Thursday, June 05, 2008

Does an unreleased land appraisal hide a sweetheart deal for Forest City Ratner?

Here’s another mystery concerning the Atlantic Yards project, one that might be hiding a city-enabled bonus of tens of millions of dollars for developer Forest City Ratner (FCR), legitimizing its purchase of property at below-market rates (and leaving more room to fund public relations exercises like today’s rally).

Land purchased by FCR for the project has been subject to a "highest and best use" appraisal (right) submitted to the New York City Economic Development Corporation (NYC EDC), as a condition for delivering to the Empire State Development Corporation (ESDC) the city's $100 million subsidy for AY land acquisition. However, the city agency has refused to release the appraisal, required in the City Funding Agreement, in response to my Freedom of Information Law (FOIL) request.

Why is that important? Without seeing the appraisal, I can’t be certain, but evidence suggests that the appraisal, rather than helping the NYC EDC decide how much money it would contribute, instead served as an after-the-fact corroboration of the city’s $100 million pledge.

Thus, the value in the appraisal almost surely correlated closely with the $103.5 million Forest City Ratner had already spent for the properties at issue. (The properties, listed at right and below, make up only a portion of the arena block. Click on all graphics to enlarge.)

If so, the appraisal may well have low-balled the true value of the land, according to information shared with me by a real estate professional, and let Forest City Ratner get away with paying less than the property is worth under the ESDC's zoning override.

NYC EDC’s unwillingness to release the appraisal also rests on dubious logic, such as the claim that the developer is negotiating with other property owners in the Atlantic Yards footprint. Some of the agency’s other justifications for denying my FOIL and not releasing the appraisal are questionable, as I’ll describe below.

This analysis contains a certain amount of speculation, of course, but it relies on reasonable suspicion. We won't know if Forest City Ratner got a sweetheart deal until NYC EDC releases the appraisal publicly.

Fishy sequence

The fishiest aspect is the sequence. While NYC EDC, in a letter to me (scroll down), claims that the appraisal, due sometime before the City Funding Agreement was signed in September 2007, was used to help decide the level of subsidy for land acquisition, I don't think that's likely. By March 2007, the city's $100 million contribution had been locked in; some Brooklyn City Council members, at a hearing that month, expressed dismay at learning that the $100 million would not go to infrastructure. (Citizen groups at a protest last June made the same point, calling for “Stop Payment.”)

That $100 million figure had since the February 2005 signing of a nonbinding Memorandum of Understanding (MOU) stood as an upper boundary for the city contribution to the project. And Forest City Ratner had spent its $103.5 million on “Arena Land” by November 2006, as the color graphic below indicates.

Thus, it seems that the appraisal, rather than help the city decide that it would spend the whole $100 million on land, simply served to reimburse the developer for some but not all properties it bought. So the properties "Arena Land" were likely chosen to add up to close to $100 million. The city's contribution was designed as "recognized costs."

“Appraisals, particularly last year before the credit crisis, are notoriously amenable to being ‘tailored,’” the real estate professional told me. “A true value can only be determined by a proper open competition. I imagine Forest City Ratner was smart enough to not allow a document to exist showing a value 50% higher than what they paid.”

What exactly is “Arena Land”?

The term “Arena Land” invites dispute. The Atlantic Yards City Funding Agreement, section 3.05 (b) (p. 11 of this 14MB PDF) states that the developer must deliver to NYC EDC an appraisal regarding highest and best use of the "Arena Land," which is defined as certain parcels on Blocks 1118, 1119, and 1127, as shown in the graphic at right.

The list of properties designated as "Arena Land" includes parcels on Block 1118, home to the former Underberg Building, between Atlantic Flatbush, and Fifth avenues. However, parcels west of Fifth Avenue couldn’t be land under the arena, which would be situated somewhat to the east. They still would be part of the arena block. The oval in the graphic indicates several properties not considered part of "Arena Land" but which are owned by the developer, as indicated in the graphic below.

"Arena Land" does not include several properties on Block 1127 (lots 54, 50, 48, 46, and 43) within the arena block, even though those were owned or controlled by the developer by November 2006, as the map shows.

