Wednesday, April 23, 2008

Behind 80 DeKalb, FCR's test run for AY marketing (and, probably, housing bonds)

Forest City Ratner's plan for a 365-unit rental apartment building at 80 DeKalb Avenue, a new tower at the edge of Fort Greene and Downtown Brooklyn, offers some obvious and not so obvious parallels regarding the housing planned for the Atlantic Yards project.

The marketing of residential real estate--a first for FCR in Brooklyn and one of only three such company projects in the city--presents the obvious parallel. (Rendering from architect Costas Kondylis. Click on graphics to enlarge.)

The less obvious parallel: the developer's success in gaining scarce tax-exempt bonds from the state housing finance agency--in an application that earned praise from the agency's head--shows that FCR may be well-positioned to compete for similar bonds from the city housing finance agency to build AY.

For 80 DeKalb, a tower planned for a slice of a seven-story building Forest City Ratner bought in 1989, the developer was able to request somewhat less bonding per unit than competing projects--likely in part because of low land costs. (A package of mortgages regarding the property, which has a total of some 761,000 square feet of building/development rights, initially totaled $30 million.) For AY, the developer may be able to similarly out-compete other projects, in part due to various subsidies and tax breaks.

(In photo looking east along DeKalb Avenue, note Fort Greene Park and Brooklyn Tech High School--once an apparent FCR target for development--in the background.)

At "Investor Day"

During an "Investor Day" meeting last October, as I reported, FCR's MaryAnne Gilmartin described 80 DeKalb 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.”

Map at right from MetroTech Bid. 80 DeKalb is the oval segment of the building in the lower right of the map. Map below of the BAM Cultural District at right is from the Downtown Brooklyn Partnership; 80 DeKalb is the oval segment of the building at top, while the circle indicates the Forte Tower on Fulton Street.)

The building, the back segment of a factory-turned office building also known as 10 MetroTech, would be 365 feet tall (plus another 35 feet for water tower and elevator machine room) and occupy 335,268 square feet over 34 stories. When it opens--the schedule says next March--it will be close to the BAM Cultural District, where some new high-rise buildings, including housing, are planned.

Access to tax-exempt bonds

To pay 60% of the $207.3 million project cost, the developer will use scarce tax-exempt housing bonds, which carry an interest rate of some 175 basis points less--e.g., 4.25% vs. 6%--and thus boost borrowers. (The federal government, which takes the hit on lost interest, limits each state's allocation; Congressional legislators from New York City are trying hard to get an increase in "volume cap" for the city.)

Though 80% of the building will be market-rate, it's typical for tax-exempt bonds to pay for half of more of such projects. The 20% low-income units would be for four-person households earning $35,350 or less; such 80/20 projects gain tax-exempt bonds via a program of the New York State Housing Finance Agency (HFA).

Atlantic Yards, with rental buildings containing 50% market-rate units, 30% middle/moderate-income units, and 20% low-income units, would compete for bonds issued by the New York City Housing Development Corporation (HDC). Both HFA and HDC have far more projects in the pipeline than they can fund, given the federal government's limited allocation of some $1.6 billion a year for the state.

Atlantic Yards, at least according to financial documents submitted to the Public Authorities Control Board, would involve $1.4 billion in tax-exempt bonds out of a then-$4 billion project cost. Or, subtracting the arena, it could be said that the housing bonds would involve $1.4 billion out of $3.36 billion for the non-arena portion of the project.

Winning the competition

FCR, along with three other projects, was selected among 14 projects for the state agency's bonds, because "we view [the 80 DeKalb project] as an efficient use of a scarce resource," said Priscilla Almodovar, President and Chief Executive Officer of HFA.

She praised FCR: "[T]he developer agreed to limit its allocation to $1.5 million per low-income unit--lower than our $1.7 million ceiling--and agreed to permanent affordability for its low-income units rather than for just 30 years. In addition, given the turbulent credit markets, projects that were in the ground and had their financing lined up were given priority. Lastly, the project will bring a mixed-used project to Brooklyn at a time 80/20 projects are usually proposed for Manhattan. I anticipate recommending this project to the HFA board later this spring.”

(At right, a west-facing view of the construction site.)

The three other projects moving ahead, all in Manhattan, are requesting $1.65 million, $1.7 million, and $1.9 million per unit, though two will be permanently affordable to low-income tenants, while the Brooklyn project will offer a different version of permanent affordability, to somewhat higher-income tenants.

