Wednesday, September 07, 2011

Liberty Bonds, 9/11, and Forest City Ratner: the first subsidy for a commercial tower (the only one in Brooklyn) and the largest subsidy for a residential tower

While Forest City Ratner was not the largest beneficiary of post-9/11 federal recovery funds, it was among the savviest, gaining the first triple tax-exempt bonds for commercial projects, the Bank of New York Tower at Atlantic Terminal, which was the only project outside of Manhattan.

Beyond that, FCR garnered the single largest share of the relatively small amount of tax-exempt bonds designed for housing, aiding construction of the Beekman Tower (aka 8 Spruce Street aka New York by Gehry) in Lower Manhattan.

Thus, in gaining nearly $300 million in tax-exempt (federal, state, city)  bonds, the developer saved tens of millions of dollars by paying a lower interest rate. It's more evidence for scholar/writer Fred Siegel's characterization of Bruce Ratner in the 11/30/05 Cleveland Plain Dealer: "He's the master of subsidy."

Yesterday, in a New York Post op-ed headlined Liberty misspent: Political use of rebuild bonds, Nicole Gelinas of the free-market Manhattan Institute suggested that, given that so much of the aid, including up to $8 billion in Liberty Bonds for real estate, went outside of Ground Zero, "New York squandered time and money doling out favors."

Beyond Gelinas's argument, there's evidence, described below, that the Bank of New York is not now meeting the requirements for job retention that justified another chunk of subsidies it gained.

The IBO report

In a report issued at the end of last month, Federal Aid 10 Years After the World Trade Center Attack, the New York City Independent Budget Office counted $11.3 billion in direct aid and tax breaks, with the largest share, $4.6 billion, directed to transportation projects such as the World Trade Center Transportation Hub and Fulton Street Transit Center.

Triple tax-exempt bonds for the Atlantic Terminal tower

From the report:
Tax Exempt Bond Program for Commercial and Residential
Projects
. The Liberty Bond program created $8.0 billion in triple-tax-exempt private-activity bonds at an estimated cost of $1.2 billion to the federal government from foregone income tax revenue (the cost to the city and state would be much lower).

...Commercial Liberty Bonds Issued for Additional Projects in the City. The legislation creating the Liberty Bond program provided that up to $2 billion in Liberty Bonds could be used for commercial projects outside of the New York Liberty Zone—defined roughly as Manhattan south of Canal Street—if they were not needed for projects in the zone. Three early projects that received Liberty Bonds totaling $820.8 million were not located in Lower Manhattan: 1 Bryant Park in Midtown, Atlantic Terminal in Brooklyn, and InterActiveCorp’s headquarters in Chelsea.
As the chart indicates, the only one in Brooklyn, and the first, was Atlantic Terminal.

Starting with promise

According to the 9/13/02 press release (below), headlined NEW YORK STATE AND NEW YORK CITY RECOMMEND FIRST LIBERTY BOND PROJECT FOR FOREST CITY DEVELOPMENT Will Create 396,000 Square Feet of Office Space and Bring 1,400 Jobs to Downtown Brooklyn:
Charles A. Gargano, Chairman of Empire State Development (ESD), and Andrew M. Alper, President of the NYC Economic Development Corp. (EDC), announced that the State of New York and New York City jointly selected the first commercial Liberty Bond Project that was recommended to the New York Industrial Development Agency (IDA) Board of Directors for approval at its September 10, 2002 meeting.

The IDA board will be asked to approve $113.9 million in Liberty Bonds on behalf of Forest City Ratner's FC Hanson Office Associates for the development of a ten-story, 396,000-square-foot office tower to be built above the Atlantic Terminal transit hub in Downtown Brooklyn. The Bank of New York agreed to be the anchor tenant and will occupy 80% of the office tower. The Bank of New York plans to relocate 1,400 employees to Brooklyn that might otherwise have relocated out of New York City.
Note that the sum turned out to be $90.8 million. But the justification was that, even though the money was going outside of Lower Manhattan, it was staying in the city rather than going to New Jersey.

