SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK -------------------------------------------------------------------x THE CITY OF NEW YORK, - against - Plaintiff, FC 42ND STREET ASSOCIATES, L.P., Defendant. -------------------------------------------------------------------x Index No. /2017 Date of Filing: May 31, 2017: E-Filed Case SUMMONS Plaintiff designates the County of New York as the place of trial. The bases of Venue are CPLR 503(a) and 507. Plaintiff resides at City Hall, New York, New York TO THE ABOVE NAMED DEFENDANT: YOU ARE HEREBY SUMMONED to answer the complaint in this action and to serve a copy of your answer, or, if the complaint is not served with this summons, to serve a notice of appearance, on the Plaintiffs attorneys within 20 days after service of this summons, exclusive of the day of service (or within 30 days after the service is complete if this summons is not personally delivered to you within the State of New York); and in case of your failure to appear or answer, judgment will be taken against you by default for the relief demanded in the complaint. Dated: New York, New York May 31, 2017 CARTER LEDY ARD & MILBURN LLP Defendant's Address: 1 Metrotech Center, 23rd Floor Brooklyn, NY 11201 \.,p /I (~-~ 1 By: ~g,. (.j, ~ fvl~f. '.::\ e A. Ohliger, Esq. ~ 2 Wall Street New York, New York 10005 Ohliger@clm.com (212) 732-3200 (212) 732-3232 (facsimile) Attorneys for Plaintiff, The City of New York 7961793.1 1 of 12
SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK -------------------------------------------------------------------){ THE CITY OF NEW YORK, against Plaintiff, Inde){ No. /2017 --- E-Filed Case COMPLAINT FC 42ND STREET ASSOCIATES, L.P., Defendant. -------------------------------------------------------------------){ Plaintiff, THE CITY OF NEW YORK (the "City"), by its attorneys Carter Ledyard & Milburn LLP, respectfully alleges as follows: SUMMARY OF ACTION 1. This is an action for a declaratory judgment, pursuant to New York Civil Practice Law and Rules ("CPLR") 3001, seeking judicial construction of the term "Fair Market Value" as that term is used in a certain ground lease dated December 13, 1996 (as amended to date, the "Ground Lease"). 2. In determining the value of certain land, on which the "Base Rent" for the upcoming "2 11 ct Rental Period" 1 of the Ground Lease will be based, the defendant would have the appraisers take into consideration the e){isting subleases and actual rents being paid by some or all of the defendant's sublessees. The City's position is that the Ground Lease contains no such direction and that any valuation must value the Land and the New 42 Land without consideration of e){isting subleases, and that in arriving at a Fair Market Value for the Land and the New 42 Land, the appraisers must consider current market conditions, including market rents. This, and 1 Capitalized terms not otherwise defined herein have the meaning set forth in the Ground Lease. 2 of 12
other disagreements between the parties, produce ground rent calculations by each party that differ by as much as a factor of ten. Accordingly, a justiciable controversy exists between the parties necessitating a judicial declaration of the correct meaning of the relevant terms of the Ground Lease. THE PARTIES 3. The City is a municipal corporation, organized and existing under the laws of the State ofnew York. 4. Defendant FC 42"d Street Associates, L.P. ("FC" or "Tenant") is a New York limited partnership. VENUE 5. Venue is proper in this Court pursuant to CPLR 503(a) and 507, because at least one of the parties resides in this County, and the land that is the subject of this action is located in Manhattan, between 41 st and 42 11 d Streets and Seventh and Eighth Avenues. FACTUAL BACKGROUND 6. The leased propetiy is pati of the decades-long project (the "42"d Street Project") sponsored by the City and New York State Urban Development Corporation, d/b/a Empire State Development ("ESD") to rehabilitate and renew the Times Square area. The 42 11 d Street Project area runs generally from 40 111 to 43rd Street between Broadway and Eighth Avenue. 7. Forest City Ratner Companies was selected as the developer of the property described in the Ground Lease and the New 42 Lease (defined below), and FC was formed by it as the entity to serve as the tenant under the Ground Lease and the New 42 Lease. As set fotih in those leases, the goals of the 42 11 d Street Project included "(i) elimination of the blight, physical decay, crime and frightening street life that have characterized the West 42"d Street area; (ii) - 2-3 of 12
