Saturday, February 28, 2015

Atlantic Yards, Pacific Park, and the Culture of Cheating

I offer a framework to analyze and evaluate Atlantic Yards (in August 2014 rebranded as Pacific Park Brooklyn) and the Barclays Center: Atlantic Yards, Pacific Park, and the Culture of Cheating.

Note: this post is post-dated to remain at the top of the page. Please send tips to the email address above, rather than posting a comment here.

model shown to potential immigrant investors in China in 2014,
though not shown publicly in Brooklyn.

A new push to end use of tax-exempt federal support for sports facilities

I'm just catching up on how the worm is just starting to turn, regarding how federal taxpayers help build new sports facilities and fuel owners' profits.

From Think Progress on 2/4/15. With Obama Budget, Your Federal Tax Dollars Won’t Pay For Sports Stadiums:
President Obama’s most recent budget proposal takes aim at a tax exemption that has helped drive an explosion in publicly-financed sports facilities across the United States, a move that would end federal taxpayers’ role in subsidizing the construction of stadiums and arenas that often provide little economic benefit to their cities and states.
As it stands now, cities and states can help pay for stadiums by accessing tax-free government bonds that have below-market interest rates subsidized by the federal government. The budget Obama released Monday, however, repeals the tax-exemption from the bonds that finance sports facilities if more than 10 percent of the arena or stadium is dedicated to private business use.
Because almost all professional sports stadiums and arenas would fail that test, the Obama proposal would virtually eliminate a tax exemption that provides millions of dollars in federal subsidies each year to sports facilities. States and cities would instead have to finance stadiums with bonds that are not tax-exempt, raising the cost of an already pricey endeavor in a way that could affect the way lawmakers and local taxpayers view the deals.
“Perfect. You couldn’t do it any better if you believe like I do that we should not finance these things with tax-exempt debt,” said Dennis Zimmerman, a retired economist who worked for the Congressional Research Service and Congressional Budget Office and now serves as the director of projects for the American Tax Policy Institute. In a 1996 paper for CRS and in other publications, Zimmerman examined the tax exemption on government bonds used for sports facilities and recommended eliminating it.
NYC Independent Budget Office
ThinkProgress suggested that the exemption likely will survive the Republican-controlled Congress, but the president’s proposal could push it toward passage another time.

Not the same as NYC funding

Note that this is not the similar tax exemption, allowing payments in lieu of taxes (PILOTs), that enabled construction of new stadiums for Yankees and Mets, and the Barclays Center.

That tax exemption was eliminated in 2008 but grandfathered in for the arena.

The New York City Independent Budget Office in 2009 estimated some $200 million in public costs given the tax-exempt financing.

That was likely overstated by some $50 million, given that it was based on $678 million in tax-exempt bonds, rather than the $511 million ultimately sold.

More discussion

Neil deMause followed up on Field of Schemes:
Since stadiums and arenas are almost by definition used for private events more than 10% of the time, sports team owners immediately made sure that they wouldn’t get caught in this trap by focusing on the other test, and ensuring that at least 90% of bond costs would be paid off by generally applicable taxes. This required jumping through some fancy hoops at times — sometimes dividing up bond issuances into one publicly paid tax-exempt set and one privately paid taxable set, sometimes pretending that private rent payments are really tax payments and convincing the IRS to go along with it — but has consistently worked out over the years, so far costing taxpayers $4 billion in foregone tax revenue.
The Washington Post's Wonkblog, 2/5/15, It’s time to stop letting sports team owners blackmail taxpayers for new stadiums:
"It's a silly tax break," said Matt Gardner, director of the Institute on Taxation and Economic Policy [a non-partisan research organization]. "It's ludicrous that the federal government would be subsidizing state and local borrowing to give investors tax breaks to make it easier for them to build sports stadiums."
...Dennis Zimmerman, the director of projects at the American Tax Policy Institute, made a similar suggestion in a report 19 years ago. ["Tax-Exempt Bonds and the Economics of Professional Sports Stadiums," Congressional Research Service, May 1996] "I'm pleased," he said. "And I don't think it stands a snowball's chance in hell."
The hearkens back to a 9/5/12 article from Bloomberg, In Stadium Building Spree, U.S. Taxpayers Lose $4 Billion:
Tax exemptions on interest paid by muni bonds that were issued for sports structures cost the U.S. Treasury $146 million a year, based on data compiled by Bloomberg on 2,700 securities. Over the life of the $17 billion of exempt debt issued to build stadiums since 1986, the last of which matures in 2047, taxpayer subsidies to bondholders will total $4 billion, the data show.
Those estimates are based on what the Treasury could have collected on interest from the same amount of taxable bonds sold at the same time to investors in the 25 percent income-tax bracket, the rate many government agencies assume. In fact, more than half the owners of tax-exempt bonds pay top rates of at least 30 percent, according to the Congressional Budget Office. So they save even more on their income taxes, a system that U.S. lawmakers of both parties and President Barack Obama have described as inefficient and unfair.
...The new generation of publicly owned stadiums was designed to increase revenue from high-priced seating as well as concessions and retailing. The venues have helped double the value of sports franchises since 2000, according to W.R. Hambrecht & Co., a financial services firm.
That article reflects on the attempt at reform:
Almost 20 years earlier, U.S. lawmakers from both parties set out to block muni bonds for municipally financed stadiums as part of an attack on public borrowing for private businesses, according to former Senator Bob Packwood, the Oregon Republican who was chairman of the Senate Finance Committee.
“We wanted to limit it,” Packwood said in an interview. “It was one of the most egregious uses of the part of the tax code that allowed for industrial development bonds. It was clearly not what the tax code had in mind when tax-exempt bonds were authorized.”
...The wording of the law encourages cities and states to offer more-favorable terms to pro teams wanting financial assistance while preventing the borrowers from using stadium revenue to pay off the bonds, he wrote. The measure functions as “an open-ended matching grant” for stadiums, he said. Cities and states borrowed more money backed by tax revenue, not less, to make sure that no more than 10 percent of a stadium’s debt payments came from a private business, Zimmerman said.
...Not all of the subsidy goes to the city, based on a 2009 report from the Congressional Budget Office and the Joint Committee on Taxation. Researchers found that just 80 percent of the amount the Treasury gives up because of the exemption serves to reduce a municipality’s borrowing costs. The remaining 20 percent amounts to “a federal transfer to bondholders in the higher tax brackets,” according to the report...That’s because people paying the top marginal rate get a disproportionate benefit from the exemption.
The AY angle

