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Transcript of the letter sent to Trump by Mayor Hipp
April 30, 2008
Michael D. Cohen, Esq.
Project Manager, EnCap Golf Holdings, LLC
c/o The Trump Organization
Re: Notice of Default for Failure to Make Payment;
Request re: Apparent Invalidity of the Financial Agreement
Dear Mr. Cohen:
As you know, this firm has recently been retained as Special Counsel to the Borough of Rutherford (the "Borough") in connection with the Meadowlands Golf Course Remediation and Redevelopment Project (the "Project") and the legal issues arising in that regard concerning the relationship between EnCap Golf Holdings, LLC ("EnCap") and the Borough.
It appears that the Financial Agreement entered into between the Borough and EnCap has been rendered inoperative by a combination of EnCap defaults and the evident failure of the Project, as more particularly described below.
Review of the Financial Agreement
Pursuant to the "Third Amended and Restated Landfill Closure and Development Agreement" entered into between EnCap and the New Jersey Meadowlands Commission on March 10, 2003 (the "Development Agreement"), the Project provides for, among other things, remediation and redevelopment by EnCap of certain property located in the Borough.
On December 29, 2004, the Borough and EnCap executed a "Financial Agreement Relating to PILOT Payments and Securitization of PILOT Payments for Meadowlands Redevelopment Project," as subsequently amended on July 30, 2005 and September 6, 2005 (the "Financial Agreement"). Broadly stated, the purposes of the Financial Agreement were to facilitate completion of the Project by EnCap and to compensate the Borough for both its cooperation and the adverse impacts of remediation and construction generated by the Project.
After comparing the terms of the Financial Agreement with the Borough’s records, it appears that there are several outstanding deficiencies under the Financial Agreement. Moreover, in light of multiple expressions of doubt made by State agencies and officials with regulatory oversight of the Project regarding the viability of both the Project and the Financial Agreement, the Borough is concerned that the purpose of the Financial Agreement may have been eviscerated by the Project’s significant environmental and financial failures.
The Borough understands that EnCap has designated Meadowlands Development Venture I, LLC ("MDV") as Project Executive of the Project and has delegated to MDV authority over all matters related to the Project. I expect that as Project Manager you are in a position to address the following concerns:
Factual Premises of the Financial Agreement
1. Apparent Absence of Support for Claimed Need for PILOTs
During negotiations of the Financial Agreement, and as reflected by the language of the executed Financial Agreement, EnCap has advised the Borough that "the revenues to be derived from Rutherford Project will not support the payment of ad valorem real property taxes on the Improvements, once constructed…" However, our review of the Borough records revealed an absence of any documents or materials which would factually support that statement. In order to determine the enforceability of the PILOT provisions of the Financial Agreement, it is essential that you promptly provide such information to me.
2. Parameters of the Remediation/Infrastructure Construction Period
I also write out of concern that neither the Borough nor EnCap intended the present Financial Agreement to operate in a scenario in which the remediation and infrastructure construction period, and its concomitant adverse impacts upon the Borough, would extend beyond the time frame described by the Financial Agreement. Specifically, the schedule of Impact Fee payments and PILOTs created by the Financial Agreement—the mechanism by which the Borough and EnCap agreed to exchange value—appears to be poised for imminent failure given the current status of remediation and construction activity on the Project site.
The Financial Agreement provided for the remediation phase to be completed by 2009; a deadline that is now impossible to meet.
Payments Due the Borough
1. Impact Fees
2007 Impact Fee. As you know, the Financial Agreement requires EnCap to pay annual Impact Fees to the
Borough in consideration of the impact on the Borough of the remediation and construction activities on the Project site. The Borough’s records indicate that in the years 2004, 2005 and 2006, EnCap made payment of Impact Fees directly to the Borough.
However, in a letter to the Borough Clerk, dated December 31, 2007, counsel for EnCap indicated that it would not pay the Impact Fee due for the year 2007 to the Borough, but had instead delivered payment to a third party to be held in escrow, and that EnCap had unilaterally imposed certain conditions upon the release of that payment from escrow. As you know, the Financial Agreement does not provide for such measures.
The Borough hereby asserts its entitlement to payment forthwith of the entire Impact Fee payable to the Borough for the year 2007, ($200,000), which under the terms of the Financial Agreement was due by December 31, 2007.
2008 Impact Fee. In addition, the Financial Agreement expressly requires payment by EnCap of the remaining Impact Fees for each year on a quarterly basis. Please be advised that the Borough has not received any portion of the first-quarter payment of the Impact Fee for the year 2008, ($50,000), which under the terms of the Financial Agreement was due to the Borough on March 31, 2008. The Borough hereby asserts its entitlement to immediate payment of one quarter of the Impact Fee payable to the Borough for the year 2008.
