Commonwealth of Massachusetts
Department of Environmental Management
EOEA # 11083
COMMENTS ON THE LAND DISPOSITION AGREEMENT
AND MASTER LEASE
Submitted on behalf of
Berkshire Natural Resources Council, Inc.,
Massachusetts Audubon Society, and
Save the Glen Association
Robert S. Sanoff
Adam P. Kahn
Kim I. Stollar
Foley, Hoag & Eliot LLP
One Post Office Square
Boston, MA 02140
Dated: December 1, 2000
The proposed Land Disposition Agreement (the "Draft LDA") between the Department of Environmental Management (the "DEM") and Greylock Management Associates, Limited Partnership ("GMA") attempts to memorialize an arrangement which is plainly illegal and which represents the worst-type of sweetheart deal in which public resources are being diverted to a private developer primarily for that developer’s benefit. What began in 1996 as a transaction in which a private developer would construct "general recreational facilities" with only limited public financing has become in the Draft LDA a government handout in which the government has most of the risk and expense and little opportunity to share in any meaningful profits.
Repeating precisely the conduct which the Inspector General in a 1991 Report had found to be illegal and improper in the original development proposal for the Greylock Glen, the DEM proposes in the Draft LDA to go forward with a project which is materially different from the development which was described in the February, 1996 Master Plan, in DEM’s April, 1996 Request for Development Proposals (the "RFP"), and in the September 3, 1996 Provisional Developer Designation (the "PDD"). Those three documents explicitly contemplated that the developer, using no more than $6.5 million of government money, would commit millions of dollars of its own equity and financing and build the Greylock Center, including a golf course, hiking trails, a clubhouse, a fitness center, a conference center, and other facilities. In a complete turnaround, the Draft LDA now proposes that the DEM, at a cost of roughly $15 million, will build the golf course, the hiking trails, and infrastructure improvements before GMA even has any obligation to construct other facilities.
Such a material change in the project is illegal in at least three separate respects: (1) the Commissioner has not certified and cannot certify that the Draft LDA implements the February 1996 Master Plan, as required in Section 5 of Chapter 676; (2) the Draft LDA is not the result of bid solicitations which were based on the February, 1996 Master Plan as required in Section 6; and (3) the Draft LDA violates Massachusetts procurement laws, MGL c.7, § 38A1/2, et seq.; MGL c. 149, § 44A, et seq. As the Massachusetts Inspector General found in his 1991 Report about the earlier proposed development of Greylock Glen, it is illegal for the DEM to solicit bids on a project and then materially change that project in the land disposition agreement without reopening the bid solicitation process and readvertising the work to determine if there were additional bidders for the revised project.
Surely, there would have been substantial numbers of additional bidders for the project as recast in the Draft LDA since the Draft LDA is far more favorable to the developer than the RFP or the PDD. Not only does the Draft LDA reallocate the risk and expense of the project from GMA to the DEM, it gives the bulk of the potential benefits to GMA as well. After constructing the golf course entirely at public expense on public lands that were taken at public expense, the DEM is obligated under the Draft LDA to lease that golf course to GMA rent-free for five years. It is only after the DEM has completed its construction work that GMA has any obligation to undertake construction in connection with Greylock Center. Although the September 3, 1996 Provisional Developer Designation agreement required GMA, no later than July 6, 1997, to provide DEM with written commitments of GMA’s ability to finance at least $9.4 million of the project construction work, no such written commitments were obtained by DEM. The Draft LDA drops that requirement. Instead, the only protection that the Draft LDA offers the public that GMA will actually perform its $19 million obligations is the posting of a $1 million performance bond. No doubt, GMA will try to leverage its publicly-subsidized leasehold on the golf course as the collateral for the performance bond.
In the end, the Draft LDA does not provide the Commonwealth with a reasonable return on its investment. In return for investing $15 million of public funds on top of the roughly $10 million already spent, the DEM estimates that it will receive roughly $27 million over thirty years in the form of fees, taxes, and proceeds from land sales. If the DEM took the $15 million it proposes to spend under the Draft LDA and merely purchased thirty-year U.S. Treasury bills, it would earn in excess of $83 million. Plainly, the Draft LDA is anything but a good deal for the Commonwealth and its citizens.
The Draft LDA is, however, a great deal for GMA. Under the Draft LDA, GMA can sit on the sidelines while the DEM invests $15 million in construction work. If and when that construction work is completed, GMA can decide whether to go forward with its obligations under the Draft LDA or simply default, leaving the public with a half-constructed project and a $1 million bond that is secured by the rent-free leasehold on the golf course. Other than the $1 million bond, the Draft LDA imposes no financial assurance on GMA. The absence of financial assurance puts the Commonwealth at enormous risk because the principals behind GMA have an established track record of failed projects, bankruptcy, and litigation. In 1993, the two principals behind GMA, Christopher B. Fleming and Charles Norton, filed for personal bankruptcy leaving hundreds of creditors choking on debts of tens of millions of dollars. A number of the projects touted by GMA as evidence of Fleming and Norton’s development experience were embroiled in litigation or foreclosure. That is the likely future for Greylock Center under the Draft LDA.
