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The Plaza at 835 West Hamilton Street LP v. Allentown Neighborhood Improvement Zone Development Authority

United States District Court, E.D. Pennsylvania

September 12, 2017

THE PLAZA AT 835 WEST HAMILTON STREET LP
v.
ALLENTOWN NEIGHBORHOOD IMPROVEMENT ZONE DEVELOPMENT AUTHORITY, et al.

          MEMORANDUM

          STENGEL, C. J.

         In 2009, the Pennsylvania General Assembly passed the Neighborhood Improvement Zone Act (“NIZ Act”), which subsidizes development projects in downtown Allentown. Because of the subsidies, new developments are able to offer cheaper rent to their tenants than preexisting, unsubsidized buildings. The plaintiff owns an office building in Allentown that is ineligible for NIZ subsidies. The plaintiff projects that its building will be unable to keep or acquire tenants and therefore expects to default on its mortgage and face foreclosure. The plaintiff challenges the NIZ Act and its implementation under the Pennsylvania Constitution and the Equal Protection Clause, the Takings Clause, and the Contracts Clause of the United States Constitution through 28 U.S.C. § 1983 and the Declaratory Judgment Act, 28 U.S.C. §§ 2201-2202.

         Motions to dismiss for failure to state a claim have been filed by the City of Allentown and Mayor Pawlowski, as well as by Pennsylvania Revenue Secretary Eileen McNulty. Defendant ANIZDA filed a motion for judgment on the pleadings.)[1] For the following reasons, I will grant the motions and dismiss the claims with leave to amend to the extent the plaintiff can state a claim consistent with this memorandum.

         I. BACKGROUND

         The heart of the plaintiff's complaint is that the defendants did not interpret the NIZ Act's provision of funds for “improvement and development” to apply to preexisting buildings and their tenants, thereby denying the plaintiff access to the NIZ funds to which its competitors had access.

         A. The Plaza

         In November 2006, the plaintiff acquired PPL Plaza (“The Plaza”) for $92 million. (Compl. ¶¶ 27-31.) The plaintiff paid over $13 million in cash at closing and financed the remainder with two loans, one for $75 million and one for $7 million. Id. ¶ 33. The plaintiff's loans were to be repaid in monthly installments, with a final balloon payment of all amounts outstanding on December 1, 2016. Id. ¶ 34.[2] The plaintiff has spent $334, 000 on improvements to the property. Id. ¶ 37.

         As of the filing of the complaint, the Plaza's sole tenant (besides one small retail tenant on the ground floor) was a company called Talen Energy Corp. Id. ¶ 44.[3] Talen's lease, which was created in 2003, sets its rent at $27.20 per square foot. Id. ¶ 40, 42. The lease expires on April 30, 2018. Id. ¶ 40.

         B. NIZ Act

         In an effort to stimulate the economy in Pennsylvania's cities, the Pennsylvania General Assembly passed the NIZ Act on October 9, 2009. Id. ¶ 52.[4] The Act allowed the city to create a municipal authority that would designate a “Neighborhood Improvement Zone” (“NIZ”) of no more than 130 acres in which the city would enable the construction of a sports facility and other developments. 72 Pa. Cons. Stat. §§ 8902-B-8904-B. (Compl. ¶ 53.)

         The City of Allentown designated a NIZ of 128 acres in downtown Allentown along the western side of the Lehigh River on August 28, 2011, and this designation took effect on September 6, 2012. Id. ¶ 56. The zone, which contains the Plaza, “is the only zone designated or eligible for designation under the Act.” Id. ¶ 55.

         The Act permits state taxes paid by businesses operating in the NIZ to go into a fund, which can then pay debt service on bonds or loans issued to finance development, improvement, and construction in the NIZ. 72 Pa. Cons. Stat. §§ 8903-B-8907-B; §§ 8904-B(b)-(d), 8902-B. Id. ¶ 60. The Pennsylvania Department of Revenue (“DOR”) certifies the amount of state and local taxes paid by businesses in the NIZ, which are put into the fund and administered by a municipal authority, the Allentown Neighborhood Improvement Zone Development Authority (“ANIZDA”). 72 Pa. Cons. Stat. § 8904-B(d). (Compl. ¶¶ 11, 76.) According to the Act, the money in the fund can be used to finance “the construction of all or part of a facility or facility complex” or “the improvement and development of all or any part of the neighborhood improvement zone.” 72 Pa. Cons. Stat. § 8904-B(e)(1).[5]

