Opinion
INDEX NO. 158480/2018
03-22-2019
In the Matter of the Application of LA HERMOSA CHURCH a/k/a LA HERMOSA CHRISTIAN CHURCH a/k/a LA HERMOSA CHRISTIAN CHURCH (DISCIPLES OF CHRIST), INC., Petitioner, For approval to Obtain a Mortgage on Its Real Property Located at 3-5 West 110th Street, New York, New York 10026, Block 1594, Lot 41, in the County of New York, pursuant to Sections 510 and 511 of the Not-For-Profit Corporation Law and Section 12 of the Religious Corporation Law.
NYSCEF DOC. NO. 61 MOTION DATE __________ MOTION SEQ. NO. 001
DECISION AND JUDGMENT
The following e-filed documents, listed by NYSCEF document number (Motion 001) 19, 20, 21, 22, 23, 27, 29, 30, 31, 42, 43, 44, 45, 46, 47, 48, 49, 50, 51, 52, 53, 54, 55, 56, 57, 58, 59, 60 were read on this motion to/for special proceeding.
Petitioner moves pursuant to Not-For-Profit Corporation Law (N-PCL) §§ 510 and 511 and Religious Corporations Law (RCL) § 12 for an order approving a mortgage on petitioner's real property located at 3-5 West 110th Street, New York, block 1594, lot 41 in Manhattan. Its primary office is located there (id., ¶ 22).
The mortgage sought is to secure a $7.2 million loan from the Church Extension Disciples of Christ, Inc. (extension fund), an Indiana organization that is the financing arm of the National Disciples of Christ (national organization). Since 1883, the extension fund has assisted congregations to plan and finance holy places to be used for ministry and sharing the gospel. In 2016, it provided new loans or refinanced existing loans for 40 congregations nationwide and loaned more than $100 million to churches and related organizations to help fulfill their religious missions. Historically, it has made over 13,500 loans totaling over $950 million to churches and related organizations (id., ¶ 66). According to petitioner, the extension fund is not a typical commercial lender. Since its goal is to help local congregations, not maximize its own profits, it provides terms that are more favorable to the borrower than a typical commercial lender would ever extend (id., ¶ 7).
The property is petitioner's house of worship, its sole asset of significant economic value. It contends that the site, located on Central Park North directly across the street from the northeastern corner of Central Park and Fifth Avenue, is suitable for development of a very valuable residential building, that the property has been appraised at approximately $33 million, and that if rezoned, the value could double. Petitioner thus seeks the mortgage to finance the rezoning process.
The Charities Bureau of the Office of the Attorney General (AG) objects to the proposed mortgage on the ground that the rezoning process is speculative and risky, and if rezoning is not approved, petitioner could lose its property to the lender.
I. FACTUAL BACKGROUND
On July 17, 1940, petitioner was incorporated under RCL article 9, section 180 (Petition [Pet.], ¶ 21; Exh. A).
Petitioner is a small congregation consisting of 52 members and 7 trustees (AG's Objection, Exh. 8). According to its website, it provides worship services on Sunday, a music program for underprivileged children on Tuesdays, and English classes on Thursdays (id., Exh. 9). As a congregational church of the Christian Church (Disciples) and since its incorporation, petitioner has served the religious needs of its community, largely comprised of poor and immigrant Hispanic and other minority families in East Harlem (Pet., ¶ 1). Its annual budget is less than $100,000 (id.).
Petitioner's corporate purpose is to (1) associate for the purpose of founding and continuing a free church, (2) establish and maintain for its members a place of religious worship, communion, education, and moral advancement, and (3) promote the Christian faith (id., ¶ 23).
