Development: A cautionary tale

'Creative financing' of a politically-favored pet project to develop a golf course and residences atop a Meadowlands landfill have put the state and the developer in a ticklish situation.

The whole mess just underlines the importance of due diligence on the part of public officials when committing to development projects.

Despite warning flags beforehand that the developer, EnCap -- a subsidiary of Cherokee Partners -- was financially shaky, wasn't bringing much collateral to the table, and had a history of stiffing subcontractors, the deal was pushed through by highly juiced pols and friends.

The story, as summed up in today's Bergen Record, is worth recounting in full:

Top aides OK’d risky EnCap deal

Friday, June 8, 2007

By JEFF PILLETS
TRENTON BUREAU

Senior officials in the McGreevey and Codey administrations signed off on a $212 million loan for the troubled EnCap golf project, even though subordinates warned that the cut-rate financing was a risk for New Jersey taxpayers and bad policy for the environment.

Documents reviewed by The Record show that lawyers from the politically connected DeCotiis firm of Teaneck scored the massive loan for EnCap Golf Holdings in December 2005 despite concerns about the developer's shaky credit and long history of missing payments and breaking promises to state agencies.

The Department of Environmental Protection, which contributed $105 million to the EnCap financing package, even exempted the developer from providing more than minimal collateral.

The bottom line: The biggest loan the DEP has ever made to a private developer is backed only with $13 million in borrowed cash and the promise of future tax revenues that may never materialize as the massive landfill-to-links project teeters on the brink of collapse.

The developer is months behind in payments to its subcontractors, and on May 17 the state Attorney General's Office found EnCap in default of the terms of its deal with the New Jersey Meadowlands Commission. EnCap has until next Friday to submit a revised landfill cleanup budget -- or else the project could be canceled.

EnCap's current troubles were anticipated more than two years ago by DEP staff members who pegged the company as a risky borrower and argued against the financing.

The EnCap loan "will not meet the Financing Program's normal creditworthiness standards," Samuel Wolfe, a former assistant DEP commissioner, wrote in a November 2004 memo to his superiors.

Wolfe also warned that EnCap would deplete New Jersey's share of shrinking federal grant money that communities across the state need for vital sewer-repair and drinking-water projects. The lack of sufficient collateral and favorable repayment terms being fashioned for EnCap, he said, even ran the risk of drawing scrutiny from the Environmental Protection Agency.

"The federal government could choose to embarrass the state by publicizing the [loan] terms," Wolfe wrote.

Representatives of both the DEP and the Environmental Infrastructure Trust, the agencies that provided the loan package, declined to discuss EnCap's financing in detail because the deal remains under investigation by state Inspector General Mary Jane Cooper.

The formulation of the 2005 EnCap financing package spanned two gubernatorial administrations that preceded Jon Corzine. Conceived under EnCap champion Gov. James E. McGreevey, the loan was formally approved during the administration of Richard Codey as acting governor.

The team of officials who approved the loan included DEP Commissioner Bradley Campbell, Treasurer John E. McCormac, Dennis Hart, executive director of the Environmental Infrastructure Trust, and Susan Bass Levin, who as head of the state Community Affairs Department is an ex officio member of the EIT board. All were McGreevey administration holdovers.

Of those available for comment this week, only Hart offered a substantial defense of the decision.

Public came second

Some 4,500 pages of government documents reviewed by The Record show that despite the warnings from Wolfe and other ranking state bureaucrats, EnCap landed a deal brimming with lucrative concessions while offering spotty security for taxpayers.

The documents also challenge the official portrayal of the EnCap project: a model of public-private cooperation that would transform historic landfills in Lyndhurst and Rutherford into a golf-themed mini-city. The reality as revealed in the e-mails and other documents is that, time after time, the public interest took a back seat to the desires of the private developer.

Long-standing credit standards were waived. Special loan legislation was tailored for the developer. Regional sewer and water plans were redrawn to suit EnCap's business needs over the objections of environmental advocates. Millions were furnished for peripheral project expenses, such as the relocation of radio towers.