Were properties omitted because they’re in litigation? For example, Forest City Ratner owns Lot 43; Freddy’s Bar & Backroom, the commercial leaseholder, is a plaintiff in the pending eminent domain case. The developer also owns Lot 50, 473 Dean Street, whose rent-stabilized tenants are party to a pending lawsuit.

Then again, joining the tenants of 473 Dean in the same lawsuit are tenants of Lot 21, 624 Pacific Street, which is included in “Arena Land.”

I suspect that the properties defined as “Arena Land” were chosen because their cost added up to a sum very close to the $100 million the city had committed. I can’t be sure, but it’s a question worth asking. After all, there’s no apparent rationale for including certain properties and not others in “Arena Land.”

Maybe the term "Arena Land" will have to join the Atlantic Yards Lexicon under this definition: "Those properties on the arena block for which Forest City Ratner spent about $100 million."

After the fact?

The appraisal may represent an after-the-fact rationalization. As noted, the funding agreement requiring the appraisal was signed in September 2007.

Without the appraisal, NYC EDC asserted in a letter to me (below) denying my FOIL request, “NYC EDC and the City cannot reasonably be expected to undertake a deliberative process in which they review and evaluate the information provided to determine the appropriate level of City funding of land acquisition costs so as to ensure the project can proceed.”

However, by November 2006, Forest City Ratner had already paid $103.5 million for the properties at issue and somewhat more for additional properties on the arena block. If the city was to fund land purchases with up to $100 million of its pledge in the MOU, the question then was not whether the city would spend $100 million, but the subset of properties to which that sum would be applied--hence the reasonable speculation about whether the appraisal was tailored.

The use of all $100 million to buy property was not explicitly contemplated in the nonbinding Memorandum of Understanding (MOU) signed in 2005. It stated (p. 5), The City’s capital contribution shall be used for the same purposes as the ESDC’s capital contribution [site preparation and public infrastructure improvements], except that the City's capital contribution may also be used to fund a portion of the costs of acquisition of the Arena Site (other than the MTA Properties).
(Emphasis added)

That suggests that city funds would be used for both infrastructure and property acquisition. The word “except” did allow the city to use its capital contribution for property acquisition, but the phrase "may also" suggested that the $100 million would not be used exclusively to buy property.

The FAQ on the official Atlantic Yards web site (right) is also disingenuous, suggesting that the city funding would be used only for infrastructure improvements and site preparation, with no mention of land costs. The $305 million includes $100 million from the state, $100 million from the city for land acquisition, and an added $105 million from the city for infrastructure. (The FAQ claims that "it is essential that people have accurate information about what Atlantic Yards will mean for Brooklyn and for New York City.")

Backing into the appraisal

So, how might the appraisal have neatly arrived at $100 million?

The appraisal is supposed to take into account all government regulatory restrictions, including zoning--which is confusing, since zoning for AY would be overridden by the ESDC. Given that the city is reimbursing Forest City Ratner for paying above current-market prices--earning May 2004 Daily News coverage headlined Bonanza--the appraisal would have to value the site by taking the zoning override into account.

There is precedent for that. Indeed, the Metropolitan Transportation Authority's 2005 RFP for the adjacent Vanderbilt Yard stated that, though the railyard is within a manufacturing district, "MTA considers the assumption that the Site could be rezoned or could have the current zoning overridden to attain higher FAR reasonable."

Indeed, the 2005 appraisal (right) that resulted valued the property at $75/sf, with a Floor Area Ratio (FAR) of 10—the same FAR as in the adjacent Downtown Brooklyn rezoning—leading to a valuation of $271.2 million. The appraisal subtracted various costs associated with track relocation and platform construction to reach a $214.5 million figure.

Getting to the value

How might "Arena Land" be valued? The market in the past two years, according to the real estate professional I contacted, ranged between $110 and $200 per buildable square foot. The arena itself would be the most valuable of all the pieces.

Using the same methodology as the MTA's appraisal, I went to city records and determined that the lots that comprise "Arena Land" total 105,392 sf.

With an FAR of 10 and a value of $110/sf, the value would be $115.9 million.

With an FAR of 10 and a value of $150/sf, the value would be $158.1 million.

