Sunday, February 26, 2017

So, how much did Barclays Center pay the Islanders? $53.5 million? $45 million? $37.5 million?

In the unusual deal between the Barclays Center and the Islanders, in which the arena takes over the team's business arrangements in exchange for tickets, suites, and sponsorship revenue, the base payment from the arena to the team is supposed to be $53.5 million.

That's not what Barclays paid the Islanders, however, because there's a $2 million annual license fee required of the Islanders, plus additional costs described, variously, as "certain actual expenses and costs," "certain non-game day operating costs," "expense reimbursements," an "operating expense reimbursement," and "certain adjustments."

It's not so easy to get a consistent or definitive number. Though Newsday previously reported what seems to be the most accurate figure--$37.5 million--it's worth seeing the way the number has been presented.

$45 million, from Official Statement?

Consider: according to the screenshot below from the August 2016 Official Statement provided to potential arena bond investors, the arena paid the Islanders $53.5 million, minus operating costs of $6.7 million, as well as that annual $2 million license fee. "

The text does not make it clear whether the "operating expense reimbursement" is separate from the operating costs subtracted from the arena payment or not. But it leaves the impression that the arena paid slightly under $45 million.

Another part of the Official Statement indicates various payback:
The Islanders ramp up expenses that began in Year 3 and continued throughout Year 4 were offset in Year 4 by the recoupment of Executive and Dedicated Islanders Staff expenses by Islanders ownership. 
$45 million, from Official Statement market study?

The screenshot below from the market study--from consultant Convention, Sport & Leisure--included in the Official Statement cites the $2 million rent payment, the $53.5 million guarantee, and some $6.5 million in expense reimbursements.

Again, that leaves the impression that the arena paid about $45 million.

$37.5 million?

By contrast, the screenshot below, from a December 2016 report on annual arena financial results indicates that the annual payment, net of direct sales and management costs, was $37.5 million, as Newsday first reported 1/30/17. That's a $7.5 million difference.

So what's the difference between those two numbers?

Arena spokesman Joe DePlasco, responding to my queries, said it was a deduction for sales tax and rent. 

But I couldn't get any clarity on why that wasn't fully or consistently explained in other documents.

So a potential investor relying on the Official Statement might feel a little under-informed, at best.

Saturday, February 25, 2017

When Barclays Center came clean: FY 2016 financial document, unlike 2015 version, cited Islanders opt-out

Something very interesting becomes clear when comparing the annual financial reports for the Barclays Center operating company covering fiscal years 2015 and 2016, which end June 30. (The documents were each released about six months later.)

Passages regarding the New York Islanders stand out, because only in the 2016 document--which appeared, of course, after talk of the Islanders leaving the arena surfaced--was the team's opt-out clause mentioned. That's not very transparent.

2015 document excerpted at left; 2016 document excerpted at right; arrows indicate added text re opt-out. Click to enlarge.
From the 2015 document
Agreement with the Islanders
Brooklyn Arena, LLC and Subsidiaries Notes to Consolidated Financial Statements
On October 24, 2012, the Company entered into a licensing agreement with the Islanders whereby the Islanders have certain and exclusive rights regarding the use of the Arena and the Arena is entitled to certain revenues. The term of the agreement is for 25 NHL seasons commencing on the first home date during the initial season, which is expected to be the 2015/2016 season. The licensing agreement requires the Islanders to pay an annual license fee of and provide for an operating expense reimbursement to the Arena subject to a per game cap. The Arena is required to pay Islanders an annual guaranteed season payment net of direct sales and management costs, which is subject to certain adjustments as defined in the agreement. The annual season payment is subject to annual increases of 1.5% each season over the term.
No amounts have been paid under this agreement for the year ended June 30, 2015.
(Emphases added)