Even though EnCap's landfill cleanup proposal ranked 121st on the state's list of water-quality projects, 10 employees of the DEP's Division of Water Quality were diverted to work full time on the developer's loan application.

Environmental reviews that normally take months were fast-tracked in weeks, sometimes days. DEP department heads even e-mailed each other "kudos" for pushing EnCap's application ahead of others that had come in earlier.

EnCap's lawyers, from the powerhouse firm DeCotiis, FitzPatrick, Cole & Wisler enjoyed private meetings with top policymakers at the DEP, Treasury, DCA and other key agencies. The lawyers also were granted access to the back-office bureaucrats and technical staffers assigned to review the loan.

In hundreds of e-mails to agency staffers and their consultants, DeCotiis lawyer Steven Pearlman can be seen orchestrating essential details of the state approval process. He imposes deadlines and hectors officials to meet them. He offers strategies to lessen the loan's federal tax burden on EnCap.

The documents reviewed by The Record also reveal that, even as the state bent to accommodate EnCap, the developer routinely missed application deadlines and withheld key financial information from the state.

EnCap, the records show, initially failed to disclose plans to collect hundreds of millions from public bonds backed by future tax revenues, or PILOTs, [sic - the correct term is TIFs. -- DD] that would be generated by the 2,500 houses, hotels and other businesses scheduled to be built as part of the luxury golf village. In separate agreements with EnCap, Rutherford and Lyndhurst ceded large shares of those future revenues to the developer.

State officials, who had been scrambling to find sufficient collateral for the loan package, were shocked to discover that EnCap hadn't told them there was a potential mountain of cash that could be pledged to back the loan.

In separate interviews with The Record, four state officials who worked on EnCap's loan application said they were outraged by what they said was the developer's failure to show its full financial hand. The officials, who still work for the state, would speak only on condition of anonymity for fear of damaging their government careers.

"People in our unit were screaming mad," said one veteran of the water-quality division. "This developer was getting break after break. And these guys ... aren't even upfront about their sources of income."

Added another longtime DEP employee: "If I go to my bank for a mortgage but don't have collateral, I won't get the loan. If I put bad information on my application and get caught, I'd get charged with fraud."

A pet project

So why all the special treatment for EnCap?

Senate President Richard Codey, who was acting governor in December 2005 and who signed legislation authorizing all of EIT's financing that year, said he never agreed to any special concessions for the developer or its attorneys.

"I never signed anything fast-tracking that project,'' Codey said in an interview this week. "If any of these memos or warnings had come across my desk, I would have put a stop to the loan."

Codey said he would meet with Attorney General-designate Ann Milgram to express concerns about EnCap's financing.

Clearly, the Meadowlands venture was close to the heart of Codey's predecessor, McGreevey, who came to office in 2002 and established "smart growth" policies as a priority. After announcing his resignation in August 2004, the scandal-scarred McGreevey surprised Trenton by declaring that he would stay in office an additional 90 days to see through Meadowlands redevelopment projects.

But critics point out that the smart-growth development boom has also benefited the Democratic builders who had financed McGreevey's successful campaign.

They also note that the leading financial architects of McGreevey's victory were Alfred and Robert DeCotiis, founding partner of the Teaneck firm that represents EnCap. Robert DeCotiis' son, Michael, was McGreevey's chief counsel.

The DEP employees interviewed by The Record, as well as a top former McGreevey administration official familiar with the loan, said it was clear to everyone that the governor was the driving force behind the financial package.

"McGreevey didn't really care what the loan was about. He cared who was getting it,'' said the former official. "For reasons obvious to everybody, DeCotiis projects got top priority.''

McGreevey was traveling in China and was not available for interviews, according to friends who contacted him via e-mail. But state Sen. Raymond Lesniak, D-Union, said the former governor did note that the loan package had been approved by the Attorney General's Office and the DEP.

DeCotiis attorney Pearlman did not respond to a request to be interviewed for this article. But the documents show how he deftly navigated the state bureaucracy.