         C. The Guidelines

         ANIZDA promulgated guidelines regarding the use of the NIZ funds. (Compl. ¶ 80; Reese Mot. to Dismiss Ex. 1 (ANIZDA Guidelines for Obtaining Financing for Projects in the City of Allentown's NIZ (“the Guidelines”), as amended Mar. 4, 2015) (Doc. No. 15-2).)[6] The Guidelines are “intended for informational purposes only” and “shall not be construed to limit in any way the discretion of the Authority.” (Guidelines ¶ 1.3.) According to the plaintiff, the Authority interpreted the Act's language providing funds for “the improvement and development of all or any part of the [NIZ]” to apply to construction of a facility or complex, renovations, or capital improvements to the existing building, but not to upkeep of preexisting buildings. (Compl. ¶¶ 86, 108). Although the Guidelines do not explicitly state that a project must involve one of these three categories to be eligible, they generally refer to projects as though they are construction projects. (See, e.g., Guidelines #5 (describing preferences given to certain “certified subcontractors in the construction of the Project”); #8 (“Applicant should provide a timeline of major milestones and construction activities.”); #13 (“The Authority shall have the right to review construction inspection reports being prepared for the Applicant's financial institution . . . .”).) The plaintiff alleges that ANIZDA also restricted NIZ funds to “new businesses starting up or moving into the NIZ.” (Compl. ¶ 82).[7]

         As the plaintiff was not planning construction, renovations, or capital improvements, it was ineligible for those subsidies. Id. ¶ 108. And its tenant, Talen, was already operating within the NIZ and therefore was not eligible for NIZ funds given to new businesses moving into the NIZ. Id. ¶ 84. As a result, “the NIZ affords benefits to every new building inside its boundaries except for PPL Plaza.” Id. ¶ 60 (emphasis omitted).

         The plaintiff met with city and state officials, ANIZDA officials, and developers, but was unable to obtain a modification of the Guidelines or other accommodations to give it access to NIZ funds. Id. ¶¶ 102-08.

         The NIZ Act has spurred development in the NIZ. Since 2009, two office and residential complexes have begun construction: the City Center Lehigh Valley, which consists of four office buildings with 650, 000 square feet of rentable office space, a full-service hotel, 170 luxury apartments, and 100, 000 square feet of upscale retail and restaurant space (id. ¶ 64), and the Waterfront Development, [8] which includes six office buildings, 124 residences, and restaurant and retail space. Id. ¶ 65. The developers of these complexes anticipate receiving NIZ subsidies of more than $40 million. Id. ¶¶ 67, 69. Because of these subsidies, they are able to charge tenants prices significantly below pre-NIZ market rates. Id. ¶¶ 68, 70-71.

         The value of PPL Plaza has plummeted since the designation of the NIZ.[9] Under the lease, the plaintiff charges Talen $27.20 per square foot. Id. ¶ 42. In January 2015, after the NIZ Act and Guidelines were promulgated, Talen's parent company asked to renegotiate its lease at a base rent of $8.00 per square foot. Id. ¶ 90. It also offered to purchase PPL Plaza for $41 million-a loss to the plaintiff of over $51 million. Id. ¶ 90. In October 2015, Talen explained that, although it would be “ideal” for Talen to stay in the Plaza, it had received lower rent offers from the new, NIZ-financed buildings, and it was “close on a final lease solution for a new building” in the Waterfront Development. Id. ¶ 94. It is therefore “evident that Talen will vacate the Plaza when the Lease expires in April 2018.” Id. ¶ 97. The plaintiff explains that the loss of Talen, and the plaintiff's likely inability to find a replacement tenant willing to pay a high enough rate of rent, will likely result in the plaintiff's default on its loans and a foreclosure sale of the Plaza. Id. ¶ 101.

         On August 21, 2017, the plaintiff filed a supplemental memorandum explaining that the owner of its debt had initiated a foreclosure action against it in the Pennsylvania Court of Common Pleas for Lehigh County. (Pl.'s Supp. Mem. in Opp. to Defs.' Mot. to Dismiss ¶ 2 (Document # 64)).

         D. The Resolutions

         The plaintiff contends that, in addition to incentivizing Talen to leave the Plaza by making cheaper rent rates available in the new buildings, ANIZDA made a special deal for Talen with two resolutions. (Compl. ¶¶ 109-113.) The first addressed the fact that Talen's relocation would have cost Talen money for which it was ineligible for NIZ subsidies, as the Guidelines deemed ineligible “any project proposing to relocate tenants, occupants, or business existing in the NIZ to another location within the NIZ.” Id. ¶ 84. Thus, Talen would have to bear the cost of moving to the Waterfront Development. The plaintiff alleges that, to prevent Talen from bearing this cost, ANIZDA passed Resolution #73, which directed tax revenues to be returned to businesses that relocate from another place within the NIZ to the Waterfront Development. (Id. ¶¶ 117, 118; ANIZDA's Mot. for Leave to File a Mot. for J. on the Pleadings in Excess of the Ct.'s P. Limit, Ex. D (Resolution 2015-73) (Documents #37-8)).