As I wrote in 2008, Forest City Ratner's hired economist, Andrew Zimbalist, ignored the federal subsidy in his 2004 report for the developer.

He would've had to quote his own, recently stated opposition to tax-exempt bonds for sports facilities. In his 2003 book, May the Best Team Win: Baseball Economics and Public Policy, he wrote (p. 140-141):
While one may legitimately question the costs and benefits to a particular metropolitan area of attracting a professional sports team, there appears to be no rationale whatsoever for the federal government to subsidize the financial tug-of-war among the cities to host ball clubs. If there is a global welfare gain from the relocation of a team from city A to city B (because city B may be larger or wealthier or have more avid sports fans), then city B ought to able to pay for that gain without a subvention from Washington, D.C.

Friday, February 27, 2015

In discussing future of modular construction, panel mostly avoids B2, though architect implies largest Atlantic Yards towers too tall for modular

The highest-profile effort at modular construction in New York has been Forest City Ratner's ill-fated B2 tower, stalled at ten stories but slated to resume construction this spring.

Despite the presence of an architect who worked on B2, the tower got virtually no mention on a 2/2/15 panel, Edge Construction: The Future of Modular, sponsored by the American Institute of Architects' New York Chapter.

But there were some interesting observations on the need for dramatic change in the industry--implicitly not accomplished by the now-sundered collaboration between Forest City Ratner and Skanska, now mired in lawsuits--to move modular construction from theory to practice.

And SHoP Architects principal Chris Sharples, whose firm worked on B2, offered an interesting aside suggesting that 30 to 40 stories might be the limit for now.

While that implies record-setting heights--the 322-foot B2 would be the world's tallest modular tower--it does not encompass four other towers in the planned project.

They include the 511-foot B3, at the northeast corner of the arena block or the similarly tall B1, at the Barclays Center plaza. (Presumably B1 would be a good candidate for modular, given the very limited radius for construction equipment near the operating arena.) Two additional towers would be 460 feet and 419 feet.)

The video, and other coverage


Edge Construction: The Future of Modular - 2.2.15 from Center for Architecture on Vimeo.

Here's coverage in Real Estate Weekly, Architects puzzle over modular ‘headscratcher’, and Crain's New York Business, Modular housing stuck in never-ever land.

The de Blasio strategy

The panel grew out of a meeting that Mayor de Blasio's administration called with the architects' group, which wanted to know if modular construction should be part of its affordable housing strategy. (It went unmentioned last May at the launch of de Blasio's housing program, as I noted.)

The AIA/NY group put together a think tank, involving architects, developers, structural engineers, housing advocates, and city officials, aiming to see if there were ways to add productivity.

"In a way, we have to do in our industry what Tesla's doing to the automobile industry," observed Stephen Kieran, a partner at architecture firm KieranTimberlake, suggesting a venture capitalist might re-start things.

Developer Jeffrey Brown, who constructed a modular apartment building in Inwood, The Stack, called the building business "very, very primitive," involving "35 subcontractors, each with their own agenda."

The modules for his seven-story building were made in Berwick, PA, three hours a way, and trucked overnight to New York.

(The city Department of Transportation doesn't allow significant daytime delivery of such wide loads, a rule that apparently scotched Forest City Ratner's initial plans to deliver to the B2 site.)

It took only 19 months to place the 59 modules (B2 has 930), but "a lot of other things at the site caused delays," Brown acknowledged, given that not all internal connections worked.

Still, "for the most part, we were able to produce an incredibly high quality building that came complete to the site," he said. (They had concluded it was too risky to apply the facade in the factory--part of the B2 plan, by the way--so wound up in a "tedious process" doing so on site.)

To convince the lenders, Brown said he had bankers visit the Deluxe Building Systems plant and employed third-party engineers to vet the process.

Cost and labor

Brown said the cost of construction was $200 per square foot. One panelist said developers could build affordable housing--presumably not high-rise or union--for $180 per square foot. But construction costs are still rising, Brown said, so he favors modular.

Sharples said there was a learning curve for labor--an implicit reference to the reported slow-but-faster process for B2--that would improve for each project. "The key is to hang on to that crew," he said. "If there's a lot of product to feed, there's a really great way to start to deal with those issues of cost."

That left the lingering question as to whether Forest City Ratner, with its partner/overseer Greenland, might use modular for any additional buildings, if and when B2 is finished.

David Wallance, a senior associate at FXFOWLE Architects (which is working on two new conventional towers for Forest City Greenland), suggested the existing modular manufactures in the northeast are too small, generating perhaps $50 million of production in a year.

He said they were "wedded to the idea that the most economical approach is to move the largest possible modules down the highway," with a distribution radius limited to 300 miles. He proposed that modules fit the size and shape of standard shipping containers, then be subject to mass customization and variation.