Without having constructed anything, DEM has already spent well beyond the original $8.5 million appropriation earmarked for Greylock Glen by the Massachusetts legislature. The Draft LDA would require the DEM to spend an additional $15 million which will likely inure only to the benefit of the developer and not the public and result in a partially constructed project without any realistic prospect of economic viability.
The Draft LDA is the second land disposition agreement which the DEM has released for public comment in connection with development of the over 1,000 acre Greylock Glen pursuant to Chapter 676 of the Acts of 1985 ("Chapter 676"). The first land disposition agreement, which was distributed in 1990, involved a proposed development to be undertaken by Heritage Development Group, Inc. ("Heritage"). That first land disposition agreement was the subject of a February 1991 Report by Joseph R. Barresi, the Massachusetts Inspector General.
In his February 1991 Report, the Inspector General concluded that the initial land disposition agreement with Heritage was illegal and improper:
The first three of these findings are substantial legal flaws, each of which independently would render void any disposition agreement signed as a result of this process.
IG Report, at pp.1-2.
The recently proposed Draft LDA with Greylock Management Associates ("GMA") raises many of the same issues as the initial land disposition agreement with Heritage. In April of 1996, DEM issued a Request for Development Proposals (the "RFP") for Greylock Center which requested bidders to submit proposals for the development of Greylock Center in accordance with the Master Plan, as amended on February 22, 1996. The RFP expressly authorized bidders to include in their response the use of up to $6.5 million in public funds. On or about May 22, 1996, GMA submitted a Development Proposal ("GMA Bid Proposal") which provided that GMA would construct Greylock Center, including the golf course (and tennis and fitness facility) at a cost of approximately $10 million to be funded with $2 million in "Owner’s Equity," $5 million from a construction loan, and $3 million in DEM funds.
On September 3, 1996, DEM selected GMA to serve as the developer and entered into a written agreement, titled the Provisional Developer Designation (the "PDD"). As set forth in the PDD, "[a]n initial ‘Phase I’ component shall be constructed by the Designated Developer utilizing the current levels of available public funds [i.e. $6.5 million], which Phase I generally consists of a fifty (50) room inn with meeting facilities, 5,000 square feet of commercial space, 5,000 square feet of institute (educational) space, 18 holes of USGA golf, two tennis courts, a 20,000 square foot clubhouse/fitness center, trails, cross-country ski trails and fifty residential lots." PDD, § 2. Section 4 of the PDD spelled out GMA’s financial obligation:
The Designated Developer shall be responsible for obtaining up to $33,000,000 in private funding for Project costs, including but not limited to, $450,000 in equity contributions for pre-development/pre-Land Disposition Agreement costs, $9,400,000 for Phase 1 costs and $23,200,000 in Phase II costs. The Designated Developer’s Phase I and Phase II project costs will be funded by debt and equity contributions. GMA shall provide not less than $2,200,000 in equity for Phase I of the Project and not more than $4,640,000 in equity for Phase II of the Project.
Within 240 days of the execution of the PDD, GMA was required to obtain "a written commitment for adequate financing to fund the construction and development of Phase I of the Project…." PDD, § 4. DEM’s financial obligation was explicitly limited "not to exceed $6,550,000 in total public funds…." Id.
Beginning with the April, 1996 RFP and continuing with the PDD , the Greylock Center project was premised on two bedrock positions: (1) the developer would construct the golf course, together with the other components of Phase I, with DEM’s funding obligation limited to no more than $6.5 million, and (2) the developer would be obligated to demonstrate its financial capability to fund the full $9.4 million of Phase I work, of which at least $2 million would be GMA equity funding.
The Draft LDA represents virtually a 180 degree reversal from both of those bedrock positions. As to the first position, the Draft LDA, in marked contrast to the PDD and RFP, purports to require the DEM, and not the developer, to build the golf course, the hiking trails, and cross-country trail network, as well as the installation of water, gas, and sewer lines up West Mountain road to the Greylock Center -- all at the government’s expense. DEM is reported to have estimated the cost of this work at more than $15 million. See "Glen project $12M short" 10/19/00 Berkshire Eagle (noting that DEM had estimated the cost of the installation of the utility lines at $3.5 million and the construction of the golf course and trails at $12 million). Under the Draft LDA, GMA has no obligation to undertake any construction unless and until the Commonwealth had completed its construction work. For example, GMA has no obligation to build the clubhouse until DEM completes construction of the golf course. See Master Lease, § 4.5(c). Likewise, GMA has no obligation to build the conference center until 10 years after DEM has completed all of its infrastructure improvements. See Draft LDA, § 3.6(b)(iii).
