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MDK Development, LLC v. City of Hoboken

SUPERIOR COURT OF NEW JERSEY APPELLATE DIVISION


August 3, 2009

MDK DEVELOPMENT, LLC, AND MAURICE J. DEGENNARO, TAXPAYER OF THE CITY OF HOBOKEN, PLAINTIFFS-APPELLANTS/CROSS-RESPONDENTS,
v.
THE CITY OF HOBOKEN, AND S. HEKEMIAN GROUP, LLC, DEFENDANTS-RESPONDENTS/ CROSS-APPELLANTS.

On appeal from the Superior Court of New Jersey, Law Division, Hudson County, Docket No. L-475-08.

Per curiam.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Submitted:*fn1 May 20, 2009

Before Judges Cuff, C.L. Miniman and Baxter.

This appeal concerns a redevelopment project in Hoboken. Following three attempts to obtain conforming bids to redevelop the site of the municipal garage, the City of Hoboken (the City) selected a redeveloper. Plaintiffs, a developer, who had participated in the two earlier efforts, and a taxpayer filed an action in lieu of prerogative writs to challenge the award. Plaintiffs appeal from an order granting summary judgment in favor of the City and the designated redeveloper. We affirm.

In 2006, to effectuate the redevelopment and sale of its public works garage, the Hoboken City Council (City Council) designated the property fronting Observer Highway between Willow and Park Avenues an area in need of redevelopment pursuant to the Local Redevelopment and Housing Law (LRHL), N.J.S.A. 40A:12A-1 to -73. The City Council then hired Phillips Preiss Shapiro Associates, Inc. (PPSA), planning consultants, to prepare a redevelopment strategy. PPSA received substantial input from the Observer Highway Redevelopment Advisory Committee (Advisory Committee).

The Advisory Committee met frequently and worked with planners and architects to develop a consensus regarding the redevelopment of the garage property and to balance the desire to sell the property for full and fair market value with the desire to avoid a poorly planned, tall and bulky structure and the loss of open space, views and sunlight. The Advisory Committee recommended that redevelopment of the garage property include a mixed-use building with a 9/7 story configuration*fn2 and no more than 240 residential units. PPSA incorporated these recommendations into its redevelopment plan, which was submitted on April 19, 2006. The City Council reviewed and adopted the redevelopment plan by ordinance dated May 3, 2006.

The first request for proposals (RFP) placed significant weight on the proposed purchase price in evaluating submissions. The City Council received two proposals and rejected both.

In late 2006, the City Council undertook a less formal solicitation process. Concerned that 240 residential units could not be built in the 9/7 story configuration, the City Council solicited proposals for larger buildings; specifically, a 12/10/8 configuration that would allow up to twelve stories in the southeast portion of the building, ten stories in the center portion, and eight stories along the far side. The City Council anticipated receiving the best proposal for each of the configurations. The 2006 solicitation yielded six proposals from developer entities URSA Tarragon, Trammell Crow Residential (TCR) and plaintiff MDK Development, LLC (MDK), all of which were rejected by the Advisory Committee. The Advisory Committee concluded that the 2006 solicitation process produced "lowball" offers for the 9/7 story configuration. As a result, the Advisory Committee recommended the implementation of a third process that would give the 9/7 story configuration a "fair shake" by allowing for two types of proposals:

(1) Proposals conforming to the 9/7 story configuration of the Redevelopment Plan and having a minimum purchase price of $25 million; and

(2) Alternate proposals for development that exceeds the 9/7 story configuration of the Redevelopment Plan and having a maximum purchase price of $25 million.

Proposals for the 9/7 story configuration were to be given absolute preference over proposals for larger developments. However, if no 9/7 story proposals were received or the first two processes had not produced any proposals exceeding the suggested $25 million minimum, then an alternate proposal would be selected based upon numerous design criteria intended to encourage the smallest building size feasible at a purchase price of $25 million.

