Monday, December 01, 2008

Brutally weird: Why a vacant lot in Alphabet City is (not) like the land under Yankee Stadium

Let’s take a walk over to Alphabet City, to the part of the East Village still called the Loisaida. Turn off 14th Street down Avenue D. Then, on the east (left) side of the street, going south, the Jacob Riis Houses, public housing named after the journalist/reformer, stretch from 13th Street all the way to 6th Street, 19 buildings in all.

On the right side of the street is a series of modest retail establishments. As you approach 8th Street, on the right (pictured) you see the All in One Value Center, Crown Fried Chicken, and a bodega with a green awning, all occupying rehabilitated tenement buildings. Turn right at the bodega and see a cleaners occupy the same building, its entrance on the north side of 8th Street.

Then there’s a vacant lot, to the west a building houses a ground-floor church, Iglesia Evangelica Bautista. Next door is a modern, handsome public housing complex, the four-story Lower East Side III, built in 1996, flush to the street, unlike the Riis Houses superblock.

But wait, let’s return to that vacant lot. That vacant lot is what the New York City Department of Finance (DOF) says should be compared to the South Bronx site hosting the new Yankee Stadium. That vacant lot is 4324 square feet, just a little less than one-tenth of an acre, while Yankee Stadium, at least when the city first assessed the site, was more than 17 acres, more than 170 times larger.

Not only is that vacant lot not comparable in size, it is not comparable in location. That vacant lot, according to MapQuest (below), is 8.71 miles away by driving; that route is slightly indirect, but the distance easily exceeds seven miles.

A DOF "comparable"

Yet that vacant lot was included in a list of “comparables” chosen by the DOF in an effort to value the land under the new stadium. That, critics on state and federal oversight committees say, was used to inflate the value of the property and allow more tax-exempt bonds to be issued, aiding the Yankees.

And, should tax-exempt bonds be issued for the Atlantic Yards arena, the comparables chosen by the DOF will deserve a close look.

In a document attached to an October 14 letter from Rep. Dennis Kucinich (D-OH) to Mayor Mike Bloomberg, the DOF explained how it both estimated market value for the stadium and chose comparables:
Harlem is located in the Northern section of Manhattan starting from 110 Street. The neighborhoods of Harlem have seen major revitalization over the past five years. In addition, this revitalization has also spread across the river to the South Bronx and Concourse neighborhood where the New Yankee Stadium is site. Washington Heights located North of Harlem and directly West of the Yankee site has also gained from this growth in land value.

A significant reason why Northern Manhattan land sales have been enchanced is because of government investment in the area. Given the significant city investment planned around the Yankee Stadium site, we expect that the land value will be similarly enhanced.


That has nothing to do with Alphabet City.

In fact, the choice of that vacant lot is so ridiculous--so brutally weird--that, when testifying before Congress on October 24, DOF Commissioner Martha Stark made no attempt to defend it in her prepared remarks. And, when questioned about that vacant lot, her answers were inadequate.

That vacant lot, according to Assemblyman Richard Brodsky, a fellow witness, helped constitute a “smoking gun” point to improper procedures by the city.

"Using the normal methods of assessment, the department came up with value of the land under the stadium of about $26 million,” he said at the hearing, called by Kucinich, chairman of the Domestic Policy Subcommittee of the House Oversight and Government Reform Committee. “That got reversed by the use of extraordinary and I believe illegal methodologies, which include use of land on the Lower East Side to measure the value of land in the South Bronx."

Kucinich said: “From evidence that Subcommittee staff has reviewed, it has become clear that from the very beginning of the assessment process top City officials made it known to the Department of Finance (DOF) that they should be mindful of the Yankees’ interest ‘in seeing that the assessed valuation [would] be high enough to generate as much PILOT for tax-exempt debt as is lawful and appropriate.’ And DOF buckled.”

