THE ELECTRONS HIT THE FAN.
CityBridge amended its privacy policy to enable it to collect the MAI on a unilateral basis over 4th of July weekend of 2017. A bad move both politically and legally. A cease and desist letter was sent to CityBridge by the City and CityBridge reversed itself. If the relationship between the City and CityBridge had not already been sufficiently soured, the unilateral change in the privacy policy was something of a last straw. At that point, while CityBridge was not meeting its deployment targets, it had put out LinkNYC kiosks at most of the high value Manhattan locations. They had told me that there was no increased revenue to be gained for them by putting out more kiosks. The kiosks their advertisers required had been built.
Coincidentally, CityBridge began to argue that, notwithstanding the Second Amendment, and the assurances of viability attached to it, that without the collection of the MAI there was no way the franchise could be financially successful. Without a further change in the structure of the program, they claimed, they would go out business. In August of 2017 they stopped building new kiosks, in part blaming delays on Con Ed’s lack of responsiveness and arbitrary imposition of hundreds of thousands of dollars in additional charges (which were at least partially caused by CityBridge’s arrogance and high-handedness in dealing with Con Ed). Later in the year, claiming financial disaster, they stopped paying the minimum monthly guaranteed payment. The City entered into a series of monthly “forbearance agreements” saying that it would not default CityBridge while negotiations took place to resolve the outstanding issues. But CityBridge was in an excellent position. They had the kiosks in the locations they needed and had stopped spending money installing additional ones, they had stopped paying rent, and they continued to sell ads on the kiosks. What could have been better for them?
An incidental result of this delay was the failure to remove the payphone kiosks on the timeline set out in the franchise agreement, another default under the agreement. Not only were the payphones a technology that had been superseded by mobile phones, but they were also an unsupported technology. Replacement parts were impossible to source. The copper wire system that they relied on was entirely degraded and non-functioning. As a result, all were eventually converted to battery operated wireless service. The batteries frequently went dead. There were per diem liquated damage provisions for non-deployment of kiosks and penalties for the failure to maintain the phones. DoITT had a half dozen individuals who had been inspecting the phones and writing violations against them for decades. The liquidated damage amounts built up into the high six figures and became yet an additional issue in negotiations of the default and discussions of a possible third amendment (Ultimately, the City waived the accumulated liquidated damages in the third amendment).
In 2022 there was a blizzard of publicity about the removal of the “last phone booths” with panegyrics to a lost age. This was not entirely accurate. First, because none of the stories noted that CityBridge was supposed to have removed them all six years prior and second, because there were still plenty of phone kiosks around if you just looked. This is not to mention that there were hundreds of places where phones had been pulled and the sidewalks had not been properly restored, a not insignificant ongoing failure by CityBridge.
With respect to CityBridge’s claims of financial distress, my view was that first, in my judgement CityBridge had done a poor job in selling the ad panels – and based on my twenty years of experience with the outdoor advertising industry (beginning with the very lucrative and novel sale of panels on the Bryant Park newsstands in the late 90’s), I couldn’t understand why they weren’t doing better. There was something wrong with their sales program, in my view, probably having to do with their attempting to sell only to national accounts. Just for example, I thought that if they made a deal with Miller Beer to blanket Manhattan with ads from four to six PM on weekdays that might say “It’s Miller Time” on the ad panels, it would be easy to determine how many additional six packs of beers were moved as a result of the campaign, and put a value on that (although this is a bad example because ads for alcohol were prohibited from the program). But they weren’t doing anything creative like this (that were the signature of TDI, the out-of-home advertising firm which had the subway system franchise for many years – for example the wrapping of entire subway cars for single advertisers).