The would presumably move production to lower-cost countries, a politically dicey issue for certain projects, given the lack of local and union labor. It also would mean more thick walls and ceilings, given the additional panels--an issue that might be ameliorated by zoning changes that give a bonus to modular, panelists suggested.

Cost is cost is dependent on scale, said architect Jim Garrison, suggesting a project has to exceed 30,000 square feet.

What about union labor? Some 60% to 70% of the residential projects in the city are nonunion, open shop, noted Brown. He called B2 unusual "because it's very very visible, politically sensitive, very well publicized project. The unions would be doing themselves a disservice if they didn't try to make their own mark, but I don't think that's a model."

In other words, while the unions made a deal with Forest City to work in the factory at lower-than-onsite wages, but, he seemed to be suggesting, other projects need not follow that model. (Of course, other projects may not have ridden the momentum of union rallies and lobbying.)

How high to go, and where might be best


Sharples suggested that Arup engineer David Farnsworth--who wasn't on the panel but worked on B2--"would probably say higher," but comfortably 30-40 stories was a likely limit, since tall buildings require brace frames for stability

The challenges include the laydown area for the modules, Sharples said, but the process means less waste, less redundancy on the job site, and improved quality of life for neighbors.

(That was what Forest City was promising regarding Atlantic Yards, and about which it is now conspicuously silent. given the increased activity related to conventional construction.)

"There's a cost to society inherent in the way we build now," Garrison observed, "and we don't measure it... If we were to measure it as a city, it would change the formula dramatically."

Sharples suggested that waterfront projects offered opportunity for modules to be brought in by boat.

Garrison said that, to build the planned 250-room Pod Hotel in Williamsburg, "we flirted with three manufacturers from the region [but] they all fell on their face." So they're working with a Polish company to ship the modules.

What will happen in ten years

Moderator Tomas Rossant asked for ten-year predictions. Sharples suggested iterative change, with more collaboration, ideally leveraged by venture capital and governmental subsidies.

Wallance suggested there must be a global solution involving transportation and scalability--an implication, perhaps politically dangerous, that jobs would move out of the city.

Garrison said tradecraft needed to be improved, or "other cultures [would] teach us how to do this. It's essential that we turn it around."

Brown said people do what's in their economic interest, "there needs to be new blood, new money, and a new spirit."

Rossant said "I think fundamentally we need to band together more... why aren't we together lobbying governments, lobbying trade organizations, why isn't there a more formalized think tank on this."

So stay tuned. But it's interesting, again, that nobody pointed to B2 as a touchstone.

Thursday, February 26, 2015

Forest City: arena income boost still expected by 2016 (?); increased B2 impairment related to delay; arena/team sale now aimed at 2015

Forest City Enterprises acknowledged this week that reaching "stabilized operations" for the arena--$65 million in net operating income (NOI)--"is taking longer to achieve than originally anticipated," something of a euphemism for a gap of nearly $25 million between current revenues and the 2016 goal.

Despite that gap, company officials professed confidence in a conference call yesterday with investment analysts.

Analyst Sheila McGrath of Evercore (which is helping Forest City sell the Nets) noted that the quarterly NOI "has been bouncing up and down," a reference to the fact that the fourth quarter of 2014 brought fewer revenues than the same period in 2013.

McGrath, typically a chummy sort, then asked a potentially tough question quite casually: "I was just wondering if you, y'know, still feel pretty good about stabilization once the [New York] Islanders come into the mix?"

CFO Bob O'Brien attributed the income "bumpiness" to the entertainment mix at the Barclays Center, which in 2013 had Beyonce and Justin Bieber, but noted that 2014 overall was up over 2013. "And again, it 's ramping up slightly behind where we had anticipated," he said, "but we believe certainly with the Islanders coming here, we expect to achieve the stabilized NOI that we projected."

Unless they have evidence--and they haven't shown it--that the 2015-16 arrival of Islanders will bring in huge revenue while not disturbing some other revenue generators, that strikes me as doubtful.

(I don't know the details of the Islanders deal, but the Wall Street Journal reported that the arena, rather than getting rent from the hockey team, guaranteed an unspecified annual payment in return for the revenues. So that's variable.)

Regarding B2

Given that Forest City has announced a $146 million impairment regarding the B2 modular tower, one analyst asked "how much of that is potentially recoverable through litigation and how much of that should we just think of as sort of a sunk cost because the project got delayed and/or yield expectations came down?"

CEO David LaRue said about $100 million to $110 million was related to the building and the land, with  the balance related to the factory Forest City once ran with Skanska and has since reopened on its own. (More precisely, the factory write-off was $38.7 million, which leaves $107.3 million.)

"So, we can assume there will be some recovery, I can't tell you when," he said. The returns on the building should be solid, he said, given Brooklyn's market.

Paul Adornato of BMO Capital Markets pointed out, however, a $40 million increase in Forest City's hit: the company at a real estate conference previously identified the cost of the impairment, not including the factory, as $70 million, not $110 million.

"When we made that estimate at the end of our third quarter, we had not yet purchased the factory, or understood exactly where things stood there," responded O'Brien."And when we added in the cost of carry and the time delay to restart that factory, that increased significantly the cost estimate that we had at the end of the third quarter to where we see it now."

Selling the arena and team

Officials said they were hoping to sell their 55% majority share of the Barclays Center, and 20% minority share of the Brooklyn Nets, by the end of 2015 in coordination with partner Mikhail Prokhorov's Onexim.