Why it mattered

The land under the stadium was valued at $204 million, thanks in part to that vacant lot (at right, DOF memo). After the size of the stadium site was reduced from 17 acres to 14.56 acres, DOF reduced the market value of the land to $175 million.

Stark said the city uses three universally accepted methods of valuation. Small homes typically are valued on the “sales approach,” based on comparables. Office buildings and residential apartment buildings that generate income are valued on the “income approach.”

However, DOF values new construction for specialty properties such as stadia, utility property, museums, court houses, and churches are based on the “cost approach,” the spending on construction. Then, when Finance values a developed property, the overall land value is arrived at by taking a percent of the overall property value--typically between 15 and 25 percent or, in this case, about 17.1%.

But there was another step, pointing, apparently, to Alphabet City. "We wanted to make sure we had checks and balances to make sure the land value as a percent of overall value made sense,” Stark testified. “We looked at sales of land that were enhanced or improved by government investment.”

“We arrived at overall land value using a comparable sale approach, then as a test,” Stark said, “what you do is check it as a percent of overall building value and the overall total value. We did not use that approach to value the property, we used it to validate the resulting land value that we got from using comparables.”

So, even though she seemed to be contradicting herself, the comparables, including this lot on East 8th Street, came first.

Does that compute? Independent Budget Office economist George Sweeting told Neil deMause that the economic value of the land should show up in the land value while the rest should show up in the "improvements" line.

East Village vs. South Bronx

In the letter to Bloomberg before the hearing, Kucinich laid out the indictment:
The NYCDOF valued the stadium site so highly because it inappropriately compared the stadium site to smaller lots in different neighborhoods where real property values are significantly higher. Both these practices violate basic principles governing real property assessment.

First, the NYCDOF derived the $275 per square foot rate by comparing the stadium site to City assessments of significantly smaller lots. Smaller lots are typically worth more per square foot than larger locations. In addition, the ‘comparables’ used by the NYCDOF were located in more expensive neighborhoods in other boroughs, such as Manhattan Valley and Alphabet City, both located in Manhattan.

DOF defense

In her testimony Stark explained that the original assessment was wrong because it was based on “vacant land rather than land that had benefited from government infrastructure improvements and investments.”

What?

The land on East 8th Street has benefited from government investments, but it was and remains vacant.

Stark added, “The assessors identified 11 lots that were more appropriate comparables because they reflected land in similar neighborhoods, including Harlem, which are less than a half a mile away and where the land value had been enhanced because of significant government investment. The average sales price for these properties was $304 per square foot, and the median was $275 per square foot. The assessors used the median sales figure of $275 per square foot..."

Similar neighborhood?

Asked about the East 8th Street site, Stark explained, “It’s a neighborhood in Manhattan outside the Central Business District. It’s a part of town that has not done as well as Central Manhattan, more analogous to Harlem and the South. Bronx... it’s called Alphabet City, it’s kind of more of our bohemian sort of neighborhood.... It’s come back, in large part, because of the city’s investment in making sure all of the abandoned housing has been much improved.”

Brodsky was incredulous: “The notion that the Lower East Side and Manhattan Valley is comparable to the area around the stadium, which you just referred to as the poorest community in New York, is laughable. It was chosen for a reason--the values are higher, much higher.”

Kucinich asked Stark, “Do you expect me or this subcommittee to believe that this... was anything other than cherry picking?”

“Everything in real estate is location, location, location,” Stark said, adding that, in “Harlem, yes, absolutely, there has been a boom.... Sales less than half a mile away are absolutely appropriate to use.”

When looking for comparables, she said, “you look first and foremost” in proximity to the site of the property.

Well, in defending the choice of Harlem, she essentially undermined the argument for choosing a site more than seven miles away.

“Trendy Alphabet City”

Kucinich called the location “trendy Alphabet City.” While nearby Avenue D isn’t exactly trendy, Alphabet City is a heck of a lot more trendy than the South Bronx.

