Skip to main content

Net gain to Ratner, loss to public: IBO says developer saves $726M on arena; city loses $40M plus another $180M in opportunity costs

In the absence of any effort to update the flawed fiscal impact reports from the city and state on Atlantic Yards, the Independent Budget Office (IBO), at the request of several elected officials, has updated its September 2005 Fiscal Brief on Atlantic Yards, with far more pessimistic results.

Unlike the previous report, which found a modest net gain for the city over 30 years, the new report, titled The Proposed Arena at Atlantic Yards: An Analysis of City Fiscal Gains and Losses, estimates that net revenues would be negative for the city and modestly positive for the state and the Metropolitan Transportation Authority (MTA)--at least until significant lost opportunity costs were added.

Moreover, the losses for the city would be far greater--another $180.5 million--were opportunity costs to be calculated. Such opportunity costs--foregone gains thanks to tax exemptions and other below-market benefits--were not fully calculated in the 2005 report.

Indeed, the combination of subsidies and tax breaks, including $194 million in federal tax breaks on tax-exempt bonds, adds up to what the IBO calculates as $726 million in savings on the arena for developer Forest City Ratner. And that's without assuming--as does Assemblyman Richard Brodsky, in the case of the new Yankee Stadium--that the use of PILOTs (payments in lieu of taxes) to pay for a sports facility constitutes a full subsidy in itself.

[Clarification 2/20/12: The $726 million is likely overstated by some $50 million, given that it's based on $678 million in tax-exempt bonds, rather than the $511 million ultimately sold. But the overall subsidies for the project, including not-yet-allotted housing bonds, surely would lift the total well over $726 million.]
Arena focus

The IBO report, which follows up testimony by IBO Deputy Director George Sweeting at the 5/28/09 state Senate oversight hearing, focuses only on the arena, not the project as a whole. The previous report, which similarly was limited to the arena, did attempt to estimate additional costs for education, sanitation, police, and fire services.

Still, the IBO backs up new concerns--in a report from the Council of Brooklyn Neighborhoods submitted to the Empire State Development Corporation--that the project benefits, promised in a decade, are unlikely in that time frame, citing "much greater uncertainty about the timetable for the rest of the project," with weakened credit markets and lower demand for office space and luxury housing.

The highlights

From the report:
• Over a 30-year period, the arena would cost the city nearly $40 million more in spending under current budget plans than it will generate in tax revenues (present value, 2009 dollars). The costs total nearly $170 million from financing city expenditures on the arena and the loss of existing tax revenues at the site.
• For the state, the arena would have a net fiscal benefit of $25 million as new tax revenues would exceed spending currently budgeted for the facility. The Metropolitan Transportation Authority would garner nearly $6 million in new tax revenues.
• The new direct and indirect economic activity generated while the arena is under construction in 2010–2011 includes an annual average of 3,282 new jobs in the city, most in the building trades. When the facility is open there will be an average of 955 new jobs, many of them part time, and mostly in performing arts and spectator sports.
• For the developer, Forest City Ratner Companies, the mix of special government benefits result in total savings of $726 million.

The project also includes tax exemptions and other provisions that reduce the level of potential additional revenues the arena might generate for the city, state, and Metropolitan Transportation Authority. These opportunity costs total $181 million for the city and $16 million for the state, plus another $22 million for the transportation authority due to its below market rate sale of land. Were governments not denied these revenues, the city would realize a substantial net fiscal gain from the arena instead of a net loss.
As-of-right benefits

Beyond the uncertainty about the timetable for the rest of the project, the IBO says that "the arena accounts for virtually all of the discretionary benefits flowing to the project" while the rest of the benefits are either as-of-right or special arrangements that would result in benefits that are consistent with those as-of-right programs.

Still, the diversion of scarce housing bonds to Atlantic Yards as opposed to other projects could be seen as a partial subsidy, if the per-unit costs for this project are considerably more.

Calculating benefits

What are the benefits? The IBO cites "direct contributions of cash, capital investment and property; access to tax-exempt financing; exemptions from property, sales, and mortgage taxes; and a below market sale of MTA property."

While the city initially gave $100 million to the project, then another $105 million, IBO says that a portion of the latter "would likely have occurred in the absence of the project," so it only counts $50 million.

