Friday, May 27, 2016

Culture of Cheating, Chinese version: "It’s normal. Anyone would do that.”

Do I have any specific suspicions regarding the ethics of Greenland Group, the Shanghai-based (and government-owned) parent of Greenland USA, the 70% majority owner of Atlantic Yards/Pacific Park (except the B2 modular tower, owned fully by partner Forest City Ratner, and the Barclays Center operating company, owned by Mikhail Prokhorov's Onexim)?

No.

Do I have any specific suspicions about the immigrant investors, mostly from China, who are supplying over $500 million in low-cost capital under the EB-5 program, and gaining visas for themselves and their families?

No. (Though the source of EB-5 funds can be suspect.)

Do I have any specific suspicions about the expected fraction of Chinese investors buying condos in Atlantic Yards/Pacific Park?

No.

But let's just say that they're all connected to a country and business/government culture not known for integrity. And that's not the best fit for a project that, as I've written, already exemplifies the Culture of Cheating.

And, as described below, there's a new, disturbing anecdote.

Recent history

Transparency International ranks the perceived level of public sector corruption on a scale of 0 (highly corrupt) to 100 (very clean); China's number is 37, and its rank among 168 countries is #83 (up 17 places from #100, although its index score only increased by one point).

From Age of Ambition
Then there's Evan Osnos's fascinating 2014 book Age of Ambition: Chasing Fortune, Truth, and Faith in the New China, which noted (right) that paying for power was so common a new word entered the lexicon. Read the bottom:
Every country has corruption, but China's was approaching a level of its own. For those at the top, the scale of temptation had reached a level unlike anything ever encountered in the West.
Remorseless cheating

Now comes a 5/25/16 Reuters special report, Deception 101: How an industry helps Chinese students cheat their way into and through U.S. colleges.

Among other things, it describes the case of Shenzhen native Xuan “Claren” Rong, who went to the MacDuffie School in Massachusetts and used a service that a tipster said ghostwrites college applications and doctored transcripts.

(Despite the tipster contacting the University of California Davis with such concerns, the university didn't investigate until Reuters--which could make a records request of this public university--got the tipster's correspondence.)

Rong's father to Reuters "expressed no remorse" about sending a fake transcript.

“We just wanted to get in a better school,” he said. “It’s normal. Anyone would do that.”


Thursday, May 26, 2016

Forest City's Gilmartin: Brooklyn residential bet depends on spread vs. Manhattan; incentives needed for office market

There are some interesting quotes from Forest City's CEO in the Real Deal's Downtown Brooklyn’s second act: Q&A, part I: Forest City's MaryAnne Gilmartin and RXR's Seth Pinsky offer their takes.

First, the reasons

So, why did residential outpace office development after the 2004 rezoning?
I don’t think anybody, including Forest City, ever imagined the residential market would kick in like it did. We thought we’d see a third central business district thrive and an expansion of the office market as a result of the zoning, but that didn’t happen. It started with the food movement and then the artists. They all flocked to Brooklyn. Certainly, government policies, including the allowance for taller buildings to spur the office market, allowed for market forces to respond so that residential development took over.
It started with the food movement? C'mon, Smorgasburg didn't start until 2011. The artists were in Williamsburg, not Downtown Brooklyn decades earlier. (They got kicked out of DTB for MetroTech.)

People were moving to condos and rentals in Downtown Brooklyn because they offered new residential units near transit at a relatively low price point, given the price of land and tax breaks (as noted in the doc My Brooklyn). As to the "third central business district," everyone knew the projections were overblown.

Brooklyn vs. Manhattan

She was asked what kind of residential buyers/renters are coming to Downtown Brooklyn:
It’s really about the spread when living in Brooklyn versus Manhattan.... If you look at the $1,500-per-square-foot condo in Brooklyn then look at what’s available in Manhattan, there is such a stark comparison. For the same quality you’re looking at north of $2,000 a square foot in Manhattan. That’s what we’re betting on in Brooklyn. If you’re a renter, an apartment at our luxury tower at 80 DeKalb goes for $60 a foot, which nobody believed would happen in Brooklyn. But then you have a similar building in Manhattan, like the Gehry building, where rents easily pierce $80 a foot. If I’m chasing $20 of spread, I think I’ve got a pretty nice runway in Brooklyn.
In other words, luxury, luxury, luxury--aiming at people who see Brooklyn as a bargain compared to Manhattan. Greenland Forest City is aiming at around $1500 psf for 550 Vanderbilt.

