City officials said Tuesday that they “steadfastly” deny the allegations made in a lawsuit filed by a developer over a failed mixed-used development in Portland’s Bayside neighborhood.
Federated Cos. announced late Monday that it is suing the city and its manager, Jon Jennings, claiming they obstructed progress and failed to fulfill their contractual obligations on the $85 million “Midtown” project, which would have added 450 housing units, nearly 100,000 square feet of retail space and an 850-vehicle garage in Bayside.
City Hall didn’t make any officials available for an interview Tuesday, but Communications Director Jessica Grondin issued a written statement in response to an inquiry from the Portland Press Herald.
“The city is still in the process of reviewing the 400+ paragraph complaint,” Grondin said. “However, the city steadfastly denies all of the claims asserted in the complaint.”
Federated says that it repeatedly tried to reach out to city officials to resolve the impasse, only to be ignored. But Grondin said the city takes “great exception” to that characterization, saying it was Federated that was not responsive to the city’s request for third-party mediation.
“In response, Federated has continued to avoid its responsibility to timely construct its project in accordance with its approvals, sell the property to a developer with the financial and technical capacity to develop it, or facilitate the city’s repurchase of the property as contemplated by the agreements between the city and Federated,” she said. “The city looks forward to resolving this dispute, whether in court or otherwise, and to finally freeing up the property for meaningful development.”
The lawsuit, filed Friday in U.S. District Court in Portland, seeks at least $75,000 in damages, which Allison Economy, a Bangor-based attorney representing the Florida-based developer, said was a threshold figure for a federal lawsuit. She said actual damages are estimated to be “in the eight figures.”
According to court documents, Federated says it has already invested nearly $10 million to acquire 3.25 acres of former city-owned land on Somerset Street, draft plans, file applications and secure contractors for the project. The company also says that it has lost millions from potential investors and millions in other potential revenue because of the city’s actions.
It also continues to pay taxes on the property. In June, the city placed liens on the Somerset Street land for over $40,000 in unpaid property taxes. That lien was discharged in July.
Federated says code officers have threatened enforcement for a variety of issues, including the presence of syringes from apparent drug use on the property, graffiti, and gravel that was placed there by the city. The company says the city has denied requests to fence in the property.
The Midtown project was formally upended last year.
Permits for the entire project expired in late March 2018 after the city denied Federated’s building permit application for an 850-vehicle parking garage, which was supposed to be finished by September.
The city is requiring Federated to submit new applications, but the developer says it’s unnecessary and would only lead to further delays.
City officials said the permit denial was based on Federated’s failure to pay more than $80,000 for traffic mitigation and other costs and for not posting a required performance guarantee for the entire project, which is a standard condition of all developments in Portland.
Federated argued that it did not need to pay for performance guarantee, which is an upfront payment by a developer to cover the cost of site work and public infrastructure in the event the project is not completed.
The city never provided an estimate for that guarantee. But in court documents, Federated claimed that it would have had to place upward of $15 million in escrow to meet the requirement.
Federated says the city waived the requirement. And even if it wasn’t waived, they argued that the city would have to pay those upfront costs, based on their partnership agreement. Such fees are assigned to the subdivision applicant, which in this case was the city, they said.
Federated blames city officials for unnecessary delays in processing application materials and trying to leverage its role as both regulator and business partner to seek concessions from the developer.
The lawsuit claims the city deliberately obstructed and essentially stopped working on the project after the developer buckled to the demands of opponents.
The city began working with Federated Cos. in February 2011. Its initial site plan, which included about 800 units of housing in four 165-foot towers, was approved in January 2014 but challenged in court by a group called Keep Portland Livable.
Federated Cos. scaled down the project to settle the lawsuit and received its site plan approvals in March 2015 to build three, four-story apartment buildings and a parking garage at 59 Somerset St.
Federated alleges that the move led to “a detrimental pattern of ‘bait and switch'” by city officials, who preferred the original plan.
“As the project shrunk in size, the city’s support for it lessened, and the temper of the city’s interactions with Federated noticeably changed,” the suit claims. “The city abandoned Federated, its longstanding partner, and left the developer in the lurch.”
Site plan approvals are valid for one year but can be extended for up to three years.
Federated said that the city extended approvals for one year to induce the company to close on the purchase of the city land for $2.2 million without being granted building permits and again the following year to induce the company to begin drawing down more than $8 million in federal loans to trigger a countdown to complete the garage.
As of January, the city had paid over $620,000 in interest on the loans subsidizing the parking garage, Grondin said.
The Midtown project has struggled to move forward during an unprecedented period of real estate development in Portland, with scores of office and luxury condominium buildings springing up throughout the city, especially on the peninsula.
Portland’s planning and permitting process has faced criticism from residents and developers in the past, but the city has taken steps to streamline the process. And area residents frequently criticize the city for being too accommodating to developers, rather than being too hard on them.
The lawsuit outlines the complexities of the real estate partnership between the developer and Maine’s largest city. It references a series of agreements – from purchasing the land, contracts to build a garage for public use to rebuilding a city street – that were repeatedly renegotiated and amended. And it referenced verbal assurances, as well as implied agreements.
The suit names Jennings as a defendant, in addition to the city, alleging that he influenced the process before he officially assumed his role as city manager.
The lawsuit says Jennings began meeting with Federated representatives and city staff in June 2015 – about a month before he officially took over as city manager.
That month, Federated had asked about possibly including a hotel as part of the development, but city officials emphasized the need to create housing. In response, the city declared the purchase and sale agreement as void.
“The city effectively held Federated’s legitimate contractual and land use rights hostage, for the purpose of serving political ends not shared by Federated, by resort(ing) to its role as seller of the property – extorting a particular development scheme from Federated by use of inappropriate means,” the suits alleges.
Federated blamed Jennings, who has a background in real estate development. They say he had “a direct and active role in the project’s trajectory” before he took over as city manager and he directed his soon-to-be employees to declare the purchase and sale void.
“By means of intimidation arising from his incoming status as the direct supervisor of both the police chief, acting as interim city manager, and the city’s economic development director, as author of the June 19 communication, Mr. Jennings acted in a personal non-city employee capacity when he procured the breach of PSA, a breach which but for this direct involvement would not have occurred, and proximately damaged Federated thereby,” the suit states.
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