Wednesday, May 20, 2009

The AY endgame? The deadline for tax-free bonds, the impact of lawsuits, and Atlantic Lots

(This is one in an irregular series of articles about issues that a State Senate committee might address when it holds a hearing on Atlantic Yards.)

Two articles published yesterday give some hints of the Atlantic Yards endgame, including an effort by developer and Forest City Ratner (FCR) and the Empire State Development Corporation (ESDC) to gain additional subsidies (and to delay developer obligations), and plans by opponent Develop Don't Destroy Brooklyn (DDDB) to file more lawsuits, none of which may block the issuance of tax-free bonds by the December 31 deadline.

Also hinted is a plan by the ESDC to issue a revision of the Modified General Project Plan (GPP), which would describe a new timetable and offer new financing numbers and could--I believe--trigger an additional public hearing in the summer or fall.

Also, Forest City Ratner now plans only the arena and one tower, and NoLandGrab points out that GlobeSt "presciently"--I'd call it an error that revealed truth--ran an image commissioned by the Municipal Art Society, from a photo by Jonathan Barkey, for its Atlantic Lots scenario.

Clash with the MTA

The New York Observer's article, headlined Atlantic Yards, Finance Footrace, mentions what I think may be a key sticking point:
The developer is negotiating with the M.T.A. to close on a deal for the development rights on much of the site, for which Forest City agreed to pay $100 million and invest more than $300 million into a rail yard and other improvements. Forest City has asked to change that agreement, though the M.T.A. has resisted thus far, according to multiple people familiar with the discussions.

Thus the forced resignation of MTA Executive Director Elliot (Lee) Sander looms large; as I wrote, his successor may be more willing to compromise with Forest City Ratner's requests.

So, the oversight hearing should get to these questions: how little does Forest City Ratner want to pay the MTA, and what's the value of the cheaper rail yard it proposes?

The December deadline

There's a December 31 deadline to get tax-exempt bonds for the arena, under a provision in which AY was grandfathered in by the Internal Revenue Service, and Forest City Ratner has expressed confidence in doing so even while lawsuits are pending.

Indeed, the one lawsuit that could definitely stop the project--rather than require the ESDC to revise some of its documents--is the appeal of the eminent domain case, which was decided unanimously. That appeal could be dismissed by the fall; if it is accepted, and goes to the Court of Appeals, the case could take two years.

FCR spokesman Joe DePlasco said that, even if the case is appealed, the developer will seek financing. That's not impossible, but an additional risk premium would have to be factored in. I suspect they don't want to issue bonds until the eminent domain case is dismissed.


That question should be answered not by DePlasco, whose record is not exactly credible and who doesn't answer to taxpayers, but by the ESDC.

The Observer points out that the market for tax-free bonds "is far more robust than the broader credit market." (Update: See Gringcorp's comment below for some skepticism.)

Other cases

Another case involves an appeal of the decision dismissing the challenge to the environmental impact statement. While a successful appeal might not formally stop the process of eminent domain and thus issuance of bonds, it could raise sufficient questions about the use of blight to pause or even kill the process.

Also, I learned yesterday, there's a hearing June 8 in state Supreme Court on a motion filed on behalf of residents in two buildings in the AY footprint, who ask that a decision against them be vacated and that a new ESDC hearing be held, given questions about project benefits and timetable.


A motion filed by attorney George Locker pointed to ESDC CEO Marisa Lago's acknowledgement that the project could take "decades":
As of April 8, 2009, the evidence is clear that ESDC believes that Atlantic Yards is a project that will take decades. This is an enormous change from the 10-year project that was approved in 2006. ESDC should be directed to hold a public hearing on all of the changes.


Should there be a new Modified GPP, as noted above, those plaintiffs may get their wish.