(Remember how Atlantic Yards was supposed to help solve Brooklyn's housing crisis? See flier at right.)

And we'll see whether they can get $60 psf in the market-rate units at 461 Dean Street, which may have an asterisk attached, given its proximity to the Barclays Center and its history of modular troubles.

New office demand

She was asked if Downtown Brooklyn compete with neighborhoods like Dumbo for TAMI-sector [technology, advertising, media, and information] tenants and if a major company headquarters would come to Downtown Brooklyn:
The TAMI worker, the TAMI professional and student, all want to be in Brooklyn. The relative cost of a company to relocate to Brooklyn is highly compelling. The fact that there’s an engineering school going up on Jay Street, for example, allows for the creation of the new kind of 21st-century worker in Brooklyn. The traditional finance sector that was located in MetroTech has been replaced by NYU, Tough Mudder and Makerbot. 
That's because the "traditional finance sector" has shedded jobs, or moved them out of Brooklyn or remotely, so Forest City has had to scramble to find smaller tenants for MetroTech.

It's interesting that Gilmartin did not directly answer the question about a major company moving its headquarters to Brooklyn--surely Greenland Forest City, if it builds more than a million square feet of office space in the B4 tower and at Site 5 (aka the "Brooklyn Behemoth," for now on hold), would want an anchor tenant.

Biggest challenges

Asked about the biggest threats, Gilmartin cited rising land prices and the absence of the 421-a tax break:
You can’t build unless you have a tax benefit. Without it, you can’t make the numbers work. So you have to offer a combination of “as of right” benefits, including reduced energy costs and relocation benefits. Those benefits are essential to making the numbers work. It still costs the same amount to build a new building in Brooklyn as it does in Manhattan, but we have to factor 30 percent less in rent. To remove these kinds of benefits, which are renewable every few years because it’s a legislative process, would be a death knell for the emerging office market in Downtown Brooklyn. 
Land prices "are being driven up so much by demand"? She can't really complain. Didn't Forest City sell a development site at 625 Fulton for a nice sum? And doesn't Greenland Forest City control a whole bunch of development sites?

Gilmartin, like the Downtown Brooklyn Partnership she co-chairs, seeks permanent incentives to make the numbers work. Perhaps we won't see office towers rise in Atlantic Yards/Pacific Park until those benefits are renewed and/or made permanent.

What's next?

Asked about upcoming deals, Gilmartin responded:
Obviously we’ve got our work cut out for us over in Pacific Park, but I’m a big believer in the office market. Brooklyn is ready for a sophisticated office tower; the idea that it could be built on Flatbush and look straight across at the Manhattan Bridge would be ideal... There’s some unused air rights that NYU has in that [MetroTech] area that could be interesting.
"Brooklyn is ready for a sophisticated office tower" sounds like "we're ready to build at Site 5," with our Shanghai government-owned partner/overseer, as long as the state agrees and we can put some expensive condos on top.

As for "some unused air rights that NYU has," well, that was a key, I suspected, to the amazingly under-the-radar 2008 absorption by NYU of Polytechnic University (which then became NYU Poly, then, after a donation, was renamed NYU Tandon).

Pinsky's take

The Real Deal Q&A is also worth reading for the answers from RXR Realty's Seth Pinsky, a former city official, who talks about how the Brooklyn office market has grown because it's closer to the workforce, how office buildings may become more attractive if residential rates soften, and why he likes the mayor's proposal for transit expansion (others disagree).

Wednesday, May 25, 2016

Mold mystery persists at B2 modular tower: state records show unresolved, six-month wait for consultant's report


The setting of the final modules for the pioneering but troubled modular tower built in the Atlantic Yards (now Pacific Park) project drew much press coverage, as has the opening of the lottery for 181 units of affordable housing inside. (Half the units are market-rate.)

