Friday, October 31, 2008

Decoding FCR’s Gilmartin on Beekman Tower: condo aversion may jeopardize AY condos (or 50/50 plan)

Forest City Ratner executive MaryAnne Gilmartin, the developer’s point person on Atlantic Yards, was honored last night by the American Institute of Architects (AIA) New York chapter at its Heritage Ball, and on Monday night, she spoke in detail about a less controversial but hardly uncomplicated Frank Gehry project also announced in 2003: the in-construction Beekman Tower in Lower Manhattan.

Yesterday, I suggested that her take-away quote, “every deal dies three times,” also applies to Atlantic Yards, which is going through even more gyrations.

Lessons for AY

But there are some other hints and lessons from her talk. While the Beekman Tower is less a model for Atlantic Yards housing than the under-construction tower at 80 DeKalb Avenue in Brooklyn, Gilmartin’s explanation of why Beekman contains rental units, not condos, may cast further doubt on the developer’s plans for 1930 condos in the Atlantic Yards project.

If the condo market is currently saturated, and the developer prefers the flexibility of rentals, then either the condos would be quite delayed or a switch to rentals would further undermine the pledge of 50/50 affordable and market-rate housing.

Also, while questions about Atlantic Yards just didn’t come up, Gilmartin’s assertion that “we just simply do not know how to give up” may be tested by trying to pursue Atlantic Yards during an economic downturn. Note also that she described "the development, community" as "change-resistant, by its very definition--we really only do things when we have to."

Focus on Beekman

The Beekman Tower, which combines rental apartments with a 100,000 sf school, is among eight examples in AIA NY’s +Housing exhibition, which illustrate “public uses combined with, and often financed by housing.” (For Forest City Ratner, it looks like Liberty Bonds were the key, not the housing.)

Gilmartin was honored for “her contribution for the revitalization of New York City… [her] outstanding contribution to architecture and the urban landscape.” She’s worked on FCR’s Times Square project and the new New York Times building. According to her bio, before joining Forest City in 1994, she was as Assistant Vice President for Commercial Development at the New York City Economic Development Corporation (EDC) during the Koch and Dinkins administrations, managing the corporate retention program that kept Bear Stearns, Morgan Stanley, Chase Manhattan Bank and others in the city. Some, in fact, went to Forest City Ratner’s MetroTech.

(Fun facts: Gilmartin’s favorite book is E.B. White’s Here is New York, and she lives in Westchester.)

Gilmartin, among a supportive and curious audience, spread good cheer. “I’m humbled by the AIA’s recognition,” she said., adding, “To make a great building, it takes a great many people,” noting that many of the people in the room participated not online in the Times Tower but Beekman Tower and Atlantic Yards. (Architecture Week just happens to be sponsored by Kramer Levin, a law firm that represents FCR.)

Coveted site

Gilmartin described the one-acre site near Pace University, once a parking lot owned by New York Downtown Hospital as “coveted by development community” because of its ability to straddle Wall Street as well as TriBeCa.

While the development site could have supported “a residential building with no bells and whistles,” Gilmartin said that the developer “realized we could do something very special” in some sort of public-private partnership. FCR purchased the rights to build just over 800,000 sf, with potential bonuses from a plaza. It also agreed to build one level of doctor’s offices and one floor of parking.

“The program evolved and changed over time,” she said, noting that the original plan was to combine a Pace dormitory with a more modest FCR residential project. “This is a notable quotable from me, but ‘every deal dies three times,’” she said early on.

As the project “became much more aspirational and more expensive... ultimately Pace decided they didn’t have appetite for great architecture and high design,” and dropped out. “We lost our Liberty Bonds, which were a very big piece of the financing,” she said, noting matter-of-factly that “the mechanisms that we utilize to finance it are complicated and essential to the underlying success of the project.”

“We realized there was an opportunity here,” she said, citing the chance to build a school to serve the growing residential community. She said it was a “poster child for the School Construction Authority, the way we packaged the deal.” The rest of program would be residential.

Condos vs. rentals

“The notion of doing condominium with Frank Gehry was alluring,” she said, given it “was sure to transform the skyline.” She added, again matter-of-factly, “our job is to maximize the economic equation as well as to drive high design.”