As to the second bedrock position, the Draft LDA substantially increases DEM’s financial contribution well beyond the $6.5 million limit set forth in the RFP and PDD. Whereas the PDD required GMA to provide written commitments for $9.4 million ($2.2 million of which had to be in equity), the only financial commitment required of GMA in the Draft LDA is the posting of a $1 million performance bond. Draft LDA, § 5.2(d). Presumably, GMA will not even have to post its own collateral to obtain the bond, since it is likely that GMA can obtain that bond merely by pledging its sweetheart leasehold in the golf course, which provides for a $1/year rent for the first five years (the "Initial Rent Period") and only $6,500 per month for the second five years. Draft Master Lease, §§ 7.1-7.2.
Indeed, again and again in the Draft LDA, the largest share of risk and obligation is on the DEM; GMA’s obligations are not triggered until after the DEM completes its construction. DEM must promise to build a multi-million dollar golf course, the hiking trails, and the infrastructure improvements even though the funds have not been appropriated. GMA commits only to taking the value of the improvements leased to it by the DEM at virtually no cost for five years. If, at that point, GMA can leverage its rights under the Draft LDA and Master Lease sufficient to finance its building obligations and wants to do so, GMA will go forward with that construction. If GMA cannot leverage its rights, it will simply decline to go forward and forfeit the $1 million performance bond, which is likely to have been secured by the rent-free lease on the golf-course, leaving the DEM with a partially constructed project and no viable developer.
At the center of Chapter 676’s scheme for Greylock Glen is the requirement that, before any development goes forward, DEM must have in place a Master Plan that will serve as the blueprint for the project:
The master planner shall formulate and the commissioner [of DEM] shall approve a plan for the development of the lands which plan shall implement the purposes by outlining the proposed uses of the lands as well as the facilities and improvements thereon with sufficient specificity so as to serve as a basis for the solicitation of proposals by private parties for the development of the lands.
Chapter 676, § 6. In his 1991 Report, at p. 3, the Inspector General confirmed the centrality of the Master Plan:
The legislation clearly established the master plan as the major control over the project. The act required that the plan "serve as a basis for the solicitation of proposals" from developers; authorized the Commissioner of DEM to negotiate with and select a developer "so as to best implement the plan and the purposes of the act;" and established as a condition precedent to any disposition that the Commissioner find that "the disposition implements the plan."
The Draft LDA violates the letter and spirit of Chapter 676 --specifically the requirement that the Draft LDA must implement the Master Plan. Likewise, the change in the project from the 1996 Master Plan and the RFP to the Draft LDA is a clear violation of Massachusetts procurement laws, MGL c. 7, §§ 38A1/2, et seq.; MGL c. 149, §§ 44A, et seq.
Section 5 of Chapter 676 expressly requires the Commissioner of DEM to certify that the Draft LDA implements the Master Plan. The Commissioner has not made such a certification, nor could he, because the Master Plan, as amended in February, 1996, is dramatically different in material respects from the Draft LDA. Whereas the Master Plan, at p. 26, expressly stated that the developer was to be "wholly responsible for execution of the site and building design, construction, management and marketing of the project," the Draft LDA provides just the opposite -- DEM, not the developer, will be responsible for the execution of the design and construction of key aspects of the Greylock Center, such as the golf course, the hiking trails, and the infrastructure improvements. Under the Draft LDA, the developer does not have any obligation to build anything at Greylock Center until after the DEM has completed its multi-million dollar construction obligations.
An additional change involves the back-loading of the conference center in the Draft LDA. In the RFP, DEM repeatedly emphasized that the conference center was necessary to "create a drawing power sufficient to overcome the access problems associated with the site" and as the "linchpin of the project." RFP, at p. 69. For that reason, the RFP, at p. 27, made the conference center a mandatory requirement and, at p. 33, insisted that "[e]xperience with conference center development and operations is essential." In a complete flip flop, the Draft LDA puts the conference center component into Phase II of the project, which need not be commenced for over a decade after DEM completes its work.
Given these material changes from the Master Plan to the Draft LDA, the Commissioner of DEM cannot properly certify that the Draft LDA implements the Master Plan. Without such a certification, the Draft LDA is illegal and invalid because it violates the requirements of Chapter 676.
The inability of the Commissioner to certify that the Draft LDA implements the Master Plan is not some hypertechnical deficiency. It underscores the more basic problem that, under Section 6 of the Chapter 676, the Master Plan is to "serve as a basis for solicitation of proposals by private parties for the development of the lands." Where, as here, the Draft LDA materially departs from the Master Plan and the RFP, then the bid solicitation process is illegal under both Chapter 676 and Massachusetts procurement procedures.