The narrative regarding 461 Dean Street, aka B2, has changed from the delays that pushed the timetable back two years, major cost overruns, the buyout of an investment partner, the unusual early payback of a tax-exempt loan, the winding down of the modular factory that was once supposed to build the entire project, and the legal battles that persist between developer Forest City Ratner (FCR) and its former construction and module fabrication partner, Skanska.
5/8/14 mold observation;
click to enlarge

But a mystery persists about just how well Forest City--and its New York State overseers--responded to problems at the building, notably the testing for possible mold, which can cause upper respiratory tract health problems.

This innovative, 32-story tower was plagued by leaks and even mold in its early stages, with the first four floors largely gutted, as documents from Skanska and the state's own construction monitor indicated.

No publicly released document shows how the mold concerns were resolved. Notably, documents I recently received show that a state monitor waited at least six months for a promised report on mold--and we don't know whether it arrived or what it said.

5/23/14 mold observation; click to enlarge
Taking "appropriate actions"?

When City Limits on 8/31/15 published Documents Reveal Woes at Pioneering Atlantic Yards Building, my report relied on state documents only through September 2014, acquired via a Freedom of Information Law (FOIL) request to Empire State Development (ESD), the state authority with the uneasy role of both overseeing and shepherding the project.

An ESD spokesman said at the time, "When the ESD project team notified FCR that our owner's representative had observed evidence of possible mold, FCR took appropriate actions to remedy the situation."

From STV, 7/31/15 weekly report
New redactions don't leave much to go on
(Note that use of language. Indeed, most of the monitor's mentions did regard possible mold, but mold was indeed found; see screenshots above stating "Wallboard with mold in 2nd floor corridor removed" and "a thoroughly moldy upper sheetrock layer [in a third-floor mod], which was promptly removed.")

Whether Forest City "took appropriate actions" remains unclear. When I asked last year for specifics, I got the generic response regarding "appropriate actions."

Now, newly received documents covering the period through August 2015 leave lingering questions, as well as suggest a lack of transparency.

No, they don't directly contradict the ESD's August 2015 statement.

But the new documents suggest that "appropriate actions," if they came, arrived slowly, with an unresolved, six-month wait.

New document: no response after six months

Thanks to FOIL, I received copies of daily reports, through 3/31/15, filed with ESD by William King, the lead staffer for STV, the state's construction monitor.

In his final daily report, under the category of "Information Previously Requested," King noted that, on 7/16/14, he'd sent Forest City a second request for a response to 6/19/14 questions regarding leaks, mold remediation, and air monitoring to "measure potentially high mold spore counts in a unit where any mold is not visible."

On 8/13/14, he sent a third request. Two days after that, King wrote, Forest City responded that it was bringing in a second environmental consultant. After that, who knows.

From STV 3/31/15 daily report; full page here


Some six and half months later, that section of his report indicated no follow-up. The issue was unresolved, as far as the daily documents indicate.

Similarly, King's 6/6/14 query to Skanska regarding possible mold in installed, discolored drywall, had not been answered by 3/31/15. (Skanska had left the project by then.)

What about the weekly reports?

King's daily reports ceased at the end of March 2015. Why? "It was determined that weekly reports were sufficient," an ESD spokesman said in response to my query. That also reduced the opportunity for granularity and candor.

If King's questions were resolved after March 2015, we don't know, because STV's ongoing weekly reports--at least as delivered to me--compound the murkiness. They're so heavily redacted there's no mention either of his questions or the responses, if any. See above right.

From STV, 8/15/14 weekly report;
note lack of redactions
That redaction pattern suggests a government agency concerned about what information might emerge.

By contrast, STV's weekly reports issued a year earlier (see full set here) were delivered to me significantly un-redacted, with information used in my earlier article. See screenshot at left.

In those reports, STV did address concerns about leaks and construction integrity, albeit without the granularity of the daily reports.

Presumably its staffers continued to do so--but we don't know what they asked or what they found. Crucially, we don't know what Forest City's second environmental consultant said.

Previous editing?

Indeed, the previous set of STV weekly reports, though less redacted when delivered to me, may have experienced significant editing--or, perhaps, inconsistency.

