The bond-financed plan was supposed to transform contaminated acres in northern New Jersey with hotel development, residential housing, and a golf course. But the ill-fated EnCap project in the Meadowlands became a public-private partnership mess that state officials will now have to dig themselves out of.
The New Jersey Meadowlands Commission in 2000 entered an agreement with EnCap Golf Holdings LLC that gave development rights to the Texas-based company. EnCap was expected to remediate the 1,300-acre property and close four landfills. Yet state officials now say that the development company did not have the financial backing or knowledge to carry out the project and almost eight years of clean-up at the site has yet to be completed.
State agencies sold $210 million of long-term debt on behalf of EnCap to help finance remediation costs. While taxpayers are not responsible for the bonds, various state authorities and municipalities now say that lack of communication among government entities allowed EnCap to access the municipal bond market twice and almost resulted in a larger, $450 million bond deal backed by payments in lieu of taxes in an agreement with two corresponding local governments, the borough of Rutherford and the township of Lyndhurst.
"EnCap convinced the town officials to enter into these financial agreements by representing that the agreements were necessary in order for remediation as well as development to occur in the towns," according to a state inspector general investigative report on EnCap. "EnCap representatives did not reveal to the towns that EnCap had already obtained funds from a [New Jersey Economic Development Authority] bond issue or that EnCap was in the process of obtaining the $212 million of [New Jersey Environmental Infrastructure Trust/Department of Environmental Protection] funds plus additional loan funding through the [Bergen County Improvement Authority] allegedly to pay the entire cost of the remediation."
State administration officials rejected the PILOT bond proposal in 2006 and in the fall of that year, Gov. Jon Corzine requested that state inspector general Mary Jane Cooper investigate the history of the public-private partnership.
According to the inspector general report filed in late February, EnCap officials told the commission that it had the "private financial wherewithal to complete the project without public financing," yet changes in the company's ownership from the time of the request for qualifications process to the actual signing on the remediation land agreement decreased EnCap's own funding abilities to $19 million.
"Encap was never what it said it was and when it came time to sign the agreement with the Meadowlands Commission, Encap only superficially resembled the entity that had responded to the Meadowlands Commission's request for qualifications," Cooper said before a Senate Environment Meeting regarding the EnCap debacle on March 17. "Conversely the state was bound by its obligations of fair dealing and full disclosure."
Shortly after signing a development agreement with the NJMC, EnCap's ownership structure changed, with Cherokee Investment Partners II holding a majority interest in the company.
To help finance the clean-up of the Meadlowlands, the NJEIT and the BCIA sold on Nov. 30, 2005. a combined $210 million of 20-year, variable-rate debt on behalf of EnCap to support remediation costs at the site. Wachovia Bank, as the direct letter of credit provider on the debt, holds those bonds as of October 2007 as EnCap defaulted in its payments. Wachovia declined to speak about the EnCap bonds.
"Back in the fall, the bank group lead by Wachovia that has five banks involved, they went and took their $145 million letter of credit, they took the letter of credit and bought back our bonds and a portion of a BCIA bonds," said Dennis Hart, executive director of the NJEIT.
The bonds include NJEIT Series 2005 bonds for $107 million, subject to the alternative minimum tax. Banc of America Securities LLC priced the bonds. McCarter & English LLP is bond counsel and Public Financial Management Inc. is the financial adviser. Moody's Investors Service rates the bonds Aa2. Standard & Poor's and Fitch Ratings do not rate the debt.
The second piece includes BCIA Series 2005B bonds for $37.9 million, Series 2005C bonds for $26.7 million, and Series 2005D bonds for $38.2 million. The Series B and C bonds are subject to the AMT while the Series D bonds are taxable. Banc of America served as senior manager on the deal. Parker McCay is bond counsel and Municipal Advisory Partners Inc. is the financial adviser.
Those bond proceeds, along with Department of Environmental Protection funds paid down a $150 million NJEDA bond deal that the authority priced on behalf of EnCap in April 2004.
While the remediation project has been problematic for the state, real estate developer Donald Trump sees opportunity at the site and has entered into an agreement with EnCap, now called Cherokee Investment Partners II, whereby the Trump Organization took over the remediation work in return for $18 million over the next three years, according to Michael Cohen, attorney for Trump Organization and manager of the clean-up for the project. Since January, Trump's company has been working on the most critical and immediate environmental needs at the site.
Cohen said his team would submit to New Jersey officials on April 18, on behalf of Cherokee, a detailed list of the estimated costs of finishing the remediation project. Hart said officials in 2005 pegged clean-up costs at roughly $148 million.
A representative for Cherokee could not be reached for comment.
In response to the Encap issue, Sen. Paul Sarlo, D-Bergen, Essex, and Passaic, filed legislation earlier this month that would require any business receiving financial assistance of $25 million or more from the state for redevelopment or remediation projects to disclose financial statements to the state Treasurer and the affected agencies that detail project activities and ownership information of the private company.
The bill also calls for the creation of an omnibusman to serve as a main point of contact for the development company and various state agencies to allow for better communication between state departments and authorities, with that position reporting to the state Treasurer and/or the governor.
"Anytime when you see a project that is going to receive an excess of $25 million in some type of public funding whether it's in a way of a loan, a rebate, or a grant the public should be fully aware of the relationship between the private entity and the public entity and how that money's being spent," Sarlo said. "And is it being spent truly on a public private partnership or is it being used for some other hidden agenda?"
In the meantime, Hart said state officials are much more conscious of keeping tabs on how agencies work with private developers through regular committee meetings.
"We at the state are doing a better job of making sure that all the various state agencies are brought together for these types of projects now," Hart said. "So, through the Executive Office of Economic Growth and NJEDA and the various state agencies, we're doing a much better job of working together now than we were a few years ago."
The offices of the state Attorney General and the state Comptroller are currently reviewing the EnCap issue to evaluate how their departments may respond. Lawmakers have requested that the U.S. Attorney General's office take up the issue. Michael Drewniak, spokesman for that office, declined to comment on whether the attorney general is investigating EnCap's relationship with the state.