Monday, June 08, 2009

Two reasons Ratner's arena switch is fishy: construction costs down and Gehry design impossible; are other costs being off-loaded?

Forest City Ratner, in its announcement that the Frank Gehry arena design has been traded for a more pedestrian design by Ellerbe Becket, claimed that "rising construction costs impacted the budgets of all developers," and the press and public officials have uncritically repeated that.

Ratner would be saving only about 20%--$200 million on an arena reported at $1 billion or $950 million--so that's fishy, since lowered construction costs should already have taken care of much of that gap.

Construction costs decline

Construction costs have already been going down--9% nationally since mid-2008, according to Turner Construction Company, which is also the main Atlantic Yards contractor.

Beyond that, local concessions from unions and the construction industry in New York have lowered costs 8% to 20%, as shown in Forest City Ratner's renegotiation after stopping work at the Beekman Tower.

So that should have taken care of most of the cost difference between the announced arena cost in 2008 and the current announced cost.

Ellerbe Becket vs. Gehry

The new arena (right) would cost much more than several previous iterations of the Gehry design, which began at $435 million, at project approval in December 2006 cost $637.2 million, then ballooned to $950 million last year, and has since been reported--perhaps inaccurately--at $1 billion.

It's a design issue

As I pointed out on Friday, Gehry's design was impossible, given Forest City Ratner's unwillingness to build the four towers surrounding it and the Urban Room at the entrance to Building 1, the flagship office tower.

FCR may blame the office market for the inability to construct Building 1.

However, the delay in the other three towers likely is also owed to the scarcity of tax-exempt housing bonds, and there's no evidence so far--I've filed Freedom of Information Law (FOIL) requests, so far stymied--that that the Empire State Development Corporation (ESDC) assessed the availability of such funding when it approved the project in 2006.

Comparing arenas

The Brooklyn arena would look a lot like the Conseco Fieldhouse in Indianapolis, which a decade ago cost only $183 million.

The new arena in Orlando would cost $480 million. That's a decent benchmark for current arena costs.

New York math

Adjust the Orlando number upward by 40% for additional construction costs in New York (the adjustment factor, according to former Finance Commissioner Martha Stark), and the result is $672 million. That's about 10% below $750 million and 16% below $800 million.

But a 40% adjustment shouldn't be necessary. As noted above, costs in New York City have declined 8% to 20%. So there's likely some slack in the numbers.

Indirect costs added?

So, what about that slack? Is Forest City Ratner attaching indirect project costs to the arena price tag, thus having them paid for via tax-exempt bonds, which are a cheaper way to raise money?

We need some specifics about the costs of the arena. The ESDC which is supposed to oversee the project, should explain.

1 comment:

  1. Couple of things about this $800m number that Ratner's people waved under Bagli's nose. First, and most important, is that we have no idea what that number includes. Fees associated with the financing? Land acquisition? Contingencies? A Developer's fee? Take the Louisville Arena, a structure of a very similar size, though in a very different market. $250m odd hard cost (which includes labour), nearer $380m when you add everything else on. Given the paucity of the savings, I can't help but think that unionised labour's the reason why Ratner's saddled with a very undistinguished $800m arena. In fact, given recent declines in commodities prices, I'm not sure how much value engineering Ratner's done.

    Second point - FCR will find it very difficult to lard the arena's financing with non-eligible costs. Most arena financings will need to use both taxable and tax-exempt bonds because some costs are always taxable. Be assured the IRS is pretty diligent about checking this. Of course, one might ask where they were during the land value shenanigans, to which I can only say auditing eligible costs is much easier.

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