A former in-house counsel to the EIT for 15 years, Pearlman, in several e-mails, refers to staffers there as his "troops" or "fast-tracking crew."

"The level of arrogance on their part was astonishing," said one former DEP official who now works in another agency. "They felt they were entitled to everything."

Pearlman points out in one correspondence that before EnCap, the state water-quality program worked almost exclusively with public sewer agencies and other local utilities, not private developers.

"We are faced with a case of first impressions at every turn," Pearlman writes in 2004 after winning a crucial state approval. "I want to thank you and your group for their extraordinary efforts to fit this square peg into a round hole."

Rewriting the rules

At one point, the attorney even drafts a letter promising EnCap's insurance company, AIG, that the loan money would be forthcoming. He instructs the state to simply transfer his writing to New Jersey government letterhead and forward it, which the state does.

"I simply took matters into my own hands," Pearlman says in a July 11, 2005, e-mail to state regulators. "Once [DEP Budget and Finance Director] Dave Barth signs the letter ... I can put pressure on AIG" to issue a new policy.

Among other things, the state agreed to:

• Waive a 2001 executive order establishing basic credit standards for those borrowing from state-run programs.
  
  
• Rewrite legislation that cleared the way for a special timetable for the EnCap loan. A line inserted in the EIT's 2005 fund authorization allows the agency to "establish an alternate financing schedule for private purpose solid waste/brownfield remediation projects." EnCap was the only such project pending at the time.
  
  
• Amend rules to move the Kingsland Park landfill, owned by EnCap, from Bergen County's watershed management area to Passaic County. The change came over the objections of the United States Fish and Wildlife Service, which argued that the waste would threaten the New York harbor.

But the biggest break EnCap appears to have received was the state's willingness to go along with a risky $212 million loan despite the developer's long record of missing payments and breaking promises to the state.

In October 2003, Assistant Attorney General Stefanie Brand sent a blistering e-mail to her colleagues describing how EnCap had already reneged on key agreements with the state and was months overdue on $10.5 million in various payments to state agencies.

Brand pointed out that EnCap had missed deadlines to use Hudson River dredge as fill to cover the four Meadowlands landfills that make up the project. As a result, she said, the state would be forced to let EnCap cover the old landfills with potentially contaminated recycled material -- stuff haulers would normally pay a working landfill to accept.

"Allowing EnCap to substitute 'recyclables' for dredge would mean a huge economic windfall for EnCap, less environmental benefit, and could result in criticism due to the concessions DEP made," Brand wrote.

There were other prominent red flags.

EnCap's request for comprehensive refinancing came only about a year after it had been granted another huge loan -- $150 million -- from the state Economic Development Agency. At the time, the loan was considered the last EnCap would get from the state.

Creative collateral

The development agency refused to sponsor EnCap's new financing request because the developer could not get firm backing from a bank or other private lenders, documents show.

Instead, the Bergen County Improvement Authority became the sponsor of the loan package.

By the late spring and summer of 2005, officials overseeing the loan application appeared more than willing to accept creative collateral proposals fashioned by the developer's lawyers.

The state, in negotiations between the DeCotiis lawyers and treasurer McCormac, finally settled on a loan package that included EnCap's pledge of a portion of future brownfields tax revenues generated by the new development.

As further security, the state also agreed to accept $9 million from the developer's controversial proposal to sell several hundred million dollars in PILOT bonds against future property tax payments due the developer.

While EnCap eventually succeeded in getting a $107 million letter of credit from Wachovia and $13 million toward collateral from a separate Bergen County Improvement Authority loan, the developer was unable to obtain backing for the remainder of the $212 million package.

In an interview this week, Hart defended the EnCap project as good for the environment but said the inspector general's investigation barred him from providing detailed answers about the financing.

"The EnCap project is a big project – big projects need a lot of money,'' Hart said.

Campbell had no comment for this article.

Sean Darcy, a spokesman for Community Affairs chief Bass Levin, declined to comment on the specifics of the loan, but maintained that Bergen County taxpayers would not be exposed should EnCap default.