By bargain and sale deed dated June 3, 1977, petitioner obtained title to the property from the American Christian Ministry Society of New York, Inc. (ACMSNY), a religious institution affiliated with the United Christian Missionary Society, a predecessor of the Division of Homeland Ministries (n/k/a Disciples Home Missions), a general ministry arm of the Disciples (id., ¶¶ 26, 27, Exh. C). Before ACMSNY deeded the property to petitioner, the parties entered into a covenant agreement, pursuant to which ACMSNY covenanted to convey title to the property to petitioner, and petitioner thereby agreed to take title pursuant to a bargain and sale deed with covenant against grantor's acts that included the following reversionary clause:
To have and to hold the premises herein granted unto the grantee for the religious use and purposes of a Christian Church congregation (Disciples of Christ) integrated with and organizationally related to and supportive of Christian Church (Disciples of Christ) through the General Assembly of the Christian Church (Disciples of Christ) of Indianapolis, Indiana and the Christian Church (Disciples of Christ) Northeastern Region, Buffalo, New York, so long as said premises shall be used for said religious purposes herein mentioned and no longer.(id., Exh. D).
The deed to the property contains the above-quoted restriction on use and reversionary right to AMCSNY (id., Exh. C). Thus, any contemplated transaction to sell the property for a use other than the prescribed religious purpose necessarily requires consultation with the Disciples to obtain the waiver and/or consent of ACMSNY (id., ¶ 30). At approximately the same time that ACMSNY gifted the property to petitioner, the extension fund extended a loan to petitioner, secured by a mortgage on the property. Petitioner used the loan proceeds to improve the property (id., ¶ 31).
In 2015, a lawsuit was commenced by which petitioner's former pastor generally alleged that he had been unlawfully terminated from his position, and the other plaintiffs, former members and trustees, generally alleged that they had been wrongfully removed from their positions and excommunicated as members of petitioner (id., ¶ 38). In April 2016, the plaintiffs in that suit filed a notice of pendency against the property, alleging an ownership interest therein (id., ¶ 39). In August 2016, the pleadings were amended to assert new claims to enjoin petitioner from entering into any transaction with a real estate developer for the sale of all or part of the property (id., ¶ 40).
Also in 2015, petitioner's board of trustees, whose duty it is to plan, program, and conduct petitioner's business (id., ¶ 24), decided to partner with a developer to realize the substantial value of the property (id., ¶ 34). During most of 2015 and the beginning of 2016, petitioner marketed its property to New York area real estate developers in pursuit of a transaction that would replace the existing facility, which is old and in poor condition, with a new house of worship for its congregants, which would provide substantial endowment funds that would permit petitioner to continue its religious mission (id.).
Between March 2015 and February 2016, the board met with, or received written proposals from, six developers with extensive experience in residential real estate development (id., ¶ 35). In February 2016, petitioner entered into serious negotiations with one developer concerning a potential transaction at a price of approximately $40 million. After a few months, in June 2016, negotiations reached the point where a resolution to approve the transaction was presented to petitioner's congregation for a vote. The resolution was approved (id., ¶ 36). Given the notice of pendency, however, in September 2016, petitioner terminated negotiations (id., ¶ 37).
As a result of the litigation, petitioner experienced a severe strain on its financial resources (id., ¶ 42). In the fall of 2017, it settled the lawsuit, resulting in the dismissal of the litigation with prejudice (id., ¶ 44).
II. The proposed mortgage loan (PML)
In 2016, after hearing that the New York City Planning Department was considering rezoning East Harlem to provide for an increase in residential density, petitioner sought the expertise of counsel to evaluate whether the property was a candidate for rezoning (id., ¶¶ 46-48). After exploring the issue and in consultation with counsel, petitioner determined that the planning department's rezoning study presented an opportunity to approach it about rezoning the property in such a manner as to allow it to have buildings of greater density and height (id., ¶ 51).
After settling the litigation in the fall of 2017, petitioner decided that financing was needed to control the upzoning process. Thus, in December 2017, it worked closely with Disciples and the extension fund to obtain an unsecured bridge loan in the amount of $2 million, the proceeds of which were used to pay for petitioner's initial costs to consultants, attorneys, architects, and other professionals for the upzoning and other pre-development costs, including the expense of the litigation (id., ¶ 60).