By resolution dated August 20, 2007, the City Council rejected all of the proposals received through the late 2006 solicitation. That resolution further authorized a third RFP, which allowed for two types of proposals: (1) a bid of at least $25.5 million for development consistent with the redevelopment plan, particularly the limitations on building height, or (2) an alternate bid of exactly $25.5 million for development consistent with the redevelopment plan, except that the building height shall not exceed a 12/10/8 story configuration. In addition, a bidder could submit only one bid and had to choose between the project as described in the redevelopment plan or the alternate proposal. Also, if one or more acceptable conforming bids were submitted, the City Council could select from the conforming bids a proposal based upon a number of factors set forth in the RFP. The August 2007 resolution also addressed the fact that the 12/10/8 story configuration was not set forth in the redevelopment plan. It stated:

6. If no acceptable Conforming Bids are submitted, the City Council may select contingent upon the subsequent amendment of the Redevelopment Plan, a proposal from the Alternate Bids based upon a number of factors to be set forth in the RFP, including developer qualifications and experience, and the development plan (particularly with regard to the minimization of building height and footprint).

On October 1, 2007, the City Council issued the 2007 RFP. It contained over 100 pages and numerous forms of agreement prepared by legal counsel specifically for the 2007 RFP. It also included two sets of design criteria prepared by PPSA for the evaluation of conforming and alternate proposals. The former was intended to evaluate the price and design components of competing conforming proposals, while the latter was intended to evaluate various design components of competing alternative proposals, with the minimization of building height and bulk receiving greater weight.

Paper copies of the 2007 RFP were available to interested persons at the Office of the City Clerk. The 2007 RFP was also available on the City's website. Because addenda are common to any RFP process, the 2007 RFP included a provision explaining precisely how interested parties could receive all addenda. The RFP directed potential respondents, who did not receive paper copies of the appended documents, to submit a letter to the City Clerk stating their interest in receiving any and all addenda to the 2007 RFP. Potential bidders received instructions to submit any requests to the City Clerk prior to the October 26, 2007 deadline for submitting questions. Responses to the 2007 RFP were due on November 16, 2007, and were required to include security in the form of a bid bond, an irrevocable letter of credit or a certified check, in an amount not less than ten percent of the highest purchase price offered. In addition, the 2007 RFP provided that, if a developer was selected by the City Council, it would be required to enter into a contract of sale and a redeveloper's agreement:

Following the selection of a proposal, the selected Respondent . . . shall negotiate and enter into a contract of sale and a redeveloper's agreement . . . with the City. Such negotiations will be permitted to proceed for a reasonable time, and execution of these agreements shall be subject to ratification by the City Council . . . .

The City Council anticipated negotiations would consume several weeks following selection.

On October 12, 2007, the City Council held a pre-response conference, where prospective respondents could raise issues and ask questions about the 2007 RFP process and the redevelopment project. All prospective developers were strongly encouraged to attend. No principal or official of MDK attended. On October 26, 2007, the City Council issued the first addendum to the 2007 RFP, which listed questions raised by interested developers at the pre-response conference and set forth the official responses of the City Council. In accordance with the procedures set forth by the 2007 RFP, the addendum was disseminated pursuant to a distribution list prepared by the City Clerk of those entities that either picked up paper copies of the 2007 RFP or sent a letter to the City Clerk requesting copies of all addenda. MDK does not appear on the distribution list.

The City Council continued to field questions from interested developers, resulting in two additional addenda, dated November 9, 2007, and November 12, 2007, which were similarly disseminated. MDK submitted no questions regarding the 2007 RFP.

On November 16, 2007, at 10:55 a.m., five minutes before responses to the 2007 RFP were due, the City Clerk received by facsimile transmission a letter from Khoren Bandazian, development counsel for MDK, informing the City that MDK would not participate in the 2007 RFP. It cited "certain 'flaws' in the process" for its non-participation, such as the pricing structure and the City's purported failure to seek the maximum price for the sale of the property, regardless of the story configuration. MDK also complained about the process for distributing addenda to the 2007 RFP, alleging that they had not been provided to all of the bidders. MDK concluded its letter by offering $30.1 million for a development with an otherwise unspecified 12/10/8 story configuration. By letter dated November 28, 2007, redevelopment counsel for the City, responded on its behalf and refuted MDK's allegations.