McCormac said he agreed to the loan only after warning the DeCotiis lawyers that their client would not be allowed to "double dip" from other pools of taxpayer money.

He said he told EnCap's lawyers that if they accepted the $212 million loan package they would not be considered eligible for later reimbursement under the state brownfields law, which grants developers 75 percent of sales taxes generated by the businesses created on contaminated sites they remediate.

But the deal negotiated by McCormac uses those very brownfields tax revenues as security to help back the uncollateralized part of the loan.

McCormac said that provision was "thrown in at the last minute" for reasons he says he cannot recall.

Uncertain future

Less than two years after the loan was approved, the EnCap project is in default and threatening to unravel.

Under the direction of Corzine, the DCA's Local Finance Board has all but rejected EnCap's PILOT bond application.

The future of the Meadowlands dumps -- ugly and contaminated orphans set amid some of the world's most valuable real estate -- seems as uncertain as ever.

In a way, it was all predicted in a June 20, 2005, e-mail from Pearlman, who pointed out all the uncertainty with the project and new laws that allowed for the creative financing the state was about to buy into.

"We're in unchartered territory," EnCap's lawyer wrote. "The law is relatively new and we haven't worked through the details to see if it in fact works.

"We just don't know."

---

At a glance: record-setting loan

When: December 2005

How much: $212 million

Why: Money was to cap four Meadowlands landfills where EnCap would build golf courses, shops, a hotel and 2,500 houses.

Source: $105 million at no-interest from bonds sold by the New Jersey Environmental Infrastructure Trust. $107 million at low-interest from federal clean water grants given to the state Department of Environmental Protection.

Collateral: No-interest loan fully backed by letter of credit from Wachovia. Low-interest part backed only with $13 million loan from Bergen County Improvement Authority; other future tax revenues would also be available, but only if the development is built.

Timeline: The loan package, and a separate $96 million bond issued by the BCIA in 2005, were refinancings of earlier loans issued by the state Economic Development Agency in 2001 and 2004.

A fourth round of financing -- $366 million in bonds backed by future property taxes on the development – was rejected by the state at the end of 2006.

* * *

A brief look at EnCap players

Here is a roster of key public officials involved in the $212 million loan package EnCap Golf Holdings secured from the state in December 2005.

• James E. McGreevey, governor from 2002 until November 2004

Role: Championed EnCap's Meadowlands golf project as model of "smart growth"; key appointees from his administration remained in place after he left office amid a sex scandal and held those positions when the loan package was approved.

Current status: Now in private life.

• Richard Codey, governor from November 2004 until January 2006

Role: Held office when package was approved in December 2005; signed 2005 law authorizing record-setting EnCap loan.

Current status: Back in his permanent role as state Senate president.

• John McCormac, state treasurer under McGreevey and Codey

Role: Negotiated details of deal with EnCap attorneys and gave final approval to loan terms.

Current status: In private business as a financial consultant; candidate for mayor of Woodbridge.

• Dennis Hart, executive director, NJ Environmental Infrastructure Trust

Role: Signed off on $107 million of no-interest financing; that portion of loan is fully collateralized.

Current role: Still in same position.

• Bradley Campbell, former commissioner Department of Environmental Protection

Role: His agency provided $105 million, low-interest financing portion of the loan, with little security.

Current status: Partner specializing in environmental law at Wolff and Samson in Essex County.

• Susan Bass Levin, commissioner of state Department of Community Affairs

Role: Voted for 2004 agreement that set terms of the loan package; she was out of office and working for Jon Corzine's successful gubernatorial campaign when the loan package was finalized in December 2005.

Current status: Reappointed commissioner by Corzine in 2006, she is now headed to the Port Authority where she will serve as deputy director.

This is a textbook case of what to watch out for in 'creative' development projects. In Plainfield's case, one red flag would be if TIFs (Tax Increment Financing) are advance as a tool for funding the development.

Forewarned is fore-armed.

-- Dan Damon

Note: Tax Incentive Financing corrected at 7:46PM to Tax INCREMENT Financing. Fire the proofreader.

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