Construction Law Insights

Mid-Atlantic Arena, LLC v. City of Va. Beach, 2020 Va. Unpub. LEXIS 16 2020 WL 2780000 (Va. May 28, 2020)

The City of Virginia Beach (“City”) and United States Management, LLC (“USM”) entered into a development agreement (“DA”) for USM to construct an entertainment and sports arena in Virginia Beach. USM assigned its rights under the DA to Mid-Atlantic, LLC (“MAA”). As developer, MAA had to construct the arena in accordance with a master plan and obtain financing for the endeavor. The City offered to lease some of its most valuable real estate for the arena, provide $78 million in infrastructure improvements to support the arena, and significant tax incentives. The City retained the right to approve MAA’s construction loan commitment and documents evidencing and securing the construction loan (the “Construction Loan Documents”). The City’s review and

approval rights were limited to four categories: (1) funding mechanisms and reasonable assurances that any overseas lender would fully fund the Construction Loan; (2) protection and cure rights of City and the Construction Lender in the event MAA defaulted under the Construction Loan and/or Transaction Agreement; (3) City Credit Rating Concerns; and (4) general consistency with the debt, equity, and loan term structure outlined in MAA’s proposal and pro-forma submitted to the City and the Term Sheet. The City’s obligation to participate in MAA’s construction loan closing was outlined in DA § 5.2 and was conditioned on the City approving the final form of all construction loan documents. DA § 5.2 required MAA to provide the City with an executed loan commitment that met the City’s requirements by a certain date, otherwise either party could terminate the DA. DA § 5.3 included several conditions that MAA had to satisfy prior to closing on its construction loan. In DA § 7.2.5, MA represented that it would have adequate financial resources to complete construction of the arena.

MAA worked with JPMorgan Chase Bank, NA, in conjunction with Sumitomo Mitsui Banking Corp. (collectively, “JPMorgan”), to arrange a $180 million construction loan. Under the credit agreement, before MAA could access the $180 million construction loan, MAA had to obtain $81 million in equity commitments for the project. JPMorgan sent its initial loan commitment letter to MAA in March 2017. By April 5, 2017, the City confirmed that an amended version of the commitment letter satisfied its requirements under the DA. MAA and JPMorgan then drafted the credit agreement for the $180 million construction loan, which MAA forwarded to the City in June 2017 per DA § 4.3. By November 7, 2017, MAA was unable to muster $81 million in equity contributions.

To fill a $37 million gap in funds, MAA contacted AEG Worldwide, its arena management company, to obtain a commitment to provide additional capital. AEG conditioned its contribution on the execution of its management agreement. By November 7, 2017, AEG was clear that it did not agree to make any additional capital contributions beyond its existing $5 million commitment. On August 28, 2017, the City requested a copy of the support agreement, but never received a copy of it from MAA. The executed credit agreement listed a subsequent $37 million contribution from AEG per the support agreement, which was classified as a loan document. As the deadline for closing on the construction loan approached, MAA altered its credit agreement with JPMorgan to reclassify missing items as post-closing conditions, which MAA had 45 days to satisfy. This included the support agreement. The post-closing conditions, including the $81 million in equity contributions, still had to be met before MAA could access the construction loan funds. The City did not receive a copy of the amended credit agreement until November 6, 2017 and did not approve it. The City, therefore, invoked DA § 5.2 ad informed MAA that it would not participate in the construction loan closing. On November 7, 2017, MAA and JPMorgan sent the City an executed copy of the credit agreement. On November 8, 2017, the City informed MAA that it had not met the DA § 5 construction loan closing date, so the City terminated the DA. MAA filed a breach of contract claim against the City. The Circuit Court found in favor of the City. MAA appealed, arguing that the Circuit Court erred in (i) finding that MAA and JPMorgan’s closing on the credit agreement did not satisfy the terms of the DA, (ii) that the City’s refusal to participate in the closing was not a breach of the DA, and (iii) using extrinsic evidence and personal experience in making its decision.

The Supreme Court affirmed the circuit court’s decision and found that MAA’s closing on its construction loan did not satisfy the terms of the DA and the City’s refusal to participate in that closing was not a breach of the DA. In DA §§ 7.2 and 7.2.5, MAA represented that the arena project would be fully funded as of the date of its construction loan closing. On November 7, 2017, MAA’s funding for the arena project fell $217 million short. Although MAA entered into a credit agreement with JPMorgan for a $180 million loan, MAA did not have sufficient financial resources to draw on the loan because MAA had to first obtain $81 million in equity commitments. At closing, MAA only had $44 million in capital contributions. Although MAA attempted to obtain $37 million from AEG, AEG had no obligation to provide these funds as of the construction loan closing date. Therefore, MAA failed to satisfy DA § 7.2.5. Per DA § 4.3, the City had the right to approve certain documents related to MAA’s construction loan, including the credit agreement and the support agreement. DA § 5.3 made the City’s approval of the loan documents a condition precedent to the construction loan closing. Specifically, DA § 5.2(g) mandated that the City approve the credit agreement and the support agreement. The City received an updated copy of the credit agreement on November 6, 2017, but did not approve it, and never received a copy of the support agreement. MAA failed to obtain the City’s approval of key documents prior to closing, so MAA’s closing with JPMorgan did not satisfy the DA’s construction loan closing requirements and the City was not required to participate in the construction loan closing. Because MAA did not close on its construction loan by the outside loan closing date in accordance with the DA’s requirements, the City was within its right to terminate the DA per DA § 5.4. Finally, the record was clear that the circuit court judge gave an analogy about his experience with residential lending, but that he was not substituting his judgment for the language of the DA and that his decision was grounded in his analysis of the language in the DA.

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