Friday, September 30, 2011

Malcolm Gladwell, in Grantland, gets the Atlantic Yards big picture: "a man buys a basketball team as insurance on a real estate project"

Well, New York Daily News sports columnist Mike Lupica was right all along, writing 11/13/05:
If Caring Bruce Ratner is still the owner of the Nets in five years, I'll eat my hat.

...He doesn't want the team.

He never really did.

He wants the land.
After the March 2010 groundbreaking, Lupica commented, "It was a hustle in broad daylight by Caring Bruce Ratner from the start."

Enter Gladwell

That same sentiment comes from New Yorker writer and Grantland contributing editor Malcolm Gladwell, in a 9/26/11 essay in the latter headlined The Nets and NBA Economics: David Stern would have you believe the Brooklyn-bound franchise embodies everything wrong with the league's finances. It's not true.

His conclusion:
The rich have gone from being grateful for what they have to pushing for everything they can get. They have mastered the arts of whining and predation, without regard to logic or shame. In the end, this is the lesson of the NBA lockout. A man buys a basketball team as insurance on a real estate project, flips the franchise to a Russian billionaire when he wins the deal, and then — as both parties happily count their winnings — what lesson are we asked to draw? The players are greedy.
We can't blame Gladwell for coming to the story late, but it is an example of the kind of analysis that--despite some factual flaws--gets the big picture right, the picture that the compliant media ignore as they focus on celebrities like Jay-Z and micro-controversies such as branding.

(And, yes, in Internet time, I'm coming to this analysis late.)

About the site


Gladwell begins:
Ten years ago, a New York real estate developer named Bruce Ratner fell in love with a building site at the corner of Atlantic and Flatbush Avenues in Brooklyn. It was 22 acres, big by New York standards, and within walking distance of four of the most charming, recently gentrified neighborhoods in Brooklyn — Park Slope, Boerum Hill, Clinton Hill, and Fort Greene. A third of the site was above a railway yard, where the commuter trains from Long Island empty into Brooklyn, and that corner also happened to be where the 2, 3, 4, 5, D, N, R, B, Q, A, and C subway lines all magically converge. From Atlantic Yards — as it came to be known — almost all of midtown and downtown Manhattan, not to mention a huge swath of Long Island, was no more than a 20-minute train ride away. Ratner had found one of the choicest pieces of undeveloped real estate in the Northeast.

But there was a problem. Only the portion of the site above the rail yard was vacant. The rest was occupied by an assortment of tenements, warehouses, and brownstones.
The key is that Ratner sought some prime land--and it was not merely "above the rail yard" but around it.

As Gladwell's last sentence above suggests, it was not so much undeveloped as underdeveloped. Some of the buildings were empty, and there were some vacant lots, too. But a rezoning might have taken care of that quickly.

And the railyard could have been rezoned and bid out. Instead, Ratner got the benefit of a state override of zoning--essentially a private rezoning.

And Ratner didn't spot the land ten years ago. Forest City was looking at the railyard site in the early 1990s, as veteran Brooklyn journalist Dennis Holt once recalled.

When Brooklyn Borough President Marty Markowitz, in his January 2003 State of the Borough address, kept pressing for a Coney Island arena, as he had in the previous year, was he feinting? Quite likely. Ratner had been discussing the Atlantic Yards site with the city since 2002, as Chris Smith reported in New York magazine.

Also, as Chuck Ratner, then-CEO of parent Forest City Enterprises on 9/9/05 told investment analysts:
I will confess that it was less than two or three years ago we were sitting around in New York wondering where the next deals were going to come from. We had finished a whole bunch of office and we completed MetroTech and we didn't have the next great site in Brooklyn. That was one of the reasons we got so aggressive and creative, Bruce and his team did in this Atlantic Yards project. We saw that land sitting there for this last 10 years, realizing it would be a great opportunity if somebody could turn it on.
Eminent domain

Gladwell writes:
To buy out each of those landlords and evict every one of their tenants would take years and millions of dollars, if it were possible at all. Ratner needed New York State to use its powers of "eminent domain" to condemn the existing buildings for him. But how could he do that? The most generous reading of what is possible under eminent domain came from the Supreme Court's ruling in the Kelo v. New London case. There the court held that it was permissible to seize private property in the name of economic development. But Kelo involved a chronically depressed city clearing out a few houses so that Pfizer could expand a research and development facility. Brooklyn wasn't New London. And Ratner wasn't Pfizer: All he wanted was to build luxury apartment buildings. In any case, the Court's opinion in Kelo was treacherous ground. Think about it: What the Court said was that the government can take your property from you and give it to someone else simply if it believes that someone else will make better use of it. The backlash to Kelo was such that many state legislatures passed laws making their condemnation procedures tougher, not easier. Ratner wanted no part of that controversy. He wanted an airtight condemnation, and for that it was far safer to rely on the traditional definition of eminent domain, which said that the state could only seize private property for a "public use."
It's hard to know exactly what Ratner planned to build while sussing out the site, pre-Nets. But it was likely not merely luxury apartments but also office space and retail. After all, in the 1990s the railyard site was seen as a site for office buildings.