2. Land Taxes
In addition to EnCap’s obligation to pay Impact Fees to the Borough, section 4 of the Financial Agreement
requires EnCap to pay land taxes on real property included within the Rutherford portion of the Project. As provided by the Financial Agreement, failure by EnCap to pay land taxes triggers the Borough’s right to declare EnCap in default under the Financial Agreement. The Borough’s records indicate that as of April 11, 2008, EnCap owed the Borough $705,421.87 in unpaid land taxes.
3. Legal & Engineering Expenses
Section 15 of the Financial Agreement obligates EnCap to make monthly reimbursements to the Borough for the out-of-pocket expenses incurred by the Borough in obtaining professional services related to the Financial Agreement.
The Borough’s records indicate that as of April 28, 2008, EnCap owed the Borough $244,320.03 in legal fees, and $6,448.34 in engineering fees.
4. Total Payments Due the Borough
In summary, EnCap owes the Borough a grand total of $1,206,190.24 in Impact Fees, Land Taxes and Legal
& Engineering Expenses pursuant to its obligations under the Financial Agreement.
5. Notice of Default
You are hereby notified that EnCap is in default under the terms of the Financial Agreement and that full payment for the Impact Fees discussed above, the full amount now due for Land Taxes, and full payment of the Borough’s professional expenses discussed above must be immediately delivered to the Borough to avoid the implementation of the Borough’s legal remedies upon default.
Stagnation of the Project
In addition to the foregoing, it is evident that implementation of the Project is in serious jeopardy. In summary, I note the following:
1.Issuance of PILOT Bonds
The Financial Agreement expresses EnCap’s intentions to issue PILOT bonds for the purpose of securitizing a portion of the PILOT payments to be made by EnCap to the Borough, and EnCap’s intention to apply the proceeds of such PILOT bonds to the cost of the Rutherford Project. The Borough understands from the following correspondence (attached for convenient reference) that EnCap has been unsuccessful in causing such PILOT bonds being issued in the future:
-November 22, 2006 letter from Susan Jacobucci, Director of the Division of Local Government Services, Chair, Local Finance Board, to Stephen Pearlman, Esq., counsel for EnCap, in response to EnCap’s application to the Local Finance Board for approval of the PILOT bond financing called for by the Financial Agreement. In this letter, Director Jacobucci advises,
"EnCap’s proposal does not provide sufficient financial protection for the municipalities; therefore, we
cannot recommend this approach for approval." (Attached hereto as Exhibit A.)
The Borough understands that although nearly a year and half has passed since the issuance of that letter, no subsequent application for this purpose has been submitted on behalf of EnCap to the Local Finance Board.
-June 25, 2007 letter from Deputy Attorney General Valerie W. Haynes to Eric D. Wisler, Esq., counsel for EnCap, in which Deputy Attorney General Haynes advises,
"…the State does not intend to provide any additional funding for the project, nor is the State prepared to
commit to the securitization of PILOT payments." (Attached hereto as Exhibit B.)
-August 20, 2007 letter from Assistant Attorney General Robert J. Gilson to Eric D. Wisler, Esq., counsel for EnCap, in which Assistant Attorney General Gilson states,
"[a]s you have been advised previously…to the extent that securitization of applicable PILOT agreements requires legislative changes (which in our opinion it does), we have been informed by the Governor’s administration that, consistent with the Governor’s public statements, they will not support any such change and will not facilitate any such securitization. In our judgement, EnCap has no basis upon which to anticipate or rely upon the benefits of securitization of any such proceeds and cannot and should not expect any cooperation from NJMC with respect to its efforts to obtain securitization." (Attached hereto as Exhibit C.)
-March 19, 2008 letter from Assistant Attorney General Robert A. Romano to you, in which Assistant Attorney General Romano advises, "…[i]t is the State’s position that it is not supportive of providing PILOT bond financing for the Project…We write to repeat that EnCap has no basis to anticipate or rely upon State action to facilitate PILOT bonds being issued in connection with the Project." (Attached hereto as Exhibit D).
2.Project Defaults
The express purpose of the Financial Agreement was to facilitate the long term tax abatement and bond financing which EnCap represented was necessary for it to undertake the remediation and redevelopment which the Project entailed.
Nevertheless, despite the Borough’s cooperation and subsequent execution of the Financial Agreement, the Project has suffered for a period of years from multiple defaults unrelated to the Borough’s obligations under the Financial Agreement. Cumulatively, the following defaults raise serious doubts about whether the Project will materialize in the manner understood by the Borough and EnCap at the time they entered into Financial Agreement.
- EnCap has failed to submit a budget that conforms to the sequencing schedule set forth by the New Jersey Department of Environmental Protection ("DEP") on September 19, 2007. (see Exhibit D)
- EnCap has failed to maintain performance security in the amount of 125% of the budget as required by the Development Agreement.
- EnCap is in financial default under the Loan Agreement dated December 1, 2005 between EnCap, the Bergen County Improvement Authority and the New Jersey Environmental Infrastructure Trust ("EIT").
- EnCap is in financial default under the Loan Agreement dated December 1, 2005 between EnCap and the DEP.
- EnCap is in financial default under EnCap’s agreements with the Letter of Credit Bank Syndicate and EnCap’s mortgages.
