Skip to main content

Ratner's profit likely would exceed IRR, but the public's still in the dark

So how much profit would Forest City Ratner make? Remember, a real estate expert consulted by New York Magazine estimated 25 percent, though he didn't have enough figures to be certain.

Two things are clear, however. First, the "internal rate of return" (or IRR) figures in the KPMG audit commissioned by the Empire State Development Corporation don't tell us anything about Ratner's profit.

Second, the public still doesn't know whether this is a good deal or not.

Overall rate of return?

In covering the approval last week of the Atlantic Yards plan, the Times reported:
The developer has yet to divulge precisely how much money it will make on the project. But Mr. Silver yesterday played down concerns that the developers were using public subsidies to generate excessive private profits, noting that the board’s official review powers were limited to vetting the state’s contribution to the infrastructure costs.
“Our role is not to measure the profits that the private investors will make,” Mr. Silver said yesterday. “Our role is to make sure that state liability on the project will be limited to what they say it will be. And we were satisfied about that, plain and simple.”
According to a KPMG audit commissioned by the Empire State Development Corporation, a copy of which was provided to The New York Times, Forest City estimated that the overall rate of return on the $4 billion project, excluding the arena, at about 10 percent over 30 years. The accounting firm estimated the return at about 7 percent.

That confused a technical term, IRR, with a more colloquial "overall rate of return." And Silver's quote dismissed the requirement, in a 2/18/05 Memorandum of Understanding, that the developer was required to provide a 30-year pro forma income and cash flow statement regarding the Atlantic Yards project. (Was that just for internal consumption?)

As I noted, somewhat more cautiously:
So what really would be the developer's profit? How do the tax breaks and grants factor in? A sentence in an earlier version of the Times article raised a question:
But because Forest City is using grants and tax-exempt bonds to finance the bulk of the project, critics cautioned, the project’s investors will likely earn a much higher rate of return on their direct investments.

(Why was that sentence eliminated? Possibly because the financing is still unclear.)

The missing context

Indeed, crucial context was absent. I ran the report past David A. Smith, founder of Recapitalization Advisors, Inc., a Boston-based affordable housing consulting firm.

IRR, Smith explained, is typically used as a way of harmonizing an estimated return from various kinds of investments, including equity (cash) and debt. But the transaction includes both outside investors and the developer, or sponsor. Sponsors like Forest City Ratner, Smith said, "use other people's money as much as you can. They are entitled to a development profit for their services in assembling the resources. So the sponsor is trying to minimize cash outflow and maximize development fee."

That development fee would cover overhead, supervision of construction, supervision of architects, and a profit allowance. And some of that is buried beneath the numbers of the document.

Unanswered questions

Simply assessing an IRR on the equity sources, not the debt, doesn’t answer two important questions, Smith noted:
1) What fees to the sponsor are included in uses of funds?
2) Among the equity sources, what percentage is coming from the sponsors and what percentage is coming from outside investors?

"I find it very surprising that a full 'sources and uses' on the transaction is not publicly available, given the significant amount of public resources going in," said Smith, who noted that affordable housing transactions typically offer a transparent document explaining where the money is coming from and where it will go.

"The goal is for the allocating agency to see that their contribution gets the absolute highest bang for buck," Smith said, because different projects compete for scarce subsidies. "In Atlantic Yards, it’s within the realm of possibility that the problem is they have a moving target, with sources and uses in flux even as the individual phases are also in flux."

"I don’t fundamentally have a problem with the idea that some aspects they might not choose to publish in the paper, but you’d like to have confidence that a review was being done of the public contribution, and whether the public contribution is getting an adequate return on its public investment," he said.

Does report give guidance?

What should legislators think about the KPMG document? "As far as I can tell, KPMG thinks it can work, but raises the related question of whether the state is getting the best value for the resources it is providing," he said.

How could one do that? "You could bid it," he said. "But if it’s not bid, you first obtain from the sponsor a complete 'sources and uses'. Secondly, you drill through it to understand the projected and anticipate profits to the sponsor. You quiz them on it."

Smith said that, with "a massive and highly complex undertaking" like Atlantic Yards, "your complications and volatility and risk go up, and then likewise the compensation for that risk goes up. I wouldn’t have problem defending a large development fee, because there’s a lot of exposure."

Still, he noted, the questions remain. "One, have public resources been adequately protected in the sense of public officials or administration officials getting good value for money going in? Two, even assuming they have relative to this transaction, is this a good use of money relative to other things those public resources could be used for?"

Comments

Popular posts from this blog

Barclays Center/Levy Restaurants hit with suit charging discrimination on disability, race; supervisors said to use vicious slurs, pursue retaliation

The Daily News has an article today, Barclays Center hit with $5M suit claiming discrimination against disabled, while the New York Post headlined its article Barclays Center sued over taunting disabled employees.

While that's part of the lawsuit, more prominent are claims of racial discrimination and retaliation, with black employees claiming repeated abuse by white supervisors, preferential treatment toward Hispanic colleagues, and retaliation in response to complaints.

Two individual supervisors, for example, are charged with  referring to black employees as “black motherfucker,” “dumb black bitch,” “black monkey,” “piece of shit” and “nigger.”