preservation and restoration of the area's extraordinary theaters and the revitalization of the 42nd Street Project area as a theater and entertainment center serving tourists and all New Yorkers; (iii) development of the 42nd Street Project area's commercial and retail potential, fostering a lively, healthy street ambience and supporting the City's policy of fostering an environment that encourages the expansion of the midtown Manhattan office area...". 2 8. The Ground Lease was entered into on December 13, 1996 by and between 42nd St. Development Project, Inc. ("42 DP"), a subsidiary of ESD, as landlord, and FC, as tenant. A true and correct copy of the Ground Lease (excluding the voluminous schedules and exhibits and later amendments not relevant to the current controversy), is annexed hereto as Exhibit A and expressly made part of this Complaint. 9. The City is the successor-in-interest to the rights of the Landlord under the Ground Lease. 10. Simultaneously with the execution of the Ground Lease, FC, as tenant, entered into a parallel separate ground sublease with The New 42nd Street, Inc. ("New 42"), as landlord (the "New 42 Lease"). New 42 was the ground tenant under a Master Lease with 42DP, also dated December 13, 1996. The Master Lease concerned itself with the rehabilitation of the various theaters in Times Square. The New 42 Lease demised to FC the land on which the Liberty Theater and Empire Theater were located, being Block 1013, Lots 49 and 50 (the "New 42 Land"). 2 Ground Lease, Exhibit A, at I. -3-4 of 12
11. The Ground Lease demised to FC the Property 3, meaning the Land (consisting of Block 1013, Lots 45, 46, 50, 49, 53, 55, 57, and 12) and the Improvements located thereon. However, during the term of the New 42 Lease, the Land does not include the New 42 Land. 12. The term of the Ground Lease is 99 years, expiring December 12, 2095. There are 'ten separate Rental Periods during the term. The paities are currently in the I st Rental Period, which nms for a period of20 years from the Rent Commencement Date, and will expire September 14, 2018. The 2"d Rental Period runs for fifteen years from the end of the!st Rental Period. FC SUBLEASES 13. On the same day that FC entered into the Ground Lease and the New 42 Lease, it also entered into a sublease (the "Tussauds Lease") with The Tussauds Group Limited ("Tussauds"). FC had, several months previously, entered a sublease (the "AMC Lease") with Americai1 Multi-Cinema, Inc. ("AMC"), that sublease to become effective after the Ground Lease was entered into. 14. The Tussauds Lease has an initial term of 25 years, with various options to renew for up to an additional 74 years. The AMC Lease has an initial term of20 years, with various options to renew for up to an additional 24 years. 15. The Project, as built, consists of approximately 312,000 leasable square feet The Tussauds and AMC Leases comprise approximately two-thirds of the leasable space at the site. There are approximately eight other spaces that comprise the balai1ce of the leasable space. 3 Ground Lease, 2.0 I (b ), Exhibit A at 34. -4-5 of 12
GROUND LEASE RENT RE-SET 16. To determine the Base Rent under the Ground Lease for the 2"d Rental Period, the Ground Lease requires that the Fair Market Value of the Land and the New 42 Land be determined. The Base Rent under the Ground Lease is "equal to ten percent (I 0%) of the Allocable Share of the Fair Market Value of the Land and the New 42 Land, determined as of the end of the 1 51 Rental Period...". 4 The parties have previously determined that the Allocable Share of the Land is 78.95% and the Allocable Share of the New 42 Land is 21.05%. What is in dispute is the meaning of Fair Market Value. 17. Section 3.0l(c)(vi) of the Ground Lease states that "'Fair Market Value' means (A) with respect to the 2"d Rental Period and the 3rd Rental Period, the most probable price in terms of money which a conveyance of the fee simple interest in the Land and the New 42 Land would bring in a competitive and open market under all conditions requisite to a fair sale considering that the Land and New 42 Land enjoys the benefits and rights accorded by, and is subject to the restrictions and limitations on the development and use of the Land and the New 42 Land contained in, this Lease, including DUO;..." 5 (emphasis supplied). I 8. "DUO" refers to the Design, Use, and Operating Requirements that are set fo1ih in Schedules C through I of the Ground Lease. In terms of potential impact on Fair Market Value, the most significant restrictions appear in Schedule F (Display and Signage Requirements); Schedule G (Use and Operating Requirements); and Schedule H (Architectural Requirements). 4 Ground Lease 3.0 I (a)(ii), Exhibit A at 37. 5 Ground Lease at 42-3. - 5-6 of 12