LaRue acknowledged that nothing was certain. Indeed, last May, O'Brien said they hoped to have an agreement on price regarding sale of the Nets by the end of 2014. That didn't happen, and later they decided to sell the arena as well, recognizing it might work better as a package deal.

Were they planning to sell the arena or merely refinance it? LaRue said it was possible to sell a share, as with properties like 8 Spruce Street, the Frank Gehry-designed apartment tower in Lower Manhattan. But the company won't take on additional debt, he said.

More on the sale

The Financial Times reported confusion regarding Prokhorov's sale, quoting one advisor working with potential a bidders: "Am I buying the team? Am I buying the arena? Do I have to buy the team and the arena? Can I buy just the arena or just the team? . . . I don’t know.”

Wednesday, February 25, 2015

Barclays Center still well behind income goals, according to 2014 results

Thee Barclays Center is still well behind its plan to boost Net Operating Income (NOI) to $65 million by 2016, earning about $40.5 million in 2014.

While 2014 represented a better year financially for the arena than 2013, according to 2014 financial results released yesterday by Forest City Enterprises, which owns 55% of the arena, the Barclays Center actually did better in the 12 months ending in the first half of 2014.

As I reported, total revenues for that split-year period were $120.4 million, with operating expenses of $74.5 million, leaving NOI of $46 million. (After payments in lieu of taxes to pay off the construction loan, that left $17.5 million in profit, some of which went to additional interest.)

In an 8-K document filed yesterday with the SEC, Forest City reported $116.7 million in revenues in 2014, with expenses of $76.1 million. In 2013, according to the company's filing, the arena earned $111.5 million, with expenses of $77.7 million.

Net Operating Income for 2014, according to the company, was $40.5 million, compared with $33.4 million for 2013. (Those numbers differ slightly from the figures above, if you subtract expenses from revenues.)

Part of the challenge may be that NOI for the last quarter of 2014 was $11 million, compared with $13.7 million for the last quarter of 2013.

Net Income After PILOT payments was supposed to hit $47.2 million last year.

The move of the New York Islanders to the Barclays Center in fall 2015 should boost income, but it's unclear how much it will make up the gap.

Warnings from the annual report

This is boilerplate, but worth noting:
We Are Subject to the Risks of Owning and Operating an Arena

Barclays Center is the home venue for the Nets basketball team and future home of the New York Islanders professional hockey team which will relocate to Barclays Center for the 2015-2016 hockey season. In addition, the mix of events at the Barclays Center include a variety of concerts, family shows, and other sporting events. As we approach stabilized operations, which is taking longer to achieve than originally anticipated, our investment in the Barclays Center is dependent on a number of factors, that could adversely affect us, including:
• Pricing and sales pace for suites and sponsorships, including new sales and renewals of existing agreements;
• Performance of the third party asset manager to operate the Arena efficiently and effectively;
• Attendance at games and events, which drives on-site spending for concessions and merchandise;
• General economic conditions that affect corporate and individual spending on entertainment and leisure activities;
• Ability to secure event bookings through relationships with promoters, artists and other clients;
• Popularity of live entertainment events as a whole and individual acts;
• Popularity of the Nets and New York Islanders, their performance, and fan base;
• Competition from other event venues in our marketplace;
• Competition from other leisure-time activities, such as television, radio, and the internet;
• Organized labor matters; and
• Actions of the NBA, NHL, the Nets and the New York Islanders.

Forest City: stalled B2 modular tower represents $146 million write-down

Announcing 2014 fourth-quarter and year-end results, Forest City Enterprises reported a better 2014, but a big hit from the stalled B2 modular tower at Atlantic Yards/Pacific Park, now facing an impairment--a write-down of the asset--of $146 million.

Though the modular factory has been restarted, Forest City acknowledged the possibility it may have to fund the completion of the building from equity if a mortgage loan cannot be extended.

Forest City also pointed to a better potential economic result: it is also trying to recover damages from former partner Skanska; both companies have sued each other.

Net Earnings/Loss

From the press release:
For the three months ended December 31, 2014, the company had net earnings attributable to common shareholders of $69.2 million, or .31 per share, compared with a net loss of $207.7 million, or $1.05 per share, for the fourth quarter of 2013. For the full year of 2014, the company had a net loss attributable to common shareholders of $7.6 million, or .04 per share, compared with net loss of $20.5 million, or .10 per share, for the full year ended December 31, 2013. Per-share amounts are on a fully diluted basis.
The B2 hit

"Fourth-quarter earnings were negatively impacted by a pre-tax, non-cash impairment related to our B2 BKLYN project and the modular factory of $146.0 million, of which $38.7 million represents the write off of the factory," stated CEO David LaRue. "Despite our disappointment at the need for this impairment, we are confident in our ability to complete the building. We expect the factory to be operating at full capacity by late Spring, and to complete the building by the third quarter of 2016. We also continue to pursue legal actions to seek recoveries under our fixed-price contract with the former construction contractor."

More on Atlantic Yards/Pacific Park

"During the fourth quarter, we started four new projects, including 1001 4th Street, SW in Washington, D.C. that is part of our residential development fund with the Arizona State Retirement System (ASRS) and 535 Carlton at Pacific Park Brooklyn that is part of our strategic partnership with Greenland USA," LaRue said. "In addition, we held a ground-breaking event with our partner on 550 Vanderbilt Avenue, the first condominium building at Pacific Park Brooklyn, and expect that building to be added to our under-construction pipeline in the second quarter."

