Friday, July 23, 2010

In City Council hearings, Pinsky lets Atlantic Yards fall down the memory hole, claiming "certain elements" of the project have been accelerated

Atlantic Yards is falling down the memory hole.

In two City Council committee hearings, held in March 18 and May 25, New York City Economic Development Corporation (NYC EDC) President Seth Pinsky made some questionable statements regarding Atlantic Yards, but was not called to account.
  • He mischaracterized the timing and size of the city's investment
  • He claimed there were new incentives to get the project done on time, but those incentives don't conform to the timetable his agency used to calculate city revenues
  • He made new claims about the total of city spending on Atlantic Yards, but hasn't provided full details
  • He cited, but didn't at the time provide, a new cost-benefit analysis that seems dubious under scrutiny, given that it presumes a both a full buildout and one accomplished in ten years
  • He didn't point out that the city's new analysis represents a 20% decline in city revenue (though, likely, it's merely a more honest calculation than its predecessor because it incorporates certain costs)
Pinsky has a lot on his plate, so maybe he can't be expected to get everything right. But if he gets it wrong, why do all the errors come in defense of the project?

More scrutiny needed

That's an argument for an oversight hearing, as new City Council Member Brad Lander and veteran Letitia James have requested.

"It is the largest project in Brooklyn, and will have a massive impact on the neighborhoods around it," Lander said. "There are many unanswered questions, both about the project itself, and about a wide range of City services (transportation, public safety, affordable housing, public schools, open space, etc). Tish [James] and I have made repeated requests for such a hearing, and we will keep pushing for it."

The city contribution

As I wrote June 25, additional cash delivered to Forest City Ratner for infrastructure led a NYC EDC official to calculate that the city subsidy, rather than rising beyond the $205 million once reported, was instead at $171.5 million.

However, that may lowball the total, since the city seems to be excluding some Atlantic Yards-related infrastructure spending that is not directly passed on to the developer.

Debatable totals

What's the total city investment? The city initially put in $100 million for infrastructure, but some could go to land. That money all went to reimburse Forest City Ratner land, and the city added $105 million for infrastructure.

Pinsky in March identified $131 million for acquisition, including $31 million shifted from previously announced $105 million in infrastructure, plus $24 million for infrastructure being given to Forest City and $24 million spent by the city. That represents a total of $179 million.

In May, Pinsky calculated a total of $171 million or $179 million, rather than the previously calculated $205 million. (The cost-benefit analysis assumes $179 million or, to be precise, $178.7 million.)

We still don't have clarity about the itemization in an August 2008 letter (right; click to enlarge), given that only the Sixth Avenue Overpass work was dropped (since the structure will remain intact). We do know that the cost of the Carlton Avenue Overpass has gone up.

Lander asked for clarifications from the city but got--as he described to me--only some verbal description that was inconclusive.

He said, "Without a more precise accounting of the infrastructure expenses referred to in their letter to you and at the hearing, there’s reason to be concerned that the city is putting more subsidy dollars in than they’re saying."

Why is FCR getting more cash in the first place? Pinsky, at a Council hearing, said the rationale for giving Forest City money for infrastructure rather than having the city spend it itself was because the infrastructure abuts or is surrounded by the work FCR is already doing and "it made more sense just to have one contractor."

Pinsky on original investment

At the March hearing, Pinsky told Council Members, "The original investment that had been agreed upon when the project was first envisioned was $205 million."

That's not true.

According to the original Memorandum of Understanding, signed 2/18/05, the city initially pledged $100 million in capital contributions, as did the Empire State Development Corporation (ESDC).

Only in January 2007, in the month after the project was officially approved by the ESDC, did the city agree to add $105 million in infrastructure funds.

Timing issues

Pinsky also was fuzzy about timing. He said that, "when the project was originally proposed, two or three years ago, there was a $100 million in the city’s budget..."

Actually, the project was announced 12/10/03 and the city's MOU, pledging $100 million, was signed 2/18/05, more than five years before the hearing at which Pinsky spoke. The additional $105 million came nearly two years after the MOU.

The cost-benefit analysis

Pinsky, at a 5/29/09 oversight hearing held by state Senator Bill Perkins, maintained that the project would produce more than half a billion dollars in new tax revenues to the city, but acknowledged later that he was using the NYC EDC's 2005 study, which presumed 2 million square feet of office space, more than three times the current total.