With an FAR of 10 and a value of $190/sf, the value would be $200.2 million.

Forest City Ratner paid $103.5 million. That suggests the potential for significant savings.

If the appraisal was tailored to reach $100 million or so, how might that have been done?
  • Costs could have been subtracted from the total value.
  • The price per square foot could have been below market.
  • An FAR below 10 was not used.
But we won't know until we see the appraisal. Even if the developer saved "only" $12.4 million, that's a significant sum.

Trade secrets

In denying my FOIL request, Judy Fensterman, NYC EDC’s FOIL Appeals Officer, wrote:
I have determined that NYCEDC can properly withhold the Appraisals as 'trade secrets or submitted to an agency by a commercial enterprise or derived from information obtained from a commercial enterprise and which if disclosed would cause substantial injury to the competitive position of the subject enterprise' pursuant to FOIL Section 87(2)(d).

The trade secret exception is recognized in state law, and one backed up by the Committee on Open Government (COOG) in various advisory opinions.

However, the Atlantic Yards appraisal may represent a unique case. Take, for example, this COOG advisory opinion regarding an appraisal prepared in connection with eminent domain proceedings in the Village of Croton-on-Hudson.

According to the COOG's summary, Village Attorney Marianne Stecich stated that the amount at issue “is very, very, very comfortably under five million dollars," which led the petitioner to contend that the disclosure took the issue out of the trade secret exception. Stecich told the COOG “that the disclosures made by the Village might provide a minimal ‘hint’ as to the appraised value of the parcel, but nothing more” and the COOG agreed.

By contrast, in the case of the "Arena Land," we have more than a minimal hint. We already know what Forest City Ratner paid. We already know how much the city paid. The question is whether those numbers correlate with the appraisal, and the methodology behind the appraisal.

Confidential information?

Fensterman gave some other reasons for denying the FOIL:
The Appraisals contain confidential information of a sensitive nature to FCRC and its lender; they contain proprietary analyses by the appraiser as to value and also provide insight into the lender's underwriting standards and other business practices, which is nonpublic information that would be substantially detrimental to the lender's competitive position if disclosed.

An appraiser, however, uses well-established methods of calculating values, the real estate professional told me, calling it ridiculous for NYC EDC to claim proprietary analyses or business practices.

Ongoing negotiations?

Fensterman’s letter also stated:
Further, FCRC is in the process of negotiating with the remaining property owners within the Atlantic Yards project site in order to assemble the remaining parcels through negotiated acquisitions. The premature disclosure of the Appraisals would frustrate this process by providing the remaining property owners with confidential, non-public information as to the potential values of adjacent parcels. The disclosure of the Appraisals at this point in the discussions could adversely affecting FCRC's competitive position, essentially causing them to lose leverage and placing them at a clear disadvantage vis-a-vis their ability to negotiate with the remaining business owners. This could have a material adverse impact on FCRC's ability to acquire the project site and carry out the Atlantic Yards project.
(Emphasis added)

The real estate expert acknowledged that NYC EDC had a point here, given that it’s standard business practice to not force one party negotiating with another other party to reveal the value they've calculated. However, the expert noted, the appraisal is just one tool rather than a definitive sense of the value. After all, property owners can get their own appraisal.

Beyond that, NYC EDC's logic is questionable on two levels. Firstly, the developer need not negotiate to acquire the project site. The ESDC intends to take remaining properties by eminent domain, which requires a separate process of valuation.

Secondly, two property owners I contacted told me that the developer has not been negotiating with them. “I have not received a single phone call or letter,” said Henry Weinstein, who owns a building and two lots at Pacific Street and Carlton Avenue. Condo owner and Develop Don’t Destroy Brooklyn spokesman Daniel Goldstein, like Weinstein a plaintiff in the AY eminent domain case, said, "To my knowledge they are not negotiating with any owners or tenants."

That does not preclude the possibility that the developer is negotiating with other property owners. However, it seems to contradict the blanket statement that the developer is in “the process of negotiating with the remaining property owners within the Atlantic Yards project site.”

It's another questionable aspect of a process that deserves a lot more sunlight.

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