Among the highlights, thanks to the transcript (for sale):
- The developer has apparently signed funding agreements with the city and state, despite reports that it has not done so
- It would take 4½-5 years to build a new railyard, not 3½ years, as promised in the Atlantic Yards environmental review
- The size of the project may have been reduced
- The flagship Miss Brooklyn tower has apparently been trimmed, and would have more office space
- The number of planned arena suites has been reduced from 170 to 130
- Additional arena sponsorships were supposed to be announced in January, but that didn’t come to pass
- The developer has invested $250 million in the $4 billion project, its largest single investment, but that's only 25% more than its developer fee, and less than the direct public investment of $305 million
- The residential project at 80 DeKalb is a test run for Atlantic Yards.
Funding agreements signed
FCR Executive VP MaryAnne Gilmartin said, “In June of 2007, we received favorable decision on the Federal eminent domain lawsuit, in September of 2007, executed critical funding agreements with the City and State of New York, which allow us to be reimbursed for investments made in infrastructure and land to date on the project.”
That seems to contradict the (anonymously sourced) New York Post article published January 29, which said that “the developer never signed binding contracts for the project.” AY ombudsman Forrest Taylor, asked last month if funding agreements had been finalized, said, “There’s a city part and a state part. I think the state is done.” However, it’s one agreement, so “until both are done, neither are done.”
Yesterday, I asked the Empire State Development Corporation if Gilmartin’s statement was accurate and whether it contradicted or complemented the statements made in the Post and by Taylor. I didn’t get a response.
Five years for new railyard
It seems that the developer’s construction consultant low-balled the time it would take to create a temporary railyard and then finally a new railyard. Robert Sanna, FCR’s Executive Vice President and Director of Construction & Design Development, said, “We have been working with about 20 different operating divisions of the Long Island Railroad over the last 24 months to redesign and relocate that storage facility all the way down at [block] 1127. And that project itself is about a four and a half to five-year build.”
(The Construction Schedule attached to the Final Environmental Impact Statement indicates 10 + 18 + 14 months = 42 months, or three-and-a-half years, as opposed to Sanna's estimate. Click to enlarge.)
“But in order not to encumber the arena site proper, we've devised a plan to create a temporary yard, which we're in the process of constructing now and will complete so that we can begin construction on the arena site in earnest on that project. The temporary yard work is underway at the moment as we speak.”
Only 6.5 million square feet?
Joanne Minieri, FCR President and Chief Operating Officer, said, “Atlantic Yards Development Company, LLC is the entity in which Forest City owns 58.2%. That entity will be the owner of the master plan for the real estate development of over 21 acres in downtown Brooklyn with 6.5 million square feet of residential and commercial development rights.”
That’s very tantalizing, since Atlantic Yards is supposed to be 8 million square feet over 22 acres. Add the 850,000 square foot arena to the figure Minieri mentioned and the total is 7.35 million.
It’s possible that another entity, in which Forest City is a partner, owns the development planned for Site 5, now the home of P.C. Richard/Modell’s, which was subject to a second Memorandum of Understanding (because there were two investment groups). (Gilmartin described the project outside the arena as “15 buildings,” which again seems to be excluding Site 5.
Then again, maybe they've cut a building.
Site 5 was not part of the FCR-created Atlantic Yards financial projections unearthed as a result of the lawsuit filed by Assemblyman Jim Brennan and State Senator Velmanette Montgomery. Nor was it part of the KPMG report. Site 5, once to be 400 feet tall, was cut to 350 feet tall, with 572,000 zoning square feet.
The City Planning Commission recommended that Site 5 be reduced to 250 feet and about 392,000 zoning square feet; that was accepted. Added to 7.35 million square feet, that would make 7.75 million square feet. Also, there would be some space for community facilities, including a school.
It’s possible there's no significant cut, but Miss Brooklyn has been reduced. And there may be a discrepancy between "square feet" and "zoning square feet." It's time for someone to come clean on what the dimensions of the project would be, as currently considered.
(Graphic from 12/14/06 ESDC memo to PACB.)