In accordance with the November 16, 2007 deadline, the City Council received two responses to the 2007 RFP, both of which included a form stating the respondents had received all three addenda to the 2007 RFP. One proposal, from TCR, was a conforming proposal with a 9/7 story configuration and a purchase price of $26 million. However, the TCR proposal did not include the required security, nor did it incorporate the required affordable housing component. The other response, from S. Hekemian Group, LLC (Hekemian), was an alternate proposal with a 12/10/8 configuration and a $25.5 million purchase price. Unlike TCR, the Hekemian proposal fully conformed to the 2007 RFP.

By resolution dated December 13, 2007, the City Council selected Hekemian to purchase and redevelop the garage property contingent upon the negotiation, execution and subsequent ratification by it of a redeveloper's agreement and a contract of sale. It further directed the Mayor and Director of Community Development, with the assistance of Special Redevelopment Counsel, to commence those negotiations. Since the December 2007 resolution, the City has negotiated the terms of the contract of sale and redeveloper's agreement with Hekemian, undertaken additional environmental studies of the garage property and retained an environmental attorney to direct and coordinate such efforts, and authorized its planning consultant to draft amendments to the redevelopment plan and confer with Hekemian regarding design enhancements to its conceptual plan.

On January 28, 2008, MDK and Maurice J. Degennaro, a taxpayer of the City, filed a complaint in lieu of prerogative writs challenging the designation of Hekemian as the redeveloper of the garage site. In their complaint, plaintiffs alleged that the process used by the City was arbitrary, capricious, unreasonable and contrary to law, specifically the LRHL. Plaintiffs argued that the 2007 RFP adopted by the City Council deprived the citizens of the City of the benefits of unfettered competition, limited the financial return to the City from the redevelopment effort, established a minimum bid security amount that suppressed competition, and failed to take adequate measures for potential bidders to obtain all relevant information about the project. Plaintiffs sought a declaration that the actions of the City Council on December 13, 2007, regarding the 2007 RFP for the garage site were arbitrary, capricious and unreasonable, and in violation of law. It sought a judgment voiding the 2007 RFP, any proposals submitted in response to it, and the selection of Hekemian as redeveloper. Plaintiffs also sought a permanent injunction barring defendants from executing any developer agreement or contract of sale, and also sought an order requiring the return of any bid security provided by any respondent to the 2007 RFP and an order requiring adoption of a new RFP following amendment to its redevelopment plan.

All parties filed motions for summary judgment. Judge Edward O'Connor, Jr., granted the motions submitted by the City and Hekemian. In his oral opinion, Judge O'Connor held that MDK had standing to challenge the selection of Hekemian despite its failure to participate in pre-bid meetings and to submit a formal bid. The judge noted the liberal approach adopted by the courts of this State on the issue of standing and granted standing to MDK because it demonstrated a legitimate interest in the project. He further held that Degennaro's "status as a tax payer together with the public interest" were sufficient to grant him standing because he was seeking "to insure that the governing body of [the City] honestly and faithfully acts in the best interest of its citizens."

Judge O'Connor also rejected the contention that Counts One and Two of the complaint, which challenged various specifications of the 2007 RFP, were time barred. The judge held that the forty-five-day limitation period did not accrue until Hekemian was selected as the redeveloper and the City was authorized to commence negotiations on a suitable developer's agreement.

The judge held that MDK's complaint stated a cause of action because the City Council is required by law to convey public property without public bidding only in conformity with a redevelopment plan and plaintiffs alleged that the 2007 RFP was contrary to such a plan. He also held that Hekemian was a necessary party to the action. On the other hand, the judge held that plaintiffs could not demonstrate that the actions by the City were arbitrary, capricious, unreasonable or contrary to law. He held that the decision to limit a prospective redeveloper to submission of a conforming or an alternate proposal, but not both, was not arbitrary, capricious, unreasonable or contrary to law.

