Friday, July 06, 2007

AY a boondoggle or house of cards? Some (preliminary) responses

On the New York Observer's blog The Real Estate, Matthew Schuerman wonders, given the seemingly contradictory announcements regarding Atlantic Yards, So, Is Atlantic Yards a Rip-Off or Not?

I haven't spent enough time with the documents unearthed via Assemblyman Jim Brennan's lawsuit to come to any overall conclusions about them. But I do think the questions of whether the project is a boondoggle or a house of cards may be disaggregated.

And all this suggests that a responsible entity like the Independent Budget Office or an academic research institute should crunch the numbers themselves.

Schuerman writes:
It’s been an odd week in the history of Atlantic Yards project. Last Friday, the Mayor said that $300 million worth of tax breaks that Forest City Ratner wrangled out of state legislators are going to “a developer who doesn’t need them.” A couple of days later, Assembly Member James Brennan unveiled internal documents that show, according to his analysis, that the 22-acre apartment-and-arena complex is “financially risky” with a “meager annual profit of 3-6%” for the rental units, “enormous” construction costs and unrealistically high rents.

So, is Atlantic Yards a boondoggle or a house of cards? It could, perhaps, be both, but it is notable that we have arrived at the point in history when the Mayor, who is responsible for awarding much of the $1 billion-$2 billion in subsidies to the project, wants to turn off the spigot, while a Brooklyn politician who thinks the project is too big is warning that it might fail.


Indeed, as I suggested on Sunday, the New York Times's account of the documents Brennan uncovered left the impression that Forest City Ratner needed flexibility, a long leash, to make the project work.

Boondoggle?

First, I don't think we have a solid account of Forest City Ratner's profit. A developer's fee of $200 million, 5% of the total project cost, sounds like not so much if the developer is putting up $4 billion.

But FCR would put up only a fraction, which means the fee--larger than the 3% fee sought by Extell, rival bidder for the MTA's Vanderbilt Yard--could represent a substantial return.

Second, some of the math in the documents Brennan uncovered certainly raises questions. If the Atlantic Yards office space would be more lucrative than housing, then why did the developer trade office space for condos?

Third, the boondoggle depends on how much the public is investing, in terms of direct subsidies, public costs, and foregone opportunities (such as for affordable housing elsewhere, which could be delivered more rapidly).

We don't have a solid account of that, even as Forest City Ratner has gained some benefits unavailable to most developers: the state's use of eminent domain, as well as a zoning override, or private rezoning. And the request for proposals (RFP) for the MTA's Vanderbilt Yard (but not the project site), unlike with other projects, was issued 18 months after the city and state backed the Atlantic Yards plan.

Fourth, and unmentioned in any of these documents: what's the benefit to Forest City Ratner beyond Atlantic Yards? Surely the public infrastructure investment improves the market for offices and housing planned over the developer's Atlantic Center mall. And the new population and visitors improves business at the Atlantic Center and Atlantic Terminal malls.

House of cards?

I don't think Brennan indicated that the entire project was a house of cards, but pointed mainly the rental buildings that would include affordable housing. The Times focused on the condos; I pointed out that the increased in expected sale price for the condos didn't seem out of line, even if there were questions about the developer low-balling construction costs.

If it's a house of cards, it's more a house of cards for the rentals, which means affordable housing would arrive more slowly than promised and interim surface parking lots would persist.

So one important question, yet unanswered, is how the city and state plan to enforce the developer's plan to build affordable housing, and on what schedule. As affordable housing analyst David A. Smith commented, "what happens in what order, and who decides what changes are made to the development plan?"

Solution?

Brennan stated in a press release:
“The Empire State Development Corporation should reconfigure of the project with input from the community,” Brennan said. “A smaller project could reduce overall risk, while maintaining a rational balance with the environment. The State, the City and Ratner could restructure the project to guarantee the affordable housing at the same time,” he added.

Unmentioned was part of his previous solution to hasten a smaller project: increased subsidies from the state. (That sweetener for the developer could fulfill, at least in some people's eyes, the boondoggle scenario.)

Whose fault?

It's expensive to develop over railyards, but one factor in increased project costs is simply delay, caused by multiple factors, including, significantly, public opposition to the project.

Could development over the Vanderbilt Yard (and even some surrounding areas) gotten more public buy-in and proceeded faster had it involved an RFP and multiple developers, and been evaluated via the city's slower-track ULURP, or Uniform Land Use Review Procedure?

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