Monday, November 17, 2008

How Forest City Ratner (quite possibly) saved $55 million on "Arena Land"

In June, I wrote that an unreleased appraisal might be hiding a city-enabled bonus of tens of millions of dollars for developer Forest City Ratner (FCR).

Now I can better estimate a number: $54.6 million.

That number, of course, is speculative, but the calculation is fairly straightforward. Forest City Ratner was reimbursed $100 million by the city for property in the Atlantic Yards footprint for which it spent $103.5 million.

But the property was more likely worth $158.1 million, based on the city's own valuation of development rights at a site reasonably close to the Atlantic Yards footprint. So that means the city's land subsidy could be considered not the announced $100 million but nearly $155 million, a bonus of some 55%.

(To estimate the city's subsidy, you have to consider the $3.5 million for which FCR was not reimbursed: $158.1M - $3.5M = $154.6M.)

"Highest and best use"

To recap, according to the City Funding Agreement, land purchased by FCR for the project was subject to a "highest and best use" appraisal 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.

That appraisal has never been made public. The NYC EDC refused to release it in response to my Freedom of Information Law (FOIL) request.

Note that the appraisal was issued after the land deals were done, not beforehand or during negotiations. Given the city had already pledged $100 million, the appraisal did not help the NYC EDC decide how much money it would contribute; rather, it served to delineate the subset of properties to which the city's $100 million would be applied.

"Arena Land"

If the appraisal had indicated the properties were worth more than $100 million, the developer would've been reimbursed for a smaller fraction of its purchases and would've had to contribute more of its money.

As I wrote the "Arena Land" could join the Atlantic Yards Lexicon under this definition: "Those properties on the arena block for which Forest City Ratner spent about $100 million."

Fishy sequence

“Appraisals, particularly last year before the credit crisis, are notoriously amenable to being ‘tailored,’” a real estate professional told me.

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

The appraisal was supposed to take into account all government regulatory restrictions, including expected zoning override, as with the Metropolitan Transportation Authority's 2005 RFP for the adjacent Vanderbilt Yard.

Indeed, the 2005 appraisal that resulted valued the property at $75 per buildable sf, with a Floor Area Ratio (FAR) of 10, 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, though Forest City Ratner's cash bid was $50 million, later doubled after the MTA agreed to negotiate exclusively the developer.)

That $75/sf now looks like a significant bargain. The market in the past two years, according to the real estate professional I contacted, ranged between $110 and $200 per buildable sf.

The lots that comprise "Arena Land," for which FCR paid $103.5 million, total 105,392 sf, I determined. With an FAR of 10, that's $98.20/sf.

At $150/sf

But what if the value per square foot was not $98.20 but $150?

Speaking at a panel October 20 at the Museum of the City of New York, Yvonne Isaac of the developer Full Spectrum said, "the city’s asking upwards of $150 a square foot buildable FAR," including land in the Brooklyn Academy of Music Cultural District.

Isaac was skeptical of that number. "There’s no way we could make that affordable," she said, indicating that the developer was not proceeding with a project there, for the time being.

Maybe $150/sf won't work, but it is the city's number.

Revaluing "Arena Land"

What if the city had valued the "Arena Land" at that number? The value would be $158.1 million.

That means the city would've reimbursed Forest City Ratner for a much smaller proportion of the properties listed above. The developer would've had to absorb a significant chunk of the purchase price--nearly $55 million worth.

And until the city releases its appraisal of "Arena Land," that's as good an estimate as we have.

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