535 Carlton is expected to be completed in the third quarter of 2016.

From the annual report, on B2

The annual report states:
Based on the recent events, including the temporary ceasing of construction and litigation related to the construction of B2 BKLYN, we investigated and evaluated alternatives to restart and complete the construction. During the three months ended December 31, 2014, we completed our evaluation of various scenarios to complete B2 BKLYN and in November 2014, purchased the Construction Manager’s entire 50% ownership interest in the factory used to construct the modular units. In December 2014, we engaged a new construction manager to oversee the construction of B2 BKLYN and began preparations to recommence construction of modular units. Based on current information available, including the Company’s decision to complete B2 BKLYN using modular units and to purchase the modular factory, the Company updated its impairment calculation. As a result, the Company’s estimated undiscounted cash flows no longer exceed the carrying value of the asset, requiring the Company to adjust the carrying value to its estimated fair value as of December 31, 2014. As such, the Company recorded an impairment charge of $146,300,000 during the three months ended December 31, 2014. Based on the latest information available, we estimate the construction will be completed in the third quarter of 2016.

At December 31, 2014, we have $40,538,000 capitalized on the Consolidated Balance Sheet related to B2 BKLYN. Based on the most current information available, total project costs are estimated to approximate $162,100,000, after giving effect to the impairment discussed above. Significant estimates were used to develop the estimated remaining project costs and may change in the future. We continue to vigorously pursue legal action against Skanska USA for damages related to their default of the CM Contract. However, we cannot assure we will be successful in recovering these damages.

Subsequent to the construction stoppage, we received a notice of default on the nonrecourse mortgage secured by B2 BKLYN. We have since entered into a forbearance agreement with our lender which expires on April 8, 2015. In the event we are unable to complete the negotiation of a longer term agreement, or cure the default, we may be required to repay the current outstanding balance of $45,000,000 currently secured by, amongst other things, $37,500,000 of restricted bond proceeds included in restricted cash, $10,000,000 of cash in escrow and an equity letter of credit of $9,300,000. In addition, we may be required to fund the completion of B2 BKLYN with equity until the uncertainties regarding its construction are resolved. 
Additional warnings from the annual report

This is boilerplate, but sometimes such boilerplate poses warnings worth remembering:
We Are Exposed to Additional Development Risk in Connection with Using a New Construction Methodology on B2 BKLYN, Modular Construction, Litigation Risks, and Owning a Factory to Produce the Modular Units

B2 BKLYN is an apartment building under construction in Brooklyn, New York adjacent to the Barclays Center at the Pacific Park Brooklyn project. We decided to use modular construction to build this 32 story, 363 unit apartment building. During 2014, our former partner in the modular factory and the B2 BKLYN construction manager ceased operations at and closed the factory for the fabrication of apartment modular units which were being used in the construction of B2 BKLYN. As a result, in November 2014, we purchased our former partner’s ownership interest in the modular factory and in December 2014, we engaged a new construction manager to oversee the construction of B2 BKLYN and began preparations to recommence construction of modular units.

We are engaged in litigation with our former partner in the modular factory and the former B2 BKLYLN construction manager relating primarily to the project’s delays and associated additional completion costs. We are seeking to recover all costs associated to complete the building, including those incurred by the modular factory. With the re-opening of the modular factory and the re-activation of the B2 BKLYN project site, we do not anticipate further delays resulting directly from the litigation, as the natural conclusion (or settlement) of the pending litigations will be limited to the payment of monetary damages from one party to the other. We may not be able to successfully recover all or any of the costs we are seeking to recover.

In addition to risks inherent in construction projects generally, such as unanticipated site conditions, environmental, and force majeure issues, the following additional risks exist with constructing B2 BKLYN:
• High rise modular construction has not previously been done at the heights of B2 BKLYN. As a result, the project has encountered, and may continue to encounter, delays and increased costs in the fabrication and assembly of the modular units. Based on the latest information available, we estimate the construction will be completed in the third quarter of 2016. If the project continues to experience such delays, we may fail to satisfy completion deadlines set forth under the lending arrangements for the project and the lenders may not be willing to extend such deadlines. Failure to meet the completion deadlines could result in a default under such lending arrangements with a resulting acceleration of the debt and foreclosure of the project, as well as reputational damage;
• Third party claims that any element of the design or construction methodology infringes on protected intellectual rights could delay the project and increase construction costs; and
•In 2013, two trade organizations representing New York City-licensed plumbers and mechanical contractors sued the City of New York, challenging a determination by its Department of Buildings (“DOB”) that certain piping work performed in a modular factory need not be performed by licensed plumbers or mechanical contractors if such work was monitored by a licensed professional engineer and otherwise complied with the technical requirements of the New York City Building and Construction Codes. Piping work at our modular factory is being performed by non-licensees monitored by a licensed professional engineer in accordance with DOB’s determination. We intervened in the proceeding, and in December 2013 the Court dismissed the suit. However, these trade organizations appealed the Court’s determination. It is possible that the lower Court could be reversed on appeal. It also remains a possibility that other construction industry organizations could bring similar suits challenging the DOB-authorized fabrication methodology used in our factory. If the DOB’s determination were overturned and licensees were required in the modular factory, it would likely increase the cost of construction and potentially delay the completion of B2 BKLYN.

Construction worker dies at Barclays Center; crushed by steel beams brought for green roof (updated)

Updated 7:55 am Feb. 25

The Brooklyn Paper, in Green roof grief: Barclays ironworker crushed to death by beams, had the early details on a tragic story that emerged this afternoon:
An ironworker died on Tuesday afternoon when steel beams fell on him as he worked to install Barclays Center’s new green roof, according to a police spokesman.