In his 1991 Report, at p. 11, the Inspector General reaffirmed the basic rule of government contracting that the contract awarded for public work must be for the same basic specifications as were the subject of the bid solicitation:
It is a fundamental tenet of public contracting in Massachusetts that when specifications are advertised -- and in this context the master plan constituted a key set of specifications -- the contract must confirm to the specifications. The selection of Heritage, whose proposal did not comport with the advertised master plan, violated a bedrock principle of public contracting. In this case, the rules were changed after the race was run.
As with Heritage, the DEM seeks with GMA to change the rules after the race was run, rendering the Draft LDA illegal as written, requiring an entirely new procurement process that is in fact based upon the February, 1996 Master Plan.
As the following table illustrates, the Draft LDA contains markedly different terms than the 1996 Master Plan, the 1996 RFP, and the PDD.
TABLE COMPARING KEY ISSUES IN THE DRAFT LDA WITH MASTER PLAN AND BID SOLICITATION MATERIALS
1996 Master Plan, RFP, PDD
Construction of golf course, trails, infrastructure
Additional DEM funding required
Capped at $6.55 million
Uncapped, estimated to be at least $15 million
Start of developer’s construction obligations
GMA to obtain permits prior to negotiation of LDA with groundbreaking on Phase I to occur within four months of LDA
GMA’s construction to begin only after all of DEM’s construction work completed, and then for some facilities, such as conference center, not until a decade later.
GMA to provide written commitments for $9.4 million Phase I financing (including $2.2 million equity funding)
GMA to provide $1 million performance bond with no required equity funding
The Draft LDA seems to be written with selective amnesia about the provisions of the Master Plan, the RFP, GMA’s Bid Proposal, and the PDD. The Draft LDA’s departures from these earlier documents plainly violates both Massachusetts procurement procedures and Chapter 676’s requirement that the Draft LDA be based on the Master Plan. In words that call to mind Yogi Berra’s colorful phrase about it being "déjà vu all over again," the Inspector General concluded in his 1991 Report, at p. 18, that "[t]he state may not legally sign an agreement which departs so fundamentally from the deal which was advertised and the proposal which was selected."
Section 44J of Chapter 149 of the General Laws requires that bid solicitations must provide notice of "sufficient facts concerning the nature and scope of such project, the type and elements of construction, and such other information as will assist applicants in deciding to bid on such contract." It would obviously defeat the purpose of this notice if a government agency could enter into a contract for work which is materially different from the description of that work set forth in the bid solicitation. For that reason, Massachusetts courts have repeatedly held that a governmental agency is required to reopen bid solicitations when the specifications for a public works project have changed and failure to do so invalidates the government contract. E.g., Lynch v. Somerville, 326 Mass. 68, 70-71 (1950) ("If the [advertised] terms of the specifications are not to be followed … we think a new advertisement must be published and the proceedings must begin again. Because the contract did not follow the specifications upon which bids were asked, we think it was invalid"); Phipps Prods. Corp. v. Mass. Bay Transp. Auth., 387 Mass. 687, 690 (1982).
The Draft LDA also fails to comply with many other procurement procedures in the construction bid law, MGL c. 149, §§ 44A, et seq., and the designer selection law, MGL 7, §§ 38A1/2, et seq. For example, those procurement procedures include, inter alia, (1) a bid deposit (MGL c. 149 § 44B); (2) eligibility and financial certifications (MGL c. 149, § 44D); (3) performance and payment bonds for the contract price (MGL c. 149, § 44E); and the mandatory selection of three finalists for the design work (MGL c. 7, § 38F).
As the Inspector General concluded in his 1991 Report, at p. 34, the Draft LDA is subject to these procurement procedures. Section 44A(2) of Chapter 149 provides that these procurement procedures apply to "[e]very contract for the construction …of any building by a public agency estimated to cost more than twenty-five thousand dollars." The term "construction … of any building by a public agency" has been construed to mean physical construction of "public buildings" and improvements on land owned by the Commonwealth. Andover Consultants, Inc. v. City of Lawrence, 10 Mass. App. Ct. 156, 160 (1980). The term "public building" is defined in Black’s Law Dictionary as "belonging to or used by the public for the transaction of public or quasi public business." In a decision involving facts similar to those here, In re: Town of Nantucket, (Aug. 22, 1989), the Massachusetts Department of Labor and Industries expressly found that a facility was a "public building" and subject to the procurement requirements of Chapter 149, Section 44A, et seq., even though the building was to be constructed by a private party with private financing on publicly owned property. By failing to comply with the procurement procedures applicable to public works contracts, the Draft LDA is illegal and invalid.
The Draft LDA obligates the DEM to spend more than $15 million in construction costs over the next two years -- money which has not yet been appropriated. The benefit of that construction work will then be transferred to GMA in the form of a rent-free golf course for five years. In return, the public receives a promise from GMA to perform millions of dollars of construction work. GMA’s promise will be secured solely by a $1 million performance bond. At bottom, the Draft LDA is an improper sweetheart deal which imposes significant cost and risk on the public in return for precious little potential benefit.