As to Count Two, which challenged the pricing strategy, the judge found that the strategy was the product of information gathered as a result of two prior failed solicitations. The judge characterized the work of the Advisory Committee as creative and reasonable in light of the goals of the redevelopment project, i.e., the least amount of development for the desired financial return. He also held that the pricing strategy and dimensional limitations could not be considered an unconstitutional gift of public funds because they were designed to further the public health, safety and welfare by preserving light, views, and open space for neighboring residents.

Addressing the contention that the security required was excessive, the judge held the redevelopment statute does not prescribe or limit the security a municipality may require from a prospective redeveloper. He agreed that the City acted reasonably by referring to the Local Lands and Building Law (LLBL), N.J.S.A. 40A:12-1 to -30, and incorporating the ten percent requirement of that statute. The judge noted the amount of the security was consistent with the size and scope of the project and the considerable municipal resources invested in the project. In addition, the redevelopment plan specifically allowed for variance from the height restrictions. Therefore, plaintiffs contention that the alternate 12/10/8 proposal was neither authorized nor consistent with the existing plan was without merit.

Finally, the judge held that MDK offered no facts to suggest that any term of the proposed redeveloper's agreement or the contract of sale was onerous or unreasonable. He also held that MDK could not be heard to challenge the distribution plan for supplemental information because it had notice of the initial solicitation and took no action to indicate its intention or desire to participate in the third round.

On appeal, plaintiffs reiterate the arguments presented in the Law Division that the City Council did not act in conformity with the law governing redevelopment agreements. In their cross-appeal, the City and Hekemian argue that neither MDK nor Degennaro have standing to challenge the 2007 RFP, that their challenge to the specifications of the 2007 RFP contained in Counts One and Two of the complaint are time barred, and plaintiffs did not state a claim on which relief can be granted. We affirm the July 1, 2008 order granting defendants' motions for summary judgment.

The LRHL establishes the powers of a municipal entity to determine that an area is in need of redevelopment and to carry out a redevelopment plan. Vineland Constr. Co. v. Twp. of Pennsauken, 395 N.J. Super. 230, 250 (App. Div. 2007), appeal dismissed as moot, 195 N.J. 513 (2008). N.J.S.A. 40A:12A-8 provides that [i]n order to carry out and effectuate the purposes . . . and . . . terms of [a] redevelopment plan, the municipality or designated redevelopment entity may:

g. [L]ease or convey property or improvements to any other party pursuant to this section, without public bidding and at such prices and upon such terms as it deems reasonable, provided that the lease or conveyance is made in conjunction with a redevelopment plan, notwithstanding the provisions of any law, rule, or regulation to the contrary.

n. Do all things necessary or convenient to carry out its powers.

Included in a municipality's broad authority to do all things "necessary or convenient" to carry out its powers is the ability to contract with a private redeveloper. Vineland Constr. Co., supra, 395 N.J. Super. at 254. There are no statutory or constitutional limitations on a municipality's selection of a private developer in carrying out a redevelopment plan, ibid., nor does the LRHL set forth any criteria governing the selection of a private redeveloper. Id. at 255. The designation of a redeveloper, therefore, is a purely discretionary act. Id. at 254. Accordingly, judicial review of a redevelopment determination is limited. Id. at 251. If supported by substantial credible evidence, ibid., a redevelopment determination shall be vested with a presumption of validity that will be upheld where any state of facts may reasonably be conceived to justify the action, id. at 255. It follows that the challenger of a municipal action bears the heavy burden of overcoming this presumption of validity by showing that it is arbitrary, capricious or unreasonable. Id. at 256.

The 2007 RFP offered developers a choice; they could either submit proposals that could be constructed under the existing redevelopment plan, or submit proposals for a larger building, which was not permitted by the existing redevelopment plan. If necessary, the City Council was prepared to amend the redevelopment plan to reflect the alternate design and all prospective bidders were informed that selection of the alternate proposal was conditioned on the plan amendment.

If one or more qualified conforming proposals were submitted, the City Council would make its selection from the conforming proposals only and give no consideration to any alternate proposals. Alternate proposals would only be considered if no qualified conforming proposals were submitted. It was believed that this approach would result in the submission of more conforming bids.