City of New York plaza requirements, however, stymied the initial effort. “In fact, [City Planning Commission Chairperson] Amanda [Burden] was absolutely captivated by the designs we presented her with, but she was straitjacketed that certain plazas have to have certain requirements,” Gilmartin said.

(Since when are community groups on a first-name basis with Burden?)

The city has since changed plaza requirements, which means FCR can go back and add some of the features that designers and developers wanted to add.

The second iteration of the building was to contain 1.1 million sf, with 480 rentals on the lower floors and 200 condos on the upper floors. “This was during the condo craze. We were very concerned, based on break-even... they would need to sell for a very hefty number to really pencil out,” said Gilmartin, noting that condos cost more to build more than rentals and limit flexibility, because such larger units are tougher to flip into rentals.

Flooded market

“The condo market we believe, was flooded with supply,” she said, noting that 10,000 units were to come online in 2006, “and based on the sales and the absorption, we believe that the projections for the pipeline in Manhattan would take about six years to absorb.”

(While she didn’t comment on the Brooklyn pipeline, Richard Meier, architect of the Brooklyn building One Prospect Park, told New York Magazine this week that he thought unsold apartments in that luxury building would go unsold, and “I think that people who don’t have things under construction are probably reconsidering whether they’re going to go under construction…”)

Gilmartin added, “It really is outside our core business: we are long-term holders of real estate, we create value, and we like to keep the value we create.”

AY implications

If building condos is “really antithetical to what we’re about,” does FCR plan to build any condos in Atlantic Yards? It’s an interesting question, because the developer initially promised a 50/50 plan for all the AY housing. Then, after the deal with ACORN was signed, FCR added condos—2800, now reduced to 1930, of which 200 would be affordable—and could point to the fine print, that the Housing Memorandum of Understanding addressed only rentals.

So, as noted either the condos would be quite delayed or a switch to rentals would further undermine the pledge of 50 percent affordable rentals.

Beekman: all rentals

“So we settled on what we all believed was the best for the project and for the company,” she said. It became 903 market-rate rentals. “We would have done 80/20 [20% low-income housing], but there were virtually no [affordable housing] bonds available at the time we were closing the financing.” She did note that “we had a contribution to the city so money could go offsite to build affordable housing.”

(How much? Not a huge amount--the Liberty Bond financing generated about $6 million in fees that go to the New York City Housing Development Corporation, while the $203.9 million in tax-exempt financing surely saved FCR many multiples of that. Remember, Forest City Enterprises CFO Bob O’Brien told investment analysts last April, with satisfaction, that the developer managed the unusual feat of getting tax-exempt bonds for market-rate units, without an affordable component in return.)


Holding firm

Pressure from lenders forced FCR “to defend our vision,” she said, noting that “it would’ve been easier to do a project not as aspirational, not as expensive.” The developer invested a significant amount of equity, $100 million, before construction loans closed.

That number is atypical, she said, explaining that that FCR faced a tight deadline to receive the 421-a housing break. (Remember, the state belatedly reformed a tax break that has long gone to luxury housing and FCR “blackmailed” the community board to support the application.)

Also, she said “construction costs were beginning to rise, making it very difficult for us to ascertain where they would be if we waited any protracted period of time to build.” Such rising construction costs inevitably affects Atlantic Yards, as Gilmartin has stated, though the numbers are hard to quantify.

In March 2008, FCR “cobbled together” five lenders, she said, essentially syndicating a $680 million loan. “It wasn’t as bad as where it is today,” she said, “but it was a very difficult time. Our ability to pull it off was questioned by many.”

Adding “sanity”

“What Gehry typically does is fantastic and memorable,” Gilmartin said enthusiastically, but Gehry can apparently go too far. “There was a point in time where the building actually torqued and it moved. We really need to introduce a certain amount of sanity, because we believed that the core needed to stay put.”

“We had to have a certain amount of discipline on the inside of the building,” she continued. “To do that, we believed we needed to marry Frank’s creative vision with the work of Ismael Leyva,” an expert in residential layout and design.

(Leyva, you might remember, is the Mexican-born architect once hailed as a minority contractor under FCR’s CBA—but is so successful he’s already designing Downtown Brooklyn towers. If the spirit of the Atlantic Yards Community Benefits Agreement is to change the traditional ways of doing business, as I’ve written, Leyva doesn’t exactly represent that.)