And the Atlantic Yards plan eventually included luxury and subsidized apartments, office buildings, and retail, along with the arena.

The eminent domain justification

Galdwell leaves the impression that, because former Justice Sandra Day O'Connor, in her Kelo dissent, suggested that a stadium qualified as "public use," justifying the transfer of private property to private parties, that "a light bulb went off inside his head. And he bought the New Jersey Nets."

Actually, Ratner bought the Nets some 18 months before the Kelo decision. So eminent domain was more complex. The main justification on the part of New York State was the elimination of "blight," a bogus issue.

But yes, the provision of an arena--a "public use"--was used by the courts to justify eminent domain.

Stern's deflection

Gladwell points to NBA commissioner David Stern's lame contention that team owners are in peril, claiming that the previous owners of the Nets--before Russian billionaire Mikhail Prokhorov "lost several hundred million dollars on that transaction."

After all, as Gladwell notes, Ratner's plan would, "by some calculations [earn him] as much as $1 billion in profit." (That calculation came from  source quoted by New York magazine's Chris Smith, another major journalist to see the big picture, in August 2006, albeit when the economy was rosy.)

Gladwell writes:
Ratner knew this would not be easy. The 14 acres he wanted to raze was a perfectly functional neighborhood, inhabited by taxpaying businesses and homeowners. He needed a political halo, and Ratner's genius was in understanding how beautifully the Nets could serve that purpose. The minute basketball was involved, Brooklyn's favorite son — Jay-Z — signed up as a part-owner and full-time booster. Brooklyn's borough president began publicly fantasizing about what a professional sports team would mean for his community. The Mayor's office, then actively pursuing an Olympic bid, loved the idea of a new arena in Brooklyn.
I would call it a mixed-used neighborhood, with some thriving and some empty buildings, but gentrifying and very valuable. The key was that it was "a great piece of real estate," in the words of Chuck Ratner.

The Extell offer

Gladwell writes:
Early on, another New York developer, Gary Barnett, made a competing play for the railway yard. Barnett's offer was, in many ways, superior to Ratner's. He didn't want the extra 14 acres, so no land would have to be expropriated from private owners. He wasn't going to plunk a small city down in the middle of an already crowded neighborhood. And he tripled the value of Ratner's offer. Barnett lost. He never had a chance. He wanted to build apartments. Ratner was restoring the sporting glory lost when the Dodgers fled for Los Angeles. As Michael Rikon, one of the attorneys who sued to stop the project, ruefully concluded when Ratner's victory was complete: "It is an aphorism in criminal law that a good prosecutor could get a grand jury to indict a ham sandwich. With regards to condemnations in New York, it can fairly be said that in New York a condemnor can condemn a Kasha Knish." Especially if the kasha knish is being eaten to make way for a professional basketball arena.
Barnett offered $150 million cash to Ratner's $50 million, after which the Metropolitan Transportation Authority, choosing to negotiate only with Ratner, got the latter to up the cash bid to $100 million. (Of course Ratner later renegotiated that deal to put only $20 million down, with the rest to be paid over 22 years at a gentle interest rate.)

The MTA and Ratner argue that the overall value of the Ratner bid was superior, but Extell was never allowed to develop its bid, or to compete on an even playing field, given that the property was seemingly anointed to Ratner for 18 months before a very hasty RFP was issued. It was never a fair fight.

Rikon didn't sue to stop the project, but, as is his specialty, represented property owners negotiating condemnation deals.

