Crucially, the letter points out that, before project approval in 2006, the Empire State Development Corporation (ESDC) hired KPMG to do a report about the feasibility of the project, no such analysis was conducted before the ESDC passed the 2009 Modified General Project Plan (MGPP) in September.
Unmentioned in the letter is that the ESDC did ask KPMG for an update, but only on the feasibility of the housing market over a ten-year buildout--a market study that was highly dubious.
Is project feasible?
The letter states:
Since the time of the 2006 approval, the ESDC has issued and approved a Modified General Project Plan, the MTA and FCRC have struck a new deal for the sale of the MTA Vanderbilt Yards to the develope and, as per the above, the arena financing, along with the rest of the project has been radically altered.Significant changes
This mandates a new PACB review for Atlantic Yards as the changes since 2006 raise serious questions about the availability of funds to finance the project. The tax-exempt arena bond, which has yet to be issued—but is scheduled to be authorized on Tuesday, November 24 is of specific and urgent concern. These bonds are technically non-recourse to the State, but it is generally understood that should a default occur the State and its taxpayers will be on the hook. The PACB was formed specifically to guard against reckless borrowing by ESDC that could result in defaults and place the State in a moral obligation to support the bonds.
There is no way for the PACB to know if the current Atlantic Yards proposal is financially sound and feasible.
The letter continues:
Since December 2006 the following substantial changes have occurred:Lack of new analysis
* The Project was approved at $4 billion is now at least $4.9 billion.
* The arena price tag shot up from $637 million to $900 million.
* In 2006 it was uncertain what the amount of the arena bond would be, but it is now at least $700 million.
* It is unknown if or when housing bonds will be available for the project’s proposed affordable housing component.
* Financing agreements were signed more than one year after the 2006 PACB approval and new financing agreements are reportedly still under negotiation. Both these old and new agreements have never been vetted by the PACB (or the Comptroller).
* It is unknown what rating the arena bond may get, but it has been reported that FCRC is having trouble getting a credible rating.
Changes in the project revenue model:
a. The number of arena luxury boxes has been substantially reduced from 170 to 100 since the 2006 approval. It is unknown what the rental of these suites would be since the economy has changed, but in 2006 FCRC projected a range of $58,000 to $580,000 and KPMG, in consultation, projected a range of $65,000 to $450,000.
b. Whatever the suite rental projection is now, the total number of suites would be reduced by 41%, and a reduction of suite revenue would be at least 41%.
c. The suites went on sale on May 5, 2008, since that time, over 21 months, only 20% have sold according to Nets President Brett Yormark.
d. The new Yankees and Mets stadiums having major trouble filling expensive seats and suites, and their bond issues have been devalued. The Nets are not nearly as popular and beloved as the Yankees and Mets.
e. The terms of the Barclays naming rights deal are unknown. At the end of 2008 Barclays and FCRC reportedly renegotiated the sponsorship, which had previously been reported to be either $300 million or $400 million. This revenue stream is not publicly available.
f. There is an unknown timeline for construction of the project, the sale and cost of condos, and the leasing and rents of rentals.
g. It is unknown if the commercial office building will ever be built, and whether the income from it, will ever be realized.
h. Assumptions about the housing market, condo sale prices and rental prices were made at the height of the real estate boom/bubble, assumptions that could only make sense if there is another real estate boom/bubble throughout the life of the project.
The letter continues:
In 2006, the PACB had the benefit of a report from KPMG, which attempted to review the revenue and income assumptions supporting the project. KPMG found that the FCRC’s projected internal rate of return (IRR) was overly optimistic and reduced the likely IRR, but nevertheless found that the project was economically feasible, despite the fact that many of FCRC’s income projections were on the optimistically high side.
There has not been any new analysis by KPMG or anyone else about the current feasibility of the project given the enormous increase in construction costs, reduced revenues and extended project timeline. Moreover, in 2006, the PACB only approved the issuance of approximately $100 million in bonds and did not authorize the approval of the approximately $700 million required to finance the arena. The December 2006 PACB resolution, and a subsequent April 25, 2007 affidavit by Todd L. Scheuermann (at the time the Governor’s designated representative to the PACB) made it clear that the PACB only approved the $100 million bonds associated with infrastructure improvements and approved a revenue stream associated with ESDC acquiring title to the real estate necessary for the project. The PACB has never approved the issuance by an ESDC subsidiary of bonds for the arena construction.
These are just some of the changes impacting the questions of project finance and feasibility. Clearly the financing structure, the figures and the overall economy are far different today than they were in 2006.
The PACB needs to convene to vote on the project again if ESDC is to be permitted to approve a new bond issue. Given the current dire financial circumstances facing the State, as Comptroller and Committee chairs with oversight of the ESDC, we urgently ask for your concerted effort to make this happen to force compliance with the law and to assure that ESDC does not issue moral obligation bonds without doing the necessary due diligence.