“We expected people to appreciate the Gehry factor, but we didn’t want them to compromise,” she said, giving the example of walls that moved or curved. Still, she said that rentals with kitchens designed by Gehry and lighting picked by him, and with no unit designs duplicated, “represents a pretty serious departure from the norm.”

Size and pricing

Gilmartin laid out the plans for the 903 units.

NumberTypeSq. feetRent/mo.
190Studio466$2915
4651 BR678$4237
491.5 BR791$4964
1742 BR1120$7000
253 BR1648$10,297

She said the $75/sf level was similar to other high-end buildings; in fact, FCR asked bankers to underwrite it like any other high-end building, while noting greater upside potential thanks to Gehry’s role. (By contrast, according to a Forest City Ratner planning document, market-rate units in the first round of AY buildings were to rent for $51.62/sf, though that figure surely has grown.)

Residents can automatically get their kids into a quality school in the base of the building. “We didn’t change all the mix to bet on that phenomenon, because it is an untested factor,” she said, but they can combine units to create more two-bedroom units if families flock to the building.

Asked the selling point for such expensive units, she said, “First of all, it’s the exposure. We’re selling views. From the moment you step into the apartment, you see sky.” Each apartment has three vistas, “which is extraordinary… When you clear the 11th floor, there’s not much to compete with it.”

“You have unbelievable thought and consideration for every detail in the unit,” she said, adding that the selection of materials was unprecedented for rentals.

Getting it done

“We were mindful the building would be iconic in nature, and... change the skyline,” Gilmartin said, citing “a great responsibility to us to make sure we did it right.”

That involved, she said, “Frank’s vision, and our stick-to-it-iveness… We just simply do not know how to give up.”

“We’re a public company, and my mission to create a project that reproduces return to our shareholders, and I’m not apologetic about that,” she said. “That’s kind of what I’m paid to do. While Frank’s paid to be a genius, I’m paid to make sure we make some money... that collaboration creates a great result.”

Some compromises

Still, there had to be compromises in the shift from condo to rental, one audience member pointed out, citing an interview with Gehry who seemed a little disappointed without the opportunity to design interiors. (It might have been this January 2006 Times Talk appearance, in which Gehry said “we can't really make a big architectural statement” about interiors.)

Gilmartin responded regarding the shift, “I actually don’t think Frank was disappointed. I think he was happy we made a decision. We were really in many ways belaboring whether we would do one or another.”

The rentals units have nine-foot ceilings, while condos would have 11-foot or 12-foot ceilings, she said. The average size of the units declined, as well.

Also, the shared amenity space for condos would be more lavish, perhaps a wine cellar or a screening room. “We will choose to do different things in amenity spaces, but Frank is designing them as well,” she said, noting that the rental building will contain a pool.

Still, she said, “I daresay that the finishes in the apartments ultimately changed very little. This is effectively condo-level finishes.”

The rental market

Noting that financing for the building is locked in, Gilmartin acknowledged that “we are watching very closely the rental market” and remained optimistic. Given that city rental market “performs very well,” FCR expects not a dip but perhaps more modest growth. “We’re in it for the long haul and we’re patient.”

While the building has a lot of units, the critical mass offers potential synergies, such as allowing some tenants to upgrade to bigger units or higher floors.

“I won’t want to speak to our break even, but our expectation is lease-up will take 20 months,” she said. “Typically you want to run a building like this at 95% occupancy.”

Going forward

“We will not see a building like this built over the next few years,” she said, citing the expiration of Liberty Bonds, the shifting boundaries of property eligible for 421-a benefits, and the difficulty in financing the project.

European banks have been far more receptive to lending to support iconic architecture, she said, but suggested that New York, and its banks, have an increased sophistication about architecture.

“If you build it, they will come,” she said. “The development, community, which is change-resistant, by its very definition--we really only do things when we have to, like the whole LEED thing--I like to think we’re on the forefront, but the fact is, it’s very hard to change how developers do things, in a tough town like New York, because it’s very hard to put a building together.”

“So I think the future holds great buildings that are also sustainable buildings. That we’ll be challenged by economic times, but in those challenging times creates great opportunities,” she concluded. “I come from economic development... if we have a great mayor, and I hope that we do, I think that this next five-year period represents tremendous opportunities for New York to build great buildings, because I think people of this town recognize the importance and the power of them, and it doesn’t mean just for private enterprise. It means that a public school is deserving of a great building.”

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