Job retention, and leaving Manhattan


According to Good Jobs New York, the Bank of New York project also received $40 million under the Job Creation and Retention Program (JCRP), a fund "created in the wake of 9/11 to encourage major employers in Lower Manhattan to remain there and to encourage others to relocate to the area."

Though the bank moved in part outside Lower Manhattan, that $40 million was the largest single grant (of 91) under JCRP, administered by the Empire State Development Corporation (ESDC) and its subsidiary the Lower Manhattan Development (LMDC) Corporation.

According to Good Jobs New York, the goal was to "retain the Bank of New York in New York City after the Federal government ordered the company, which clears a significant amount of Federal securities, to leave lower Manhattan following the attacks of September 11th." (As noted below, the bank apparently moved only a fraction of its jobs outside of Lower Manhattan.)

At a 4/21/06 conference, Andrew Alper, then-president of the New York City Economic Development Corporation, Alper cited the Bank of New York tower as the “best example” of the Downtown Brooklyn strategy. (The mall is north of Atlantic Avenue, and at/near the southeast boundary of the Downtown Brooklyn. Maybe just call it "Ratner Heights.")

After 9/11, the Bank of New York was “almost completely knocked off line,” he said. Given that the bank’s other option in diversifying its real estate was leave the city (presumably for Jersey City and a new tax jurisdiction), “We put together an incentive package to build a new building at Atlantic Terminal.”


Signs of cronyism

One skeptic of such subsidies initially didn't oppose them, but later changed her mind. The Daily News reported 12/8/05:
Bettina Damiani, director of Good Jobs New York, a group that monitors how the government spends money to encourage development, initially supported the Ratner project because it seemed to enhance a viable business district.

But she said her perspective changed as the bond awards continually went to big developers and corporations building outside the damaged area.

"You'd like to think that if only the wealthiest, most well-known businesses in New York are tapping into a taxpayer-financed program that there might be something wrong with it," Damiani said. "Unfortunately, they just seem to think that that means it must be doing great."

Were jobs retained?

Damiani's skepticism may have been appropriate, as job totals indicate. As stated in the Forest City press release:
The company will also receive a $37.5 million grant through the WTC Job Creation and Retention Program in return for keeping 7,700 jobs in New York City -- 6,160 in Lower Manhattan, 1,400 in Downtown Brooklyn and 140 elsewhere in New York City for at least 12 years.
That sum rose to $40 million, but the job retention goal does not seem to have been met. (Graphic below from Good Jobs New York,)


Though 7700 jobs were initially retained as of the start date, 12/30/02, and the total grew through 2006, those numbers declined in 2009 and 2010, with the total at 6915. That now leaves the bank subject to "clawback" provisions.

Savings for Ratner

Beyond the tax-exempt bonds, Forest City Ratner had to do very additional financing. According to a 9/10/02 Daily News article:
The $114 million will cover most of the $120 million construction cost of the 10-story, 396,000-square-foot office building above the Long Island Rail Road station.

The project also will include 375,000 square feet of retail, expected to cost an additional $120 million. After the Sept. 11 attacks, federal regulators pushed banks to diversify their real estate so the nation's financial system would not become paralyzed in an attack.

In July, the bank signed a deal to lease 300,000 square feet in the new building, set for completion in 2004. It will move 1,500 to 1,800 employees from Manhattan to the Brooklyn site.
That jobs number soon became 1400. Also note that the $114 million in bonds--ultimately $90.8 million--was not a direct gift, but saved a significant fraction in interest.

The Times reported 8/8/04 that "Tax incentives reduced the rents by $15 to $20 per square foot.

Other subsidies to Forest City, according to CoStar, included approximately $2.5 million in a mortgage recording tax waiver to induce construction of the building. 

Topping out

In a 5/22/03 press release, Forest City Enterprises announced the "topping out" of its Atlantic Terminal office building:
The last steel beam was hoisted 295 feet high on the 10-story, 400,000-square-foot office building, which is being constructed above a four-story, 375,000-square-foot retail center. Under the offices and retail center are renovated Long Island Railroad and subway stations. The land is being leased from the Metropolitan Transportation Authority and the Long Island Railroad Company.
Meanwhile, Atlantic Yards was gestating.

