Long exasperated with city officials, the life sciences REIT takes legal action
By Murray W. Wolf
The lawsuit regarding the Alexandria Center for Life Sciences in New York City concerns a floodwall to be built to clear the way for the development of a planned third tower. (Photo courtesy of Alexandria Real Estate Equities)
As has been widely reported, Alexandria Real Estate Equities Inc. (NYSE: ARE) filed a lawsuit in U.S. District Court last Tuesday, Aug. 6, against the New York City Health + Hospitals Corporation (H+H) and the New York City Economic Development Corporation (EDC).
The lawsuit alleges that H+H and EDC are guilty of fraud and breach of contract in connection with a planned floodwall for a city-owned parcel adjacent to the Alexandria Center for Life Science (ACLS) at 29th Street and First Avenue, between Bellevue Hospital and NYU Medical Center in the Kips Bay area on Manhattan’s East Side. (Details about the lawsuit are provided later in this article.)
In retrospect, it’s not surprising that Alexandria filed suit against the City of New York this week. Executives of the Pasadena, Calif.-based real estate investment trust (REIT), the nation’s largest life sciences real estate (LSRE) company, have publicly expressed rising exasperation with city officials for at least several months.
‘Challenging’ and ‘disconcerting’ policies
Jan. 30, during Alexandria’s fourth quarter (Q4) 2023 earnings conference call with securities analysts, Alexandria Executive Chairman Joel Marcus spoke of the REIT’s decision to sell the 10-story, 350,000 square foot former Pfizer Inc. (NYSE: PFE) Midtown Manhattan headquarters building at 219 E. 42nd St. At one point, Alexandria, which acquired the Pfizer property for $142 million in 2018, said it might redevelop the building for lab space.
However, Mr. Marcus said, “We made a strategic decision not to go forward with the contemplated redevelopment of that building,” due in part to “challenging” state and local governmental policies.
Mr. Marcus also credited Alexandria for the growth of New York’s commercial life sciences lab space market, noting that the REIT first opened lab space there in 2010. But he said New York remains “a small, start-up market,” so the firm plans to continue to concentrate on its Alexandria Center for Life Sciences New York City “mega campus.”
“That’s the best way for us to continue to be successful,” he said, “and we have taken this disciplined action (selling the former Pfizer building) out of an abundance of prudence.”
Next, April 23, during Alexandria’s Q1 2024 earnings conference call, Mr. Marcus used stronger words than “challenging” to express his frustration with New York officials.
Although he reiterated that selling the former Pfizer headquarters was “a very good decision,” he questioned the “competence” of state and city officials.
“There has been, of all the regions, no lab leasing in New York City in the first quarter whatsoever,” he pointed out, “and yet the state and the city are proposing, fostering more and encouraging more people to deliver space. We sit in a very good position with our campus but, nonetheless, when you have local and state governments who are not mindful of using funding better spent on funding startups, and also the health, welfare and safety of the citizens, that’s very disconcerting.”
Then, on June 24, on what might have been the last straw for Alexandria officials, the New York EDC announced the kickoff of the official review process for two major publicly funded life sciences projects: the Science Park and Research Campus (SPARC) Kips Bay project and Innovation East. In a news release, the EDC said, “Both projects are key initiatives to advance the LifeSci NYC goal of creating 10 million square feet of life sciences space by 2030.”
However, those projects would also be direct competitors to Alexandria’s ACLS.
July 23, during Alexandria’s Q2 earnings conference call, company officials didn’t say much about the New York market, perhaps because they knew legal action was in the works. But, after news of the lawsuit broke this week, Alexandria didn’t hold back in a statement provided to the news media.
“We have invested over $1.5 billion in physical infrastructure and risk capital into dozens of startup and early-stage commercial life sciences companies over the last 15 years,” Mr. Marcus said in the statement.
“Despite these efforts, the New York City Economic Development Corporation and New York City Health + Hospitals Corporation have fraudulently strung us along for years with false assurances, concealed essential facts as part of an insidious scheme to offload the costs of a critically needed and long-delayed Kips Bay floodwall, and intentionally blocked us from timely developing our commercial life science campus’ third tower.”
Lawsuit alleges fraud and breach of contract
Alexandria summarized the lawsuit in an Aug. 6 filing with the U.S. Securities and Exchange Commission (SEC), which disclosed that the suit was filed that same day in U.S. District Court for the Southern District of New York.
The SEC filing explains that an Alexandria subsidiary, ARE-East River Science Park LLC, holds an option to incorporate a land parcel adjacent to and north of the existing ACLS campus into the existing ground lease of that campus.
“The Option Parcel will allow ARE to develop a third world-class life science building within the ACLS-NYC campus,” Alexandria stated in the SEC filing. “ARE’s investment in pre-construction costs for development of the Option Parcel, including costs related to design, engineering, environmental, survey/title, permitting and legal costs, aggregate $161.5 million as of June 30, 2024.”
The SEC filing continues, “The lawsuit alleges two principal claims against H+H and EDC: fraud in the inducement, and, in the alternative, breach of contract in violation of the implied covenant of good faith and fair dealing. As alleged in the complaint, ARE’s claims arise from H+H’s and EDC’s misrepresentations and concealment of material facts in connection with a floodwall, which H+H and EDC are seeking to require ARE to integrate in development of the Option Parcel. ARE alleges that H+H’s and EDC’s misconduct have prevented ARE from completing the North Tower.”
As background, the lawsuit explains that Alexandria entered into a ground lease for city-owned land in 2006 to develop the ACLS, beginning with the East and West Towers, at 430 and 450 E. 29th St., which were completed in 2010 and 2014, respectively. In 2019, the REIT exercised an option for an adjacent city-owned parcel, the site of a potential North Tower at 550 E. 30th St.
But Alexandria alleges that it was “fraudulently induced” into agreeing to cooperate on a flood protection system when it exercised the option for the site of the third tower. The firm says it thought the city would reimburse it for any floodwall costs, and the infrastructure project wouldn’t delay North Tower development.
Alexandria says the floodwall issue has indeed delayed the North Tower project, causing the REIT to miss out on the LSRE market boom of 2021 and 2022.
Alexandria goes on to say the matter “exposes the firm to potential losses ranging from zero to the full amount of the investment in the project,” which, as noted above, was $161.5 million as of June 30.
Alexandria seeks at least $50 million in damages, as well as a reformation of the ground lease for the project.
To view Alexandria’s SEC filing, please visit https://d18rn0p25nwr6d.cloudfront.net/CIK-0001035443/d247c15e-dd6e-4c49-81f0-52a3bed40da0.html
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