"We’re in the process of updating that analysis," Pinsky said. "We expect it to still be an extremely positive number."

(At right, Pinsky at the 2009 hearing; photo by Adrian Kinloch.)

That contrasted with a September 2009 report from the New York City Independent Budget Office (IBO), which concluded that the arena would be a net loss to the city. (It calculated a modest gain to the state, but left out the giveaway of naming rights.)

Getting closer to the numbers

Pinsky this past May told acknowledged to City Council that "we haven’t done a full re-analysis of the cost/benefit analysis that we did, but we’ve made sure that the changes in the assumptions have not gone against the city overall."

Pinsky declared, "So it’s a considerable return that the city will be making off of the project." He amplified by saying, "The last estimate that was made, I think it was back in 2006, was around $300 million."

Actually, the document was dated 6/27/05, and the total was $524 million. The new total is $411.3 million, a decrease of more than 20%.

Moreover, the NYC EDC analysis depends on income taxes from new residents, a fundamental methodological error. As James Parrott of the Fiscal Policy Institute said, "I don't know of any serious cost-benefit analyses of mixed-used economic development projects that count the taxes of residents."

Impact of delays

Moreover, it presumed a full buildout and a buildout over ten years, both of which are highly unlikely. "We’re making a smaller capital investment in the project than we had anticipated," Pinsky told City Council, "and we’re continuing to get the same benefits over time."

The first part of that sentence is untrue, as noted above. The second is almost certainly untrue, given that the Development Agreement allows 25 years and the penalties do not kick in for the third tower (of 16) unless it takes more than ten years for construction to start.

So it's quite likely that Phase 1, which was supposed to be completed in four years, will take more than ten years. Rather than build five towers in Phase 1, Forest City Ratner need only build three towers.

Elements accelerated?

Lander brought up the timetable issue, citing "a much longer construction timeframe, and "a lot of long-term uncertainty."

Pinsky claimed the overall timeframe "is likely to be consistent with what had been assumed before" and that "certain elements of the projects which have now been accelerated."

Both of those statements are questionable.

In 2007, the City Funding Agreement allowed 12 years to build Phase 1. The Development Agreement signed in December 2009 allows three or four years to start construction of the first tower, five or six years to start construction of the second tower, and ten years to start construction of the third tower.

Pinsky also said that "Forest City has agreed to build the first building on the site within three years" and "before there was no requirement that they start any of the additional building that early."

So those are new requirements, but only compared to the City Funding Agreement.

However, they do not require Forest City Ratner to conform to the ten-year timetable on which the NYC EDC's fiscal analysis is based.

Who's in the driver's seat?

Pinskey claimed that "the cost of other aspects of the project... have changed in ways that are favorable to the city’s cost/benefit analysis. They’re less favorable to Forest City."

Well, that may be true if the focus is on increased construction costs. However, since the initial analysis, the timetable was extended and the city's contributions increased.

More importantly, Pinsky's statement ignores the fact Forest City Ratner last year gained significant concessions. For one thing, property for the project will be acquired in two or more stages, rather than all at the beginning, thus saving the developer considerable cash flow.

Also, FCR last September was able to get the city and state funding agreements amended, thus allowing increased cash flow.

Similarly, rather than pay $100 million upfront for the Metropolitan Transportation Authority's Vanderbilt Yard and build a larger replacement railyard, FCR last year renegotiated the deal.

The developer put down $20 million for the fraction of the railyard and agreed to pay the remaining $80 million (at a gentle interest rate of 6.5% interest) over 22 years, which a real estate appraiser last year told The Real Deal was "a real coup."

And FCR gets to build a smaller permanent railyard that saves perhaps $100 million.

The transcripts

Excerpts from the transcripts are below, with emphases added in bold, and the full transcripts are embedded at bottom.

The March hearing: Lander

COUNCIL MEMBER LANDER: And then certainly on the project question front, last but definitely not least, and I hope we'll be able to have a hearing on Atlantic Yards now that, you know, there's been a groundbreaking and the project is moving forward. There's a lot of questions that the Council would like to ask. So I'm hopeful that we can do an Economic Development Committee hearing just on that project. But just strictly from a budget point of view, can you tell me what's the status of the money that the City has allocated for acquisition, infrastructure?