Earlier this year, in an effort to make the best use of volume cap, HFA suggested that developers not ask for more than $1.7 million per unit, and set other allocation criteria, such as project readiness, length of affordability, and consistency with the city's goals. Some developers have asked for well over $2 million per unit, even $3 million, according to the New York Observer.

FCR's bid

For-profit developers build affordable housing because the projects make financial sense. A developer's returns on such 80/20 projects can reach 30%, according to a source quoted in the Observer. So a developer with lower land or development costs--or even a lower profit goal--can compete with rival projects by requesting a somewhat lesser amount of bonds per unit and offering, as FCR did with 80 DeKalb, some sweeteners. In that sense, it's somewhat like a blind bid.

Forest City Ratner, part of a publicly-traded company based in Cleveland, is likely not sacrificing profits on 80 DeKalb. Rather, its relatively low bonding request per unit likely reflects a smart decision acquiring the property inexpensively in 1989 and seeing (likely, helping) it get rezoned a dozen years later to accommodate residential development, thus boosting the value of the land.

An advantage for AY?

A similar process may await for Atlantic Yards. Though the financing of the project and the developer's plans remain murky, it's reasonable to speculate that, given the significant amount of subsidies and tax breaks for Atlantic Yards, plus the advantage of eminent domain, Forest City Ratner may be able to compete by asking for somewhat less per unit than other 50/30/20 projects before HDC.

And should the developer gain the additional subsidies it seeks, that that could further help it compete for housing bonds.

(At right, a view west along Fulton Street. The office entrance to 10 MetroTech is along Fulton Street in the brick building clad in silver to the left. Note the lingering Bogolan banner.)

For AY, the projected $1.4 billion in housing bonds for 4500 rental units works out to $311,000 per unit. I found scant opportunities for comparison with other 50/30/20 projects; one announced in 2004 in Harlem involved 234 apartments and $44 million in tax-free bonds, or $188,000 per unit. Another 2004 project involved $54 million and 211 units, or $256,000 per unit. So, given cost increases, AY would be in the ballpark.

Other reasons to pick AY

Moreover, Atlantic Yards may meet other criteria under which projects compete. For example, HFA's term sheet this year set a maximum per low-income unit and cited, among allocation criteria, length of affordability and project readiness, as well, as furtherance of New York City's goals, "as evidenced by written input from New York City's Department of Housing Preservation & Development which will include projects in recently rezoned areas or on 'catalytic' sites that will spark nearby high-priority development, as well as projects on city-owned land."

It's plausible that HDC could establish similar criteria. The AY site hasn't been rezoned, would no longer contain city-owned land (it would be owned by the state), and arguably wouldn't "spark" nearby development, which is mostly doing fine, albeit mostly market-rate housing.

However, the city's goals include increases in large amounts of affordable housing for both low-income and middle-income groups. So a mayoral administration backing Atlantic Yards could presumably help nudge the project toward the front of the list. Perhaps that's why HDC head Mark Jahr in February expressed confidence Atlantic Yards would be funded.

HFA also cites special consideration to projects involving difficult to house populations, such as those with special needs or very low-income, and those meeting certain energy efficiency measures. Atlantic Yards likely would get points for the latter, as well.

(The federal General Services Administration, or GSA, has leased space at Ten MetroTech, with an entrance on Fulton Street, and is still marketing it to sublease. GSA spokeswoman Renee Miscione told me last May that the agency, which has leased space since the early 1990s from Forest City Ratner, now leases under 150,000 square feet. Scroll down for photo that shows that Community Benefits Agreement signatory Brooklyn United for Innovative Local Development, or BUILD, has moved from FCR-provided free space on Pacific Street in the AY footprint to free space in the ground-floor of Ten MetroTech.)

The 80 DeKalb apartment mix

HFA held a public hearing April 15 at its 641 Lexington Avenue offices regarding the bonds contemplated for 80 DeKalb and three other projects. Such public hearings are apparently pro forma; this one attracted clusters of representatives from each developer, HFA staff, one curious reporter, and exactly one person to testify.

That was Alfred Chiodo, a staff member from Council Member Letitia James's office, who was put in the somewhat awkward position of praising a project from a company whose AY project James opposes vigorously, and then asking the developer for something of a favor.

Given the crisis in affordable housing, and the number of families in need, Chiodo said James hoped that the affordable units at 80 DeKalb be skewed toward larger apartments. "Ideally I would like to see a mix of 15% studios, 30% 1 bedroom, 50% 2-bedrooms, and 5% 3 bedrooms," James said in a letter submitted to HFA.