Residential: Beekman Tower

Forest City also did well with housing. According to the IBO report:
Residential Liberty Bonds Fund Market Rate Rental Development in Lower Manhattan. HFA [New York State Housing Finance Agency] and HDC [New York City Housing Development Corporation] provided financing assistance to a total of 15 projects with their residential Liberty Bond allocations. All of the projects, totaling 5,675 housing units, were located in the Financial District or Tribeca. The units created were overwhelmingly market rate. Although the legislation did not require the residential projects funded by the bonds to include an affordable housing component, both HFA and HDC generated small amounts of below-market rate housing from these projects. HFA-financed buildings were required to reserve 5 percent of units for tenants earning no more than 150 percent of area median income, creating some middle income housing in Lower Manhattan. HDC collected a 3 percent fee from developers, which was used to finance affordable housing elsewhere in the city.
(Graphic from Good Jobs New York)

Note that Forest City Ratner received, by a good margin, the single largest segment of that $800 million--$203.9 million in bonds for the Beekman Tower--a building that, in an Reuters article yesterday, Lower Manhattan: Rising from the ashes, was cited as an example of revitalization.

It also was a very good business deal. As I wrote 4/7/08, covering a conference call with investment analysts, analyst Sheila McGrath brought up the tower.

Forest City Enterprises CEO Chuck Ratner asked executives Bob O'Brien and Joanne Minieri to “give Sheila a little color” regarding the “tremendous demand on the part of the banks” for the tax-free Liberty Bonds.

JM: Like a billion-two demand for the 204 [million] that we put out there.

SM: And are all the units in that building, they’re all market-rate units?

JM: That’s correct, Sheila.

BO: That’s the beauty of the Liberty Bonds, tax-exempt rates and all market-rate units.

CR: Thank you, Bob.

SM: Gotta like that.

The Liberty Bonds not awarded to the Times Tower

Forest City didn't get all the Liberty Bonds it requested. It actually wanted them for the Times Tower, which it built in midtown in partnership with the New York Times Company.

As I wrote in my 9/5/05 report on the New York Times and Atlantic Yards, the Times, as opposed to some other publications, wasn't so good at reporting the full story:
B.7 Why Did FCR Fail to Get Liberty Bonds?
As city officials negotiated with Forest City Ratner over the terms of possible Liberty Bonds for the Times Tower, a Times report did not mention that the developer refused terms that could have required it to pay back some of the money (Times Tower Is Delayed As Partner Awaits Loan, 10/17/03):
Forest City has been unable to land an anchor tenant for its space. Its negotiations with city officials for special tax-free financing known as Liberty Bonds are also at a standstill.
...In recent months, Forest City began negotiating with city officials for $400 million in Liberty Bonds, which were designated for rebuilding New York after the attack on the trade center. Forest City ultimately applied for $150 million in bonds, but has been unable to get city approval.
Forest City declined to comment yesterday.
That same day, The New York Sun explained that FCR couldn’t get Liberty Bonds because it wouldn’t agree to return some profits (Financing Hitch Delays N.Y. Times Move, 10/17/03):
In August, the city agency in charge of distributing the bonds, the Industrial Development Agency, rejected Forest City’s application on grounds that the request was not tied to the September 11 attacks and would not bring new jobs to the city. Instead it offered the developer $100 million on condition that it would return the money if the developer was able to fill the space at a faster pace and for higher rents than expected. Forest City’s chief executive, Bruce Ratner, rejected the offer.
A month later, The New York Observer reported the same details (Times’ New Tower Seeks $150 Million In Liberty Bonds, 11/17/03):
Mr. Ratner originally asked the E.D.C. for $400 million in Liberty Bonds. In September, according to sources within the agency, the city came back with its offer: $100 million in Liberty Bonds, but if the market turned around and rents went up, Mr. Ratner would have to pay the money back to the city.
“We said, ‘We’ll help you mitigate the risk that exists today, but if the market recovers, we would share in the excess until the full benefit of the Liberty Bonds is paid back,’” said an executive at the E.D.C.
Mr. Ratner rejected the offer and pressed for better terms.
Forest City Enterprises: Atlantic Terminal/Bank of New York announcement, 9/13/02

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