A state audit suggests the City of Niagara Falls could have produced better development results had it shown more foresight and provided more oversight in its dealings with Niagara Falls Redevelopment and Cordish Co.

During a visit to City Hall on Wednesday, state Comptroller Thomas DiNapoli said the city failed to provide adequate protections for itself before entering into a 1997 development deal with NFR and a 1981 lease agreement for the Rainbow Mall with Rainbow Square Limited Partnership, the predecessor to the mall’s current owner, Cordish.

In addition, DiNapoli’s office found the city did not adequately monitor either development deal, allowing significant milestones to pass without making sure the developers were living up to expectations. He noted that, in some cases, the failure to properly oversee the progress of major projects had to do with a lack of personnel assigned by the city to handle the job.

While DiNapoli did provide the city with several recommendations for staying out of disappointing deals in the future, he acknowledged the limitations imposed at the time both contracts were signed made it difficult for the city to undo any development wrongs from the past. He suggested renegotiation of existing deals as one possibility of improving the rate of return from either NFR or Cordish.

“There are limited options on what the city can do,” DiNapoli said.

Under its development deal with the city, NFR promised to invest at least $110 million in 140 acres of downtown property known as the East Falls Street Redevelopment Area. The company did acquire numerous properties downtown, but never built the attractions it once promised. DiNapoli’s office concluded while the original deal contained some benchmarks, including timeframes for minimum investment requirements, the city failed to appoint anyone to monitor whether the provisions of the original contract were met.

In 2003, the city entered into an amended agreement with NFR that allowed the company to purchase property within its development territory from private owners. DiNapoli’s office found that the move limited the city’s control over the acquisitions and offered no recourse in the event the developer failed to meet benchmarks included in the deal. DiNapoli said the city would have had greater leverage had it required NFR to acquire the property through the city or the city’s Urban Renewal Agency.

The comptroller’s report did raise questions about one component of the NFR deal — a 2005 construction project that started but was never finished. While the city and NFR apparently agreed to complete construction by April of 2007, the comptroller concluded that the construction never progressed beyond the building of a foundation. The auditors also found no documentation supporting the inspection and acceptance of the foundation by the city’s building inspector. Auditors said city officials could not confirm the foundation was sound enough to support construction of a building on top of it.

When asked if the situation suggested NFR had failed to live up to the obligations of its current agreement with the city, DiNapoli said the weak requirements under the deal made it difficult to determine if the city had any recourse.

Mayor Paul Dyster backed DiNapoli’s understanding of the situation, saying the contract provisions were not clear as to the specific nature of the proposed development.

When asked if he thought NFR was in compliance with its current agreement, Dyster declined comment citing the “complex legal issues” involved. He noted that both NFR and Cordish are current on their property taxes and other fees owed to the city. He also indicated that Economic Development Director Peter Kay is continuing to direct potential investment partners to NFR and he hopes the city and the company will be able to work together on projects in the future.

NFR declined comment on the audit’s findings.

Auditors found the city’s 1981 lease agreement for the Rainbow Mall did not have adequate provisions to protect the city’s interest in the event that the developer failed to rent retail space or achieve minimum acceptable performance standards, such as occupancy rates, sales revenues or some other measure of retail activity. In addition, the report found that the lease payments were not based on the mall’s performance.

Dyster said progress has been made on a new future for the Rainbow Mall, noting that the city and Cordish Corp. recently agreed to an out-of-court settlement to amicably end opposing lawsuits. The deal is up for approval at Monday’s council meeting. Dyster said the city is now engaged in regular dialogue with the mall’s owner.

In terms of future development, Dyster said he believes it is the city’s job to continue to provide an atmosphere that will compel companies like NFR and Cordish to make the best use of the assets they have acquired in Niagara Falls. In the end, he said, both companies want to make money off their investments. He said tearing down the Wintergarden to open up the West Pedestrian Mall is one example of an ongoing public improvement project that could entice private developers to do more downtown.

“We are trying to assert some positive pressure,” Dyster said.

DiNapoli outlined several steps for helping the city to avoid disappointing development deals in the future. They include designating a director of planning and economic development to monitor the progress of projects and ensuring that all future agreements include provisions requiring liquidated damages, performance bonds, letters of credit, buy-back clauses and other measures that would allow the city to recover assets in the event of default.

“Redeveloping cities across New York has more than its share of challenges,” DiNapoli said. “We shouldn’t add to that degree of difficulty by entering into contracts that don’t penalize poor performance.”

Dyster promised the city will follow through on the audit recommendations and has already done so by finding funds to keep Kay in the top economic development position where he is in charge of overseeing development deals and projects. Dyster said the audit provides a guide for what not to do when dealing with developers.

“We should have the confidence to stand on equal footing with any developer that comes through the door at City Hall in Niagara Falls,” Dyster said.

Dyster suggested the city’s current predicament had a lot to do with the circumstances facing Niagara Falls at the time both deals were made. He said the root of the city’s development woes stems from the days when its manufacturing base started to shrink and local elected officials were left scrambling for other options.

“The City of Niagara Falls did not have an alternative strategy for economic development that was in place at that time,” he said. “We are in the process of changing that.”