Tuesday, January 06, 2009

"I don’t know... how long we could delay": A look forward at Atlantic Yards in 2009

After a tumultuous 2008, Atlantic Yards faces multiple uncertainties.

The developer is closemouthed, the public is under-informed, and no one in government seems particularly up to speed. In his resignation letter yesterday, Empire State Development Corporation (ESDC) Downstate President Avi Schick notably declined to say anything about Atlantic Yards progress.

Sometime this year, the fate of the Atlantic Yards arena, at least, should be more clear.

(Graphic from AYR via NLG.)

Advantages, FCR

In New York magazine's "Reasons To Love New York 2008" package, in a short article headlined Because Sometimes Immense, Gratuitous, Noncontextual Acts of Real-estate Ego Don’t Pan Out…, writer Robert Kolker concluded that "At the moment, the old neighborhood is winning."

Well, the plan is stalled, but hardly dead, and political backers haven't publicly wavered.

Developer Forest City Ratner still has some significant advantages, including generous deadlines with gentle penalties, grandfathered-in rules for tax-exempt bonds, and the recommitment (without a dollar figure) by Barclays for the arena naming rights agreement.

(Update: A reader reminds me that bonds for the project must be issued on or before December 31, 2009--a deadline that might not be met, but also might be extended.)

So Develop Don't Destroy Brooklyn's claim that Victory is in Sight in 2009 should be taken with a grain of salt.

The disadvantage of delay

Then again, while parent Forest City Enterprises has a history of patience with its development projects, this time it can't wait forever. Beyond the carrying cost of the properties in Brooklyn, FCE has suspended its dividend to save $30 million, even as its share of Nets losses approaches $22.4 million a year.

Without those Nets losses, the company could pay its dividend and try to restore investor confidence. So Atlantic Yards must be a priority, as the developer, negotiating with public agencies, tries to increase cash coming in and stall cash going out.

Meanwhile, the Nets are something of an albatross. Some New Jersey fans are soured on the long goodbye and Nets CEO Brett Yormark resorts to ever more creative ways to distribute tickets. But a shiny new arena could raise the value of the team immensely, so it's worth hanging on.

Legal resolution this year?

How long can the developer wait? Forest City may be hoping everything will be resolved in 2009, before the parent company suffers even more in the stock market.

That remains possible. The two major legal cases, funded and organized by DDDB, may be resolved. A decision in the case challenging the environmental review should come within the next month or two. A hearing in the eminent domain case should be held in the next month or two, with a decision coming mid-year.

The state and the developer have to be considered favorites to prevail and, in neither case is an appeal automatic (unless the losing side gets two votes in the EIS case). Additional cases filed by attorney George Locker might also snag the schedule.

In normal times, victory in court would presage the sale of perhaps $800 million in tax-exempt arena bonds. But these are not normal times, and Forest City says only that it would lead to a re-evaluation of the project.

Funding questions

A victory in court would make it easier to sell a piece of the Nets and/or project to outside investors. But the credit crunch has cast a pall on all projects, at least in the short term.

The towers depend on scarce tax-exempt bonds for affordable housing. While there's little chance that there'd be enough bonds to build the housing in the promised ten-year timetable, the buildings could be spaced far more slowly.

City and state housing finance agencies, controlled by Atlantic Yards supporters, can set priorities for disposition of scarce resources that favor the project.

Governmental oversight?

A recent Simpsons episode, apparently inspired in part by Atlantic Yards, show pop culture skeptical of sports facility projects: "Welcome to the American dream: a billionaire using public funds, to construct a private playground for the rich and powerful."

Will that carry over to official skepticism about Atlantic Yards? The likely re-election of AY supporter Mayor Mike Bloomberg has to be a boost for the project. The likely re-election of Borough President Marty Markowitz ensures additional cheerleading.

Most elected officials wary of Atlantic Yards have not joined the opposition camp but prefer the "mend-it-don't-end-it" banner of the for-now quiet BrooklynSpeaks; the organization's call for an oversight structure could get new momentum in the legislature this year.

