Friday, December 19, 2008

Indirect subsidies: how Forest City Ratner might save another $8 million (and a whole lot more)

The New York Observer's scoop this week--that developer Forest City Ratner is seeking all sorts of ways to indirectly increase subsidies--was accompanied by a subtext: that AY's "projected returns were apparently very marginal," especially compared to other developments.

That conclusion was based on an analysis of the project's internal rate of return (IRR); I pointed out that IRR is not profit, because it does not, for example, address Forest City's 5% development fee.

Also, and equally important, neither set of documents cited--a report by KPMG and Forest City Ratner's own projections--fully account for all the subsidies and benefits the developer would gain.

For example, I estimated last month that Forest City gained nearly $55 million when the city reimbursed the developer $100 million for property in the AY footprint for which it spent $103.5 million--but was more likely worth $158.1 million.

And think I've identified another $8 million, given the transfer of city streets and the conveyance of city property for just one dollar.

Beyond that, the use in project documents of a term known as "extraordinary infrastructure costs"--which Develop Don't Destroy Brooklyn has aptly called "a blank check"--leaves open the possibility of much more public subsidy.

From the IBO report

The New York City Independent Budget Office (IBO), in its September 2005 Fiscal Brief on Atlantic Yards, missed some things, such as the value of naming rights, and also focused on calculating city costs and revenues rather than the benefit to the developer--which is not the same thing--some of which is obscured in the 2/18/05 Memorandum of Understanding (MOU) the developer signed with the city and state.

The $1 street bed?

The report stated:
The city will not participate directly in the ground lease for the arena building site, but its contribution of key property will make the lease possible. According to the MOU, the city will transfer its property under the arena to ESDC for $1. This will include the Fifth Avenue street bed between Flatbush and Atlantic Avenues and the Pacific Street street bed between Flatbush and Sixth Avenues. IBO estimates that the current value of this street property is about $56,000.
(Emphasis added)

How is that calculated? The IBO said in a footnote:
Department of Finance estimates of full market value for adjacent land for the current fiscal year show a value of $20.00 per square foot. IBO estimates that the area of the street beds is approximately 2,820 square feet. Together, these estimates imply a value of $56,400 for the street beds to be transferred from the city to ESDC.

But maybe those Department of Finance numbers are way, way off, given the vast increase in development rights and the typical divorce between the department's valuation figures for tax purposes and actual market value.

At a Floor Area Ratio (FAR) of 10--the same used for the appraisal of the Vanderbilt Yard--and a price of $150 per buildable square foot (a price the city has sought nearby), the value of the land would be 2820 x 10 x 150, or $4,230,000.

So the city would be forgoing not $56,400 but instead more than $4 million.

The $21,465 plot of land?

The IBO report continued:
The city would also transfer a city-owned parcel (block 1127, lot 33), which is valued at $93,800 by the Department of Finance. The city was not collecting tax from this city-owned land; therefore, transferring it to FCRC will not reduce property tax revenues from their current level for this land. However, had the property been used for an alternative private purpose, property taxes may have been paid. The use of a nominal lease that ignores the opportunity cost of the land for the city thus increases the extent of the public subsidy provided to FCRC.
(Emphasis added)

Well, yes.

City property records (right) indicate that the plot is 25 feet x 110 feet, or 2750 square feet. The land is apparently valued by the Department of Finance at $21,465, or less than $7.81 per square foot.

(The overall value of the parcel is now apparenlty $120,000.)

However, following the formula above, at a Floor Area Ratio (FAR) of 10 and a price of $150 per buildable square foot, the value of the land would be 2750 x 10 x 150, or $4,125,000.

So the city would not be forgoing $21,465 but instead more than $4 million.

Bottom line

By my calculations, the street beds and Lot 33 are worth $8,355,000.

Forest City Ratner would pay just one buck.

Watch out for more

According to the MOU:
The City will convey the City Properties and the City Streets underlying the Arena (but not including the commercial office building sites adjacent to the arena) to ESDC for $1.00 and the remaining portions of the City Properties and City Streets to ESDC for fair market value (paid for by FCRC) based on an independent appraisal that determines value based on the contemplated Development Plan and the development rights associated with such property, taking into account the amount of the any [sic] capital contribution or other financial contribution by the Public Parlies to the Project (exclusive of the contributions for the Arena Site as specified in Section 10 below) and any extraordinary cost to FCRC of relocating public utilities and installing new public utility infrastructure.

It also states:
the Public Parties will consider making additional contributions for extraordinary infrastructure costs related to the mixed-use development on the Project Site (excluding the Arena Building Site)
(Emphases added)

That leaves a lot of wiggle room for additional subsidies.

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