Section 8 of Chapter 676 authorizes the Commissioner of DEM to "enter into contracts for the use, maintenance, and alteration of the lands or any facilities improvements thereon." That authority, however, is expressly conditioned on the requirement that any such contracts, including for the disposition of the lands, must ensure that the Commonwealth will receive a reasonable return: "provided however that the [DEM] shall require a reasonable return from the developer…."
The Draft LDA cannot be understood to provide a reasonable return to the Commonwealth. Under the Draft LDA, the DEM must spend at least $15 million in construction costs before GMA has any obligation whatsoever. Once the Commonwealth’s construction is completed, GMA receives a multi-million dollar golf course rent-free for five years with a rent of $6,500 per month for the next five years and that rent is subject to deferral. Master Lease, at §§ 7.2, 7.4. In return for this significant investment, the DEM gets a promise by GMA to build certain facilities at a cost of $19 million, which is secured only by a $1 million performance bond.
DEM’s construction costs in excess of $15 million are in addition to the roughly $10 million DEM has already spent. Under a best case scenario, DEM’s $25 million investment in Greylock Center will never yield more than a paltry return for the Commonwealth. Over the next thirty years, even the wildly optimistic scenario presented by DEM in its Executive Summary to the Draft LDA shows only $26.94 million return on investment for the Commonwealth, comprised of $2.94 million in cash flows (specifically, $240,000 from land sales and $2.7 million from the payments under the Master Lease) and $24 million in highly speculative state taxes ($14 million in state hotel room taxes and $10 million in sales taxes).
Even without discounting to present value the cash flows and taxes which will not be earned for decades, DEM’s sunk cost investment of approximately $10 million and its prospective additional investment of over $15 million will not obtain a reasonable return. If DEM simply invested today its proposed $15 million expenditure in thirty-year U.S. Treasury bills at the current annual rate of 5.733%, DEM would earn $83,417,225 without taking any risk whatsoever. That return is over 300% of the best case return for the Commonwealth on its $15 million investment in Greylock Center (that is, $83 million versus $27 million). In other words, the Commonwealth’s best case return on the most optimistic assumptions will yield a return that is only a small fraction of the return which could be obtained without risk merely by buying treasury bills.
Even the best case under the LDA does not permit the conclusion that the Commonwealth will obtain a reasonable return on its investment under the Draft LDA. However, there is no realistic prospect that the Commonwealth and the public will ever obtain that best case outcome. Characterized most charitably, the housing market study commissioned by DEM pursuant to Chapter 676 concluded that the success of Greylock Center was at best uncertain:
There is not enough demand for seasonal housing to warrant a current development response. Demand generators must first be developed. Seasonal housing built today would not be feasible, and would be dramatically premature for the development. Further, its requirement of meshing with the other components and programs cannot be tested, as they have not been sufficiently developed at present.
December 24, 1997 Housing Market Study, at p. 7. As the market study indicates, there will be no brisk sales of residential properties or high occupancy rates in the hotels at Greylock Glen for the foreseeable future. The probable scenario is that the Developer will take the free use of a multi-million dollar golf course for five years, translate that leasehold into cash, and then refuse to go forward with the project. If necessary, GMA will resort to the protections afforded by the bankruptcy laws.
Indeed, the principals of GMA have in the past shown their willingness to resort to those protections. As set forth in the final section of these comments, the two principals behind GMA, Christopher Fleming and Charles Norton, both declared personal bankruptcy in 1993 when their development firm could no longer stay afloat. Fleming and Norton left their creditors holding tens of millions of dollars in unpaid bills. In a bankruptcy scenario, DEM will have only one asset it can rely upon under the Draft LDA -- a one million dollar performance bond. That one million dollar bond will not remotely enable the DEM to build the project; rather, the DEM will be left with a financially untenable golf course, hiking trails, and infrastructure improvements. Under all these circumstances, DEM cannot credibly assert that the Draft LDA offers a reasonable return on investment to the Commonwealth.
By any standard, Greylock Center is a project that is fiscally out of control. Section 9 of Chapter 676 gave the Commonwealth bonding and note authority of up to $8.5 million for use in the development of Greylock Glen. As the Inspector General documented in his 1991 Report, at pp. 5-6, DEM had already spent $6.1 million towards development of the plan as of 1991. At a minimum, an additional $3 to $4 million has been spent since that time, as detailed in a 1998 financial report jointly prepared by DEM and GMA, Greylock Center Financial Information. Without having constructed anything, DEM has already spent well beyond the $8.5 million appropriation earmarked for Greylock Glen in Chapter 676.
It is unfathomable how DEM can commit in the Draft LDA to spend an additional $15 million. The PDD required that the Draft LDA provide a schedule, budget, and explanation of the purposes for which the Commonwealth’s contribution would be expended. PDD, § 5. Noticeably, such information is absent. The Draft LDA fails to make any provision conditioning the DEM’s obligations on the availability of lawfully appropriated funds. See MGL c.29, § 18 ("[N]o money shall be paid by the Commonwealth without a warrant from the governor drawn in accordance with an appropriation then in effect . . . .")