The 52-year-old was an employee of a Massachusetts steel company contracted by Hunt Construction Group... The worker, a member of the Ironworkers Local 361 union, was crushed by four steel beams when they rolled off a truck before they could be attached to a crane, police said. Cops and paramedics responded at 1:33 pm and found the man lying in the loading dock on Dean Street, where he was pronounced dead, according to a report.
Greenland Forest City Partners issued a statement:
The iron worker who was killed was involved in the installation of the green roof on the arena. We are all devastated by what happened. All of us at Greenland Forest City Partners and Barclays Center extend our most heart-felt condolences to the worker's family and friends.
We are currently working with all relevant agencies to determine what caused this terrible tragedy.
While there have been some workplace injuries in construction work at Atlantic Yards/Pacific Park, this is the first death. The worker has not yet been named.

Updated: “My signal man was crushed,” said a fellow construction worker who declined to give his name, told the Daily News. “The load was top heavy, the truck driver unhooked it without being told, (and) it toppled right on top of him. I checked his pulse: he was there for half a second, and then he was gone.”

NY1 reported,
Investigators believe the victim may have accidentally hit the emergency release button causing the load to come down on him.
A piece of overall context: it may (or may not) be relevant that the cold weather has been blamed for delays in the green roof construction process.

Tuesday, February 24, 2015

Barclays Center numbers to look for in Forest City Enterprises annual results, coming at end of day

Yesterday how I reported on some 12-month financial figures for the Barclays Center, ending 6/30/14.

Today, at the end of business, Forest City Enterprises will report 2014 annual results.

It will be interesting to see how much the Barclays Center numbers change. (They overlaps for six months, of course.)

The numbers are, for the 12 months ending in the first half of 2014:
  • Total Revenues: $120.4 million
  • Total Operating Expenses: $74.5 million
  • Net Operating Income: $46 million
  • Net Income After PILOT payments: $17.5 million
Remember, Net Operating Income is supposed to reach $65 million by 2016, and Net Income After PILOT payments was supposed to hit $47.2 million last year.

After an overstaffed first year, ending in September 2013, the arena was supposed to save money via new efficiencies. It's not clear how much that was accomplished in the year ending 6/30/14.

Truck protocols for railyard work, green roof work, construction of B11 and B14 towers

Empire State Development posted the following documents yesterday, which indicate the protocols required of trucks working on the Atlantic Yards/Pacific Park site, notably the routes to and from the work site.







Monday, February 23, 2015

Barclays Center profit some 63% behind expectations; key debt service statistic drops 43%

Projected income/expenses, Official Statement, December 2009
The Barclays Center's gotten much notice for its awards and its high rank nationally in tickets sold and concert revenues.

That has not translated to profit.

In fact, the arena--according to the most recent 12-month report--is about 63% behind its profit goals, reaping just $17.5 million (after expenses and bond payments) in the year ending June 2014.

Its debt service coverage ratio--the net revenue available to pay back the construction bonds--was originally judged by ratings agency Moody's at a comfortable 2.85.

It's now at 1.61--a 43% drop.

No wonder Forest City Ratner CEO MaryAnne Gilmartin told the Commercial Observer recently:
Of course, it’s not yet stabilized financially. If you were to look at the numbers and research it, you would learn it’s still a work in progress. It takes awhile to get an asset like that to its stabilized, operating income.
From Official Statement; see debt service coverage ratio
Sure, but the "work in progress" lags well behind projections, which casts doubt on Forest City's pledge to stabilize net operating income by 2016. And it surely has raised questions among those considering buying the arena company. (The arena is technically owned by the state.)

Falling short

As the Wall Street Journal pointed out 2/12/15, "the aggressive investment in top-name artists, along with the learning curve of a new building, means that expenses for operating the arena are more than $12 million above original projections, while revenue is lagging."

No wonder Forest City Ratner/Forest City Enterprises is selling its 55% share of the Barclays Center operating company. (Russian billionaire Mikhail Prokhorov, who's selling his 80% of the Nets, is also likely to sell the 45% of the arena he owns.)

Yes, the main driver of the sale is Forest City Enterprises's plan to convert to a real estate investment trust (REIT).

However, Forest City is selling while the arena's buzz--major awards, high-profile events--obscures the poor financial performance, one that significantly trails the projections to bondholders and in media interviews.

Previous predictions

The December 2009 Official Statement (excerpted top right) for the Barclays Center bonds predicted net income of $47.2 million by the second year, with steady increases.

That was over-optimistic, since, 16 months later, then-CEO Bruce Ratner dialed back the projections. A 5/1/11 Real Deal profile quoted Ratner:
He estimated the arena will generate annual net income of about $110 million to $120 million, cost $30 million to operate, and require about $45 million to $50 million a year to pay off financing, leaving the company with about $35 million a year in profit...
(Emphases added)

That didn't quite make sense. The arena has cost far more to operate--which Ratner arguably didn't know--but also required additional financing costs that would cut into and seemingly eliminate Forest City's profit.

New document shows shortfall

Now, as noted in the 2/12/15 Wall Street Journal, "For the year ending June [2014], Barclays Center earned $17.5 million in income after debt-service payments, according to company filings, compared with projections of about $48 million."

The $48 million projection comes from the bond document at top, while the other figures come from a Barclays Center Financials document recently circulated to arena bondholders, which I've posted at bottom and excerpted here.

It is far more granular than Forest City's quarterly corporate filings.

From December 2014 report
As shown in the graphic at right, the 2013-14 net operating income (NOI)--revenues minus expenses--was $46 million, as opposed to $78.7 million projected in the bond document above left.

Then came $28.5 million in payments in lieu of taxes (PILOTs) to pay off construction bonds.