Petitioner applied to the extension fund for the PML in the principal amount of $7.2 million to enable it to pursue the upzoning, the construction of a new building, and the redevelopment of the property through a negotiated transaction with a real estate developer (id., ¶ 65). Pursuant to the terms of the promissory note, petitioner is obligated to pay monthly interest until the maturity date of the PML and no part of the principal may be paid as part of the monthly interest payments. The initial interest rate is six percent and while the interest rate is not fixed, it cannot exceed seven percent and is calculated based only on amounts actually drawn by petitioner, and not on the full principal amount (id., ¶ 88).
The loan will be secured solely by a mortgage on the property (id., ¶¶ 6, 68). The $7.2 million will be used: (1) to repay the unsecured $2 million bridge loan that paid for petitioner's debts and fees previously incurred; (2) to pay the debt service in the form of the monthly interest payments on the PML; (3) to pay the closing costs of the PML; (4) to pay the expenses associated with the upzoning of the property; (5) for reimbursement to petitioner for monies expended in 2015 and 2016 when it began to market the property to real estate developers; and (6) to pay expenses associated with the design of the new church premises and negotiating an agreement with a development partner after the completion of the upzoning (id., ¶ 69).
In agreeing to provide the PML, the extension fund undertook an extensive underwriting review, carefully reviewed the loan application, vetted petitioner's attorneys and land use experts, and conducted a detailed review of the proposed upzoning (id., ¶ 84).
Petitioner also worked with the extension fund to develop a budget (see id., Exh. J) for the PML that includes safeguards to ensure that it will have sufficient funds to undertake the upzoning and cover pre- and post-development transaction costs from the proceeds, will not have to access petitioner's operating funds to make payments during the loan period, and that the loan will be successfully repaid (id., ¶ 85). The budget demonstrates that the costs for each phase of the land use process have been carefully calculated, and after excluding the costs relating to the litigation, the remainder of the proceeds are budgeted for use as follows:
(1) Approximately $1.2 to $1.6 million of the principal amount of the [PML] is budgeted for the direct costs of the ULURP [New York Uniform Land Use Review Process] process.(id., ¶ 87).
(2) Approximately $1 million is budgeted for costs related to the ULURP process, such as public and government relations, legal costs, the transaction costs associated with the Proposed Mortgage Loan (i.e., title insurance, appraisal fees, New York State mortgage recording costs), legal costs and compensation to the Church for loss of rental income from their tenant.
(3) Approximately $2.6 million to $3 million is budgeted for development costs that will accrue after the anticipated completion of the ULURP and the execution of a development agreement with a developer for the Church property.
(4) Finally, approximately $1.25 million will be used for an interest reserve for capitalized interest, in an amount sufficient to cover five years of interest payments on the Proposed Mortgage Loan. The interest reserve ensures that the Church will not need to access its own operating funds to make interest payments
The budget includes an interest reserve sufficient for five years of interest payments (id., ¶ 89), and the extension fund requires no additional security from petitioner (id., ¶ 92). In the event of a default, moreover, there is an automatic six-month forbearance period to allow petitioner sufficient time to cure before the extension fund can exercise its rights and remedies as a lender (id., ¶ 93).
On November 19, 2017, the PML was presented to the board which unanimously determined to recommend it to the congregational assembly (id., ¶¶ 70-71) which thereupon voted unanimously in favor of approval (id., ¶¶ 72-73).
Pursuant to the board's and assembly's authorization, petitioner and the extension fund entered into a loan agreement, dated as of January 30, 2018 (id., Exh. H). The proposed mortgage (see id., exh. I), secures the loan, and ensures its repayment out of sales proceeds from the anticipated sale of the property (id., ¶¶ 75-76).
III. NEGOTIATIONS WITH THE AG
On December 21, 2017, petitioner submitted a verified petition to the AG for approval to mortgage the property on the terms set forth above. On January 29, 2018, the Attorney General advised petitioner's counsel that the petition was under review, and requested additional documents and other information, including: (1) the proposed promissory note and loan terms, including the interest rate, term and monthly payments; (2) any contracts for the subsequent development plan; (3) the zoning change application, if any, and status; (4) an accounting outlining the expenses paid from the $2 million bridge loan previously extended by the extension fund, including the identities of those who received payments therefrom and in what amounts; and (5) the notice or means by which members were placed on notice of the meeting to approve the proposed mortgage loan (id., ¶¶ 103-104). Petitioner maintains that it provided all of the requested information no later than February 1, 2018 (id., ¶ 105).