- EnCap is in breach of the Fill Capacity Approval and Agreement executed between the DEP and EnCap on April 19, 2004.
- EnCap is in default of section 20.1.2 of the Development Agreement for failing to evidence that EnCap can and will achieve the Phase I Landfill Closure Component Default Date of August 3, 2009.
Financial Inability to Implement the Project
The Binding Agreement between EnCap, Cherokee Investment Partners I, L.L.P., Cherokee Investment Partners III, L.P., Cherokee Investment Partners III Parallel Fund, L.P. and MDV dated as of November 2, 2007 (the "Binding Agreement") states that "The Parties acknowledge that proceeds of the working capital loans are expected to provide for the Phase I Project through November 30, 2008 and that additional working capital loans will be required prior to such date in the event that other liquidity events (i.e. issuance of PILOT Bonds) do not occur prior to such date."
Given that the State of New Jersey has repeatedly stated that it will not approve the issuance of PILOT bonds, as stated above, and given that the parties to the Binding Agreement acknowledged that the issuance of such Bonds would be essential to the financial viability of the Project, it is obvious to the Borough that the Project which was the basis of the Financial Agreement will not be financially able to proceed.
Referral of the Project for Criminal Investigation
Perhaps most troubling is the recent decision by the New Jersey Office of the Inspector General (the "OIG") to refer the Project to the Division of Criminal Justice in the New Jersey Attorney General’s Office.
As explained by the OIG’s February 28, 2008 report on the Project (the "Report"), the Governor had directed the OIG to investigate the Project’s financing out of concern about the PILOT bond scheme contemplated by the Financial Agreement.
1. Inspector General’s Findings Regarding the Financial Agreement
The following findings made by the OIG regarding the Financial Agreement are particularly alarming,
especially in light of the stated purpose of the Financial Agreement:
-The lack of full disclosure to the towns by EnCap’s representatives deprived the towns of a full understanding of the context of the financing.
-EnCap’s proposed PILOT bonds were for an amount that well exceeded the estimated cost of the entire remediation portion of the Project.
-At the time the Financial Agreement was negotiated and signed, EnCap had submitted a budget with its application for EIT and DEP loans indicating that the cost of remediation was $202 million ($10 million less than the amount of the application) and that other funds were not required for remediation.
-On December 17, 2004—mere days before the Borough and EnCap signed the Financial Agreement—EnCap executed a Participation Agreement with EIT and DEP by which EIT and DEP would extend loans to EnCap.
-It was not until two or three months after EnCap had entered into the original Financial Agreement with the Borough and the Participation Agreement with EIT and DEP, that EIT discovered EnCap’s plan to seek up to $450 million in additional revenue at an early stage of the Project.
-Counsel for EnCap acknowledged to OIG that they did not apprise EIT and DEP of the Financial Agreement and the PILOT bond proposal before the Participation Agreement was signed and that this was important and relevant information that the State representatives should have been given.
-EnCap believed that the Financial Agreement would result in tens of millions of dollars profit for it during the early stages of remediation.
-Rutherford officials would not have agreed to the Financial Agreement and PILOT bonds if the Financial Agreement would have generated a significant windfall for EnCap or if the financing provided via the Financial Agreement was intended to be used solely to restructure the Project’s financing.
2. Senate Environment Committee’s Request for Criminal Investigation
On March 17, 2008, the Senate Environment Committee and Legislative Oversight Committee met jointly tohear testimony by the Inspector General regarding the Report.In response to the Inspector General’s testimony, Senator Bob Smith, in his capacity as Chairman of the Senate Environment Committee, sent a letter to Attorney General Anne Milgram requesting a "thorough" and "expeditious" criminal investigation of the Project (attached hereto as Exhibit E).
In his letter, Senator Smith also requested, "in light of the evidence of misrepresentation by EnCap representatives," that the Office of the Attorney General "seek recovery of the Meadowlands property, civil remedies for the mismanagement of the property, and recovery of any State funds that were improperly spent."
For all of the reasons briefly outlined above, it is imperative that you advise by Wednesday, May 7, 2008, with supporting reasons and documentation as to why the Borough should not conclude that, except for the Impact Fee payment obligation, the obligation to pay Land Taxes, and the obligation to reimburse the Borough for its professional expenses, the Financial Agreement is no longer valid or binding on either EnCap or the Borough of Rutherford.
I look forward to your prompt response.
Very truly yours.
Joseph J. Maraziti, Jr.
Enclosures:
c: Mayor John F. Hipp and Members of the Rutherford Borough Council
Lane J. Biviano, Esq., Rutherford Borough Attorney
Mary P. Kriston, Rutherford Borough Clerk
Edward J. McBride, Jr., Chief Counsel to the Governor
Robert A. Romano, Assistant Attorney General, State of New Jersey
Steven E. Brawer, Esq., Special Counsel to the New Jersey Meadowlands Commission
Francis J. Quinn, Esq., Counsel for Wachovia Bank, National Association
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