Friday, June 20, 2008

Given 50% arena cost increase, DDDB asks PACB to reconsider AY approval

Develop Don’t Destroy Brooklyn (DDDB) yesterday asked the three-member Public Authorities Control Board (PACB)—comprised of Governor David Paterson, Assembly Speaker Sheldon Silver and Senate Majority Leader Joseph Bruno—to revisit its approval of the Atlantic Yards project, given “the dramatic increase in cost of Forest City Ratner’s Atlantic Yards arena and the development project as a whole.” The effort relies on an untested area of state law.

The PACB, which in 2006 derailed the planned West Side Stadium, is not supposed to evaluate the overall merits of a project, just whether the state’s investment is a sound one. DDDB contends that the nearly 50% increase in the price tag for the arena over 15 months—$637.2 million as approved in December 2006, but $950 million in March 2008—means the PACB should take another look. (The state has pledged $100 million of the project’s cost, estimated at $4 billion at time of approval but certainly significantly higher at this point.)

Whether DDDB’s effort will gain any traction is another question. The Public Authorities Law §51(3) offers some general language:
The board may approve applications only upon its determination that, with relation to any proposed project, there are commitments of funds sufficient to finance the acquisition and construction of such project. In determining the sufficiency of commitments of funds, the board may consider commitments of funds, projections of fees or other revenues and security, which may, in the discretion of the board, include collateral security sufficient to retire a proposed indebtedness or protect or indemnify against potential liabilities proposed to be undertaken.

Long-shot effort

I asked DDDB attorney Jeffrey Baker if anyone has successfully made this challenge and, if so, what was the increase in the cost of the project at issue. “As far as I know there is no case law directly on point on this issue with PACB,” he responded.

Still, DDDB leaders expressed confidence. "We fully expect the PACB and Governor Paterson to agree that the change in Atlantic Yards financing needs a new approval decision, based on the need for sound and prudent fiscal policy," DDDB Legal Director Candace Carponter said in a statement. "However, if necessary we will take all legal steps available to assure that Brooklyn is not stuck with a half-completed, derelict project due to the shaky financial foundation of the Atlantic Yards proposal."

The U.S. Supreme Court should announce Monday whether the Atlantic Yards eminent domain appeal can proceed. Should that appeal fail, DDDB is likely to fund a separate eminent domain challenge in state court, where the odds would be very long.

Assumptions based on 12/06 cost

Baker’s letter noted that the 12/20/6 resolution adopted by the PACB and submitted by the Empire State Development Corporation identified the “Barclay’s” [sic] Arena as having financing of $637.2 million:
In considering the request from ESDC, the PACB relied in large part upon a December 2006 report from KPMG LLG Economic and Valuation Services, which evaluated the financial viability of the arena. Based upon the expectation that construction of the arena would cost approximately $637 Million, KPMG found that the projected return on investment would support the development and maintenance cost.

The 50% increase, however, is “far above what could be considered an expected factor and far in excess of the rate of inflation” and “presents significant questions as to the overall financial viability of the project," Baker wrote.

Baker noted that the “source of the nearly $320 Million of additional construction costs has not been identified, and it is utterly unclear how the arena PILOT can be paid towards the bond based on assessed property taxes.”

The latter is a reference to a rule that says PILOTs (payments in lieu of taxes) cannot exceed the maximum amount of foregone property taxes. In terms of Atlantic Yards, those taxes may be significantly dwarfed by the potential arena bond.

What if PILOTs curtailed?

Indeed, the PACB’s approval, as with the KPMG study that led to the ESDC’s approval, was predicated on the use of PILOTs to pay off the arena bonds. Should the Internal Revenue Service be successful in curtailing the use of such PILOTs, that would strain the financial model significantly. The cost increase adds another strain.

1 comment:

  1. Atlantic Yards absolutely most certainly does have to go back to the Public Authorities Board “PACB” for a new approval based on the current size of the project.

    It will be interesting if the people running this remember to remember that this is necessary. I am always fascinated by how short some people’s memories can be. People have such a tendency to throw away files, not organize or not pay attention to their old files- And then try to live life as if nothing has gone before and the past doesn’t matter-

    It would be extremely embarrassing if people running the Atlantic Yards public authorities fiasco forgot to remember that the project absolutely has to go back to the PACB and then tried to proceed without doing so. It would be very embarrassing if the old files that make clear that they can’t do this then came out of the woodwork.

    (Of course, this is unlikely to happen because doing so would also be sending a signal that after any approval the PACB loses all control no matter how much a project changes thereafter. Without ‘control’ I suppose the “PACB” would dwindle down to just the “PAB”!!)

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