PRESIDENT PINSKY: The original investment that had been agreed upon when the project was first envisioned was $205 million. It was $100 million that could be used for land or infrastructure and I think the agreement early on was that it would be used entirely for land. And then $105 million in the City's capital budget for City capital projects relating to the Atlantic Yards Project. As a result of the negotiations that took place since that project was originally envisioned, as well as changed financial situations, we restructured the City's contribution. But the bottom line is that we ended up with a smaller contribution to the project in the amount of $179 million. And that consists of the original $100 million for land, plus another $31 million that was allocated to land, $24 million to infrastructure that the City was previously going to do but now Forest City will do on behalf of the City and that money will go in as Forest City actually performs that work. And then another $24 million remaining in the City's capital budget for its own infrastructure work relating to the project.

COUNCIL MEMBER LANDER: So a decreased overall commitment but an increased allocation of resources to Forest City for both acquisition and some infrastructure--

PRESIDENT PINSKY: [Interposing] That's correct.

COUNCIL MEMBER LANDER: --that had been envisioned--

PRESIDENT PINSKY: [Interposing] That's correct. And all of these investments are tied to requirements on Forest City to perform in various ways on the project.

COUNCIL MEMBER LANDER: Okay. I have here, you won't be surprised, I have a lot more Atlantic Yards questions but I'm going to save them in the hopes that we can do an Atlantic Yards hearing now that the project is rolling forward. So I won't ask those now.

PRESIDENT PINSKY: And again we're more than happy to participate.

The May hearing: Reyna (for James)

COUNCIL MEMBER [DIANA] REYNA: The Atlantic Yards, for the sake of Council Member Tish [James], who was not here, we had a briefing, this was one of the specific questions asked. The Atlantic Yards received an additional $24 million from the administration, could you explain to the Committee what the funding is for?

MR. PINSKY: Yeah, it’s actually not an additional $24 million, what’s happened is that the money that was previously in the budget has been reallocated, so- -

COUNCIL MEMBER REYNA: (Interposing) And what budget year was that?

MR. PINSKY: So when the project was originally proposed, two or three years ago, there was a $100 million in the city’s budget for … to help Forest City with site acquisition, and then $105 million that was in the city’s budget for infrastructure that the city was going to build connected to Atlantic Yards. As the project has been better defined, we’ve reprogrammed $31 million of the $105 million for additional assistance to Forest City for land acquisition. So that brings the total amount that’s been spent, and all that has been spent for land acquisition, to $131 million. Then, in addition to that, it was agreed that Forest City, because they were doing work on the site- -

COUNCIL MEMBER REYNA: (Interposing) And site acquisition for infrastructure on behalf of the City of New York?

MR. PINSKY: No, no, just for site acquisition for the arena, for the project.

COUNCIL MEMBER REYNA: And that will be turned over to the City of New York?

MR. PINSKY: No, that … it’s property that’s actually owned, technically, by the Empire State Development Corporation, and then leased for over a long term to Forest City.

COUNCIL MEMBER REYNA: And the city’s rate of return in investing $131 million is?

MR. PINSKY: So we’re putting in, and I’ll get to the total number, we’re putting in about $179 million in capital. And the estimates are that when you subtract out all of the investments that we’re making, the amount in surplus taxes that will be generated by this project will be hundreds of millions of dollars more than we’ve invested, over the life of the project. So it’s a considerable return that the city will be making off of the project.

COUNCIL MEMBER REYNA: Projected returns.

MR. PINSKY: Correct, correct.

COUNCIL MEMBER REYNA: And the total amount of those projected returns are?

MR. PINSKY: The last estimate that was made, I think it was back in 2006, was around $300 million, although, again, I don’t remember the exact number. But that was the net benefit of the project.... So, it was $100 million for acquisition, there was a $105 million on top of that for infrastructure. $31 million of the $105 has been put into acquisition as well. So that brings acquisition total to $131 million.

Then Forest City is going to do some of the work that the city had planned on doing, and so $24 million of the money that the city … of the $105 that the city was going to spend, is now going to be paid to Forest City to do the same work. And on top of that, another $8 to $16 million will also be paid to them to help them put in a water main. And then finally the city has done $8 million of the $105 million work ourselves. So, just to add that all up, what that means is that it’s $100 million for acquisition, plus $31 million for acquisition, plus $32 to $40 million for Forest City to do onsite work on behalf of the city, and $8 million for the city to do its own work, which brings the total, instead of $205 million, where we had been before, it will be somewhere between $170 and $180 million.

COUNCIL MEMBER REYNA: What was it before?