Two have referred to an employee blind in one eye as “cyclops,” and “the one-eyed guy,” and an employee with a nose disorder as “the nose guy.”

There's been no official response yet though arena spokesman Barry Baum told the Daily News they, but take “allegations of this kind very seriously” and have "a zero tolerance policy for…

Behind the "empty railyards": 40 years of ATURA, Baruch's plan, and the city's diffidence

To supporters of Forest City Ratner's Atlantic Yards project, it's a long-awaited plan for long-overlooked land. "The Atlantic Yards area has been available for any developer in America for over 100 years,” declared Borough President Marty Markowitz at a 5/26/05 City Council hearing.

Charles Gargano, chairman of the Empire State Development Corporation, mused on 11/15/05 to WNYC's Brian Lehrer, “Isn’t it interesting that these railyards have sat for decades and decades and decades, and no one has done a thing about them.” Forest City Ratner spokesman Joe DePlasco, in a 12/19/04 New York Times article ("In a War of Words, One Has the Power to Wound") described the railyards as "an empty scar dividing the community."

But why exactly has the Metropolitan Transportation Authority’s Vanderbilt Yard never been developed? Do public officials have some responsibility?

At a hearing yesterday of the Brooklyn Borough Board Atlantic Yards Committee, Kate Suisma…

Forest City acknowledges unspecified delays in Pacific Park, cites $300 million "impairment" in project value; what about affordable housing pledge?

Updated Monday Nov. 7 am: Note follow-up coverage of stock price drop and investor conference call and pending questions.

Pacific Park Brooklyn is seriously delayed, Forest City Realty Trust said yesterday in a news release, which further acknowledged that the project has caused a $300 million impairment, or write-down of the asset, as the expected revenues no longer exceed the carrying cost.

The Cleveland-based developer, parent of Brooklyn-based Forest City Ratner, which is a 30% investor in Pacific Park along with 70% partner/overseer Greenland USA, blamed the "significant impairment" on an oversupply of market-rate apartments, the uncertain fate of the 421-a tax break, and a continued increase in construction costs.

While the delay essentially confirms the obvious, given that two major buildings have not launched despite plans to do so, it raises significant questions about the future of the project, including:
if market-rate construction is delayed, will the affordable h…

Revising official figures, new report reveals Nets averaged just 11,622 home fans last season, Islanders drew 11,200 (and have option to leave in 2018)

The Brooklyn Nets drew an average of only 11,622 fans per home game in their most recent (and lousy) season, more than 23% below the announced official attendance figure, and little more than 65% of the Barclays Center's capacity.

The New York Islanders also drew some 19.4% below announced attendance, or 11,200 fans per home game.

The surprising numbers were disclosed in a consultant's report attached to the Preliminary Official Statement for the refinancing of some $462 million in tax-exempt bonds for the Barclays Center (plus another $20 million in taxable bonds). The refinancing should lower costs to Mikhail Prokhorov, owner of the arena operating company, by and average of $3.4 million a year through 2044 in paying off arena construction.

According to official figures, the Brooklyn Nets attendance averaged 17,187 in the debut season, 2012-13, 17,251 in 2013-14, 17,037 in 2014-15, and 15,125 in the most recent season, 2015-16. For hoops, the arena holds 17,732.

But official…

So, Forest City has some property subject to the future Gowanus rezoning

Writing yesterday, MAP: Who Owns All the Property Along the Gowanus Canal, DNAinfo's Leslie Albrecht lays out the positioning of various real estate players along the Gowanus Canal, a Superfund site:
As the city considers whether to rezone Gowanus and, perhaps, morph the gritty low-rise industrial area into a hot new neighborhood of residential towers (albeit at a fraction of the height of Manhattan's supertall buildings), DNAinfo reviewed property records along the canal to find out who stands to benefit most from the changes.
Investors have poured at least $440 million into buying land on the polluted waterway and more than a third of the properties have changed hands in the past decade, according to an examination of records for the nearly 130 properties along the 1.8-mile canal. While the single largest landowner is developer Property Markets Group, other landowners include Kushner Companies, Alloy Development, Two Trees, and Forest City New York.

Forest City's plans unc…

At 550 Vanderbilt, big chunk of apartments pitched to Chinese buyers as "international units"

One key to sales at the 550 Vanderbilt condo is the connection to China, thanks to Shanghai-based developer Greenland Holdings.

It's the parent of Greenland USA, which as part of Greenland Forest City Partners owns 70% of Pacific Park (except 461 Dean and the arena).

And sales in China may help explain how the developer was able to claim early momentum.
"Since 550 Vanderbilt launched pre-sales in June [2015], more than 80 residences have gone into contract, representing over 30% of the building’s 278 total residences," the developer said in a 9/25/15 press release announcing the opening of a sales gallery in Brooklyn. "The strong response from the marketplace indicates the high level of demand for well-designed new luxury homes in Brooklyn..."

Maybe. Or maybe it just meant a decent initial pipeline to Chinese buyers.

As lawyer Jay Neveloff, who represents Forest City, told the Real Deal in 2015, a project involving a Chinese firm "creates a huge market for…