During the course of a telephone call on March 21, 2018, prior to which the AG sought from petitioner documentation including the promissory note, the commitment letter that included expenses of the PML, a potential closing statement, an updated financial report, and petitioner's membership roll (id., ¶¶ 107-108), the AG raised questions about the lender and the fees it was charging, the terms of the loan respecting payments of interest and principal, and why part of the loan was going toward paying previously-incurred litigation expenses (id., ¶ 110).
On April 19, 2018, the AG advised petitioner of its concerns as a whole, and stated that petitioner "should not be in the business of being a real estate developer." Instead, the AG opined that the more typical transaction is one where the property is sold to a third-party developer (id., ¶ 116).
By letter to petitioner dated April 20, 2018, the AG advised that it would not approve the current petition (Pet., Exh. K), and that petitioner could seek the court's approval (refusal letter, at 2). It explained that
the documents themselves are not clear as to what the monthly payment will be for the proposed mortgage (though you have verbally explained that it would be interest only.) The loan document itself requires repayment of $7,200,000 over the course of 5 years at a rate of 8%, which would require a monthly payment of about $50,000(id. at 1), and that petitioner had
stated the organization's ability to provide payment of this monthly obligation will come from the loan proceeds. The proposed budget for the transaction, however, also requires the religious organization [to] rely heavily on professionals (none of whom are identified) to assist it in performing a complete rezoning and possible negotiation with its neighbors to attempt to benefit it with possible potential future returns. This is a highly speculative and risky undertaking, involving substantial entitlement risk; should the rezoning and plan approval not occur, or be held up by litigation, or should the New York real estate market be unfavorable to development at the end of the loan term, the organization would lose its property to the lender.(id.). It mentioned the presence of other inconsequential defects. (id.).
On May 1, 2018 and May 11, 2018, petitioner responded in writing, addressing the concerns and submitting supplemental information (petition, ¶ 126). At a meeting held at petitioner's request on May 23, 2018 (Pet., ¶ 128), the AG focused on the potential generalized risks of proceeding with the loan, such as the possibility that the upzoning would be unsuccessful, of a market downturn, and of a foreclosure on the property. It questioned the amounts to be budgeted for paying for the zoning and land use counsel and whether the professionals could agree to a contingency payment. (id., ¶ 129). In response, petitioner offered additional information (id., ¶ 130).
On July 31, 2018, at another meeting, the AG asked about extension fund and its relationship with borrowers, the planned structure of petitioner's anticipated endowment, the history and structure of the Disciples, the plan to deal with real estate developers post-upzoning, and the Pastor's education and background (id., ¶ 142).
By letter dated August 31, 2018 (Pet., Exh. N), the AG advised petitioner that several concerns remained regarding "the amount of the [loan] and how it is currently structured." Several items are also enumerated that the AG identified as concerns, along with suggested means of addressing those concerns: (1) the viability and continued operation of petitioner as a congregation; (2) the autonomy and independence of the congregation; (3) financial protection for petitioner in the event of default; and (4) petitioner's access to the proceeds of the future sale and endowment (see id.).
IV. DISCUSSION
A. Governing law
Pursuant to N-PCL §§ 510 and 511 and RCL § 12, when a religious corporation seeks to sell or mortgage its real property, approval by the court, upon notice to the Attorney General, or approval by the Attorney General, is required to confirm that the "the consideration and the terms of the transaction are fair and reasonable to the corporation and that the purposes of the corporation or the interests of the members will be promoted" (64th Assoc., L.L.C. v Manhattan Eye, Ear & Throat Hosp., 2 NY3d 585, 590 [2004] [internal quotation marks and citation omitted]).