That left $17.5 million in profit, presumably to be split 55%-45% between Forest City and Prokhorov.

But not really. The document indicates $3.9 million in additional interest expense, paid in escrow toward the financing lease obligation, or the option to purchase the arena at the end of the 37-year lease.

(Does anyone think the arena will still be around at that time, or be called the Barclays Center?)

The document also indicates an additional $12.7 million in interest paid to a "related party," Prokhorov's company Onexim, for a loan needed to fill out arena financing.

Details are at left. That loan, issued at a bruising 11% interest rate (the arena bonds were at 6.48%) was initially for $75.8 million but has since grown to $122 million as of last June 30. (Seems to me the buyer of Forest City's shares will take over that obligation.)

Those two interest payments suggest the arena isn't providing any return to Forest City. (Also, if you count depreciation, it's taking a loss, but that's a typical accounting move.)

However, the minority owner, Prokhorov, seems to be gaining something thanks to those loan payments.

2014 results: first nine months

According to a 10-Q filing last November with the Securities and Exchange Commission, the Barclays Center earned $85 million over the first nine months of 2014, compared with $76.3 million in the first nine months of 2013. See graphic below, with 2014 stats outlined in purple and 2013 stats in green.

Operating expenses dipped to $55.4 million from $56.6 million. Interest expense went to $30.1 million from $27.8 million. (That interest expense includes the PILOTs, plus, I believe, the payments to Prokhorov.)

That suggests that, over the first nine months, the arena had net operating income of $29.6 million ($85 million-$55.4 million), but then spent that surplus on interest.

The recently reported $17.5 million figure--which comes after paying the PILOTs but before payments to Prokhorov--splits results from the second half of 2013 and the first half of 2014.

The need for increased profit

It's important to raise profit, because the bond payments will increase to $50 million by 2035.

To bond investors, documents (top graphic at left) indicated net income from operations would start at $76.7 million in the first full year, and keep rising.

In quarterly reports to investors, Forest City long projected $70 million, but 2013 dialed it back to $65 million, a figure they say should be reached in 2016. (That year, debt service hits about $33 million.)

That $65 million goal seems like a significant stretch, because arena expenses are much higher than projected. That $29.6 million figure over nine months but the arena on the path to less than $40 million in net operating income, though a strong fourth quarter would boost that number.

Full 2014 financial results should be released tomorrow.

From The Business of Sports
Surely the arrival of the New York Islanders will help. But there have to be question marks.

A declining debt service ratio

Another concern surely is the debt service coverage ratio (DSCR), the amount of cushion available to pay back the bonds.

According to the 2010 book The Business of Sports, the Fitch ratings agency sets a minimum DSCR for a new facility at 2.25, in the "base case," when the arena appears operationally sound.

(In a "stress case," when there are more question marks, the minimum pledged revenue for a new facility is 1.75.)

The Barclays Center figure is 1.61, according to the most recent report. That's slightly above the "stress case" for an established facility, where a DSCR of 1.5 is sufficient. But the Barclays Center, despite its buzz, is still establishing itself.

The number is down, remember. On 12/1/09, the Bond Buyer reported:
Moody’s expects the senior bonds will have a 10-year average debt-service coverage ratio of 2.85 times and stressed that even without being in operation, the existing sponsorship deals and naming rights deal would provide 0.95 times coverage on the bonds.
Today, it doesn't look like the arena's ability to pay off the bonds is threatened.

After all, as the screenshot at right indicates, there are significant reserve balances, including more than a year's worth of debt service.

But the cushion is much lower.

Note that by April 2013, ratings agency Standard & Poor's projected a stable outlook for the bonds, saying the arena had come in on budget and had many sponsorships, but also saw flaws, including a lower DSCR. (S&P presumably estimated the DSCR at the time, but the figure is not specified in the excerpt made publicly available.)

The document does disclose that S&P--unlike Moody's--had previously "expected likely senior DSCR to be 2.11x...." That figure was more conservative than 2.85, but still higher than the current 1.61.

(The Louisville arena has a more dramatic DSCR of 1.1, which concerns ratings agencies.)

A brief history of projections

Forest City has steadily urged caution and backed off projections. In a Q1 2012 Earnings Conference Call, on 6/8/12, executive Matthew Messinger estimated it would take two years to stabilize net operating income, or NOI.

In a Q4 2012 call, on 3/28/13, after the arena had had its well-publicized debut, CEO David LaRue pointed to stabilization in 2015-16. "We have projected that $70 million stabilized NOI number to occur once the Islanders are in... we are on track."

In a 7/23/13 press release, the Barclays Center noted that it was reported as "the top-grossing U.S. venue for concerts and family shows." (Note: gross, not net.)

In a 7/24/13 Investor Day conference call, LaRue said they were focused on that $70 million stabilization when the Islanders moved. "So the revenue coming in is great. It's not so great if you have to spend it all."

In a 9/5/13 press release regarding Q2 2013 results, LaRue said "the arena has received excellent market acceptance and performed well from a revenue standpoint." He repeated such statements in a 9/9/13 conference call, saying the Barclays Center had "done very well from a revenue standpoint." 

In a Q3 2013 call, on 12/9/13, CFO Bob O'Brien said they "reduced the projected stabilized NOI for Barclays Center arena to $65 million," down from $70 million, given "a better understanding of the revenues and expenses."

In a 2/27/14 press release on 2013 results, Forest City cited "Underperformance of the Barclays Center arena."

In a Q4 2013 call, 2/28/14, La Rue said they'd save money on staff at the arena, and predicted the $65 million NOI would be achieved after the Islanders move.

