Wednesday, December 20, 2006

Would Forest City earn just a pittance? Confusing numbers in the AY audit

How much will Forest City Ratner earn on the project? The KPMG audit gives some hints.

From coverage in the Times:
“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.


Indeed, Forest City's estimates are considered optimistic, according to KPMG's Review of Certain Cash Flows and Assumptions in Connection with Forest City Ratner Companies Development of the Atlantic Yards.

Arena estimates

KPMG aimed to reconstruct the models that Forest City has but would not make available. For the arena, KPMG's reconstructed model reflected an internal rate of return (IRR) of 7.64 percent. (Forest City's IRR was 7.66%). After KPMG looked at the assumptions and adjusted them, it came up with an IRR of 5.09%.

Does that mean that the arena would earn Forest City about what it could get with a certificate of deposit? If so, then it would be virtually a loss leader.

The larger project

For the mixed-use development, KPMG's reconstructed model reflected an IRR of 9.86 percent. (Forest City's IRR was 9.6%). After KPMG looked at the assumptions and adjusted them, it came up with an IRR of 7.28%.

Does that mean that the developer would earn a little more than 7%? Again, investments with relatively small risk could earn a similar return.

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.

Apparently, no public agency is responsible for fully analyzing those issues, just as the net tax revenue to the public remains murky.

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