Wednesday, July 27, 2011

FAQ: Forest City Ratner's ridiculous claims about Atlantic Yards tax revenues and jobs, and what's wrong with the (somewhat more sober) city and state projections

Atlantic Yards will be an economic engine for Brooklyn, New York City and the State generating more than $5 billion in new tax revenues over the next 30 years. In addition to tax benefits, the project will also create thousands of new jobs: upwards of 17,000 union construction jobs and up to 8,000 permanent jobs.
--Developer Forest City Ratner, July 2011, as claimed to Crain's New York Business

Will the project bring in $5 billion in new tax revenues?

Not at all. That's a variant of the notorious $6 billion lie touted by sports economist Andrew Zimbalist, Forest City Ratner's hired consultant, working well outside his expertise. Bizarrely,  FCR executives and an FCR lawyer at times claimed in legal papers that it was a state estimate. That was an extra lie.

What's wrong with the $5 billion calculation?

There are many reasons why the reasoning's flawed, such as the use of new residents' income to calculate benefits, which is like Donald Trump claiming he's creating an "economic engine" by building speculative condos.

But the calculation also violates two standard practices among economists analyzing these kind of developments.

First, economists usually calculate not "new tax revenues" but "net tax revenues," as acknowledged in the excerpt from a Forest City executive's legal affidavit above.

Second, and more importantly, they always refer to the "present value" of money: "the current worth of a future sum of money or stream of cash flows given a specified rate of return." That number is always far less than the cumulative stream.

If Forest City can claim a cumulative total of $5 billion, then anyone who gets a $200,000 mortgage loan but makes $500,000 in overall payments can claim their house is worth $500,000.

In their own analyses, the Empire State Development Corporation (ESDC) and the New York City Economic Development Corporation (NYC EDC) estimate new revenues closer to $1 billion, not $5 billion.

But those studies, as well as the Forest City one, are inherently flawed for other reasons, right?

All three projections depend on Atlantic Yards being 1) built in full, as approved, and 2) built within ten years.

There's no way the project will be built in ten years. Atlantic Yards was last approved in 2009 and only one building of 17, the arena, is under construction, though the four towers around it were supposed to be built at the same time. However, the Development Agreement signed with the state gives Forest City 12 years to build three towers around the arena, and 25 years to build the project.

Nor need they build the project in full: the Development Agreement allows for a much smaller project, less than 5.2 million square feet, not the projected 8 million square feet.

There are other flaws, right?

The most recent estimates by the ESDC suggest nearly $1.2 billion in net revenue, but that depends not only on the factors mentioned above, but the construction of an office tower, a key source of jobs and thus new revenues.

But the office tower is indefinitely delayed. Maybe it will ultimately get built, but if it's not built at the original timetable--and it's already late--the revenue calculations are already off.

Will the arena be a money-loser for the city? For the state?

According to the New York City Independent Budget Office, the city would lose $39.5 million, or $180.5 million when opportunity costs were factored in.

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.

(Note that the IBO estimated $678 million in tax-exempt arena bonds, rather than the ultimate $511 million; that number mainly affects the cost to federal taxpayers, but it does adjust the overall savings to the developer, perhaps by 25%--or $50 million--of the $200 million in total costs to the public sector for the bonds. So call the revised total $676 million in savings.)

The IBO limited its analysis to the arena. The ESDC responded by saying it considers the whole project; here's the IBO's rebuttal.

Also note that Forest City Ratner in 2005 had no trouble embracing the IBO's conclusions that the arena would be a modest gain, but in 2009 attacked the IBO's methodology.

Will the project include 17,000 construction jobs?

No. First, that number means 17,000 job-years, or 1700 jobs a year for a decade--or, if the project takes 25 years, 680 jobs a year. (The ESDC says 16,427 new direct job-years and, yes, they use that term.)

However, as I and others have reported, Forest City is way behind projections. The developer's modest numbers even seem exaggerated compared to statistics reported by the consultant to the arena bond trustee: just 320 construction jobs.

And that's only if the project is built as announced. It could be significantly smaller--and thus the figure for jobs could be much, much lower.

Moreover, if Forest City Ratner pursues a modular construction plan, the numbers of jobs would decline further.

What does "upwards of 17,000 union construction jobs" mean?

Absolutely nothing. It means that 17,000 jobs is a goal they've announced, not that it's likely. As with the term anticipate, it should go in the Atlantic Yards Lexicon as a "placeholder we don't believe but think we can get away with."

Would there be 8000 permanent jobs? 4000?

There were once supposed to be 10,000 office jobs, a figure that was bogus from the start because there was no market for such jobs. Then Forest City decided in 2005 that three of four towers around the arena would contain housing, not office space, cutting the number of jobs severely.

(Sen. Charles Schumer's 2004 claim of 10,000 jobs was obsolete by mid-2005, though the New York Times recently quoted that claim without context.)

The figure of 8000 jobs promulgated by Forest City Ratner relies on a completely unrealistic configuration of office space, out of the plan since 2006, for which there is no market.

The ESDC's current estimate of about 4000 jobs should be discounted by one-third given the office market. Also, the number of building service and retail jobs would be dependent on a full buildout of the project, and also could be cut significantly. (The city's fiscal analysis, oddly enough, assumes more office space than does the state's analysis.)

What does "up to 8,000 permanent jobs" mean?

Absolutely nothing. It means that 8,000 jobs is a goal they've announced, not that it's likely. I'd make a very large wager against that total.

What subsidies have been left out?


They haven't started calculating subsidies for the affordable housing.

What about naming rights?

The state gave away naming rights to Forest City Ratner to sell to Barclays. The total was initially announced at $400 million, but later revised to $200 million-plus. “It’s part of the financing for the project,” an attorney for the state said in 2009.

It was never calculated as a subsidy, however, much less in the documents describing sources and uses of project funding.

What's the lesson for the public?

Forest City will continue its fantasy math, but government agencies owe the public more than spin: they should have provided, and should be providing, a range of best-case and worst-case scenarios.


What's the lesson for journalists?

That they must do more than "he said, she said" reporting. When it comes to numbers, it's possible to do the math, or to ask outside experts to help.

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