February 19 Town Council meeting

The financial strength and contract compliance of Prism, the designated downtown redeveloper, was again a major topic of discussion at the February 19, 2013, town council meeting.

The company is again delinquent in its property taxes for at least the fourth consecutive quarter – late on more than $200,000 of its February 1 obligation. The 2006 Redevelopment Agreement allows for default based on failure to pay delinquent property taxes.

In addition, the council discussed for the first time the audited 2011-2010 financial statements of Prism Green Associates IV LLC, the redevelopment entity whose owners are Greenfield Prism IV LLC and Prism West Orange Development LLC. The statements were provided last week to the township in response to a request for information last October. Although the original demand letter required a 10-day response, and although Prism has still not provided other requested information, the township administration and other four council members are reluctant to push for additional notice of default letters to Prism to demand performance under the Agreement.

Last night, I unsuccessfully urged other council members to support sending letters of default to Prism (as the administration has done twice before to obtain compliance). The other council members appear satisfied to wait to see if Prism is able to obtain a required $50 million construction loan. I argued that it appears that Prism isn’t taking concrete steps to obtain the financing or to comply with the Agreement. I pointed out that, if it was the case that Prism is unable to obtain the financing and lacked the financial strength to complete the project, the township is better off defaulting Prism and beginning the process to find another redeveloper.

The financial statements show a company with significant financial challenges. Some of the following information was discussed at the council meeting:

- Prism was in default on repayment of the mortgage on its property at 217 Main Street, where CVS is located, with a balance of $3.3 million as of year-end 2011. Prism had an agreement to sell the property for $5.2 million that the unidentified buyer terminated. Environmental remediation of the property is part of the discussions to potentially reinstate the sale agreement. (Prism purchased the property in 2007 for $7 million, according to deed documentation the company previously provided.)

- Prism’s three mortgages on its redevelopment properties were due in 2012 and required extensions or alternate financing.

- One of the mortgages, on the Barton Press property, went into foreclosure and was settled at the end of 2012 year with Prism acquiring the property outright. The footnotes indicate that Prism “executed a DPO (Discounted Pay-Off) … in the amount of $1.2 million.” This indicates that Prism paid less than the outstanding loan balance to settle the foreclosure proceeding. In 2007, Prism assumed the mortgage with a $5.36 million balance as part of an $11.75 million purchase price; it’s unclear what the loan balance was at the time of settlement.

- Prism had negative cash flow of $140,801 in 2011, meaning it paid out more in cash than it took in during the year. While this situation cannot continue indefinitely, because theoretically the company will eventually run out of cash, it’s not unusual for a development company that is not yet generating significant revenue from the planned project.

- Investors in the company contributed capital of $2.1 million in 2011 and $3.7 million in 2010. These contributions provided substantial cash to the company.

- The financial statement, while audited, did not receive an unqualified opinion from its auditor because it doesn’t reflect U.S. Generally Accepted Accounting Principles (GAAP), a method familiar to many people because it’s required of companies that publicly trade in this country. Prism uses the accrual method for federal income taxes, requiring estimates in some situations. This method does not use “valuation allowances” required by GAAP to account for the potential that deferred taxes, which are carried as an asset, may not be realized in the future if sufficient taxable income is not generated. The result is that current assets may be valued higher than they would under GAAP.

- The statements don’t mention the two notice of default letters sent by the administration last year, which resulted in Prism promptly paying approximately $300,000 in delinquent property taxes and an escrow account for the town’s redevelopment expenses.

- Prism paid loan interest of $920,510 in 2011 and nearly $1.07 million in 2010.

- Prism paid itself management and development fees of approximately $384,000 in 2011 and nearly $932,000 in 2010.

- As of year-end 2011, one of the investors in Prism had a $475,625 capital contribution pending.

In other council action:

- The council passed, 4-1, a $3,000 contract to Goose Control Technology of NJ to addle goose eggs at three town locations to keep the resident Canadian goose population down. I voted against this because we could do this with volunteers, as several other towns in Essex County do. I also expressed concern that the technician last year did not show up at least twice when scheduled.

- The township’s 2013 budget documents are posted online here http://bit.ly/Xq15xl.

I’m a West Orange Township councilman since 2010 and can be reached atjkrakoviak@westorange.org. A former financial journalist, I am a business communications consultant in my spare time.