From the 2016 document
Agreement with the Islanders
On October 24, 2012, the Company entered into a licensing agreement with the Islanders whereby the Islanders have certain and exclusive rights regarding the use of the Arena and the Arena is entitled to certain revenues. The term of the agreement is for 25 NHL seasons commencing on the first home date during the initial season, which was in September 2015. However, both the Company and the Islanders have the right, following the conclusion of the 2016‐2017 NHL season, to initiate good faith discussions regarding modification of the financial arrangements within the NYI License Agreement, with such discussion period expiring as of January 1, 2018. If the parties are unable to reach an agreement, resulting in an Opt‐Out Notice, either party may elect to terminate the license agreement effective as of the conclusion of the 2018‐2019 NHL season; provided, however, that, in the event that an Opt‐Out Notice is delivered, the Islanders shall also have the right to terminate the NYI License Agreement effective as of the conclusion of the 2017‐2018 NHL season. The licensing agreement requires the Islanders to pay an annual license fee and provide for an operating expense reimbursement to the Arena subject to a per game cap. The Arena is required to pay the Islanders an annual guaranteed season payment net of direct sales and management costs, which is subject to certain adjustments as defined in the agreement. The annual season payment is subject to annual increase of 1.5% each season over the term. For the year ended June 30, 2016, total payments to the Islanders were approximately $37,519,000.
By the way, that little-noticed $37.5 million figure--far lower than the much reported (and purported) $53.5 million baseline guarantee--was first reported by Newsday in a 1/30/17 article about the Islanders' possible return to the Nassau Coliseum. I'll address that issue in another post.

Friday, February 24, 2017

Wait, did the Islanders draw only 10,200 *paid* attendees in first season (rather than 11,200 total)?

I wrote last August--that the New York Islanders, rather than drawing the announced attendance of 13,900 fans, actually averaged just 11,200 in their first season in Brooklyn. See screenshot below right.
Click to enlarge

But was that correct?

The source was a market study included in the Official Statement aimed at buyers of the refinanced Barclays Center bonds

I just noticed another passage in that market study, produced by Convention, Sports & Leisure (CSL), which states that first-year attendance was "approximately 10,200 paid attendees on average." See screenshot at bottom.

So, was one of those numbers a typo? Or, perhaps, an admission that they comped 1,000 people a game? After all, 10,200 paid attendees is different from 11,200 attendees. If it was not a typo, then maybe the team was doing even worse than we think.

(I reached out to the arena and CSL, but didn't hear back. Maybe by publishing this some clarification may emerge.)

Legal case involving B15 progresses, though school construction timing unclear; project update at March 7 meeting

The legal case involving Greenland Forest City, owners of the stalled B15 site (aka 664 Pacific) and neighboring property at 497 Dean seems to have progressed, which raises the likelihood of construction.

At least one element of the dispute, according to the eCourts web site, has been settled, as shown in the screenshot at right.

But the overall case remains listed as active, with a "control date" (conference) set for 5/4/17, so it's unclear whether the dispute is fully resolved, and construction of the 27-story tower can proceed and ultimately bring market-rate apartments and a middle school. I queried both sides but didn't hear back.

However, given that pre-construction activities were delayed until this year, at least and the projected time for pre-construction and construction is four years, unless construction goes faster than expected, the promised middle school won't arrive until 2021, rather than 2018 or 2019, as once projected. The school has been dubbed by backers as M.S. OneBrooklyn.

The site, in center; 497 Dean at right
A public meeting

Perhaps we'll learn more at the next Atlantic Yards/Pacific Park Quality of Life meeting (fka Community Update fka Quality of Life), which addresses various project-related issues and will be held:
Tuesday, March 7, 2017
@ 6:00 PM
Shirley Chisholm State Office Building
55 Hanson Place
1st Floor Conference Room
Brooklyn, NY 11201
Access at issue

Not yet really in progress; won't be finished by Q4 2018
As described by Supreme Court Justice Sylvia Ash in her 12/5/16 decision, the developer must demolish an existing structure on site, which will take two weeks, and require excavation to a depth lower than the foundations of the neighboring 497 Dean, a four-story apartment building, as I wrote 12/13/16,

That was delayed by a dispute about safety precautions regarding 497 Dean.

Ash indicated she was "inclined to grant Developer a license" to enter the neighboring premises but ordered the parties to appear in a conference set forth license parameters. She also said she'd assess what would be a reasonable license fee.

If the settlement regards the license, and the fee, well, what's left to negotiate? Or is the "control date" merely an update on the work done so far? Stay tuned.

Thursday, February 23, 2017

From TreeHugger: The World's Tallest Modular Building and the Phantom 20 Percent Savings

From my article in the environmental publication TreeHugger, The World's Tallest Modular Building and the Phantom 20 Percent Savings, "Astoundingly, some recent press accounts claim that the use of modular techniques purportedly allowed Forest City to save 20 percent on the 32-story, 363-unit tower, which contains half market-rate units and half "affordable" ones.Innovation welcomed

A commenter on the article:
L'audace, l'audace, toujours l'audace. I am very grateful for builders who take risk to pioneer new and better ways to do things.
If they did not realize any savings, it is more likely that the successors will learn from their mistakes and eventually achieve savings (and enhancement in quality that comes from factory construction).
Well, OK, innovations can in fact face bumps in the road, and succeeding projects can build on them. But not only was the hype here huge, it continues in the face of reality.