While most people may think of Manhattan as having high-value real estate in Midtown, Stark set out a bit of a straw man: “The Lower East Side in this regard is much more analogous to Harlem and the South Bronx, the reason being, in order to generate any kind of investment in those communities, the city had to step in and do infrastructure improvements, whether by investing in housing, taking over abandoned buildings and the like. The Lower East Side is not one of the better neighborhoods in New York City--that is the point I was making. It is more analogous to Harlem, more analogous to the South Bronx.”

Sure, the Lower East Side--or, more accurately, Alphabet City--is more analogous to Harlem or the South Bronx than it is to Midtown. But that doesn´t make for a close comparison.

Rising property values

Yes, persistent poverty has held Alphabet City back. But the relentless gentrification of the East Village, fostered in part by, yes, government investment to stabilize buildings, has caused land values to skyrocket.

(Map via PropertyShark. Properties with cross-hatches are co-ops or condos.)

Consider the site in question--Block 378, Lot 40, circled--was sold in October 2003 for $1.15 million, or $266/sf, which the city adjusted to $343/sf, a 29% increase.

Why the adjustment? Likely because the valuation was made in January 2006, two years and three months later.

That $343/sf figure was higher than the $275 eventually arrived at, so it helped raise the average number. In other words, had DOF relied solely on Harlem (not to mention the South Bronx), the comparables would have been lower.

Skyrocketing value

Guess what. The lot changed hands less than two years after the DOF valuation, on 10/24/07. Was it another 29% increase?

No, the price was $4.9 million, or $1133/sf, a 230% increase and a sign of a very different market. That’s luxury condo territory; indeed, according to a work permit, it’s soon to be a six-story, 20-unit apartment building

Why is this site, so far away from the subway and so close to public housing, so much more valuable than land in the South Bronx?

Well, it’s in the East Village. People want to live that close to nightlife and restaurants. The commute from the Bronx would take a while.

A better example

Stark suggested that both Harlem and Alphabet City, like the Yankee Stadium area, gained from public investment, but that public investment differs significantly. In the former neighborhoods, the investment was housing rehabilitation and new buildings, such as the Lower East Side III project (right and below).

The major public investment for Yankee Stadium is a new Metro-North Station. But if DOF wanted to look at a nearby investment to improve housing, just east of Yankee Stadium there's a place called Melrose Commons.

That's a part of the South Bronx where the city has invested significant money. The New Housing New York (NHNY) Legacy project, which “seeks to set the standard for affordable housing design and development in New York City and beyond,” according to a 2006 RFP, was an outgrowth of the 2004 NHNY Design Ideas Competition, jointly sponsored by the New York Chapter of the American Institute of Architects, the New York City Council, and the City University of New York.

It states: “In an effort to combat the neighborhood’s severe decline, over $2 billion of public and private money has been invested in housing and other redevelopment activity in the South Bronx since the 1980’s, mostly in the Melrose Commons and Yankee Stadium Urban Renewal Areas. In Melrose Commons, northwest of the NHNY Site, hundreds of millions of public and private investment dollars have rejuvenated the community over the last decade. Hundreds of new housing units have been built already. When the Melrose Commons Urban Renewal Plan is completed, over 3,000 units of low, moderate-income and market-rate apartments and townhouses will have been added to the housing stock.”

It's a 20-minute walk from Yankee Stadium.

Another curious thing

How does the Department of Finance actually do its job? Assessment changes for Class 4 properties must be phased in over five years, but they didn’t exactly do it.

Here are the valuations the plot of land on East 8th Street, according to the DOF web site:
Tax Year Market Value
2004/05 317,000
2005/06 365,000
2006/07 387,000
2007/08 619,000
2008/09 929,000

The numbers for the 2004/2005 tax year seem quite low, given that the lot had just sold for $1.15 million.

Even granting some late paperwork, the increase in value--nearly $700,000, should have been phased in over five years in increments of $140,000. Instead, the first two increments were $48,000 and $22,000. It´s curious.

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