Atlantic Yards will be debated in a couple of the City Council races, though no major citywide candidate has yet emerged as an AY critic. (City Council Member Tony Avella is a long shot for mayor.)

State and city officials could have a much bigger impact if they push for oversight hearings regarding the project, or even an audit, as the Council of Brooklyn Neighborhoods requested last month. But there's no political momentum to do so, even though someone, for example, should be grilled about the fate of the Carlton Avenue bridge.

Assemblyman Richard Brodsky, who has slammed the new Yankee Stadium, has not yet turned his attention to AY. (Is it that Assembly Speaker Sheldon Silver has such a cozy relationship with the developer? Or that the legislature, according to a new report from the Brennan Center for Justice, remains stunningly dysfunctional and needlessly opaque?)

Rep. Dennis Kucinich has AY on his radar screen, but has so far concentrated on the Yankees.

Blight, at least

The demolition of buildings for empty lots in the AY footprint, to some, will be an argument to "build it now," while others are pointing out that a project aimed to remove blight has created it.

(Photo by Tracy Collins; graphic from NLG.)

Wild cards

The federal response is a wild card. A Democratic Congress, with the help of ex-HPD head Shaun Donovan as Secretary of Housing and Urban Development, and ex-Bronx Borough President Adolfo Carrion as White House advisor on urban affairs, would be more sympathetic to urban aid, some of which could help Atlantic Yards, as well as increased volume cap to distribute housing bonds.

While the announced tab on the arena has risen significantly, the cost of construction materials likely have declined, and unions may be willing to compromise on work rules to lower costs. Union pension funds likely would want to spread their investment around several projects, but Atlantic Yards likely would be high on their list.

A move to Newark?

What about a Nets move to Newark, if only temporarily? So far that's been blocked.

If New Jersey Gov. Jon Corzine gets re-elected this year, he may be willing to spend the political capital to get the New Jersey Sports & Exposition Authority to relent on penalties imposed if the Nets move to the Prudential Center. But, as reported, that requires a permanent move, not a temporary one.

Final donnybrook?

[Update: The State Funding Agreement sets a decision date of December 19, 2009--but it looks like it can be extended.]

Should the Atlantic Yards arena get over the aforementioned humps, the final donnybrook may involve the city Department of Finance's attempt to value the land under the arena high enough to ensure that PILOTs (payments in lieu of foregone taxes) are high enough to pay off arena bonds.

After scrutiny of such machinations in the Yankee Stadium deal, it will be interesting to see how the city and state finesse the issue.

Michael D.D. White offers numerous suggestions as to how government officials might pull the plug on AY; the role of bond counsel in the abovementioned PILOTs scheme will deserve scrutiny.

Arena over the hump?

If forced to bet, I'd say the arena, if not the project as a whole, is more likely than not to get built, though its chances have been declining. But there's counter-evidence; for example, a Nets official told columnist Ian O'Connor that the arena was dead because of funding problems. And other variables may emerge.

Delays in building the arena--the official opening date is 2011, but 2012 is a more likely best-case scenario--make it tougher for the Nets to attract top free agents in the class of 2010, notably superstar LeBron James. That would lower the value of the team and the expected revenue.

Pressure rising

Indeed, the longer the project lingers, the more the Nets losses mount, and pressure on Forest City to take dramatic action--sell the team/project, sacrifice shares to outside investors, or pull the plug--increases. (Update: After all, there's that Gramercy Capital loan that must be renegotiated by February.)

"[H]ow long can you delay that project if you needed to and what’s the extra cost of carrying that?" an investment analyst asked FCE CEO Chuck Ratner in a conference call December 10.

"I don’t know the answer specifically to how long we could delay," Ratner responded. "It’s not a question of entitlements, it’s a question of the marketplace."

He didn't answer the question of extra cost, however. So far, the developer's been willing to absorb losses. At some point, if bailout funds of some kind don't emerge, that willingness declines.

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