Sunday, February 22, 2015

For the Barclays Center, "Actual Taxes" are $41 million (and not paid)

Here's a question: what are the property taxes associated with the Barclays Center?

Answer: 0.

Here's another way to phrase the question: what are the Actual Taxes?

Answer: $41 million.

Does the arena pay those Actual Taxes?

No.

"It's Orwellian," sort of.

Drilling down

See, to enable the arena, a complicated series of transactions, with a fig leaf of public ownership, allowed the issuance of tax-exempt bonds, which have a lower interest rate. (The bondholders don't pay tax on interest received, so they accept a lower rate.)

The tax-exempt financing on $511 million of arena bonds saves arena developer Forest City Ratner and partners perhaps $150 million, with the hit going mostly to federal taxpayers.

As explained in the Atlantic Yards 2009 Modified General Project Plan, Empire State Development Corporation owns the land, and a subsidiary, the Brooklyn Arena Local Development Corporation (BALDC) owns the arena, thus exempting it from taxes.

The BALDC then leases the arena to the arena holding company, Brooklyn Events Center (a Forest City Ratner affiliate), which, to pay for arena construction in the most advantageous way, agreed to make payments in lieu of taxes (PILOTs) "not to exceed the amount that full real estate taxes would be if the land and improvements were not exempt from such taxes as a result of ESDC's ownership thereof."

Hence the need for Actual Taxes, which were reported to bondholders in January 2014 at $41 million, as noted in the document above right. (Presumably a new calculation is forthcoming.)

In 2013 and 2014, the developer paid $30-$31 million in PILOTs, which rise to more than $50 million by 2035 and are fully paid off in 2047.

So Actual Taxes will have to rise. Remember, in this case, they want a higher assessment, which made it bizarre that Forest City Ratner lawyers in 2012 attempted to lower various assessments, including that of the arena. 

A smaller bond issuance, for tax reasons

Note that the only $511 million in tax-exempt bonds were issued in late 2010, though the New York City Independent Budget Office (IBO), in its September 2009 report on the arena, estimated that the developer would aim at $678 million.

A major factor in the smaller bond issuance was the additional risk the larger number posed to generating an investment-grade rating. (Larger annual payments require more guaranteed income streams.)

Also, a larger bond issuance might have meant annual PILOTs would exceed Actual Taxes, which would be unacceptable.

“Concern that a PILOT be high enough to cover the debt service can result in the unusual situation of a property owner hoping for a higher assessment,” the IBO said, citing the Yankee Stadium example. “Turning to Atlantic Yards, IBO estimates that a typical property tax assessment would result in a PILOT that falls short of the payments needed to cover debt service in the early years of the project. Assuming the arena is assessed using a cost methodology, taking into account hard and soft construction costs and actual land acquisition costs, IBO estimates that in the early years after the arena opens, a typical property tax assessment would yield a tax bill of about $40 million annually."

At that point, IBO was estimating a $55 million annual debt service payment for a $678 million bond. So that had to shrink.

The value of the subsidy?

Note that the IBO does not consider the tax-exempt financing for the arena to be a full subsidy, in the way former Assemblyman Richard Brodsky considered tax-exempt financing for Yankee Stadium to be a full subsidy. (As does Michael D.D. White, regarding the arena.)

Rather, the IBO only counts the difference between taxable and tax-exempt financing, as well as the lost property taxes on formerly taxable property within the arena site.

It also argues that the Metropolitan Transportation Authority took a hit by not maximizing the price it could have gotten for the railyard portion of the arena, suggesting that the price should have been higher because the buyer would be able to maintain the advantageous tax-exempt status of the site.

Future payments
From the December 2009 Official Statement for the arena bonds

Decoding Ratner's role in the dispute over the Museum of Jewish Heritage's future

A 2/8/15 article in the Wall Street Journal, Museum of Jewish Heritage Faces Struggle Over Pace of Change, places Bruce Ratner front and center, and leaves a hint about how he's dealing with the press. From the article:
When Bruce Ratner took over as chairman of the Museum of Jewish Heritage in June, he and museum officials expressed optimism that a new era was beginning for the 17-year-old institution perched at the tip of lower Manhattan.
Nearly eight months later, there is little disagreement over direction. The museum, which explores Jewish life before, during and after the Holocaust, needs to boost annual attendance, which is far below that of comparable city institutions, despite a respected collection. It must stabilize its balance sheet, which has been in the red five of the last six years. And it needs to undertake significant projects, such as reimagining key sections of its core exhibit.
But a deep divide has emerged between Mr. Ratner, a prominent real-estate developer, and museum officials over the urgency of these problems, the roles of each leader and some of the solutions.
The article portrays museum director and CEO David Marwell as the obstacle to change, while former chairman Robert Morgenthau, who picked Ratner as his successor, suggests the developer should keep hands off.

But the article provides backup for Ratner from museum professionals as well as a city mover-and-shaker:
Suri Kasirer, an early supporter of the museum who drifted away but was recently re-engaged by Mr. Ratner as a lobbyist and strategic consultant, said she sees a certain amount of adherence to the status quo. “Sometimes you’ve got to shake things up a little bit and I think that’s what he’s trying to do. Not shake it up for its own sake, but shake it up for a vision.”
Kasirer's firm also works for Ratner on Atlantic Yards.

It's tough to know who's right regarding the museum's future. But the use of Kasirer as a source and the fact that Ratner gets the last word suggest he's successfully managing media outreach:
Mr. Ratner nonetheless remains eager to light a fire under the institution. Without new momentum, he said, “I’m not sure what will happen to the museum and that’s what worries me.”