Miss Brooklyn: more office space, and smaller
Gilmartin described “the buildings that surround the arena and then what we call Phase 1." She apparently was pointing to Miss Brooklyn: "That is a commercial building with plus or minus 528,000 square feet of zoning rights. And there are three residential buildings that comprise what we call Phase 1.”
According to documents unearthed in the Brennan lawsuit, Miss Brooklyn, or Building 1, was to have 308,801 zsf (zoning square feet) of office space, 164,652 zsf of hotel space, and 434,691 zsf of condo space, for 908,144 zsf. Apparently there’d be no more condos, which makes some sense, because the financial projections suggested that the office space would be highly profitable, with a 17% internal rate of return on top of development fees.
Meanwhile, the condos in that building were projected to lose money. Brennan suggested last July that that was an argument for reducing the size of the project; the current plan for that building suggests both a cut in size as well as a shift in function.
What’s not clear is whether the building has been cut to 528,000 sf or to 692,652 sf or to some other number. Either way, it would be a lot smaller than the total of more than 900,000 sf as contemplated in late 2006, not to mention the 1.1 million sf as initially contemplated.
Maybe the office market is picking up, despite setbacks early last year. An 11/8/07 article in the New York Sun, headlined Downtown Brooklyn Finally Arrives, suggested that demand for office space is growing:
An executive director at Cushman & Wakefield, Glenn Markman, said: "In my 20-plus years of representing landlords and tenants in downtown Brooklyn, I have never seen the demand for office tenants be stronger than today. The interest is coming from Manhattan office tenants, such as advertising agencies, media companies, law firms, and consulting companies."
130 suites, not 170
Minieri explained that Forest City owns 21.5% of Nets Sports and Entertainment, LLC. (There are numerous individual investors. “That entity owns the Nets franchise and will be the owner of the new state-of-the-art arena, The Barclays Center. The arena will be an 18,000-seat arena with 130 suites, 12 of which will be bunker suites and be the home to over 200 new events.”
(Photo of Nets billboard at 553 Waverly Avenue at Atlantic Avenue, one block from the eastern edge of the Atlantic Yards footprint, by Tracy Collins.)
A December 2006 audit conducted by KPMG on behalf of the Empire State Development Corporation noted that Forest City Ratner projected 170 suites, “a combination of first ring suites, second ring suites, courtside suites, and log boxes.” KPMG suggested that the total number of suites and the average price “appear to be on the high end,” given that NBA arenas average about 90 suites, and that only six offer more than 125 suites, and five of those six host both NBA and NHL teams.
Sponsors for the Nets
Brett Yormark, President & CEO, Nets Sports and Entertainment, explained how the team has vaulted from $5 million in sponsorship sales to more than $15 million, as sponsors and marketers “understand that they need to get involved now, build some equity with the franchise in route to Brooklyn.”
On the heels of the Barclays Center deal announced in January 2007, Yormark said, the team aims for “14 totally integrated partners, Barclays of which will be the lead.” He added, “And I think in January, we'll be able to announce half of those partnerships that we've been able to come to an agreement on.”
That has not come to pass. Nor has there been a public announcement yet of the Barclays Center Showroom in the Times Tower, which Yormark said should open “some time in January.” Perhaps the delay in the project arena opening has pushed things back.
Still, Yormark said suites had already been sold: “This past summer, we went out on a bit of a private sale to friends and family. And the response has been overwhelming. We're different. We're special. Frank Gehry, Brooklyn, the whole Brooklyn story in general is providing us with a different story that we can tell in the marketplace, and people are responding. “
$250M is "risk-appropriate"
An audience member asked what the total equity investment was in Atlantic Yards. Minieri responded, “ Us and our partners together, approximately $250 million invested in the Atlantic Yards Development Company, LLC. As it relates to the future equity levels, we'd like to keep it as low as possible and hopefully, that $250 million will be our peak equity. That's as much as I can tell you right now.”
An “unidentified company representative” added, “That's a very direct answer, huh? It's a large investment. It's clearly the largest investment we've made in any project of scale or not of scale. But it, we think, is a risk-appropriate investment. The opportunity here is... unlike an opportunity we've had probably anywhere else.”
