Friday, September 25, 2009

Bruce babbles, explains deal as a "strategic" business investment; Bagli says project was on "life support"

Do we really know the details of the deal Bruce Ratner signed with Russian mogul Mikhail Prokhorov to sell 80% of the Nets and 45% of the arena?

No, but when asked about it yesterday in a TV interview, Bruce Ratner basically babbled, repeating the mantra of a "strategic" business investment, asserting the deal's great because "it puts two business people together," and claiming he's been "delighted" throughout the whole Atlantic Yards process.

More soberly, Charles Bagli of the New York Times, interviewed on WNYC's Brian Lehrer Show, said the project had been "on life support" and suggested that one key to the deal was Prokhorov's willingness to absorb an unspecified amount of team losses.  

On the Glick Report
 
In an interview on the Glick Report on Fox Business, host Alexis Glick asked Ratner: What is behind the sale?

BR: What's really behind the sale is a strategic partnership that Mikhail Prokhorov wants to really create a business relationship both in sports, real estate, and entertainment, and really bring Russia and the United States closer in so many kind of ways, and sports is a major way to do that. But it's an investment really that's strategic I think for Mr. Prokhorov and really for Russia, in terms of investing with an American businessperson, to create something which is strategic, good for the city, good for the state, good for the United States, I think very good for Russia. It's really a business venture in the area of sports, real estate, and entertainment. I think it has to be looked at like that. It's a serious business investment. It's a serious vote of confidence, I think, for this country and also very important for sports and the NBA. And also I think a very serious vote of confidence for Russia, too, where Russia is saying: we want to be partners with an American businessperson.

Vote of confidence?

It's a "serious vote of confidence" for this country? You mean a Russian oligarch in a country where the rule of law and press freedom are a little shaky would worry about investing in the United States?

Mayor Mike Bloomberg said something similar, according to the New York Post: "It goes to show you how much confidence there is in how New York City is being positioned to come through the downturn stronger than ever, and in the future of Brooklyn," he said. "Most of us remember when Brooklyn garnering this kind of international investment would have been hard to imagine."

Needless to say, as with the Barclays naming rights deal, it's not an investment in Brooklyn.

A good deal for Ratner?

At 2:44, Glick, who's known for softball questions, actually threw a pitch at medium speed: Is this a good deal for you. You bought the Nets, I guess, about five years ago now, for 300 million dollars. It values at 80 percent stake, and a 45 percent share in the arena, at 200 million dollars. On the surface, people are saying, 'I'm not so sure this is a great deal for Bruce Ratner.'

BR: It's a great deal, actually, it really is. Because, remember, when you say 300 million dollars for a team, there's financing in addition to it, as well as arenas. Arenas very often have almost no equity in them. They're often 100 percent financed. In our case, we're putting in about 200 million dollars. If you sort of add it all up, it's probably about a 50/50 stake in both together. So there's about 400 million dollars of equity. That's a strong amount of equity for a team and arena. For us, it's great. Because, I think what it does is, it puts two businesspeople together, two countries together, and really takes this project, which already is incredible--Brooklyn has been a huge hit, when you talk to people about it--this just takes a very diverse borough and a diverse ownership base now and puts it together. So it's a huge thing for sports and for us.

It's not necessarily a strong amount of equity. Remember, the Nets' debt/value ratio as of last December, according to Forbes, was a league-leading 71%. Even if this goes a good ways toward wiping out that debt, the Nets are still losing money.

Indeed, in a skeptical piece in the Bergen Record, Ian O'Connor reported that "[o]ne minority Nets partner said that Ratner stands to lose another $100 million in his final seasons in New Jersey, and that the team would’ve cost Ratner $800 million (including the $300 million purchase price) by the time he gets to Brooklyn."

If Ratner is putting up $200 million in equity for the arena that may be unusual, but at $800 million and change, this arena would be the most expensive ever. Subtract $200 million and it still would be very expensive.

deMause's analysis

On Field of Schemes, Neil deMause noted yesterday that if the team has borrowed heavily--and it has--then 80% of the team is not worth $200 million.

He suggests: It's 45% of the arena, not the whole project. Which still seems cheap, yes, but if the Nets have a ton of outstanding debt, the team might not have that much positive equity left in it.

And deMause pointed to a crucial unanswered question about arena revenue: The big question, though, remains not who's getting the team or the arena, but who's getting the team and arena revenues. As has been noted previously, the only way anyone would want to buy into the whole project would be if they could get a cut of any resulting boodle — if you're going to own the Nets, you want them to keep any revenues they make at the arena, while if you're going to own the arena, you want the Nets to either hand over revenues to you or pay a high rent. For Prokhorov, who'd own a larger stake in the team than the building, you'd think he'd want to ensure a low rent so that he doesn't end up owning 80% of a Huizengaesque boondoggle. But no details have been released about any lease agreement between Ratner and Prokhorov, which makes you wonder if there's more that hasn't been reported, or if the two are just throwing up their hands and figuring they'll work that out later.

Second thoughts?