Also, the tax-exempt bonds for the arena would save the developer $194 million, with nearly all the cost born by federal taxpayers. That makes the financing arrangement a tempting tactic for city and state officials, but a more questionable one from a federal perspective, especially given an underutilized arena across state lines in Newark.

Upping lost property taxes

The IBO states:
The PILOT financing structure depends on the arena tax blocks being exempt from city property tax, but granting this exemption represents an estimated $146 million (present value) opportunity cost. That amount reflects IBO’s estimate of the property tax that would have been owed over 30 years if the arena were assessed as if it were privately owned.5 Forest City Ratner’s savings are just equal to the city’s revenue loss.

This estimate of the cost to the city of the arena’s property tax exemption is considerably larger than we estimated in 2005. The MTA portion of the land is currently tax-exempt because the land is publicly owned. IBO’s latest estimates assume that if FCRC or any alternative developer operating solely with as-of-right benefits purchased the rail yard from the MTA, the exemption would expire. In our 2005 report we had assumed that the exemption would continue through a leasing arrangement—even if the arena site were transferred to another developer—because that would maximize the proceeds for the MTA. It is clear that the MTA’s ability to maximize its return from property sales has been constrained. Moreover, the latest modified project plan stipulates that FCRC must pay the equivalent of full property tax to the city for all but the arena portion of the project.

New revenues

In calculating arena revenues, IBO states:
IBO assumes half of the money spent by Nets fans, concert-goers, and other spectators at the new arena and surrounding area would amount to an infusion of new spending into the New York City economy (the other half being spending shifted within the city by residents). This estimate assumes that a portion of existing Nets fans would travel to Brooklyn for games, and that a team in Brooklyn would be able to attract fans from Long Island as well as from the city. Most of the new spending occurring in the city, however, is spending that would otherwise have taken place elsewhere in the metropolitan region.
(Emphasis added)

Previously, IBO estimated that nearly 60 percent of the revenue would be new to the city's economy; now, apparently, there's a recognition of greater attrition among New Jersey fans. I've previously pointed out that a smaller number of New Jersey fans crossing state lines would result in lowered revenue. The IBO does not explain its calculations, however.

Nor does the IBO acknowledge the impact of the new arena in Newark, which opened in 2007, on the market for and revenues from non-basketball events in Brooklyn.

Elected officials

The elected officials who requested the report are Assembly Members James Brennan, Hakeem Jeffries, and Joan Millman; state Senators Bill Perkins and Velmanette Montgomery; and Council Members Letitia James and David Yassky.


Popular posts from this blog

Forest City acknowledges unspecified delays in Pacific Park, cites $300 million "impairment" in project value; what about affordable housing pledge?

Updated Monday Nov. 7 am: Note follow-up coverage of stock price drop and investor conference call and pending questions.

Pacific Park Brooklyn is seriously delayed, Forest City Realty Trust said yesterday in a news release, which further acknowledged that the project has caused a $300 million impairment, or write-down of the asset, as the expected revenues no longer exceed the carrying cost.

The Cleveland-based developer, parent of Brooklyn-based Forest City Ratner, which is a 30% investor in Pacific Park along with 70% partner/overseer Greenland USA, blamed the "significant impairment" on an oversupply of market-rate apartments, the uncertain fate of the 421-a tax break, and a continued increase in construction costs.

While the delay essentially confirms the obvious, given that two major buildings have not launched despite plans to do so, it raises significant questions about the future of the project, including:
if market-rate construction is delayed, will the affordable h…

Revising official figures, new report reveals Nets averaged just 11,622 home fans last season, Islanders drew 11,200 (and have option to leave in 2018)

The Brooklyn Nets drew an average of only 11,622 fans per home game in their most recent (and lousy) season, more than 23% below the announced official attendance figure, and little more than 65% of the Barclays Center's capacity.

The New York Islanders also drew some 19.4% below announced attendance, or 11,200 fans per home game.

The surprising numbers were disclosed in a consultant's report attached to the Preliminary Official Statement for the refinancing of some $462 million in tax-exempt bonds for the Barclays Center (plus another $20 million in taxable bonds). The refinancing should lower costs to Mikhail Prokhorov, owner of the arena operating company, by and average of $3.4 million a year through 2044 in paying off arena construction.

