Monday, April 07, 2008

Forest City tells investment analysts: “We still need more” subsidies

While developer Forest City Ratner initially got the city and state to supply $200 million in direct subsidies for Atlantic Yards, then extracted an additional $105 million from the city, that's not enough.

“We still need more” subsidies, Chuck Ratner, president of parent Forest City Enterprises (FCE) told investment analysts in a conference call last Wednesday. It confirms the clue, as noted in the most recent 10-K filing, that the developer seeks more public support before proceeding with the project.

That might generate pushback from some elected officials. “There has already been very generous public investment,” City Council Member (and Brooklyn Borough President candidate) Bill de Blasio recently told the Brooklyn Paper. “I don’t see how we can go any farther.”

Chuck Ratner's comment further undermines sports economist Andrew Zimbalist's unwarranted prediction, in his FCR-commissioned "promotional study":
Although the MOU [Memorandum of Understanding] refers to the possibility of additional optional contributions from the city and state, it seems unlikely that such payments would be made and, in any case, it would be entirely speculative to assign a dollar figure to them.

Additional contributions have already been made, and now we know more will be requested.

Revised estimate on lawsuits

Also, while last September another FCE executive suggested that lawsuits in the Atlantic Yards case would be resolved by the end of July 2008, on Wednesday another executive said that “lawsuits may be resolved in the second half of this year”—a caution that, given past over-optimistic predictions, might be taken with a grain of salt.

Sponsorships pay for arena

That executive, Joanne Minieri, president of subsidiary Forest City Ratner, also confirmed publicly what should have been obvious: the Atlantic Yards arena will be financed crucially by partnerships and sponsorships—essentially turning the arena into a marketing device to pay for itself, as I pointed out in January 2007, when the Barclays Capital sponsorship was announced in a gala at the Brooklyn Museum.

It raises the question: why exactly do cities give up naming rights without taking a percentage, especially when the facility is publicly owned, however nominally? After all, that's foregone revenue.

(Here's the transcript, which may differ slightly from the notes I took while listening to the call. Here's brief coverage in the Real Estate Observer.)

Gaining government aid

An exchange near the end of the session, showed company executives admiring their success in gaining government support. The subject was the Frank Gehry-designed Beekman Tower in Lower Manhattan, which will benefit from tax-exempt Liberty Bonds aimed at reviving the area.

Usually, tax-exempt bonds are issued only for subsidized, “affordable” units, but in this case, said CFO Bob O’Brien with satisfaction, “That’s the beauty of the Liberty Bonds, tax-exempt bonds and market-rate units.”

“Gotta like that,” responded an investment analyst.

[Longer excerpts follow.]

Delays

While Chuck Ratner was not referring explicitly to Atlantic Yards, he indicated that for some other projects the company was slowing down:
We’re looking at our entire development pipeline with a much more critical eye in response to realities of the current market. As a result, we’re moving forward only with the strongest projects and slowing or delaying others until those opportunities mature further or economic conditions stabilizes. Having said that, we continue to believe our pipeline is one of our greatest strengths…We have ample liquidity and continue to be able to secure financing.

After acknowledging that Atlantic Yards “has received considerable news coverage,” neither Ratner nor Minieri acknowledged that front-page March 21 New York Times article about the Atlantic Yards stall.

Minieri offered this summary:
We and our partners have been receiving favorable court decisions and now have won 18 separate rulings on the Atlantic Yards project. There have been no adverse decisions. Certain of these lawsuits have been and will be appealed. However, we remain confident of our position.

There haven’t been 18 court decisions and, while there may have been 18 victories including motions, opponents have also won on several motions.

Resolution soon?

Minieri continued:
We are proceeding with the expectation that the lawsuits may be resolved during the second half of this year and the Empire State Development Corporation (ESDC) will move forward with the process to transfer title of the land.

Remember, last September, O’Brien suggested that the lawsuits would be resolved by July 31:
We remain confident in our positions in all legal challenges and we are targeting resolution by the first half of fiscal year 2008.

Working with ESDC

Minieri continued:
In addition, we are currently working closely with the ESDC to complete all project documents in pursuit of this targeted timetable. As Chuck indicated, we continue to proceed with pre-development of Atlantic Yards, whereby certain site work and the construction of the temporary railyard are underway. Design and construction documents are progressing. We are pricing and bidding certain completed design documents. And efforts are under way with the public parties to complete the affordable housing program. We at Forest City remain committed to the residential program at Atlantic Yards and we will continue to work with the governmental agencies and all of those involved.

We have executed the funding agreement with the city and state for the $200 million of subsidy and received an additional $105 million allocation from the city. In February of this year, we received our first funding for the project, $58 million.