The purpose of the court review and approval of sales, mortgages, and leases by religious corporations is to "'protect the [religious] society and its members from loss through unwise bargains, and to prevent perversion of the association's property'" (Wolkoff v Church of St. Rita, 132 Misc 2d 464, 470 [Sup Ct, Richmond County 1986] [citation omitted], affd 133 AD2d 267 [1987]; see also Church of God of Prospect Plaza v Fourth Church of Christ, Scientist, of Brooklyn, 76 AD2d 712, 716 [2d Dept 1980], affd 54 NY2d 742 [1981]). Thus, the AG is made a statutory party to applications pursuant to N-PCL § 511 "to ensure that the interests of the ultimate beneficiaries of the corporation, the public, are adequately represented and protected from improvident transactions" (Matter of Manhattan Eye, Ear & Throat Hosp., 186 Misc 2d 126, 151 [Sup Ct, NY County 1999]; see 64th Assoc., L.L.C., 2 NY3d at 590). The statutory procedure is "designed to 'preserve charitable assets to serve public purposes'" (64th Assoc., 2 NY3d at 590; see Rose Ocko Found. v Lebovits, 259 AD2d 685, 688 [2d Dept 1999], lv denied 93 NY2d 997).
In determining whether to grant an application under N-PCL 511, the court must conduct a two-pronged analysis and determine whether (1) the consideration and the terms of the transaction are fair and reasonable to the corporation; and (2) the interests of the members will be promoted (64th Assocs., LLC, 2 NY3d at 590; see Church of God, 76 AD2d at 716). "New York courts have held that a court applying this two-pronged test must evaluate each prong with reference to facts existing at particular time periods." (Mosdos Chofetz Chaim, Inc. v RBS Citizens, N.A., 14 F Supp 3d 191, 221 [SD NY 2014]). Whether a bargain is fair and reasonable to the corporation, depends on "the conditions prevailing at the time it was struck" (Church of God, 76 AD2d at 717; see also Scher v Yeshivath Makowa Corp., 54 AD3d 839, 839-840 [2d Dept 2008] ["(w)hen considering whether the terms and conditions of a proposed sale are fair and reasonable to the corporation, the court views the conditions prevailing at the time the contract was made"]). And to determine if the transaction would promote the purposes of the organization or the interests of its members, the court "may consider" whether the purposes or interests "would have been . . . promoted at the time the contract was made, but [they] should be guided primarily by whether those ends would be realized in light of conditions prevailing at the time the issue is presented to court" (Church of God, 76 AD2d at 717; see also Rende & Esposito Consultants, Inc. v St. Augustine's Roman Catholic Church, 131 AD2d 740, 743 [2d Dept 1987] ["the court must consider whether the bargain was fair and reasonable at the time it was entered into and whether the sale of the property will presently benefit [the religious corporation] and promote the best interests of its members who are 'the real parties in interest'"] [citation omitted]).
Applications have been denied where the transaction "would . . . be highly detrimental to the purpose of the corporation and interests of its members" because the conveyance "would leave the . . . [religious corporation] without a house of worship" (Church of God, 76 AD2d at 717), or where "dissolution would result," and the conveyance "would be highly detrimental to the [religious corporation's] corporate purpose (Matter of Agudist Council of Greater N.Y. v Imperial Sales Co., 158 AD2d 683, 683-684 [2d Dept 1990]).
B. Contentions
1. Petitioner
To ensure obtaining maximum value for the property, petitioner states that it has worked closely with its national church affiliates and experts with extensive experience in New York City real estate. According to petitioner, the $2 million bridge loan from the extension fund will be refinanced into the PML and provide substantial financial resources for it to undertake the upzoning (id., ¶ 61). It submits an appraisal stating that the property, as is, is worth an estimated $33 million (Pet., Exh. E), and an appraisal of the building, post-upzoning, stating that the value would be $65 million.
As the total estimated cost of the construction of a new building and the estimated transaction costs are approximately $22.5 to $25 million, petitioner determined that upzoning would generate approximately $40 million of remaining funds that it would use to create an endowment. By contrast, as is, the property would yield an endowment of $10 million (id., ¶ 64).