The 2007 RFP was preceded by a thorough examination of the site and an exhaustive review of the design and use alternatives for the site. The 2007 RFP was also preceded by two failed solicitations.

Plaintiffs assert, in Count One of their complaint, that the 2007 RFP's requirement that an interested developer submit either a conforming proposal or alternate proposal was arbitrary, capricious and unreasonable, because the decision was not based on any supported findings or evidence. In addition, there was no way of knowing whether a particular proposal would be deemed responsive or not, as evidenced by the fact that TCR's "conforming" proposal was rejected in favor of Hekemian's alternate proposal. Finally, plaintiffs argue that this scheme limited the total number of submissions.

A municipal action which involves a choice between or among proposals is not arbitrary and capricious if exercised honestly and upon due consideration, even if an erroneous conclusion is reached. Bryant v. City of Atlantic City, 309 N.J. Super. 596, 610 (App. Div. 1998). Here, the City chose to restrict potential developers to the submission of either a conforming proposal or alternate proposal, but not both. If one or more conforming proposals were submitted, no consideration would be given to any alternate proposals. The City could have taken the path suggested by plaintiffs, but it was not required to do so. The record of the deliberations of the City Council reflects it still preferred the conforming plan, and it feared dilution of the submission pool if bidders could submit multiple proposals. This approach is reasonable. The scheme chosen by the City Council was designed to entice developers to submit a conforming proposal. Moreover, the City Council knew that two prior solicitations had failed to produce the desired monetary return but it still desired to redevelop the garage site. Accordingly, it adopted a two-track process calculated to produce a viable redevelopment proposal. Whether the City Council achieved the optimum result is immaterial because imprecise outcomes have no bearing on an action's reasonableness. Ibid.

The 2007 RFP also specified that alternate proposals must include a purchase price of exactly $25.5 million, the minimum purchase price for conforming proposals. In accordance with the recommendations of the Advisory Committee, this requirement was designed to encourage the smallest development with the least impact on the neighborhood necessary for the City to realize sales proceeds of $25.5 million. In Count Two of their complaint, plaintiffs argue that this requirement deprived the governing body of the opportunity to even consider potentially higher offers for structures of the same size, effectively leaving money on the table and depriving the taxpayers of the City of significant additional revenue. Without any record support, plaintiffs assert a 12/10/8 story configuration is worth significantly more than $25.5 million. Thus, capping the monetary return is an arbitrary, capricious and unreasonable municipal action and an unconstitutional gift of public property.

Plaintiffs' complaint appears entirely predicated on the fact that the City failed to maximize its profits. But that contention does not lead to the conclusion that the City's decision was arbitrary, capricious and unreasonable. The record amply demonstrates consideration of multiple factors effecting the public interest including the appropriate mix of commercial, retail and residential uses, minimization of density and preservation of open space, light and views. In addition, by limiting the purchase price for alternate proposals, the City sought to ensure that the proposals submitted would be evaluated and compared based on their merits and not on price alone. In short, the benefits sought to be achieved by a redevelopment plan are not limited to dollars and cents. Ott v. W. New York, 92 N.J. Super. 184, 202 (Law Div. 1966). There are times when other considerations outweigh the financial return that invariably results from a higher sale price. Ibid. It was within the City's discretion to determine that both objectives of maximizing profit and limiting density could not be attained under these circumstances. Ibid.

We are also satisfied that the pricing strategy selected by the City Council is compatible with the constitutional prohibition of use of public funds for private purposes. The New Jersey Constitution provides that, "[n]o county, city, borough, town, township or village shall hereinafter give any money or property, or loan its money or credit to or in aid of any individual, association or corporation." N.J. Const. art. VIII, § 3, ¶ 2. It further provides that, "[n]o donation of land or appropriation of money shall be made by the State or any county or municipal corporation to or for the use of any society, association or corporation whatever." N.J. Const. art. VIII, § 3, ¶ 3. The underlying principle is that public money should be raised and used only for public purposes. Bryant, supra, 309 N.J. Super. at 611.