Second, it wasn’t the City’s business to get involved int CityBridge/Intersection/Sidewalk Labs bottom line or their cost structure. The City and CityBridge had a franchise agreement that was hard negotiated over, and approved by the Law Department, OMB and the FCRC through a highly public and formal process. The franchise agreement had a complete panoply of potentially effective remedies in the event of default, including the $100 million in security. The City had the capacity to strictly enforce the provisions of the agreement; including, exercising the City’s rights to the $100 million dollars in security to pay outstanding franchise fees and build the required number of kiosks. It was our job under the City Charter to enforce the contract. We didn’t have the right to change terms and to do so wasn’t good public policy. In addition, the failed bidders for the original franchise, as well as the holder of the City’s other outdoor advertising franchise for bus shelters and newsstands (a competitor to the Link program, which also claimed to be losing money under its deal), would have a legal right to complain about any such changes.
Finally, based on my thirty years of business experience, with particular involvement with out of home advertising and street furniture (which is why they recruited me for the job in the first place), I was sure that CityBridge, Intersection and Google were bluffing. They wanted to get a better deal, and because of the extensive knowledge within Sidewalk Labs of how the City operated, they knew that the City tended not to enforce the terms of its contracts, to fold in negotiations, and to lose in litigation. I argued internally that once the City exercised its right to cash the letter of credit (which involved faxing a letter to the bank issuing the letter), CityBridge would move quickly to pay its arrears and remedy its deployment breaches. The franchise was just too valuable to lose and consortium members would sacrifice a great deal of money in the event of a termination. I also came to understand that the letter of credit was personally guaranteed to the bank issuing it by the principal of the venture capital investor member of the consortium. He would have moved heaven and earth not to have the LC, which was essentially a cash deposit, drawn on. We transmit the fax, the City gets the money, the bank sucks the money out of the VC investor’s account. End of story. The unsigned letter drawing on the $25 million LC sat on the top of my desk for months, with CityBridge at one point in default to the City in an amount that was twice that.
Another interesting aspect of the capital structure of CityBridge was that they had a line of credit with a bank, and a more than $150 million in a loan from what are called EB-5 investors. The EB-5 investors were a group of foreign nationals, recruited by local financial brokers, who were promised by the Federal government green cards in exchange for significant investments in US projects in distressed communities. If the City called a default under the franchise agreement, that would have also caused a default under the terms of the bank and the EB-5 loans. The EB-5 investors would lose their right to green cards. The bank lenders would likely lose their jobs (or at least their annual bonuses). Both groups would also be highly motivated to take over CityBridge (as they were entitled to do under the terms of the franchise agreement) and cure any default.
[It’s worth noting that there came a time when I enquired at the City’s Law Department about who was the City’s letter of credit law expert. I got a call back from someone senior at the Law Department asking me how much prior experience I had with letters of credit. I explained that I had routinely dealt with them in my law practice and real estate finance transactions, but that I was by no means an expert in this highly technical area of the law. The person on the phone said to me “Good, you are now the City’s LC expert.”]
But no one was interested in my opinion. It is interesting to note that between me and the Mayor, who was the ultimate decision maker on the issue, were at least four layers of bureaucracy – my boss the General Counsel of DoITT, the DoITT Commissioner, the Deputy Mayor for Operations, the First Deputy Mayor and the Mayor’s Chief of Staff. There is an argument to be made that given the relative lack of importance of the Link program in the grand scheme of city things, the issue shouldn’t even have risen to the Mayor’s level. But anything that had the potential for a bad story in the newspapers, was deemed worthy of Mayoral attention. Any information I was sending up the pike, was going through several layers of edits before it got to Mayor De Blasio. My staff and I, who had the firsthand sense of what was happening with the LinkNYC program, never met with anyone more senior than the General Counsel of DoITT to discuss strategy or our evaluation of the various probabilities of possible outcomes.
This is not to dismiss City Hall’s desire to negotiate with CityBridge out of hand. The Administration did not want to get involved in “protracted litigation with CityBridge” and most particularly did not want to take the risk of CityBridge’s shutting down this high-profile system. By coming to some kind of agreement with CityBridge City Hall could be certain that neither outcome would eventuate. This was their reasoning. The senior officials at Sidewalk Labs, who were now publicly saying that they had very little to do with the Link program, and were knowledgeable former senior city office holders, were lobbying City Hall hard to come to an accommodation. [This would be an appropriate place for me to point out that no one has ever elected me to anything, that no one would ever elect me to even the lowest elected office one might care to suggest, and that in an unlikely and bizarre set of circumstances were I to be elected to anything, it would be an impossibility that I might be reelected.]