Glick asked Ratner: This has been a very long drawn-out process. The New York media has covered this wall to wall. You're finally on the cusp of getting into the ground. Do you have regrets? Would you have done something different?

BR: Well, first of all, I have no regrets at all. I have such strong belief in this project, and it's worth it. You're talking about jobs: very, very important now. You're talking about sports: very important for the borough. And you're talking about housing. And we're going to accomplish that and good things take a long time, and I know that. Our projects have taken a long time, very often, well worth it. And I'm glad I started the endeavor and I'm glad where we are on it. We're really making huge progress. We'll start the arena this year yet. And I'm just delighted, actually, at what's happened recently and throughout the whole process. Look at this--this is a great city and great country. You're going to get people taking all kinds of positions. And that's what's great about it, it's fine, it's fine, it's good.

Watch his body language to see if he's really delighted at everything.

Timing issues AG: When is the team going to move and when will these facilities be available? When could people move there?

BR: It'll probably about two and a half years when the arena will be completed, it'll be the 11-12 season, so that's when the arena's done. And then, within the next year, we'll start the housing and we'll progress building by building until we finish the project. And our track record as a company is that projects take a long time, they're large, that's what our company does--we do development, that's our business--it takes a long time but we finish what we do. And this is I think another example of that. And listen, it's never easy, particularly in these times. We're one of the few that are able to build in these times.

As noted, Ratner's prediction about the timetable differs from the official one promulgated by the Empire State Development Corporation.

Ugly situation

Glick asked Ratner about the current economic situation in real estate: How ugly is it?

BR: I don't like the word. That doesn't mean it's not accurate. It’s going to be very difficult in the commercial field of real estate. Whether it be rents, particularly in the city, or whether it be sales all over the country, they’re down and I think we’re going to find tremendous softness in the market. It takes awhile, very often, for that to go through the system and the effect of that is lower sales prices and so on. I think that we can’t fool ourselves. If you look at where we were a year ago, this country has done extremely well, but we’re not out of the woods at all and we have to recognize that. We’re going to have, I think, a reasonably long period, at least a couple of years of continued pain in the real estate field and I think in the economy generally..... But things do go in cycles.

On Brian Lehrer

On yesterday's episode of WNYC's Brian Lehrer Show, Bagli was joined by Rep. Bill Pascrell (D-NJ), who, interestingly enough, has been the only lawmaker to raise questions about the sale.



Lehrer, who called it "yet another bizarre twist to the saga of Atlantic Yards," asked why Ratner needed a rescue package.

CB: The project’s been on life support. He’s had three years of delays, because of legal challenges... during that time, the real estate market collapsed. There’s no financing for real estate out there. Yet costs have escalated. It appears he’s been able to convince the Russian billionaire to take a leap of faith that a, that it will happen and b, that it will be profitable.

I'd note that, while costs have certainly escalated since the project was announced in 2003, they should have receded in the past year.

Bonds in escrow

With a December 31 deadline to take advantage of $100 million-plus in federal tax breaks--now to benefit, in part, Prokhorov--Ratner plans to have about $700 million in tax-exempt bonds sold, with the proceeds put into escrow until the Court of Appeals issues a ruling, likely in November, on the eminent domain case.

A $200 million deal?

Lehrer asked if the deal was worth only $200 million. CB:

I think the value of the deal is probably greater than $200 million. There’s a provision that the billionaire will take on or absorb the team’s continuing losses, between now and the move to Brooklyn… he’s stepped to say, 'I’ll absorb [losses], up to a certain level.' I don’t know what that number is.

Dismay at subsidies

Pascrell claimed that the project started out as being for affordable housing--not quite; it was "Jobs, Housing, and Hoops." He suggested the project would get $2 billion in grants and loans; that's not quite true, unless you count the $1.4 billion in housing finance, which is hardly a $1.4 billion subsidy but instead a near-monopoly on scarce resources. But Pascrell raised an important question: Would the city have agreed to subsidize the project to this degree… if [Prokhorov] was involved from the beginning?

Bagli wouldn't bite: I think a lot of questions would be raised about the level of subsidies, regardless of who was involved.

BP: I don’t believe this project would’ve been approved by the taxpayers of New York City and New York State if Mr. Prokhorov… was in this from the very beginning…

He didn't realize that the taxpayers never approved it; that was the job of the unelected Empire State Development Corporation.

BP: This is no way to invest the public’s money… where [Bagli] quoted Mr. [Daniel] Goldstein [of Develop Don't Destroy Brooklyn]… he said these massive taxpayer subsidies to enrich a Russian oligarch… that’s what’s happening…

Lehrer closed the show by re-asking Bagli if it would it have been different had Prokhorov been involved from the beginning.

Bagli again wouldn't bite: The issues that are raised, they stand regardless of whether the Russian is involved or not. They’ve been niggling questions since 2003.

Yes, questions about subsidies and eminent domain have been around since 2003, but surely the role of someone as rich as Prokhorov--richer than Ratner and presumably expatriating his profits--would have crossed the line for some people.

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