Friday, February 19, 2010

What if AY is delayed or smaller? Plausible scenario (25-year buildout, 25% smaller) means projected tax revenues would decline nearly 50%

The Empire State Development Corporation's projected tax revenues (see memo, below) for Atlantic Yards could be cut nearly in half under the plausible conditions--neither of which would incur a penalty--of a 25-year buildout and a project cut 25% in size.

Reasons for doubt

Yesterday, I suggested several reasons to doubt the ESDC's calculations of new tax revenue, which rely on a ten-year buildout of the project. After all, even a supporter such as then-ESDC CEO Marisa Lago said the project would take "decades." The Development Agreement allows 25 years, plus extensions.

Also, the projections rely on a full buildout of the project, nearly 8 million square feet, opening after ten years and continuing for the 30 years. But the Development Agreement allows for a much smaller project, less than 5.2 million square feet.

Full buildout, with delay

Though no alternative calculations or assumptions were provided, a helpful reader prepared a spreadsheet to suggest such alternatives. (The ESDC's assumption of a 3% real discount rate is maintained.)

What if, rather than take a decade to build, the full project took 15 years? That would mean only 90% of projected revenue after 40 years. A 25-year buildout would mean 72% of revenue.

This is actually is a very generous, since delays are most likely to affect the office space, which would be the major driver of revenue, and there's no requirement that the office space be built.

Remember, developer Bruce Ratner told Crain's New York Business in November 2009, “Can you tell me when we are going to need a new office tower?”

And, as I wrote yesterday, the costs are most likely underestimated and there's no effort to explain the calculations.

Partial buildout, with delay

What if only 6 million square feet of the project were completed, a 25% reduction? (Remember, there's no penalty for building even less.) And what if it were delayed?

As the spreadsheet suggests, if for some unlikely reason, 75% of the project were completed in five years, the revenue would exceed 83%. If built in the promised decade, revenue would be 75%.

But a project with 75% of the square footage took 25 years to build, tax revenue would be less than 54%.

Again, that's a very conservative calculation, since delays are most likely to affect the office space, and there's no requirement that the office space be built.

The bottom line

Though there are significant reasons to question the ESDC's effort to calculate costs and benefits, let's look at the calculations for New York City.

The ESDC calculates $834.6 million in benefits for New York City. Multiply that by .5374--the adjustment factor for the 25-year buildout and 25% smaller project--and the total becomes $448.51 million. That's only slightly more than the $389.9 million in costs attributed to the city.

And, as noted, a more rigorous calculation likely would both diminish projected revenues and increase projected costs.

Need for clarity

There's never been a thorough cost-benefit analysis.

In October 2008, Port Authority of NY/NJ Chairman Christopher Ward reported back to Gov. David Paterson on the rebuilding plans at Ground Zero. The Times reported:
To cover his bets, Mr. Ward presented two dates for each project: a target date and a “probabilistic” date, based on computer analysis of all the many random things that might go wrong.

Some “probabilistic” calculations of revenue are surely in order.

Atlantic Yards Economic Impact Analysis 9/17/09

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