Consider the report for the week ending 5/9/14, which presumably would have mentioned that second floor wallboard with mold reported in the daily report just one day earlier. Instead, it stated, "Gut ceiling and wall demolition continued on the 2nd floor."

Then again, the report for the week ending 5/23/14 did mention mold, while the associated daily reports did not.

A lingering question mark

In an interview with NY1 recently, Forest City  executive Adam Greene shrugged off the delays that doubled construction time to nearly four years.

"Because it's innovation, innovation sometimes takes a little bit longer, but that's OK," he said.

That's not clear. After all, Forest City once claimed it had "cracked the code" and promised to build the entire project via modular technology.

Now those plans are history, with new joint venture partner/overseer Greenland USA building the towers conventionally. (Greenland owns 70% of the project, outside B2, owned exclusively by Forest City, and the Barclays Center operating company, owned by Mikhail Prokhorov's Onexim.)

Absent more sunlight and un-redacted documents regarding oversight of 461 Dean, a question mark about the building's history--and integrity--will persist.

Tuesday, May 24, 2016

Idling trucks yesterday caused by early arrival and blocked exit

Not in the latest Atlantic Yards/Pacific Park Construction Update was what happened during the first day of the two weeks covered, which was a line-up of idling trucks in the neighborhood starting by 5:30 am (well before the official 7 am start of construction).

It was caused by the early arrival of such trucks and a blocked exit path from the piece of Pacific Street that's private and used as a staging area.






From the latest Construction Update: lots of late work, including overnight sewer and LIRR work

According to the latest two-week Atlantic Yards/Pacific Park Construction Update, covering the two weeks beginning yesterday and released yesterday by Empire State Development at 4:03 pm (late) after preparation by Greenland Forest City Partners, there will be a lot of late shift, Saturday, and overnight work.

Notably, overnight sewer installation should occur at the intersection of Flatbush & Dean Street for the B2 modular tower, aka 461 Dean Street. A community notice will be distributed before the specified times. The Tower Crane for B2 may be dismantled during over the weekend of June 3.

Demolition at Block 1120--the buildings on Atlantic Avenue below the railyard, between Sixth and Carlton avenues--may begin, with new fencing (aka MPT) installed and new equipment installed.

Demolition of the LIRR tunnel wall at the West Portal (Atlantic Avenue) area may resume during this reporting period. Below grade demolition of the LIRR tunnel will be completed on weekends. In coordination with LIRR, the work will be continuous from Friday night through Sunday morning each weekend.

Saturday work is also expected at B2, at the corner of Flatbush Avenue and Dean Street, as well as other sites, including B3 (38 Sixth Avenue), B11 (550 Vanderbilt Avenue), B12 (615 Dean Street), and B14 (535 Carlton Avenue).

Weekend electrical utility work will continue at the LIRR rail yard.

Outside B3, jumping of the tower crane will occur in these two weeks. DOT permits will be filed.

Monday, May 23, 2016

Those lousy Brooklyn Nets TV ratings, and the diminishing cultural role of sports

In his 5/16/16 New Yorker essay, Show Them the Money: Is the sports business a bubble?, Louis Menand addresses Matthew Futterman’s new book, Players: The Story of Sports and Money, and the Visionaries Who Fought to Create a Revolution, offering an acid observation:
For everyone knows what the social role of sports is today. It is, via commercials and endorsements, to sell stuff. And everyone knows what makes that possible: television. It did not require a revolutionary genius to figure this out.
And Futterman thinks that the business of sports is in trouble, partly because the role of stars can deform the game and every sport but football has a small audience, writes Menand:
It’s true that hundreds of millions of people watch special events like the World Cup and the Olympics, but the day-to-day audience for sports is tiny. In the United States, it amounts to about four per cent of households. Fewer than three per cent on average watch their local N.B.A. games; fewer than two per cent watch their home-town N.H.L. teams.
That's interesting, and suggests--as Brooklynites know--that the cultural presence of their "home team" is not particularly strong.

And the potential unbundling of cable bills--which charge people 20% for sports, well beyond their audience--could mean doom.