19. Schedule F contains detailed requirements concerning signage, most particularly requirements for illuminated signage, which must stay lit until 1 :00 a.m., seven days per week. 20. Schedule G has restrictions on the uses that are permitted. "From the tenth (1 oth) anniversary of the achievement of Full Operating Condition up to the twentieth (20t1 1 ) anniversary of the achievement of Full Operating Condition, at least fifty (50) percent of the Gross Leasable Area of the Project shall be occupied for uses consistent with one or more of the Permitted Entertainment Uses. The balance of the Gross Leasable Area of the Project may be occupied for uses consistent with one or more of the Permitted Non-Entertainment Uses... After the twentieth (20t 11 ) anniversary of the achievement of Full Operating Condition, all uses permitted in this area by the New York City Zoning Resolution shall be permitted in the Project." 21. Exhibit 1 to Schedule G contains a list of Permitted Entertainment Uses. Examples include music clubs, comedy clubs, interactive theme exhibitions, and movie theaters. Exhibit 2 to Schedule G contains a list of Permitted Non-Entertainment Uses. Examples include athletic good stores, clothing stores, gift shops, luggage stores, record stores, and shoe stores, as well as any use permitted by Exhibit 1. 22. Schedule H contains Architectural Requirements. "The purpose of the requirements in this section is to indicate the maximum Gross Floor Area permitted and the minimum retail space and frontage required at street level to ensure a lively street environment." Schedule H contains certain height and setback restrictions, but the most significant restriction is a limitation on the Gross Floor Area: "The maximum gross floor area shall be as follows: American Multi-Cinema 169,300; Other: 159,075; Subtotal 328,375." Given that the land area of the site is approximately 60,896 square feet, this limitation amounts to a Floor Area Ratio - 6-7 of 12
("FAR") 6 of less than 5.5. Were it not for the 42"d Street Project, the site would be governed by the Special Midtown Theater Sub-district regulations of the Zoning Resolution, under which the Land and the New 42 Land would be considered partly within a C6-6.5 zoning district, which has a base commercial FAR of 10.0 and partly within a C6-7 zoning district, which has a base commercial FAR of 15.0. Thus, the Land and the New 42 Land are limited to development equal to less than half of what would otherwise be permitted under the Zoning Resolution. 23. New York City Economic Development Corporation ("EDC"), as agent for the City, has had the Land and the New 42 Land appraised in accordance with the straightforward definition of Fair Market Value contained in the Ground Lease, and the value conclusion was in excess of $342 million. 24. By contrast, FC has communicated to EDC its belief that the land value is only about $27.24 million. 25. Discussions with FC over the last year have failed to bridge the gap. There is a fundamental disagreement between the parties concerning the proper legal construction of the term Fair Market Value, as used in the Ground Lease. 26. The Ground Lease contains numerous references to AMC and Tussauds and their respective leases. FC relies on these numerous references to support its position that any appraisal of the Fair Market Value of the Land and the New 42 Land must take into account the actual rents due under the AMC and Tussauds Leases (and possibly rents under all existing leases). 6 Generally speaking, FAR is the primary determinant of the size of a building that may be constructed on a property. For example, the owner of a property containing 10,000 square feet of land, whose property is zoned to permit a maximum FAR of 5.0, may build a structure with up to 50,000 square feet of floor area. There may be other restrictions (e.g., height and setback) which, by affecting a building's design, may indirectly limit the size ofa building, but, subject to those other restrictions, FAR determines the maximum permitted floor area. - 7-8 of 12