According to official figures, the Brooklyn Nets attendance averaged 17,187 in the debut season, 2012-13, 17,251 in 2013-14, 17,037 in 2014-15, and 15,125 in the most recent season, 2015-16. For hoops, the arena holds 17,732.

But official…

At 550 Vanderbilt, big chunk of apartments pitched to Chinese buyers as "international units"

One key to sales at the 550 Vanderbilt condo is the connection to China, thanks to Shanghai-based developer Greenland Holdings.

It's the parent of Greenland USA, which as part of Greenland Forest City Partners owns 70% of Pacific Park (except 461 Dean and the arena).

And sales in China may help explain how the developer was able to claim early momentum.
"Since 550 Vanderbilt launched pre-sales in June [2015], more than 80 residences have gone into contract, representing over 30% of the building’s 278 total residences," the developer said in a 9/25/15 press release announcing the opening of a sales gallery in Brooklyn. "The strong response from the marketplace indicates the high level of demand for well-designed new luxury homes in Brooklyn..."

Maybe. Or maybe it just meant a decent initial pipeline to Chinese buyers.

As lawyer Jay Neveloff, who represents Forest City, told the Real Deal in 2015, a project involving a Chinese firm "creates a huge market for…

Is Barclays Center dumping the Islanders, or are they renegotiating? Evidence varies (bond doc, cash receipts); NHL attendance biggest variable

The Internet has been abuzz since Bloomberg's Scott Soshnick reported 1/30/17, using an overly conclusory headline, that Brooklyn’s Barclays Center Is Dumping the Islanders.

That would end an unusual arrangement in which the arena agrees to pay the team a fixed sum (minus certain expenses), in exchange for keeping tickets, suite, and sponsorship revenue.

The arena would earn more without the hockey team, according to Bloomberg, which cited “a financial projection shared with potential investors showed the Islanders won’t contribute any revenue after the 2018-19 season--a clear signal that the team won’t play there, the people said."

That "signal," however, is hardly definitive, as are the media leaks about a prospective new arena in Queens, as shown in the screenshot below from Newsday. Both sides are surely pushing for advantage, if not bluffing.

Consider: the arena and the Islanders can't even formally begin their opt-out talks until after this season. The disc…

Skanska says it "expected to assemble a properly designed modular building, not engage in an iterative R&D experiment"

On 12/10/16, I noted that FastCo.Design's Prefab's Moment of Reckoning article dialed back the gush on the 461 Dean modular tower compared to the publication's previous coverage.

Still, I noted that the article relied on developer Forest City Ratner and architect SHoP to put the best possible spin on what was clearly a failure. From the article: At the project's outset, it took the factory (managed by Skanska at the time) two to three weeks to build a module. By the end, under FCRC's management, the builders cut that down to six days. "The project took a little longer than expected and cost a little bit more than expected because we started the project with the wrong contractor," [Forest City's Adam] Greene says.Skanska jabs back
Well, Forest City's estranged partner Skanska later weighed in--not sure whether they weren't asked or just missed a deadline--and their article was updated 12/13/16. Here's Skanska's statement, which shows th…

Not just logistics: bypassing Brooklyn for DNC 2016 also saved on optics (role of Russian oligarch, Shanghai government)

Surely the logistical challenges of holding a national presidential nominating convention in Brooklyn were the main (and stated) reasons for the Democratic National Committee's choice of Philadelphia.

And, as I wrote in NY Slant, the huge security cordon in Philadelphia would have been impossible in Brooklyn.

But consider also the optics. As I wrote in my 1/21/15 op-ed in the Times arguing that the choice of Brooklyn was a bad idea:
The arena also raises ethically sticky questions for the Democrats. While the Barclays Center is owned primarily by Forest City Ratner, 45 percent of it is owned by the Russian billionaire Mikhail D. Prokhorov (who also owns 80 percent of the Brooklyn Nets). Mr. Prokhorov has a necessarily cordial relationship with Russia’s president, Vladimir V. Putin — though he has been critical of Mr. Putin in the past, last year, at the Russian president’s request, he tried to transfer ownership of the Nets to one of his Moscow-based companies. An oligarch-owned a…