FCR's doggedness

The Observer offers some context regarding the developer:
The tough financial realities of this recession have scared off even some of the most quixotic developers in the city, forcing them to tuck their grand plans for new projects away, eating whatever costs they put into the early stages of development. By contrast, Mr. Ratner has refused to give up on Atlantic Yards, continuing to pour cash in. In the past year, Forest City has successfully extended a key loan, worked to redesign its arena, pushed various governmental agencies for revisions to agreements and all the while kept on contract an army of consultants and lobbyists.

This is an extraordinarily expensive task. Between the lawyers, the Nets, property purchases, lobbyists, architects, demolitions, and early infrastructure work, Forest City and its partners have spent hundreds of millions of dollars on this project in the past five years. That tremendous investment has been spent on a physically complicated project for which the developer hasn’t yet begun building or even clinched a deal to buy much of the land from the M.T.A.


Well, yes, and no. As of October 2007, for example, the developer committed $250 million, not counting the Nets losses, but the city and state have pledged $305 million. And FCR, as the New York Times first reported, would get a 5% development fee, or $200 million, should the project come in at the previously announced $4 billion.

That's a question for the oversight hearing: what's Forest City Ratner's projected development fee?

But Atlantic Yards has always been the developer's priority, in part because continued losses by the Nets and the team's loss in value mean that a move is crucial to reverse the tide. And the developer has been lobbying hard to gain subsidies, so FCR's efforts might be seen less as sacrifice and more like strategy.

New subsidies from Bloomberg?

Beyond the wrangling with the MTA, the Observer reports:
Forest City is negotiating with the Bloomberg administration, too, to change a deal that involves a total of $200 million in subsidies, according to those sources.

I'm assuming that's a reference to the current deal of $205 million, in which $105 million was quietly added, rather than an additional $200 million. Again, that's a question for the oversight hearing.

More litigation

While DDDB plans more lawsuits, the Observer notes that "[i]njunctions are not frequently granted to challenges on public approvals."

An article in the Brooklyn Daily Eagle suggests that DDDB may file a second lawsuit regarding environmental review, given that the project has changed. Again, if a Modified GPP is issued, there could be a hearing before bonds are issued, thus responding to that potential lawsuit.

DDDB Legal Director Candace Carponter told the Eagle that they could file a taxpayer lawsuit in federal court claiming the IRS made an illegitimate exception specifically for Ratner’s development; or perhaps a lawsuit that challenges the financing of the project.

In both those cases, a stay would be necessary before eminent domain is pursued.

[Update 7 pm May 20: Carponter tells me that the lawsuits she discussed with the Eagle were potential, rather than definite.]

A political battle

Lawsuits may raise serious questions about the project, but, outside of the eminent domain case, it may be that political entities--notably the Senate committee holding a hearing, the MTA board, and the ESDC board--may have more impact on the project over the next months.

Can the ESDC's evolving plans for AY pass the smell test? Will there be a real cost-benefit analysis?

So it would be interesting to learn what exactly Gov. David Paterson thinks.

1 comment:

  1. One sentence jumped out at me from the Observer article. "The arena would be financed by tax-free bonds, the market for which is far more robust than the broader credit market." I think Mr. Brown has not made a distinction between tax-free bonds issued by governments and other essential service providers, and tax-free private activity bonds, which are issued for the benefit of private developers for projects that are deemed to have a public use, such as private power plants, privately-run toll roads and, yes, unnecessary arena projects.

    The distinction is important because the credit work is much easier for public activity bonds. You look at a government's tax base, budget, and a rating, hope they don't default, and off you go (though there's an emerging school that says that it's not so simple).

    For private activity bonds you have to spend much more time analysing cashflows and looking at how the project will perform. This is subject to a much larger number of uncertainties, including the economy, the health of the customer(s), construction, and so forth. It's MUCH more complex, and there have not been a massive number of private tax-exempt deals done recently. I need hardly rehearse just how speculative a venture moving the Nets to Brooklyn will be.

    Kudos to Mr. Brown for looking at the uncertainty about the financing (it is rarely a rewarding task to predict whether deals will happen or not). I think he does have to look at how difficult a financing prospect a Nets arena is.

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