Petitioner also asserts that upzoning the property will yield other benefits, such as an opportunity to build a new sanctuary far larger and superior to what it can build on the property as currently zoned, and new ancillary uses such as dedicated classrooms, fellowship halls, a kitchen, and column-free meeting rooms double in height (id., ¶¶ 5, 55). Upzoning will enhance petitioner's ability to be independent from a residential development on the property site, whereas absent upzoning, a new sanctuary will likely be absorbed within a residential building (id., ¶ 56).
Petitioner thus argues that the loan is "fair and reasonable, promotes the best interests of the [its] members and will further its religious mission" (Pet., ¶ 80). It is fair and reasonable because it is "structured to allow [it] the flexibility to pursue the Upzoning while simultaneously providing monies to finance the actual development of a new Church for the Church, regardless of whether the Upzoning is successful" (id., ¶ 97). "Moreover, even if the Upzoning is unsuccessful, the Church's asset is worth almost five times the amount that would be needed to repay the [PML]" (id.). Petitioner also contends that the loan is in its best interests and will promote its religious mission because the upzoning will allow for a new and larger church, which will attract new congregants, and result in a large endowment which will further its religious mission (id., ¶ 100).
According to petitioner, dissolution or termination is not contemplated in connection with the PML, and that it is not insolvent nor will it become insolvent as a result thereof (id., ¶¶ 77-78).
2. The AG
The AG objects to the PML and asks that the petition be denied given its speculative nature, lack of financial information from petitioner, and petitioner's insolvency. It has advised petitioner that it would prefer a direct sale of the property to a developer without an speculative and risky upzoning.
The AG denies that the transaction promotes either the purposes of petitioner or the interests of its members, and argues that "petitioner has no ability to repay the loan which is the subject of this petition from its income or non-real estate assets" (objection, ¶ 9), and that the speculative rezoning application has no guarantee of success, or of eventually generating an additional $30 million sale price for the property (id., ¶ 10). It is concerned by the absence of documentation of the $2 million unsecured bridge loan from the extension fund (id., ¶ 12), and bothered by petitioner's inability to repay the debt if this petition is granted and if the contemplated zoning approval is not obtained within the five-year term of the mortgage. Petitioner would then have to default on the mortgage or sell the property below the appraised value (id., ¶ 13).
Regardless of whether the rezoning application is approved, the AG maintains that the mortgage with its obligation of repayment will remain, and should the rezoning application be denied, or local market conditions deteriorate significantly, the only back-up plan is the sale of the building. Therefore, petitioner will receive no financial benefit or anything tangible through this transaction that will promote its religious purposes or that would be considered "fair and reasonable" within the meaning of the RCL or the N-PCL (id., ¶¶ 16-17).
The AG offers petitioner's financial reports for 2014 to 2017 which show a steady decline in its financial viability, and that it has operated at a loss for each consecutive year since 2014 (objection, Exh. 6). In 2014, petitioner reported that it was operating at a modest loss of $4,645, with annual income of $99,176, and liabilities of $103,821. In 2015, the organization reported that it was operating at a loss of $22,981, with annual income of $109,592 and expenses of $132,573. In 2016, the organization reported that it was operating at a loss of $45,641, with annual income of $109,476 and expenses of $155,118. And in 2017, the organization reported it was operating at a loss of $48,602, with annual income of $105,809 and expenses of $154,411 (id.).
C. Analysis
The purpose of the PML is to finance a speculative rezoning application with the City of New York for potentially enlarging petitioner's house of worship through the development of air rights. Its terms require that petitioner pay "interest only" on up to $7.2 million, amortized over the course of five years at a rate of six or seven percent at an annual cost of approximately $35,000. The mortgage proceeds do not immediately benefit petitioner financially (Pet., ¶ 87 [a]-[d].)
Pursuant to the petition, $5.6 million of the mortgage proceeds will be used to pay professional costs, including legal fees, and fees associated with the rezoning application, the success of which is not guaranteed. An additional $30 million will purportedly be generated in sales, and the remaining $1.2 million in mortgage proceeds will be used to repay the interest-only portion of the loan over the next five-year period so that there will be no need for petitioner to utilize any of its own funds.