Forest City Ratner staffers sitting at the conference room table, who had the option to publicly respond to any comments but were not required to do so, didn't immediately inform Chiodo that a rather different apartment mix is planned, as a perusal of the plans showed.

HFA spokesman Philip Lentz later gave me the tally.
Affordable units: 25 studios, 37 1BRs, 11 2BRs.
Market-rate units: 98 studios, 151 1BRs, 42 2BRs (plus super's apartment).

While Forest City Ratner may not plan many 2BR affordable units in this building, they're not violating any guidelines. The building as a whole has relatively few 2BR units, and HFA understandably requires proportionality--that, in a building with 20% affordable units, at least 20% of each apartment type be affordable.

A letter to HFA from Forest City Ratner's Gilmartin pointed out that Community District 2 "is rapidly developing with hundreds of lxuury condos under construction or in the pipeline, yet 40% of the households currently in CD2 have an income of 50% of AMI [Area Median Income] or below. Given the dearth of affordable apartments built in CD2 during the last prosperous real estate cycle, the 73 low-income units that 80 DeKalb will generate will allow working families and individuals a chance to stay in the their community and benefit form the growth."

Under HFA guidelines 20% of the units must be low-income units under 50% of AMI. So, of the 73 total affordable units, 15% of those--11 units--must be accessible to households under 40% of AMI.

Market-rate vs. affordable

Will the affordable units be second-class? Well, yes, though that's dwarfed by access to the scare resource of an affordable apartment in a well-maintained building. (With rents at 30% of income, a two-person household at 50% of AMI would pay just $638 a month, according to the AY affordable housing chart.) And, as Bertha Lewis of ACORN has famously said about the affordable housing planned for AY, everyone will be taking the same elevators.

On the other hand, developers are granted some flexibility to maximize the value of their property. “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,” Gilmartin said at Investor Day.

While both market-rate and affordable units must have comparable sets of fixtures, a developer is allowed to upgrade market-rate units. So expect much higher-end fixtures in the latter.

For 80 DeKalb, as HFA's Lentz explained, HFA requires that affordable units be located up to at least 60% of the building floors. (In a 34-story building like this, that means affordable units must be located up to at least the 20th floor. City programs are more stringent, involving 80% of the building's floors.) Also, on no floor can more than 50% of the units be affordable.

Also, HFA grants some flexibility regarding the size of the affordable units. Though the agency requires that 20% of the units be affordable, it requires that only 18% of the floor area be devoted to those units, thus allowing for somewhat smaller units. For 80 DeKalb, FCR plans to devote 18.6% of the floor area to affordable units, according to documents submitted to HFA.

The three other projects on the road to HFA approval, all in Manhattan, set aside 20% or more of the floor area to affordable units. HFA's Lentz pointed out that a city inclusionary housing program "requires a low-income room size which may be larger then the market rate counterpart," which may explain the slight discrepancy between the Manhattan projects and 80 DeKalb.

While HFA does not require affordable units to be specific sizes, it does require that each affordable apartment type on average be no more than 20% smaller than the market counterparts.

A look at the plans for 80 DeKalb shows studios ranging from 450 sf to 550 sf, 1BR units from 568 sf to 718 sf, and 2BR units from 779 sf to 1267 sf, with a couple of larger units called 2BR-plus. So it's a good bet that many of the affordable units, including those relatively small 2BR units. will be on the smaller side.

Some sweeteners

FCR is adding some important sweeteners to the deal. HFA said it would prioritize projects that offer affordability beyond the agency's standard regulatory agreement, 30 years.

Also, the developer agreed to extend affordability for five years, then rent--for more than 60 years--the affordable apartments for households earning up to 90% of AMI, which is not low-income but still below market rate. (The term would technically be "99 years from the initial date of the HFA Regulatory Agreement," signed when the mortgate is issued.)

How they got there

The building at 80 DeKalb, bounded on the south by Fulton Street, is a former Barton's candy factory, which closed in 1981 and, according to a 6/9/85 article in the New York Times, was in converted to office space. Forest City Ratner bought the property four years later, in mid-1989, branding it as 10 MetroTech, the building in the far southeast of the sprawling complex.

The initial expenditure, according to documents at the city's ACRIS database, consisted of three mortgages totaling $30 million (assuming I'm reading it right): a Building Loan Mortgage, a Mortgage, and the Project Loan Mortgage. Property Shark indicates that the market value of the building is $83.8 million. It also notes that the developer, upon purchasing the building, spent millions to upgrade it. It's not clear to me whether an announced $12.8 million cost on 10/16/90 was an expenditure or an estimate; note that in 1991 two projects, for $3.6 million and $1.25 million, seem to cover some of the same ground.