         Second, ANIZDA gave Talen a special tax break. Resolution #74 allows Talen to “recoup all state and local taxes above the amount paid by its predecessor, PPL, in 2014.” (Compl. ¶ 19; see also ANIZDA's Mot. for Leave to File a Mot. for J. on the Pleadings in Excess of the Ct.'s P. Limit, Ex. E (Resolution 2015-74) (Doc. No. 37-9).) The plaintiff argues that these resolutions “reveal how the Act has been arbitrarily and irrationally manipulated to provide benefits to favored entities, while at the same time denying the same benefits to Plaintiff.” Id. ¶ 123.[10]

         E. Procedural History

         The plaintiff brought claims for violation of its rights under the United States Constitution pursuant to 18 U.S.C. § 1983 and the Declaratory Judgment Act and its rights under the Pennsylvania Constitution against ANIZDA, the City of Allentown, Mayor of Allentown Ed Pawlowski, Pennsylvania Governor Thomas Wolf, Pennsylvania Secretary of Revenue Eileen McNulty, Pennsylvania Treasurer Timothy Reese, and Pennsylvania Auditor General Eugene DePasquale. I approved the parties' stipulations to dismiss the claims against Defendants Treasurer Reese (Document #31), Auditor General DePasquale (Document #33), and Governor Wolf (Document #47).

         ANIZDA filed an answer (Document #36) and then a motion for judgment on the pleadings (Document #46). Defendant City of Allentown and Ed Pawlowski filed a motion to dismiss (Documents #38 & 39). Defendant Secretary McNulty filed a motion to dismiss. (Document #44.)[11] The plaintiff responded in opposition to these motions, and the defendants replied. The plaintiff filed a sur-reply in opposition to ANIZDA's reply. Lastly, the plaintiff filed a supplemental memorandum in support of its opposition to the defendants' motions, updating the court on recent changes to its financial situation. (Document #64).

         II. STANDARD OF REVIEW

         Federal Rule of Civil Procedure 12(b)(6) permits a court to dismiss all or part of an action for “failure to state a claim upon which relief can be granted.” Typically, “a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, ” though plaintiff's obligation to state the grounds of entitlement to relief “requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). “Factual allegations must be enough to raise a right to relief above the speculative level . . . on the assumption that all of the allegations in the complaint are true (even if doubtful in fact).” Id. (citations omitted). A well-pleaded complaint may not be dismissed simply because “it strikes a savvy judge that actual proof of those facts is improbable, and that a recovery is very remote and unlikely.” Id. at 556. However, a complaint must provide “enough fact[s] to raise a reasonable expectation that discovery will reveal evidence of” the necessary element. Id. at 556. In reviewing a complaint on a motion to dismiss, “the factual and legal elements of a claim should be separated, ” and while all well-pleaded facts should be accepted as true, the court “may disregard any legal conclusions.” Fowler v. UPMC Shadyside, 578 F.3d 203, 210-11 (3d Cir. 2009); see also Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).

         III. DISCUSSION

         The plaintiff's allegations show that a paradoxical consequence of the NIZ Act's implementation is that new buildings are being built while the plaintiff's existing building is the subject of a foreclosure action. But, paradoxical as this may be, it does not state a claim for violation of the plaintiff's constitutional rights.

         A. Standing

         ANIZDA argues that the plaintiff does not have standing to bring its claims because it has not alleged an injury-in-fact, causation, or redressability. I agree.

         To have standing to bring a federal action under Article III of the United States Constitution, the plaintiff must show that it meets three requirements:

First, the plaintiff must have suffered an ‘injury-in-fact'-an invasion of a legally protected interest which is (a) concrete and particularized, . . . and (b) actual or imminent, not conjectural or hypothetical. Second, there must be a causal connection between the injury and the conduct complained of-the injury has to be fairly traceable to the challenged action of the defendant, and not the result of the independent action of some third party not before the court. Third, it must be likely, as opposed to merely speculative, that the injury will be redressed by a favorable decision.

Lujan v. Defs. of Wildlife, 504 U.S. 555, 560-61 (1992) (internal quotation marks, alterations, and citations omitted).

         The allegations in the plaintiff's complaint are insufficient to show standing. The plaintiff does not show how the NIZ Act and its implementation caused the plaintiff's inability to pay its debt. According to the complaint, the plaintiff entered into its lease with Talen before the NIZ Act was passed, and that lease extends until April 2018 at a fixed rate of rent. (Compl. ¶¶ 40-45.) The plaintiff's repayment of its loans was due December 2016. Id. ΒΆ 33. Thus, it is not apparent from the complaint why a decrease ...


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