Indeed, the developer, as the New York Times first reported, would get a 5% development fee, or $200 million, though over a longer period of time. And the city is spending $205 million upfront, the state $100 million.
As for the financing, Gilmartin said, “So, as we proceed and we move forward with both the construction of the arena and each of the towers, we will allocate similar to what we do on all our master plans, the land and infrastructure costs out of that LLC into its individual single-asset entity, which will then have its level of construction costs, vertical builds as well as equity in connection with the single-asset development.”
FCR Executive VP and Director of Finance Andrew Silberfein explained arena financing, “We are working closely with Goldman Sachs and Barclays Bank, who are our advisors on the financing of the arena. And we expect the structure to be somewhat similar or actually very similar to what was done on the Yankee Stadium as well as on the Jets/Giants deal where we're going to be issuing a combination of tax-exempt and tax-exempt bonds for -- to pay for the construction of the arena.”
[I’m assuming that the transcript is in error and he said “taxable and tax-exempt.”]
“In addition, we're also exploring the possibility of doing a separate securitization of the naming rates contract that we signed with Barclays Bank. Obviously, given the credit and long tenure of that contract, it lends itself pretty nicely to that type of a financing on that.”
[I'm assuming he meant "naming rights."]
The Beekman Tower
Gilmartin spoke of the Frank Gehry-designed Beekman Tower in Lower Manhattan: “We have not gone public with any images of the tower. It's a striking design again rising 865 feet in the air. It's about as aspirational I think as this building you're in was -- it's the residential equivalent of what the New York Times Building was for us in 1999/2000.”
“It's architecturally significant. It's an iconic addition to the lower Manhattan skyline and it holds the promise of redefining the standards of luxury rentals in New York City. The good news is that it's priced to perform within its competitive set. We're not assigning any premium to the Gehry component, the star power of his architecture both outside the building and inside each of the units.”
“The building has we believe tremendous upside because nobody has ever built a rental building in New York City with this type of aspiration. And so Gehry will design, not only the curtain wall, but inside of the units, including the bathrooms and the kitchens and the hardware. And so this building as I said is 100% designed and we started some activity on the site to preserve the very valuable 421-a tax benefit, which allow us to insure the receipt of that benefit through the life of the project.”
Gehry is not designing interiors for Atlantic Yards.
The 80 DeKalb example
Gilmartin said “we think the critical mass of new residential construction along Flatbush Avenue validates the corridor as a thriving and desirable residential location. This is important not just for 80 DeKalb… but for all that we intend to do with Atlantic Yards.”
Indeed, the transformation of Flatbush—a spine of towers—makes Atlantic Yards less anomalous, even as the latter would extends well beyond major thoroughfares and extend the boundaries of Downtown Brooklyn.
Gilmartin described the 80 DeKalb project at the border of Fort Greene and Downtown Brooklyn as “the first opportunity for our company to capitalize on… the residential renaissance that we see in Brooklyn. And it allows to sample the market firsthand as a preview for Atlantic Yards. So in many ways it will inform the rollout of our residential product for the Atlantic Yards project. And so this is a 365-unit rental apartment building located in downtown Brooklyn, again, a stone's throw away from the Atlantic Yards.”
“It is the redevelopment of a vacant portion of a piece of property, an asset that we already owned. It will have doorman/concierge services, a 150-car garage, a lifestyle center that includes a gym, a library and a lounge and retail at the ground floor level.”
The plan is to open in 2009.
Flexibility & "chaos theory"
Executives emphasized the importance of flexibility. “This is a project that has, as we've mentioned, a ten-year horizon,” Gilmartin said, apparently on message that it won’t take 15 years, as Chuck Ratner once indicated.
"[T]he division between rental and condominium is flexible so long as we create the 2,250 affordable housing units, which we are committed to creating over the life of the project," she said. "And even the commercial space here, 528,000 square feet, there is some flexibility there as well to respond to the ever-changing markets within which we operate. And you can see that there are eight acres of publicly accessible open space, 200,000 square feet of retail, and the arena itself is 850,000 square feet.”