At the same time, the Franchise Administration Unit at DoITT was being audited by both the City and State Comptroller on the LinkNYC franchise. The City Comptroller was auditing the operation of the kiosks (which by any reasonable measure was excellent). The State Comptroller was auditing DoITT’s compliance management with the franchise agreement. The City Comptroller’s methodology was unsound. The State Comptroller’s staff were Javert like in their pursuit of what they thought was perfidy – particularly with respect to the alleged (mis)-calculation of a very small amount of owed franchise fees (about which they were incorrect). Neither, though, blew the whistle on CityBridge’s failure to make good on its financial or deployment obligations and the City’s failure to exercise its extensive set of rights in the event of defaults under the franchise agreement while they were performing their audits. The State audit went on for months and continued through the COVID pandemic via teleconference. Their not calling out the City’s failure to exercise its contractual remedies and more importantly, CityBridge’s material defaults, seemed to me evidence of the lack of efficacy of Comptroller audits.
After almost two years (much of it during the pandemic) of negotiations, the City proposed a third amendment to the franchise agreement essentially releasing CityBridge from about $200 million of its minimum annual guaranteed payments, waiving the accrued liquated damages, lowering the minimum number of kiosks from 7,500 to 4,000, and most importantly essentially transforming the franchise from one focused on providing fee Wi-Fi service in public spaces, to one empowering CityBridge and a new partner, ZenFi, to turn the kiosks into 30 foot high hosts for multiple mobile telecommunications small cell transmitters. The City got no increased value from the contract in return.
During the pandemic, the Partnership for New York City, lobbied the De Blasio administration hard that New York City was falling behind in the deployment of 5G transmitters, something I discussed at length here: https://www.theplacemaster.com/2022/08/18/online-porn-gambling-and-5g/. The Administration put on a full court press to attempt to accelerate the deployment of small cells on light poles around the city, to remove obstacles to building macro transmitters on building roofs (created by Buildings Department and Fire Department safety regulations) and to convert the CityBridge Wi-Fi kiosks to mobile telecom transmitter stations. The amendment to the CityBridge franchise agreement to convert it to a mobile telecommunications station, and the approval for a design for a new Link kiosk design which could host the small cells of multiple companies became a high priority, rush project.
While at all times as a city employee I tried to be a loyal soldier, advancing the Administration’s goals and priorities to the best of my abilities, I regarded then and continue to regard the third amendment to the franchise agreement as a bad deal for the city, with particular respect to its financial terms, which was essentially a gift to a private entity of hundreds of millions of dollars to which it was contractually obligated. That being said, after lots of questions being asked and objections raised by the City’s Office of Management and Budget and the Law Department, both signed off on the substance and form of the amendment. The amendment then, as required, went to the Franchise and Concession Review Board for approval – which it duly received. Only the Staten Island Borough President identified the problems with the deal and voted against it at the FCRC. The New York City Comptroller and the four other Borough President, having been fully briefed and informed, all voted in favor of handing over hundreds of millions of dollars to CityBridge essentially because they claimed they were bad at their business. To give credit where it is due, the free public Wi-Fi system has continued to operate without interruption. After the approval of the amendment, CityBridge paid a portion of its arrears (as of March 2021) and resumed paying (reduced) minimum guaranteed monthly payments.
Similarly, while raising a number of concerns, the New York City Public Design Commission approved the design of the ZenFi kiosk, which is industrial looking, utilitarian and unimaginative. Not at all the signature purpose built multi-use telecommunications street furniture about which I have previously written. But to reiterate – every aspect of this transformed telecommunications franchise has been properly approved by the requisite authorities. There is nothing illegal or untoward here – just, in my view, a bad policy outcome leaving the City hundreds of millions of dollars poorer, with a badly designed poorly located 32 foot high tower, that fails to address the needs of an equitable 21sttelecommunications system. I was recently told that CityBridge has missed the revised deployment targets of the third amendment. But, as I say, no one ever elected me to anything.