The Inspector General criticized DEM for exactly the same behavior in 1991, when it committed $16.5 million to the Greylock Center project with Heritage. IG Report at pp. 20-24. The Draft LDA’s requirement that the DEM commit to over $15 million in construction without identifying any appropriate or appropriated funding source is improper and represents a material departure from the 1996 selection process and the intent in Chapter 676 that the Commonwealth’s financial participation be capped at a sum less than what has already been expended.
Other than the one million dollar performance bond, the Draft LDA contains no financial assurance provision securing GMA’s supposed $19 million construction obligations. In the 1996 RFP, DEM required each bidder to demonstrate its financial capability to complete the project. One of the five objectives of the RFP was to minimize risk and public subsidy. RFP at 11. Private investment in the property, "including both private debt and private equity finance," were required. Id. at 32. "Proposals are asked to demonstrate the respondent’s ability to finance the project." Id. Developers were required to provide "sufficient information to demonstrate the developer’s ability to finance the project . . . ." Id. at 38. Audited balance sheets and a three year history of income and expenses for the "lead proposing developer and any component developer(s)" were required. Id. at 41.
Flouting these mandates, GMA made no demonstration of its financial capability. In its May 22, 1996 Development Proposal, at p. 14, GMA identified its general partner, Hamilton Betts, Inc., as assuming "primary development management responsibilities." However, GMA failed to provide the requisite balance sheet and income history for Hamilton Betts on the ground that "[t]he financial information requested in the RDFP, specifically the balance sheet and income and expense statements of GMA are not available as the GMA entity has not been formally formed." Id. at 8. Aside from a few banking references, GMA made no other financial capability demonstration. However, GMA did pledge $2 million in "Owners Equity" for the construction of the golf course and other recreational improvements. Id.
Recognizing that GMA’s proposal failed to demonstrate financial capability, the PDD imposed a set of financial assurance obligations on GMA. Thus, GMA was required to present: a letter of financing interest for Phase I prior to signing the LDA, a written commitment for adequate financing to construct and develop Phase I, and written confirmation from GMA’s construction lender that the Draft LDA was approved by the Lender. PDD, §4. Furthermore, the PDD committed GMA to at least $2.2 million in equity for Phase I of the project and up to $4.64 million in equity for Phase II of the project. Id., § 4. Finally, the PDD required that GMA obtain its financing for Phase I within six months of signing the LDA.
It does not appear that DEM actually enforced any of the financial assurance requirements from the PDD. Rather than carrying through on those requirements, the Draft LDA simply abandons them. The Draft LDA does not retain the requirement from the PDD that, within six months of execution of the LDA, GMA must close on its Phase I financing. The only financial assurance requirement in the Draft LDA is the $1 million performance bond. Draft LDA, § 5.2(d); Exec. Summary, at p.1. The Draft LDA contains no requirement for proof of financing for the sale parcels set to close in 2003 and 2010. Additionally, the Draft LDA simply drops GMA’s equity commitment memorialized in the PDD.
The need for complete financial assurance in the Draft LDA is essential, given that the principal individuals behind GMA have a track record of development failures and bankruptcies. Just last year the State of Rhode Island rejected a development proposal from a Charles Norton- affiliated firm for failure to provide adequate financial assurance, once Norton’s financial history was uncovered. The Commonwealth of Massachusetts must similarly protect the public’s interests.
GMA was formed as a limited partnership for the purpose of performing the Greylock Center development work. GMA’s general partner is a Massachusetts corporation, Hamilton Betts, Inc. ("Hamilton Betts"), which was organized on August 4, 1993.
GMA’s May 22, 1996 Bid Proposal listed four individuals as Managing Directors and Directors of Hamilton Betts: Christopher Fleming, Charles Norton, Alexander Spaulding, and Josiah Spaulding. However, only ten days later, on June 1, 1996, Christopher Fleming signed a Certificate of Change of Directors or Officers on behalf of Hamilton Betts which recited that Alexander Spaulding and Josiah Spaulding were being removed as officers and directors of Hamilton Betts, leaving only Fleming as president and Norton as treasurer. Accordingly, when DEM selected GMA as the developer in the September 3, 1996 PDD, it was only the development experience of Fleming and Norton that could be relied upon.
Unfortunately any examination of the development experience of Fleming and Norton discloses a pattern of troubled projects, bankruptcy, and litigation. Fleming and Norton began working together in the early 1980s through a real estate development company called St. James Properties, Inc. See Fleming Depo., p.12. Financing for the development deals entered into by St. James was often arranged by Weston Financial Group of Wellesley, MA, and its subsidiary Weston Properties Corporation ("Weston"). Id. at 62. According to Fleming, St. James would create single purpose partnerships for the individual projects, and Weston would raise equity financing by selling limited partner interests, with non-equity financing raised through bank loans secured by personal guarantees made by the general partners. Id., pp. 58, 81.
