Friday, May 19, 2006

Thousands of million-dollar condos, the AY scale, and FCR's bottom line

Forest City Ratner executive Jim Stuckey, in a radio interview Monday, defended the size of the Atlantic Yards project, saying "Unfortunately, if you want to build on this site, the infrastructure costs and the land costs are so significant that it does require that you build to a certain scale."

His unverifiable statement raises several questions about costs and revenues, statistics that Forest City Ratner won't discuss publicly. But some back-of-the-envelope calculations suggest that just the housing revenues could go far toward recouping the costs of the project.

First, the most expensive arena ever obviously drives up the project cost. Second, the cost of acquiring and operating the Nets. Third, the cost of land acquisition includes a relatively inexpensive price for the 8.3-acre railyard ($100 million), and some relatively expensive deals for specific buildings occupying smaller plots on the 22-acre site, such as $44 million for two properties. Note that the longer the project is delayed, the more construction costs increase.

Beyond the infrastructure and land costs, Stuckey left out the discretionary costs for public relations, professional talent (Frank Gehry must cost a bit more), and even support for community groups, among other things.

The switch from "jobs" to condos

When the project was announced, it was to contain some 2 million square feet of office space, enough to accommodate 10,000 jobs, according to FCR's calculations, using 200 square feet per worker. (Calculations using the more standard figure for office space, 250 square feet per worker, would suggest a cap of 8000 jobs.)

However, last year, Forest City Ratner increased the size of the project and also traded some two-thirds of that planned office space for luxury condos. As the New York Times reported:
Officials of Forest City Ratner said they eventually realized that they would have to reduce the amount of commercial space, to accommodate condominium units that would help pay for the project, including the below-market rental housing

Given that condos are apparently a better economic bet for the developer, theoretically Forest City Ratner could elimininate all the office space, now projected to accommodate 2500 office jobs, and trade it for condos. It could even shrink the project somewhat, given the higher rate of return for condos. But that would be lousy politics, especially since politicians and editorialists endorsed the project early on because of the promise of jobs.

Million-dollar condos

The fact is, until and unless Forest City Ratner releases its pro forma economic projections, as rival bidder Extell did, we're in the dark about Stuckey's claim. And the infrastructure costs and land costs cited by Stuckey certainly deserve more scrutiny.

But it is clear that FCR could create some very valuable condos. Waterfront condos in Williamsburg at Schaefer Landing, according to the Village Voice, are bringing "owners $1000 per square foot for top-floor apartments with views of the river and the Manhattan skyline—far more than anyone, developers and investors included, originally anticipated." Indeed, last September, The Real Deal quoted developer Elon Padeh as saying that the $1000 per square foot level would be reached in five years.

Similar prices would be likely at Atlantic Yards, where condos, under the best scenario, wouldn't be occupied for three years. Should present trends continue, it's reasonable to assume that condos at the Atlantic Yards project could easily be sold for $1000 a square foot, thanks to the upper floor views as well as the Frank Gehry imprimatur. So a 1000-foot condo could sell for $1 million. Or larger condos on lower floors might fetch a slightly smaller price per foot but still reach $1 million.

(Extell estimated an average size of 1500 square feet, and a price of $700 per square feet.)

$440 million off the table

Still, $1 million is a nice round figure to work with. Forest City Ratner had planned 2800 market-rate condos. At $1 million each, that's $2.8 billion in revenue. In scaling back the plan at the end of March, FCR eliminated 440 condos; 2360 condos would equal $2.36 billion.

In other words, Forest City Ratner just took $440 million in revenue--gross, not net (since they'd save something on construction)--off the table. So the configuration of the project is obviously flexible. If it would cost $3.5 billion to build--though FCR wouldn't be putting up that total, given various subsidies--then $2.36 billion in condos would constitute two-thirds of the cost.

New rental income

Beyond that, there would be significant revenue from the rentals, even the subsidized affordable rentals. Each of the 2250 renters in the affordable space would pay 30 percent of their income in rent. If those renters have an average income of about $55,000 (a rough estimate), that's $16,500 a year, or a total of $37.1 million.

The revenue would be much greater from the 2250 market-rate rentals; at a guesstimate of $3000 a month, the rentals would reap $36,000 a year per unit, or $81 million a year.

So, rental income from the 4500 units would represent about $118 million a year, or nearly $1.2 billion over just ten years. Add that to the condos and the sum approaches $3.5 billion fairly easily, without even counting revenue from the arena, hotel, retail, and office space.

Assumptions--and disclosure

Of course these numbers include assumptions and speculations and omissions, and I've left out the cost of borrowing and operations, as well as the value of subsidies.

But the bottom line is this: Forest City Ratner stands to reap a lot of revenue. If Stuckey says the current scale is dictated by the costs, the developer must back it up with some disclosure about its costs and its plans.

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