FCR Chairman and CEO Bruce Ratner similarly emphasized flexibility: “It's not like acquiring buildings. It takes a long time, a lot of dedication. There's constantly changing times. You have to remain flexible. I'm a person that believes a little bit in the chaos theory and if you're not flexible, you cannot overcome chaos.”
Chuck Ratner said that he was a “pessimist” about the real estate downturn, though “New York is clearly an exception to that… and perhaps will remain.” Bruce Ratner commented, “I don't want to make predictions, because I think the New York market as so many markets really at the end of the day depends a lot on the overall economy and the job market.”
Echoes in Chicago
Chuck Ratner also wanted to tell attendees about the Central Station project in Chicago, which would contain 8500 residential units, 2.5 million square feet of commercial space, and 500 hotel rooms—over 80 acres, far less dense than Atlantic Yards: “Let's put the picture up for just a minute. I want you to think about this when Bruce and Joanne and MaryAnne are walking you through Atlantic Yards. I want you to think about what this is."
(Graphic from Central Station site.)
He continued, "What you see outlined in yellow is the Illinois Central Railroad Yards empty 18 years ago, other than the railroad tracks. Next to it, you see an arena, a stadium in this case, Soldiers Field. We, together with a partner in Chicago, bought that land. We thought it was going to be all office buildings. You see it's right south of the Loop…. We thought this was going to be the next great office building market."
Instead, it became a residential project, over and near railroad tracks, "exactly what Atlantic Yards is. And we will make the same thing happen here that happened there and it will be even better because Brooklyn is a fabulous place to do business."
Actually, strict building guidelines regarding Central Station protect the view corridors of Lake Michigan and Grant Park. In Brooklyn, there are no such strictures regarding blocking the clock the Williamsburg Savings Bank, though maybe Forest City Ratner has a surprise for us.
A 30-year plan?
Later, Gilmartin showed a slide of the existing conditions on the Atlantic Yards site, though it’s not clear whether it was the whole site or just the Vanderbilt Yard.
An “unidentified company representative,” according to the transcript, said the slide was “almost identical” to one concerning the Chicago project: “It's taken us 15 years there, and we're only halfway through. That's both good and bad news. It's good news, because you have tremendous opportunity over a long time. And you -- obviously, the challenge is to keep your money moving through there so that it doesn't eat you up alive.”
Actually, it’s taken 18 years, since the project began in June 1989.
A 9/23/90 Chicago Tribune article gave a large range: “Development of all the Central Station land is expected to take 10 to 30 years, depending on economic conditions.”
However, the Tribune reported 1/12/89 that lead developer Gerald W. Fogelson, when announcing the land purchase, said that “he hoped the project could be completed in seven to eight years.”
Would AY be done in the ten years projected? Doubtful.
Gilrmatin described success at MetroTech: “The interesting thing about our office strategy in Brooklyn is that we are now through some of the original leases and so our leases have started to roll and we've been very successful in retaining the tenants that were early pioneers to MetroTech so Bear Stearns, Morgan Stanley and KeySpan all have opted to stay for the next cycle in Brooklyn. And again that is one of the best indicators of success."
Then again, last year The Real Deal reported that JP Morgan Chase and Empire Blue Cross were vacating space.
Gilmartin added, "And the vacancy rate is 2.6% which is a very nice number and is expected to continue." (It's not clear, but I think she was talking about housing, not office space.)
"A lot of the construction we see in downtown Brooklyn is condominium construction but we see that the rental market is robust. We see changes in the 421-a tax programs, which means that the barriers to entry are higher than ever making it more difficult to bring on new supply.”
FCR General Counsel David Berliner said that “we did get a good decision” in the eminent domain case and the appeal, heard that morning, “went very well.” (He was right.) “And the last one is the challenge to the Environmental Impact Statement. I think that we expected a decision any day now…. We feel good about that one as well.” (He was right.)
And when will construction start? Chuck Ratner quoted Gilmartin: “I think her phrase was, begin construction in earnest on the arena and some of the adjoining stuff by the middle/end of '08, maybe earlier than that hopefully.”