When asked at deposition in 1993 whether there were any deals in which the limited partners did well, Fleming testified:
Relatively few of them, if any. Some of them were tax credit deals, so its hard to know how you define "did well." . . . But by and large, I would say most of the properties got foreclosed out. So other than the tax benefits that they accrued, for the most part the investors did not do well.
Fleming Depo., at 62; see also 9/26/90 Deposition of R. Dudley Webb, p.24, BankBoston Real Estate Capital Corp. v. Webb/Sillman Assoc. et al., Case No. 89-CI-084444 (Ky. Cir. Ct.) (former St. James partner noting that as to the deals he was involved with St. James, "all but one are in the process of foreclosure"). Gerald Tulis, the accountant for St. James from 1988 to 1994, similarly acknowledged at deposition the substantial failures of St. James:
Q: Were you involved in connection with your work for Mr. Fleming, Mr. Norton, for St. James and their various entities, were any of their investments successful in the time period that you were involved?
A: No, I don’t think any of them were.
1/4/94 Deposition of Gerald Tulis, p.114, In re Christopher B. Fleming, Case No. 18113-JNF (Bankr. D. Mass.).
St. James ultimately did not make money through the equity positions it held in the development projects. As Fleming testified at deposition, "I don’t believe there’s any deals that we did with Weston where there was . . . a residual asset left at this point, that we had value in. I mean the buildings are still there, but other people own them." Id. Instead, St. James made its money on these developments in the form of development and/or construction management fees. Fleming Depo., pp. 62-63.
While Fleming and Norton personally guaranteed many of the bank loans obtained by St. James and their other companies, Fleming and Norton’s personal financial condition eventually would not support such loans. Fleming Depo., p. 89. At deposition, Norton explained that they could not obtain bank financing when the bank asked to examine their personal financial condition:
Q: [I]n the past when you have done deals as St. James, there were indications of the financial conditions of the principals of St. James?
A: Lenders would ask for it if you went down the road with them. Once they showed a level of interest and started looking specifically at the deal, they’d probably ask for financials.
Q. And if they did, in this case, you’d be giving them –
A: We wouldn’t give them anything. We would probably bow out and find somebody else to do the deal because that would be the kiss of death if we gave them our financials.
Q: So basically your feeling is that nobody will lend you money based on the true picture of your financial condition?
A: Correct. I can’t even get a credit card at this point.
Norton Depo., p.69-70.
As a result of their mounting business failures, Fleming and Norton filed on August 19, 1993 a Chapter 11 bankruptcy petition on behalf of one of their primary real-estate businesses, Webb/St. James Ventures, Inc.. See In re Webb/St. James Venture, Inc., Case No. 93-17533-JNF (Bankr. D. Mass. 1993) (Fleming and Norton each listed as 50% owners). Less than a month later, on September 9, 1993, both Fleming and Norton filed personal bankruptcy petitions. Fleming and Norton’s bankruptcy petitions each listed debts in excess of $50 million with assets of less than $275,000. On March 15, 1995, Fleming and Norton’s debts were discharged in bankruptcy with creditors receiving little, if anything.
Not only did Fleming and Norton have many business creditors with unpaid bills, but they also had unpaid tax bills. See also William J. Donovan, "Finances of port developer-hopeful in spotlight," Providence Journal-Bulletin (Apr. 18, 1999) (reporting that Norton "negotiated a $5 million state and federal tax debt down to $300,000"). Christopher Fleming’s bankruptcy filing showed he owed more than $900,000 in taxes to local governments: $404,584 to the city of Newton, MA; $234,010 to the city of Boston, MA; $288,000 to the city of Springfield, MA; and $7,082 to the town of Provincetown, MA. In re Christopher B. Fleming, Case No. 93-18113-JNF, Schedule F, pp. 6, 23. The Boston Herald reported in 1995 that one of Fleming and Norton’s partnerships, 90 Tremont Street Associates, owed $600,000 in back real estate taxes on the 90 Tremont Street project. Marie Gendron, "Developer targets vacant Dini’s building," Boston Herald, p.28 (Mar. 31, 1995); see also Gary Gerew, "Big Tax Delinquents Least Likely To Pay City: Top 10 Properties Owe $10 Million," Syracuse Herald-Journal, p.B1 (Jan. 1, 1996) (rating Continental Webb Realty, a partnership of which Fleming was President, number two on its "top ten list of tax delinquents", with $2,492,917 in taxes owed to the city of Syracuse NY).