Notably, Article VIII, Section 3, paragraph 1 provides that "development or redevelopment of blighted areas shall be a public purpose and public use, for which private property may be taken or acquired." See Gallenthin Realty Dev., Inc. v. Borough of Paulsboro, 191 N.J. 344, 356 (2007) (the State possesses the authority to take private property subject only to the restrictions of other pertinent clauses of the constitution); McClintock v. City of Trenton, 47 N.J. 102 (1966) (municipalities have broad constitutional authority for redevelopment within their private powers). Moreover, this same section authorizes the municipality to grant tax exemptions or tax abetments in furtherance of the redevelopment effort. N.J. Const. art. VIII, § 3, ¶ 1.

Section 3, paragraph 1 must be read in pari materia with Section 3, paragraphs 2 and 3, which generally prohibit the donation of land or money to or in aid of a private corporation. The provisions are designed to complement each other. Thus, when the basic purpose of a contract is furtherance of the public interest and there is a benefit conferred on the municipal corporation or its citizens, the contract will not be considered unconstitutional. Whelan v. N.J. Power & Light Co., 45 N.J. 237, 247 (1965); Bayonne v. Palmer, 47 N.J. 520, 530 (1969). See generally Robert F. Williams, The New Jersey Constitution: A Reference Guide 118-19 (1997).

Measured by this standard, the pricing strategy selected by the City Council cannot be considered a gift of public lands or funds to a private entity. In return for a payment in excess of $25 million, the City will sell the poorly situated, obsolete, and physically unattractive municipal garage located at one of the principal entry points to the City. The redeveloper will perform any required environmental remediation on the site, demolish the obsolete and decrepit building, and construct a modern mixed-use building. The City will obtain funds to relocate the garage operation and invest in open space and parks. The City will also obtain a new building that will not overwhelm the neighborhood by its size and preserve and enhance the light, air and open space for neighboring properties. In short, the pricing strategy passes constitutional muster.

The 2007 RFP required that all submissions be secured by a bid bond, an irrevocable letter of credit, or a certified check payable to the City in an amount of not less than ten percent of the highest purchase price offered. Plaintiffs contend this security is unauthorized by law and excessive.

The Court has held that a security deposit is necessary as a guaranty that the contract will be entered into if the bid is accepted. Hillside v. Sternin, 25 N.J. 317, 323 (1957). In this case, the City sought to ensure that the proposal it selected was not illusory and that it had reasonable protection against a defaulting bidder.

Although the LRHL does not prescribe, require or limit the security that a municipality may require of a redeveloper, see N.J.S.A. 40A:12A-8, section 40A:12-13 of the LLBL allows a security deposit in an amount not exceeding ten percent of the minimum price or value of the property to be sold when a municipality, acting in accordance with the LRHL, makes a sale to a private developer. The City elected to follow the practice of the otherwise inapplicable LLBL to assure that each proposal submitted to it was genuine rather than illusory. We have been provided no authority that suggests that a city seeking a redeveloper for a multi-million dollar project cannot require a substantial deposit as indication of financial standing and genuine interest of the prospective redeveloper in the project.

Finally, plaintiffs' contentions that acceptance of the alternate proposal conditioned on amendment of the redevelopment plan is ultra vires, that the City had prescribed contract forms containing unreasonable provisions, and the process for distribution of addenda was not calculated to achieve dissemination of addenda are all without sufficient merit to warrant discussion in a written opinion. R. 2:11-3(e)(1)(E). Notably, the redevelopment plan contemplated the possibility of a height variance, plaintiffs have failed to demonstrate that any provision in the draft agreements are unauthorized or illegal, and we discern, and plaintiffs have failed to identify, any defect in the manner selected by the City Clerk to provide notice of the 2007 RFP and addenda about the project.

We, therefore, affirm the July 1, 1008 order granting summary judgment to defendants and dismissing plaintiffs' complaint. In doing so, we need not address the cross-appeals filed by the City and Hekemian.

Affirmed.


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