And some say that's not the point

And neighbor Charles Recknagel wrote:
Unfortunately the buildings couldn't be more of an eyesore for this neighborhood.
The glossy red and grey panels will eventually turn a mat hazy finish. I'm all for ingenuity, but the lies and greed are what will be remembered on this project.

Wednesday, February 22, 2017

Are the Brooklyn Nets really worth $1.8 billion, as per Forbes? Nope. (And why credit arena to team value?)

Sorry, Forbes, I'm not buying it. I can't believe, as published recently, that the Brooklyn Nets are valued at $1.8 billion, the 7th most valuable team in the NBA, up from $1.7 billion in 2016 and $1.5 billion in 2015.

The reason? Well, just a year ago, the team plus the arena were valued at $1.7 billion.

How do I know? Well, when Forest City Realty Trust sold its 20% interest in the Nets and 55% in the Barclays Center operating company to Mikhail Prokhorov's Onexim Sports & Entertainment, the announcement said the team was valued at $875 million and the arena at $825 million, for a total of $1.7 billion, as shown in the screenshot below.

Sure, it's possible that Forest City, constrained by a deadline to become a real estate investment trust and a league that wanted one owner for the team and arena, did not get as much for those assets as it had hoped.

But optimistic estimates--considered a stretch--only reached $1.9 billion.

The team--and the arena

Turns out, Forbes doesn't really think the Nets are worth $1.8 billion now either, since their rather flexible methodology links team and arena--and last year estimated the pair $1.7 at billion. The arena is said to contribute $551 million in value.

(Why the overall increase? Now, among other things, the team has an $8 million a year deal for uniform advertising!)

In a Twitter exchange with Forbes writer Kurt Badenhausen, I expressed my skepticism, pointing to the 2016 valuation set by the dual sale.

He responded that Forbes's value includes the team and the arena.

But it's tough to attribute the arena value to the Nets. When I asked about the Islanders, he responded, "We include the economics of the arena that go back to the NBA team. Isles don't get any non-hockey revs."

(I'm not sure about that. The Nets don't get any non-Nets revenues, but the Nets owners do, at least now, because they're the same. But two years ago, the arena was already supposed to contribute more than $500 million to the Nets value, and it was not controlled by Prokhorov. So Forest City Ratner, a minority owner of the Nets but a majority owner of the arena operating company, was getting benefit that didn't "go back to the NBA team" either.)

"Ok, but then shouldn't you then count % of the arena value attributable to Nets rather than full value?" I responded.

"In cases where owner controls economics to arena/team, we attribute to team value-i.e. Bulls get 50% of United Center," he responded.

Maybe that's why Forbes attributed $551 million in venue value to that overall team valuation, rather than the full $875 million.

But that still doesn't make sense to me, since, if the Nets are worth $1.8 billion for the team plus their share of the arena, what about the value of the rest of the arena? Wouldn't that additional valuation bring the combo of the team plus the various arena beneficiaries well above $1.8 billion? And what if ownership of the team and the arena operating company were split?

Maybe we'll learn more about the team's value if and when Prokhorov brings in minority investors, as is expected.

Previous coverage

Here is the archived Forbes coverage: 2013, 2014, 2015, 2016. I've pasted in screenshots below. (The last time I wrote about the Forbes valuations, two years ago, I also had doubts.)

Tuesday, February 21, 2017

Forest City/ESDC predicted 224-250 events at Barclays Center; first three years averaged 180-200

FCR 2005 bid to MTA: 250 events
How many events were there annually at the Barclays Center, starting in 9/28/12 and until the New York Islanders arrived three years later?

Only 180 to 200 a year, which is fewer than predicted many times by arena developer Forest City Ratner, governmental allies, ratings agencies, and consultants, we now know.

The lesson, yet again, is to take self-serving predictions with a large grain of salt. (Note that, as detailed below, the New York City Economic Development Corporation and the New York City Independent Budget Office more accurately predicted numbers under 200. )

August 2016 to potential bond buyers: 180-200 events in first three years
The new information comes in a consultant's report in the August 2016 Official Statement sent to potential buyers of the refinanced arena bonds. (See screenshot at left.)