In the midst of the bankruptcy proceedings, Fleming and Norton’s new company, Hamilton Betts Inc., sent a letter to DEM expressing an interest in Greylock Center. See 5/5/94 Letter from Hamilton Betts, Inc. to Peter Webber and Stephen Brown, The letter emphasized Fleming’s development experience, including three projects: (1) the MONY garage in Syracuse, New York, (2) 1000 Water Street in Milwaukee, Wisconsin, and (3) One and Two Chestnut Place in Worcester, Massachusetts. What Hamilton Betts’ letter did not disclose was that each of these three projects was beset by difficulty.
With regard to the MONY garage, Fleming had originally set up a partnership to buy and develop two towers that were located over an existing parking garage. However, the partnership defaulted on a loan and a local partner took over ownership of the towers. Norton Depo. at 32-40. Eventually, the Mutual Life Insurance Company ("MONY") sued for nonpayment of rent on the land under the garage and obtained an order from the City Court of Syracuse ordering Fleming’s partnership to vacate the premises within 72 hours. See Objection of MONY to Emergency Motion To Vacate, In re Webb/St. James Venture, Inc., Case No. 93-17533-JNF (Bankr. D. Mass. 1993) (discussing the City of Syracuse lawsuit and eviction order).
In the 1000 Water Street project, Fleming and Norton’s company Webb/St. James Ventures, Inc., announced its role as the initial lead developer of the project in 1988. Chris Foran, "Changing Face of Real Estate Deals Opens Doors for Attorneys," Business Journal-Milwaukee, p.8 (Jan. 22, 1990). However, in 1989, Webb/St James Ventures, Inc. relinquished ownership to Richard H. Rubin Companies and became a limited partner. Norton Depo. at 30. The construction lender, Citibank, eventually was forced to foreclose on the project. Id.
Finally, in One and Two Chestnut Place, Fleming and Norton each began with individual equity interests in 1989. Fleming Depo. at 25. However, when NYNEX Properties Company made a capital call on all of the partners in order to meet the operating deficits of the project and pay interest on the loans, Fleming and Norton were unable to meet it. Id. at 26-27. As a result, NYNEX exercised its right to dilute Norton and Fleming. Id. at 26. Fleming and Norton were also sued by both Weston Properties XVII Limited Partnership and Patriot for Real Estate Development Corp. as a result of this deal. See Weston Prop. XVII Ltd Partnership v. Fleming et al., Civil Action No. 90-7544 (Mass. Super. Ct. 1990); Patriot for Real Estate Development Corp. v. Christopher, Civil Action No. 91-0551 (Mass. Super. Ct 1991).
In light of the checkered development record of the principals behind GMA, the lack of any financial assurance from GMA other than a $1 million performance bond is indefensible. It was no doubt with that record in mind that GMA steered the Draft LDA in two directions: (1) to remove any meaningful financial assurance and (2) to provide GMA’s compensation in connection with Greylock Center more in the form of development and management fees than in the form of an equity stake in the success of the project.
The Draft LDA gives GMA just what it wanted – no personal financial risk and the opportunity to make money in a deal from fees rather than from the success of the project. While the Draft LDA gives GMA what it wants, it does little to protect the public. If history is any guide, GMA will take the fees offered, build nothing, and leave the Commonwealth with a partially developed project that has no chance of economic viability.
The DEM’s willingness to cater to GMA’s needs in the Draft LDA is in marked contrast to the recent response of the State of Rhode Island to a development proposal by Quonset Point Partners, a Boston-based limited partnership whose principal was Charles Norton. There, the Norton-entity proposed a public-private partnership, like the Greylock Center, to develop a container port in Davisville, Rhode Island. The deal was ultimately rejected by the State of Rhode Island, after news of Norton’s $50 million bankruptcy, lawsuits, and liens were made public. William J. Donovan, "Finances of Port Developer-Hopeful in Spotlight," Providence Journal-Bulletin (Apr. 18, 1999). In a press release, the Governor stated, "I have made it clear that a port development plan must be: ECONOMICALLY VIABLE – that the developers must be able to secure the financial and shipping commitments to ensure that the port will be successful. The plan also must be PRIVATELY FINANCED." Press Release, Governor Lincoln C. Almond, July 1, 1999 (emphasis in original). That deal fell apart when the State pressed for financial commitments from the developer. Sara Kehaulini, "Quonset Group Plans a Claim Against R.I.," The Wall Street Journal, NE1 (Nov. 10, 1999) ("The state wanted explicit financial commitments; the developer said letters of interest should suffice."). Like the State of Rhode Island, the DEM has an obligation to the public to press GMA for the financial assurances it insisted upon in the PDD. If GMA cannot provide those assurances, the DEM has no business going forward with GMA as the developer.
For the above-stated reasons, the Berkshire Natural Resources Council, Inc., the Massachusetts Audubon Society, and the Save the Glen Association respectfully submit that it would be illegal and improper for the DEM to execute the Draft LDA and ML.
By their attorneys
Robert S. Sanoff
Adam P. Kahn
Kim I. Stollar
Foley, Hoag & Eliot LLP
One Post Office Square
Boston, MA 02109
Dated: December 1, 2000