Building the arena

She continued:
With respect to the arena, we are working with Goldman Sachs and Barclays Bank on the available taxable and tax-exempt financing alternatives. Sponsorship interest, which is an important driver for the arena financing, remains strong.

Remember, at the Barclays event in January 2007, Mayor Mike Bloomberg said that Barlcays was putting $300 million "into Brooklyn," while the money would go to defray the developer's cost of paying for the $637.2 million arena, not go into the public coffers, as I wrote. (The event was pitched as “It’s time the world gave something to Brooklyn.")

Progress… depends

Minieri continued:
Projects of this size and significance are always subject to changing market demand and economic influences. As a development company, we manage our projects under guiding principles and apply discipline that include monitoring the design and cost risks , financing levels, the equity needed, and the resulting long-term value creation. Atlantic Yards is no different. And upon the achievement of key project milestones, we will proceed as planned. Today’s economic environment is challenging. However, we believe that Forest City’s and the public parties’ interests, continue to be aligned with respect to the successful completion of the Atlantic Yards project.

“Key project milestones” may be a synonym for additional subsidies.

The Times treasure

Chuck Ratner followed up Minieri’s statement:
I just want to point out to everybody this great success we’ve had in the New York Times over these past several years… largely the result of the tremendously talented team we have in New York, led by Bruce Ratner and Joanne Minieri.

The term “New York Times building” was implied, of course, but the term “great success... in the New York Times” reminds us the developer has been treated gently in the editorial pages and quite variably in the news pages, thus helping the developer achieve “tremendous success.”

More subsidy needed

In response to a question from analyst Rich Moore, Chuck Ratner expressed satisfaction in the developer’s relationship with local government, and said he expects more subsidy.

RM: You work very closely with the cities, they’ve always been a source of financing, in part…what are you hearing from them, in this whole thing, is there less desire to participate, or more desire—how do they look at it?

CR: That’s a very provocative question. We talked about it quite a bit at our last board meeting.. look at what Joanne just shared with you, just in these past six or eight months, we got the various governmental agencies, state, city, borough, in New York, to increase their commitments to Atlantic Yards by 105 million dollars on top of the 200 [million] they committed. We still need more. So you look at New York and you realize it’s a huge city, with, obviously, huge challenges and issues, but there’s very few major things that are happening, that are gonna happen. We’re one of the few in these places that continue to offer opportunities for development, in these major urban markets. They clearly have the resources to support them and I think they’ll put them toward these projects. We found that to be true in MetroTech, over the 20 years we did it… so while they’ll have revenue challenges and tax-[inaudible] challenges, I think they have access to the capital to support development, where they think they need it. I think we represent places where they need it.
(Emphasis added)

Actually, it was just the city that upped its contribution. And it's hardly true that Forest City Ratner alone is offering "opportunities for development." Look at the number of bids for the West Side Yards in Manhattan.

Minieri chimed in: With respect to New York, the city and the state, they really put an emphasis on affordable housing program… a project like Atlantic Yards, of such significance really furthers their commitment to the housing program. So as I said… we work very closely with them, because it’s a public private partnership that will enable us to all come together.

Ratner followed up: I’m not aware of a single project, where in the past six months or the past six years, where a public entity has backed out of a commitment… So that’s why… [he lists several projects, and] Atlantic Yards is still proceeding.

"Gotta like" Beekman

Analyst Sheila McGrath brought up the Beekman Tower. Chuck Ratner asked Minieri and O’Brien to “give Sheila a little color” regarding the “tremendous demand on the part of the banks” for the tax-free Liberty Bonds.

JM: Like a billion-two demand for the 204 [million] that we put out there.

SM: And are all the units in that building, they’re all market-rate units?

JM: That’s correct, Sheila.

BO: That’s the beauty of the Liberty Bonds, tax-exempt rates and all market-rate units.

CR: Thank you, Bob.

SM: Gotta like that.

1 comment:

  1. So Ratner’s CFO Bob O’Brien, RFC President Chuck Ratner and executive, Joanne Minieri, president of subsidiary Forest City Ratner find a “beauty” in getting the benefit of “tax-exempt rates” through “Liberty Bonds” without having to provide any affordable units- But that is not the way things had to be. . .

    . . . . Maybe when Bloomberg tells HDC to give “Liberty Bonds” to Ratner & Co. they don’t negotiate to “quid pro quo” receipt of the special benefit for the provision of affordable units. That doesn’t mean that this favor has to be granted to Ratner and that is not the way that the New York State Housing Finance Agency designed its Liberty Bond program. HFA designed its program for use of Liberty Bonds so as to require the provision of affordable units.

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