Wednesday, February 25, 2009

Avoiding AY example, Schick, former ESDC leader, proposes "transparent" investment fund for commercial real estate

Former Empire State Development Corporation (ESDC) president Avi Schick, in a Daily News op-ed headlined How to get N.Y. building again: Create a real estate financing fund, suggested that the city and state Comptrollers should allocate $2 billion of the $200 billion in pension assets they manage to create a fund to finance commercial real estate.

And that would be matched from union pension funds, banks and others, thus financing a $5 billion real estate portfolio, though of course "requiring substantial equity participation from those seeking financing." (The term "substantial" isn't defined.)

Schick's idea has drawn severe criticism for ignoring market issues and for serving to further the interests of Daily News publisher, Mort Zuckerman.

But first let me point out how Schick's guidelines for public investment set out--at least on paper--a severe contrast with the way his former agency has shepherded the Atlantic Yards project.

Contrast with AY: transparency

Schick recommends:
* Investment guidelines, including the expected cost, timing and return, must be publicly articulated before any financing is provided. This transparency will help guarantee that investment decisions will be guided by professionals, not politics.

Only a vague "expected" timeline was provided by the ESDC in its approval of the Atlantic Yards project, and there was no assessment of the expected return--an issue in eminent domain case heard in state appellate court Monday.

In other words, Schick is setting out a higher standard. And while the justification may be a larger percentage of direct public investment in a project, the widespread special benefits for the Atlantic Yards project constitute a significant amount of publicly provided advantage.

Contrast with AY: no lobbying

Schick writes:
* Lobbying must be prohibited. The news that the banks receiving TARP money lobbied Treasury was one more sign that it was still business as usual in D.C. If pension funds are on the line, it must be all about the numbers, not who you know.

"Who you know" has been a watchword of developer Forest City Ratner, which has long been one of the state's top spenders on lobbying and has a particularly cozy relationship with all-powerful Assembly Speaker Sheldon Silver.

Lately, the developer has deployed former Senator and uber-lobbyist Al D'Amato, apparently to direct federal stimulus funds to the Atlantic Yards project.

Contrast with AY: equity stake

Schick writes:
* The fund must be given an equity stake in projects that obtain financing. The government will create substantial value by establishing this fund, entitling it to capture a portion of those profits when it exits the investment.

As noted above, while this may represent a larger percentage of direct public investment in a project than in Atlantic Yards, the widespread special benefits for the Atlantic Yards project constitute a significant amount of publicly provided advantage.

Indeed, Schick's formulation highlights Brooklyn Borough President Marty Markowitz's stunning willingness to direct federal money to the project without any attendant public share.

Avoiding mistakes of the past?

Schick concludes:
It also would avoid the mistakes of the past, when government stood idly by while unchecked excesses led to the real estate bubble. The looming liquidity crisis represents no less a market failure than the free money era that just ended, and government intervention is just as necessary to correct it.

All of which Nicole Gelinas of the Manhattan Institute, in a commentary headlined The Developers’ Bailout:Propping up politically connected real estate won’t help New York, calls "a truly awful idea."

She points out that there's already a glut of empty real estate, and preventing buildings from falling into default isn't necessarily a desired result--because the correction in a long-climbing market would benefit the new businesses taking cheaper office space.

And she points out that the state pension fund "has a history of allegedly choosing managers based on political contributions" and, yes, developer Bruce Ratner is already lobbying for federal stimulus money for his "centrally planned Brooklyn boondoggle that already benefits from hundreds of millions of dollars in public subsidies."

Bailing out Zuckerman?

New York Post columnist Steve Cuozzo, in a column yesterday headlined A HIDDEN AGENDA AT THE DAILY NEWS, came out swinging:
EVERY big newspaper has conflicts of interest - yet most publishers manage to be subtle about promoting their extracurricular agendas. Our distinguished opposites at the Daily News, however, seem guided by the principle that "desperation is blind."

He notes that Schick is still the chairman of the Lower Manhattan Development Corp., which has a "sorry record" in failing to dismantle the Deutsche Bank building as planned.

And he writes:
Schick's taxpayer-soaking plan would only pile more catastrophe on an industry that's mostly itself to blame for its plight - and which is inextricably bound up with the faltering News' fortunes.

News publisher Mort Zuckerman is also the chairman of the publicly traded real-estate company Boston Properties. Boston, America's largest commercial landlord, has gotten itself into a pickle in Manhattan that threatens the finances of the whole company.


Pension funds and "predatory equity"

Just a year ago, the shoe was very much on the other foot. Housing advocates had discovered that city pension funds had a stake in "predatory equity" investment funds that were buying rent-regulated buildings on the expectation that they could dislodge tenants and jack up rents--a tactic that has proven to be very unsustainable.

(See the example of Stuyvesant Town/Peter Cooper Village, which was bought by Tishman Speyer--not predatory equity--as detailed in New York magazine.)

What emerged was a new residential real estate investment principle, involving an effort to ensure fair treatment of tenants; the creation of a process in which the pension funds opted out of sketchy properties; and an effort to pursue Economically Targeted Investment (ETI) Programs.

The goal was "a market rate of return that is commensurate with the risk assumed, to fill capital gaps in New York City, and to provide specific quantitative or qualitative benefits to New York City and, in particular, its low-, moderate- and middle-income communities and populations."

Yes, that's a market intervention, and thus subject to scrutiny. But the beneficiaries would not be the Mort Zuckerman's of the world.

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