27. However, FC's position is in direct contravention of the Ground Lease, which precludes consideration of the existing subleases to AMC, Tussauds, and the other subtenants. The Ground Lease requires that the Land and the New 42 Land be valued without the Improvements and without consideration of any existing subleases. 28. Fair Market Value is defined as "the most probable price in terms of money which a conveyance of the fee simple interest in the Land and the New 42 Land would bring in a competitive and open market under all conditions requisite to a fair sale...". As defined in the Dictionary of Real Estate Appraisal, a fee simple estate is "[a]bsolute ownership unencumbered by any other interest or estate, subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police power, and escheat." 7 29. This is to be distinguished from a "leased fee," which is a property encumbered by one or more leases. According to the Dictionary of Real Estate Appraisal, a "leased fee" or "leased fee estate" is "the ownership interest held by the lessor, which includes the right to receive the contract rent specified in the lease plus the reversionary right when the lease expires. " 8 30. However, the Ground Lease does place one restriction on the valuation of the fee simple interest. It requires the parties' appraisers to "consider[] that the Land and New 42 Land... is subject to the restrictions and limitations on the development and use of the Land and the New 42 Land contained in, this Lease, including DUO;..." (emphasis supplied). 31. The restrictions and limitations on development in the Ground Lease include those noted previously contained in Schedule H, most significantly a limitation on the amount of 7 Appraisal Institute, Dictionary of Real Estate Appraisal (6'" Edition 2015) at 90. 8 Id. at 128. - 8-9 of 12
square footage that can be developed. In addition, there are certain requirements for retail frontage, and there are streetwall, height and setback limitations. 32. Restrictions and limitations on use are contained in Atticle 7 of the Ground Lease and Schedule G, primarily the requirement that ce1tain portions of the Property be used for Permitted Entertainment Uses and Permitted Non-Entertainment Uses. 33. FC's position that the rent to be paid under the AMC and Tussauds Leases needs to be taken into account is not supported in any way by the requirement that "restrictions and limitations on the development and use of the Land and the New 42 Land" be considered in determining Fair Market Value. 34. The essence of what the Ground Lease provides is that in calculating Fair Market Value of the vacant land, the appraiser must recognize that the Ground Lease includes limits on the size of any development to be constructed on the Land and the New 42 Land, and requires that the uses be primarily entertainment uses (at least for the first 20 years after achieving Full Operating Condition). 35. This dispute presents a question of the legal interpretation of the Ground Lease. Valuation is the proper province of appraisers, while contract interpretation is not. An appraiser, who would otherwise be appointed under the Ground Lease to determine Fair Market Value, is not competent to construe the legal meaning of the terms of the Ground Lease. The parties need to know what to instruct their appraisers in order for them to properly prepare appraisals that comport with the definition of Fair Market Value. - 9-10 of 12
36. Resolution of this matter of contract interpretation is necessary in order for the determination of Fair Market Value to proceed expeditiously and in accordance with the Ground Lease. WHEREFORE, the City respectfully requests that this Court issue a judgment: 1. declaring that, in determining the Fair Market Value of the Land and the New 42 Land for the 2 11 d Rental Period, the AMC Lease, the Tussauds Lease, and FC's other subleases shall be disregarded; and 2. granting the City such other and further relief as this Court deems just and proper. Dated: New York, New York May 31, 2017 CARTER LEDY ARD & MILBURN LLP,, '/' () Ii!,' By: de u. ~ u~ 53 ~ " Lee A. Obliger, Esq. 2 Wall Street New York, New York 10005 Ohliger@clm.com (212) 732-3200 (212) 732-3232 (facsimile) Attorneys for Plaintiff, The City of New York - I 0-11 of 12
EXHIBIT LIST Exhibit A Agreement of Lease by and between 4znu Street Development Project, Inc., Landlord, and FC 42nd Street Associates, L.P., Tenant, dated December 13, 1996 ("Agreement of Lease") - 11-12 of 12