The Nets in context

Which points us to the 4/25/16 Sports Business Daily article that described the first time in at least ten years that three National Basketball Association teams had ratings above 8% of households: the Golden State Warriors had a 9.76 rating (243,000 homes), the Cleveland Cavaliers had 9.31, and the Antonio Spurs 8.71 rating.

In those smaller cities, the combination of excellent teams and a smaller universe of things to do makes for higher ratings. (In big-city Chicago, which typically supports the Bulls, the rating is 2.96, a drop after a tough season.)

The Brooklyn Nets games on YES Network? For second straight year, and the seventh in nine years, the Nets were at the bottom, this season averaging 0.46, or 34,000 homes--pretty much double the arena capacity.

Yes, the New York Knicks were only at 1.98 of households, which suggests the size of the New York market. But that's more than four times the Nets.

So the Nets have not exactly taken hold. In 2014, the NBA signed a lucrative national TV deal. Will the tide be turning?

Sunday, May 22, 2016

As concerts begin, traffic chaos, noise on nearby Pacific Street

There have been a couple of well-attended Bad Boy Family Reunion Concerts the past two nights at the Barclays Center.

And, accordingly, Pacific Street just east of the arena--constrained by construction fencing, with two-way traffic, and having one garage open to the public--has been a madhouse during the early hours of the event. The two videos below were shot between 8:30 and 9 pm.

As Wayne Bailey's title on the videos suggests, the city Department of Transportation might well consider adjusting the traffic pattern, such as restoring the street to one-way service.





Saturday, May 21, 2016

From "How Forest City Decided to Become a REIT": tax savings ended, business refined, upside from institutional investors

There are a couple of intriguing quotes in How Forest City Decided to Become a REIT, a 2/3/16 National Real Estate Investor interview with David LaRue, CEO of Forest City Enterprises, now Forest City Realty Trust (which now prefers to be called Forest City).

Forest City, he said, sought "a sustainable capital structure that translated into reducing our leverage and increasing the cash flow from the business," meaning less debt and more revenue. But they didn't join the rush to REITs initially.

LaRue restated the rationale:
From a tax standpoint, we were tax efficient. We weren’t paying substantial taxes because of our depreciation and interest expense. Our taxable income was very much managed, and we could continue to grow the business and execute on the strategies we had at that time. So it was a question from investors, and as Chuck Ratner used to tell investors when he was CEO, when it’s the right time for Forest City to do this, based upon value and based upon the market, we would do it.
Another reason was they had to divest assets, including a basketball team and arena, that wouldn't qualify under the REIT structure. As LaRue put it, "a REIT has to generate a majority of its income from real estate rent and qualified income sources and real estate related income."

The REIT bonus

Forest City was one of only a handful of real estate companies operating as C Corporations, and is now among 198 REITs traded on the NYSE. Said LaRue:
I think as you look at investors and analysts, Forest City Realty Trust as a REIT is a business they understand. They know we have to distribute and pay a dividend based on taxable income. That is a benefit to shareholders. So we have common structure that is familiar. There are requirements to operate. A certain percent of your income and your assets must be qualified assets. So what it does is allow us to continue to have the market believe that we are remaining focused in our core businesses, which are in those qualified real estate businesses.
That should draw more investors, including institutional ones, especially since REITs must distribute a larger percentage of earnings in dividends, and Forest City has resumed a dividend it suspended in 2008. And that should drive a higher stock price. (So far, it's gone down and then back up this year.) One analyst recently upgraded the stock from "Sell" to "Hold."

Harvesting losses

As I wrote 1/13/15, the previous August, on a conference call with investment analysts, Forest City Enterprises was asked about REIT plans.

"It's a process and an issue we continue to look at," LaRue said. "We still have substantial NOLs [net operating losses] that allow us as a C Corp to continue to be very tax-efficient... As we go through repositioning, and go through non-core asset sales, it gives us some additional flexibility."

In the future, LaRue said last August, "lower levered portfolio and less development on our pro-rata share... bringing in strategic partners, will point to us becoming a taxpaying entity," which means they will have used those NOLs. "We haven't picked a date, but we're heading there [toward a REIT] over that time period."

In other words, losses--including paper losses calculated through depreciation--were very helpful.