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February 17, 2017

Appellate Division Overturns Lower Court Decision in Article 78 Proceeding and Finds Rational Basis for Industrial Development Agency's Denial of Financial Assistance for Retail Project

On February 3, 2017, the Appellate Division Fourth Department overruled a determination by a lower court that the decision by the Town of Amherst Industrial Development Agency ("AIDA") to deny financial assistance to a project was arbitrary and capricious. See Matter of Iskalo 5000 Main LLC v Town of Amherst Indus. Dev. Agency, 2017 NY Slip Op 00867.

AIDA received an application requesting financial assistance for the renovation of a hotel. AIDA declined to provide the requested financial assistance on the basis that the project was not an eligible retail facility. The applicant instituted an action under New York CPLR Article 78 challenging the AIDA decision as arbitrary and capricious.

Section 862 of the New York General Municipal Law (the "GML") restricts the retail facilities to which an industrial development agency may grant financial assistance unless the facility satisfies one of two exceptions. A retail facility is defined in part as a facility primarily used in making retail sales to customers who personally visit such facilities. The applicant claimed that its application established that the project satisfied one of the exceptions because it was a "tourism destination". A tourism destination is defined as a facility that is expected to "attract a significant number of visitors from outside the economic development region."

The applicant claimed that the hotel would attract 75% of its guests from outside the economic development region (the "Development Region"). The trial court found that the evidence supported this claim and, therefore, the project constituted a tourism destination and was eligible to receive financial assistance. The lower court ruled that AIDA's denial of financial assistance was arbitrary and capricious. AIDA appealed.

In overruling the lower court, the Appellate Division held AIDA had a rational basis for denying the application because the applicant failed to demonstrate a causal link between the project's location and visitors coming from outside the Development Region. The Appellate Division noted that, at most, "the project location or facilities would be used by or cater to visitors from outside the economic development region" and that the guests would come for various reasons independent of the project. Moreover, there was no showing on the record that such visits would be tied to or prompted by the location of the project itself.

This decision supports use by an industrial development agency of a "but for" test in determining eligibility as a tourism destination and should encourage applicants to use independent market studies to establish eligibility.

Of additional importance, the Appellate Division rejected AIDA's request for attorneys' fees based on an indemnification covenant contained in the application for financial assistance. The covenant said that the applicant was "responsible for all expenses incurred by AIDA in connection with [the] application." The Appellate Division held the indemnification provision was too broad to overcome the well-established legal presumption that parties are responsible for their own attorneys' fees, noting specifically the absence of any reference in the indemnification clause to litigation and attorneys' fees.

f you have any questions with respect to evaluating retail projects under the tourism destination exception or the scope of indemnification covenants, please feel free to contact any member of the Public Finance Practice Area.


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