That’s very much in question.
Later, Chuck Ratner said, “Our objective here is to create the 6 million square feet of FAR at a land cost that will enable us to make profit on the buildings. And as you've seen, it's been a market that's grown and we should be able to do that.” (Was "6 million" just an estimate?)
If Forest City owns only 58.2% of Atlantic Yards Development Company, who owns the rest? Unclear.
But Minieri said, “And to the extent that our outside partners choose not to proceed with each individual building, we have the opportunity to increase our ownership percentage as we spin off each building. At this point in time I think that it is our outside investor's intention to go and invest in each building as we proceed, but they do have a right to decline as we move into the individual asset development.”
New York thriving
Bruce Ratner gave his thoughts on New York’s rebirth: “I've never seen anything like what's happened in New York in the last ten years, I never could have predicted that it would be this strong. I will say that you have to look at some underlying factors in New York that make it particularly good, I think first and foremost is security. The change in crime, the positive aspect of security in this city has made new neighborhoods.”
"The second thing is the importance of intellectual capital… I think obviously the issue of immigration… So I'm very bullish on New York. You do have to look at the long cycle aspect always in New York, we may hit a national [recession], hopefully that won't happen. But the long-term prospects, I think, for this city are just so strong."
Historic preservation, elsewhere
Forest City has a history doing historic preservation, and Chuck Ratner brough that up. He noted that the Westfield San Francisco Centre would be opening in a few weeks, the largest “urban center of its kind… But the important lesson here is it's all the strategies we talk about. It's an urban strategy, it's a historic rehab, it's a public-private partnership, it's all of the things that make these projects work and presented all of the challenges that they present.”
“We took a dome inside, you see it here, this was from the early 1900s and we lifted it 60 feet in the air, built a new property underneath it and set it back down,” he continued. “The same sort of thing Bruce and his team did… on 42nd Street with the Liberty Theater all those years ago… It's a historic facade, as you saw in the earlier photo. We preserved that facade. That was necessary in order to get the public support for the project. The same thing's happening again and again to Forest City.”
In Brooklyn, Forest City Ratner is demolishing the Ward Bakery for interim surface parking. It apparently wasn't necessary to get public support, given that the governor and mayor had already signed on.
Bruce learns accessibility
Bruce Ratner may not be so accessible to the press, but for business colleagues he’s there. He said, “It's great to see investors, analysts, friends and I'll try to sort of meet everybody at lunch and so on, who hangs around and say hello. And I want to be very accessible and you can talk to me during lunch or you can call me sometime, email me. And the real issue, and I learned it from Brett Yormark who runs our Nets, always be accessible. So I want to be that.”
Learning from Katrina
Chuck Ratner cited a discussion by FCE board member Scott Cowen, president of Tulane University, about reacting to Hurricane Katrina: “What does it take to succeed. And he said the trick is to be resilient. And he defined three aspects of resiliency. One is the ability to make sense out of a situation, the ability to analyze the options. And that's what we've been talking to you about all day. That's what we did at Beekman is we considered the options we have. That's what we're constantly doing at Atlantic Yards as the project and the dynamics in the market keep changing.”
"The challenges are immense and the obstacles and barriers are high," he continued. "That provides for a larger return if you're able to overcome those obstacles and surmount those barriers. But it requires a real skill for improvisation. These things change dramatically, Central Station is different than what we thought, Stapleton is different than what we thought, Atlantic Yards is different than what we thought and you have to have the ability to improvise as you go. And you have to have the liquidity in the balance sheet and most importantly the talent to do that.”
He closed, "And the third was a set of core values that guide you. We spent no time on that today. I hope that our core values come out as we share with you our business. We've actually articulated them. They're on everybody's wall. We've lived them every day. Integrity and openness, performance ethics, sustainability, diversity and inclusion, community involvement, all of these are crucial to our success.”
Well, there must be some flexibility there, since the Atlantic Yards saga also includes lying in court papers, making large contributions to what's essentially a slush fund for Assembly Democrats, and fudging the project's timetable.