Note that Property Shark declares that the building occupies 687,035 square feet, including 359,000 office sf and 328,035 "other sf." The latter, I think, refers to the yet to be built apartment tower.

As the list at right and above suggests, those initial mortgages and future mortgages were consolidated several times, leading to the latest mortgage of $73.5 milion. (Scroll to the bottom for pages from a legal document indicating a complex series of transactions.)

To find the documents, search on ACRIS using block 02094 and parcel 0001, in Brooklyn.

Sources and uses

A document filed with HFA indicates the sources & uses of funds, which each total $207,343,679. Under sources, FCR anticipates $124.1 million in tax-exempt bonds, $21.9 million in taxable bonds, $10.9 million in tax-credit equity, and $50.5 million in developer equity.

As for uses, the document indicates a "land cost" of $45.1 million, which along with hard costs of $130.3 million, soft costs of $29.5 million, and a developer fee of $2.5 million.

That $45.1 million figure is not the actual cost of the land but rather the developer’s estimate of the land value, Lentz confirmed. "The lender does an independent appraisal before the project is finalized."

A real estate professional I spoke with for another article estimated the value of development rights in Downtown Brooklyn as $75-$100 per square foot, which suggests a value of less than $34 million for this property.

On the other hand, if the developer already has much of the land paid for, well, the portion of the loan covering the $45.1 million for the land value might be gravy.

Special Downtown Brooklyn District and rezoning

In 2001, the property received a huge boost in value when a rezoning allowed residential construction. According to the Department of City Planning's page on the Special Downtown Brooklyn District:
On July 26, 2001 the City Council adopted a proposal by the Department of City Planning to establish a Special Downtown Brooklyn District and to rezone eight adjacent areas in Community District 2.
...Two blocks bounded by DeKalb Avenue on the north, Ashland Place on the east, Fulton Street on the south and Hudson Avenue on the west are rezoned from M1-6 to C6-4. These two blocks contain offices, a theater, retail and housing. There are no manufacturing uses on these blocks.

The C6-4 District has the same maximum FAR of 10.0 as the M1-6 District, and is an extension of the C6-4 District mapped immediately to the south. C6-4 Districts do not permit new manufacturing uses, but permit residential uses and a wider array of commercial and retail uses.


(Click on map to enlarge. Original here.)

A FAR of 10.0 allows for some very large buildings--fully occupying ten times a property's footprint; in this case, the building is up to seven stories, allowing for a tall tower to be built over a fraction of the space,

Though the allowable size of the buildings remained the same under the rezoning, there's a big difference between the M1-6 District, which allows only manufacturing and commercial uses, and a C6-4 District, which allows housing but not manufacturing.

In other words, as Brooklyn was changing, gaining a luxury housing market, this was an understandable move--and a lucrative one for Forest City Ratner, which had gotten the property cheap.

Rezoning

How did the rezoning come about? I haven't had the time to dig into it, but it's certainly plausible as a piece of urban planning. And it's also plausible that Forest City Ratner, a leading lobbying client in the city and state, helped nudge it along.

[Update 8/21/08: While this was previous to the Downtown Brooklyn rezoning, it was part of a Special Downtown District in 2001 and thus a fairly thorough rezoning.]

In a search of the City Clerk's lobbying database, I couldn't find specific reference to Forest City Ratner pushing for 80 DeKalb to be part of a Special Downtown District. However, the information is incomplete. FCR's own copious lobbying activities do not delineate "target" and "subject," as required, and the details (at least in the electronic form of the database) from one FCR lobbyist, the firm Geto & DeMilly, trail off after the words "various issues in connection with." So it's possible that 80 DeKalb was the subject of some lobbying.

The inexorable march

The 80 DeKalb project should not be seen in isolation. At Investor Day, 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—would make Atlantic Yards less anomalous. Still, though the latter would extend well beyond major thoroughfares and extend the boundaries of Downtown Brooklyn.

At right, the current view looking north on Flatbush from the western corner of DeKalb Avenue. (Note the sign for Junior's Restaurant.) Below is Flatbush Avenue in 2012 from the Downtown Brooklyn Partnership. The Nets billboard, by the way, appears in the time-lapse timeline as of 2009--clearly premature.

The series of mortgages

This is attached to the ACRIS documents regarding the recent mortgage of $73.5 million.

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