The arrival of the New York Islanders hockey team means the Barclays Center did finally host 240 events in the fourth year of operation. (Given the timing of the Official Statement, I'm assuming they counted the fourth year as beginning at the end of September 2015, which was approximately one year earlier,)

The increased event count doesn't necessarily translate into huge profits, so it's possible that if the Islanders leave the arena might earn more profits from fewer events. (I'll write more on this soon.)

FCR 2005 City Council presentation: 235 events
The key is this: official projections, especially from private entities, deserve skepticism. Some public entities and agencies have been more cautious and, thus, credible.

Overly optimistic predictions of events

Repeating and augmenting my September 2013 article on the number of predicted events, it's clear many were optimistic and unrealistic:
  • 224: May 2004. Source: Report by Forest City Consultant Andrew Zimbalist
  • 250, May 2005. Source: Forest City’s bid to the MTA
  • 226: June  2005. Source: Report by Forest City Consultant Andrew Zimbalist
  • 235, May 2005. Source: Forest City presentation to City Council
  • 192, June 2005. Source: NYC Economic Development Corporation analysis
  • 194+, September 2005. Source, New York City IBO Fiscal Brief
  • 225: July 2006 General Project Plan, Empire State Development Corporation
  • 225: June 2009 Modified General Project Plan, Empire State Development Corporation
  • 200+, September 2009. Source: Barclays Center press release
  • 225, December 2009. Source: ratings agency Moody's
  • 220, December 2009. Source: Forest City, according to ratings agency Standard & Poor's, which called estimate “aggressive”
  • 184-214, December 2009. Source: consultant Conventions, Sport & Leisure International, part of Official Statement for bond buyers
  • 220, December 2012. Source: Arena CEO Brett Yormark interview in Gotham magazine.
First year results were presented as triumphant, as the arena was the busiest in the country, but the numbers, imprecisely expressed as "200-plus," were still more modest than predicted:
(Note that, as far as I can tell, the statistics involve ticketed events, so occasional graduations and occasional outside rentals are excluded.)

The fundamental flaw

Zimbalist's hired-gun report, based on Forest City numbers, was likely the basis for Forest City projections and thus ESDC projections.
However, he not only assumed the Brooklyn arena would not host an NHL team, his calculation presumed the eventual closing of Continental Airlines Arena (later Izod Center), and no new arena in Newark.

The problem, as analysts Jung Kim and Gustav Peebles pointed out in 2004, is that that left no place for the New Jersey Devils to play. And, indeed, they moved to Newark, and the Prudential Center continues--and competes with the Barclays Center and Madison Square Garden for certain events.

The recent assessment

Here's the text from the 2016 Official Statement, as shown in the screenshot above:
While the Arena Project was first developed as the home arena of the Nets, it has evolved into a multi-purpose venue hosting many types of entertainment events, such as concerts, college basketball, family entertainment, boxing, civic and cultural events, and, most recently, NHL hockey. The Arena averaged approximately 180 to 200 events each year since its opening in September 2012, which has increased to over 240 events with the addition of Islanders Home Games in 2015.
Actually, the arena was always supposed to be a multi-purpose venue, because 44 home games won't cut it.

Monday, February 20, 2017

Newsday: entertainment complex around Nassau Coliseum stalled

Nassau Coliseum entertainment complex on hold, Newsday's Robert Brodsky reported yesterday:
Construction of an 11-acre retail and entertainment complex next to the Nassau Coliseum is on hold as Nassau County Executive Edward Mangano and arena developers consider a new plan for the site that could include housing.
Mangano said Nassau began examining housing after the Empire State Development Corp. approved an $85 million grant in October for construction of two parking garages on the Nassau Hub site. The garages would have 3,400 spots and free up 19 acres of blacktop, originally designated for surface parking, to be used for housing.
So the arena, which opens in April after renovation, will not have any new retail or entertainment for at least a year.

 And Mangano gave Nassau Events Center, which was formed by Forest City Ratner but now controlled by Russian billionaire Mikhail Prokhorov's Onexim Sports & Entertainment, more time to build the planned "188,000-square-foot plaza with restaurants, a 10-screen movie theater, a 2,500-seat indoor theater, outdoor amphitheater, skating rink and retail space."

The lease requires at least $400,000 a year to be paid to the county from those new project, but until then, only $60,000 a year is required. Newsday notes that there was no mandatory start date for the retail plaza