MR. PINSKY: About $205 million.

COUNCIL MEMBER REYNA: And so your calculation is balancing this out as a savings to the City of New York?

MR. PINSKY: We’re making a smaller capital investment in the project than we had anticipated, and we’re continuing to get the same benefits over time. And so we believe, per your earlier question, that there will be a significantly positive return to the city as a result of this project.

The May hearing: Lander

[He arrived late at the hearing, so he raised questions that Pinsky had previously faced.]

COUNCIL MEMBER LANDER: That would be great, thank you. Okay, now for a minute I have to channel my colleague, Council Member James, who I know appreciated your remarks at the beginning. I’m not sure that I can work up the full level of Atlantic Yards-related bluster that she would have if she were here. I will say that I’m glad that we’re not actually authorizing any new money for that project. In fact, as you reported in the preliminary budget hearing that, of this reduction from $205 to $179. I guess just one specific question, first, the it looks like $40 to $50 million that we’re giving them for infrastructure rather than having the city spend on infrastructure itself, what’s the rationale for doing it that way?

MR. PINSKY: The reason is that most of this infrastructure abuts or is surrounded by the work that they are otherwise doing on their development. And so rather than having the city have a contractor who is trying to work around or through the work that Forest City is doing, it made more sense just to have one contractor, the contractor that’s going to be in there anyway, doing that work. And so that’s the thinking behind it.

COUNCIL MEMBER LANDER: Okay, now you spoke at one point about that project being more well-defined. On the other hand, you also referred to three-year-old data on the net benefits to the project. The project has changed substantially since 2005-2006, so how do you … why do we still have any reason to believe that the net benefits proposed … have you done some updated analysis that says that the net benefits of that project as substantially reduced, with a much longer construction timeframe, and with a lot of long-term uncertainty, still has the same financial benefit to the city?

PINSKY: Yeah, first of all, we don’t think that it’s a much longer timeframe. We think that the overall timeframe is likely to be consistent with what had been assumed before. In fact, there are certain elements of the projects which have now been accelerated. For example, with the arena construction as part of the final agreement with the ESDC and the city, Forest City has agreed to build the first building on the site within three years. That will include about at least 50% affordable housing, and before there was no requirement that they start any of the additional building that early. In addition, the way that the project has been structured, it makes it less and less expensive for Forest City to build the later phases, because they’re paying so much of the money up front. So we think that they have a very strong incentive to build out that project over the same period of time that they have agreed to. We have liquidated damages in the agreement if they don’t build certain parts of the project within certain periods of time, which gives us additional confidence as well. In addition to that, what we’ve done is, we haven’t done a full re-analysis of the cost/benefit analysis that we did, but we’ve made sure that the changes in the assumptions have not gone against the city overall. And so, for example, between the time that we did the original cost/benefit analysis and today, construction costs have increased. That represents a bigger return to the city, because that means the taxes that they’ll be paying will be higher. We’ve also looked at the cost of other aspects of the project, and those have changed in ways that are favorable to the city’s cost/benefit analysis. They’re less favorable to Forest City, which is one of the reasons why it was as difficult for them to get to the closing as it was. But the trend has been in a direction that’s favorable to the city from a cost/benefit perspective.

COUNCIL MEMBER LANDER: I appreciate the answer. I would love at a different time to get into this in a lot more detail.

MR. PINSKY: Of course.

COUNCIL MEMBER LANDER: It seems to me in part that the polarization surrounding that process obscured lots and lots of information being provided. So we haven’t had a hearing in this body on the project since 2004?

MR. PINSKY: Uh huh.

[Actually it was 5/26/05, as shown in this transcript.]

COUNCIL MEMBER LANDER: And an enormous amount has changed about the project. It sounds like you have a great deal of information about it, that it would be great if we had. It would be wonderful to know that in fact every time we’ve made a change, it’s been to the city’s benefit. I don’t know that that comports with the public information that’s been available. So it would be great if there was some information that you could provide us on what that contract looks like, and I hope that we’ll have the opportunity at a future hearing to really follow up and dig down.

MR. PINSKY: Great.

COUNCIL MEMBER LANDER: And understand in a lot more detail where this project is.

MR. PINSKY: And if there are specific questions, just let me know and we’ll be happy to answer them.

Atlantic Yards MOU City & State, February 18, 2005

EDC Preliminary Budget Hearing March18, 2010

EDC Executive Budget Hearing May 25, 2010

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