"Eminent domain insurance"

Gladwell writes:
Ratner has been vilified — both fairly and unfairly — by opponents of the Atlantic Yards project. But let's be clear: What he did has nothing whatsoever to do with basketball. Ratner didn't buy the Nets as a stand-alone commercial enterprise in the hopes that ticket sales and television revenue would exceed players' salaries and administration costs. Ratner was buying eminent domain insurance. Basketball also had very little to do with Ratner's sale of the Nets. Ratner got hit by the recession. Fighting the court challenges to his project took longer than he thought. He became dangerously overextended. His shareholders got restless. He realized he had to dump the fancy Frank Gehry design for something more along the lines of a Kleenex box. Prokhorov helped Ratner out by buying a controlling interest in the Nets. But he also paid off some of Ratner's debts, lent him $75 million, picked up some of his debt service, acquired a small stake in the arena, and bought an option on 20 percent of the entire Atlantic Yards project. This wasn't a fire sale of a distressed basketball franchise. It was a general-purpose real estate bailout.
Yes, it was a general-purpose bailout. (I'd be curious to see which vilifications Gladwell thinks are fair and unfair.)

I wouldn't call it simply "eminent domain insurance" but also insurance--see the cartel discussion below--that political and civic leaders would back the project.

Gladwell also points to how Ratner's malls would be helped by residential properties and the significant profits on the arena, including "$400 million" for naming rights. Actually, the latter figure is closer to $200 million.

I'd add that increased luxury suites, sponsorship opportunities, and TV rights all make a new arena lucrative.

Profits for Prokhorov

Gladwell writes:
And let's not forget Mikhail Prokhorov. How does he feel about buying into the financial sinkhole that is professional basketball? The blog NetsDaily recently dug up the following quotation from a 2010 interview Prokhorov did with the Russian business newspaper Vedomosti:
"We have a team, we're building the arena, we've hired professional management, we have the option to buy into another large project, the building of an office center. For me, this is a project with explosive profit potential. The capitalization of the team will be $700 million after we move to Brooklyn. It will earn approximately 30 [million]. And the arena will be worth around $1 billion."
Let us recap. At the very moment the commissioner of the NBA is holding up the New Jersey Nets as a case study of basketball's impoverishment, the former owner of the team is crowing about 10 percent returns and the new owner is boasting of "explosive" profits.
I'd add that Prokhorov has already gained "explosive" benefits with the publicity attendant on his team purchase, including a fawning profile on 60 Minutes and a cover story in the New York Times Magazine.

The team as a "piece of art" (and part of a cartel)

Gladwell, in a footonote, points to a quote dug up by TrueHoop's Henry Abbott from Cleveland Cavaliers owner Dan Gilbert:
"To me, NBA franchises are like pieces of art. There are only 30 of them. They aren't always on the market, especially a franchise that would have been such a natural fit. … If you just looked at the Cavaliers in terms of revenues, profits and balance sheets — and you paid this amount for it — people would say 'You're insane! You're nuts.' But if you look at all the tentacles, the impact on our other venues, it makes tremendous sense."
Indeed, the same goes for Prokhorov, who in news coverage is often first described to as the owner of the Nets rather than as having a questionable past.

It's not simply a "piece of art." The league is a cartel. It doesn't expand, but pieces can be lured across the state lines. Political and civic leaders love a ribbon-cutting.

One justification for city and state subsidies for the Brooklyn arena is that it would poach revenues from New Jersey. True, but that's no justification for a federal subsidy, and those tax-exempt arena bonds are enjoying more than $100 million in federal subsidies.

About NetsDaily and AYR

In a footnote linked to the Prokhorov quote above, Gladwell writes:
NetsDaily is really very good. Even better is the brilliantly obsessive coverage of the Atlantic Yards project at Norman Oder's Atlantic Yards Report, in which every twist and turn in the entire story has been faithfully and astutely chronicled. I could not have written this without Oder's help.
For the record, Gladwell contacted me and I spoke to him, then sent him some links. He also drew on some other links on my site. (Had this been a New Yorker piece, it would have been fact-checked, and some of the errors would have been avoided. But no one has a budget for that these days, do they?)

I'd say that NetsDaily is very good at rounding up and analyzing basketball news, including from sources far afield, such as in Russia.

When it comes to analyzing the Brooklyn move, well, the main writer, "Net Income,"a veteran journalist, won't use his name. Why? The New York Times Magazine, accommodating his unwillingness to use his name, stated he was "anxious to keep his old- and new-media identities separate."

What does that mean? Well, he manages to produce slanted pro-Atlantic Yards coverage/interpretation and nasty comments without owning up to them. His basic take is that a new arena makes his team better and the backstory is irrelevant: "Why do I care how it came to be? The Nets have the richest owner in sports."

And that leads to party-line coverage such as this:

What's missing? The fact that the  Nets paid 1/8 of the cost of the new playground, as I pointed out, and New York magazine followed up.

I guess recognizing how the Barclays Nets Community Alliance were claiming to "fund" a playground renovation, and how press outlets (the Post and NY1) played along, would be so "old media."

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