough against any claims? I find nothing in the agreement.

Does the Redeveloper Own the Liquor License? No.

Page 38 addresses the requirement of a liquor license for use with the hotel and restaurant part of the project. It notes that the redeveloper has secured a liquor license. The question raised here, but not in the agreement, is — Is the license in the name of the redeveloper or is it in the name of one of the principles of the redeveloper? This paragraph of the agreement also provides that these provisions relating to the liquor license will not survive the termination of this agreement. This leaves open the question of whether the license should be transferred to the party to this agreement now, making it among the assets of the redeveloper that can be looked to in the event claims are presented? It should. The Borough should immediately demand that the transfer take place now. In effect the people behind the redeveloper who have been given, under this agreement, a free opinion on the total redevelopment area, should pay the license into the project in consideration for their option so that the license stays on Main Street and as part of the redevelopment area.

On pages 42 and following, the Borough consents in advance to the sale or lease of the residential units and the commercial space in the project. It also allows the merger of the redeveloper with another business. This looks very much like a provision to allow the owners of the redeveloper to “flip” their project. That means the members of the limited liability can seel the project at a profit. There seems to be a conflict between the allowance of merger and sale and the prohibition against speculative development. The agreement goes further to benefit the current people behind the redeveloper in that it provides that on a conveyance of the rights and obligations to a qualified entity, the redeveloper is relieved of all of its obligations under this agreement.

Conclusion

A terrible agreement from the view of the Flemington taxpayers and residents and local businesses. It seems clear that the Mayor and other leaders who accepted this agreement did not have any advice from experienced people, or if they did, they ignored the advice when they entered into this agreement. The agreement needs to be renegotiated and changed immediately.

#BusinessGrowth #EconomicDevelopment #Taxes #Flemington #CommercialRealEstate #Legal #UrbanPlanning #NewJersey #government

Copyright 2020 - Lee B. Roth  | 91 Main Street, Flemington, NJ 08822 

908.782.5317 | lbr@lawroth.com 

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