The appraisals offered by petitioner are supported solely by a square-foot calculation of the building value based on comparable sales, which sales are significantly less than the appraised amount herein. The appraisals value this building as is at $400 per square foot whereas comparable area sales average from $151 to $340 per square feet. The average reasonable per square foot sales price for comparable properties was $232 (Pet., Exh. E, at 39). It is therefore, unclear if the building is accurately appraised and whether the risk of loss of petitioner's only significant asset makes sense for a mortgage of less than a third of the property's actual potential worth.
In addition, the $65 million post-rezoning appraisal cannot be used to determine whether the mortgage is fair and reasonable because it is not based on "conditions prevailing at the time the [transaction] was made" (Scher, 54 AD3d at 839-840; see Wolkoff, 132 Misc 2d at 471 ["(a)bsent any special circumstances . . . the current market value is the most reliable index for calculation of what constitutes a fair consideration for real property," and thus, "the value of property is set at the date when the bargain is struck"]). It also presumes a successful upzoning, a static real estate market, and the availability or desirability of the building in five years.
That the appraised value of the building exceeds the amount of the loan does not mean that the transaction is fair and reasonable, as it does not account for other contingencies such as the potential delay of the application process beyond five years or the possibility of litigation because the larger building may block the view of Central Park for the other buildings located around it. There also exists a risk that a failure to rezone or overspend could result in a default on the loan and foreclosure. Petitioner assumes, without any support, that neither the extension fund nor the national organization will exercise its agreed-upon rights under the terms of the mortgage.
The petition contains no contingency plan in the event of a default, and it is not likely that petitioner would be able to cure as it concedes an inability to repay the debt given its intent to escrow $1.25 million of the proceeds to repay the debt, and the financial documentation submitted reflects that petitioner has been operating at a loss for at least the last four years (Pet., Exh. D).
Essentially, petitioner is borrowing money to repay money at an interest rate of six or seven percent. A $7.2 million mortgage to finance a speculative venture is not fair and reasonable consideration to petitioner, especially when all but $1.25 million of the debt is being paid out to professionals, and none of the proceeds will be used on the church or furthering petitioner's mission or its programs.
More troubling is that in 2014, petitioner had liquid assets of $625,006 and in 2017, according to the financial statement submitted by petitioner in support of this application, those assets were reduced to $2,434 on account of the prior litigation. Petitioner then chose to undertake $2 million of unsecured debt from the extension fund without any means of repayment. Thus, the transaction requires petitioner to assume a great deal of debt for which it has no visible means of repayment and for which it will receive no consideration other than the potential to rezone its property to allow for the construction of a bigger building with potentially more income-generating ability.
As a future development deal, with petitioner acting as its own developer/contractor, and given its financial status at the time of the application, the value of the property, and petitioner's questionable ability to carry the financial burden of the increase in its liabilities, the petition falls short of demonstrating an ability to support the financial burden and increased risk associated with the transaction. Thus, the PML is not "fair and reasonable" or a sound financial decision when petitioner's sole valuable asset is placed at risk. That petitioner could lose the property, and that "dissolution" of the religious organization could result renders the petition not prudent (see Matter of Agudist Council of Greater N.Y., 158 AD2d at 684).
Petitioner provides no information on its programs beyond conclusorily asserting that one of its objectives is to rebuild its congregational membership. Rather, it concludes that the upgraded building and need for the rezoning of the property is important to "attract new congregants." The petition lacks information on current demographics, including the target population that would allow petitioner to rebuild its congregation, the presence of competitive religious organizations in the likely congregant area, or the effect of changes in demographics in the gentrifying neighborhood around the church on the success of any plans to rebuild the congregation. Thus, petitioner fails to offer a plan on how it will expand and continue its religious presence in the area.
Accordingly, as petitioner does not sufficiently demonstrate that the PML is fair and reasonable and that petitioner's interests will be thereby promoted, it is
ORDERED AND ADJUDGED, that the petition is denied and the proceeding is dismissed. 3/22/2019
DATE
/s/ _________
BARBARA JAFFE, J.S.C.