Tuesday, October 18, 2011

A proposed school of science and engineering vs. Atlantic Yards: competitive bidding and subsidies well below the city's payoff

Would you believe that New York City's "game changer"--a proposed science and engineering grad school aimed at helping New York compete with Silicon Valley--looks like a much bigger bargain than Atlantic Yards--and emerging from a fairer playing field?

At the MAS Summit for New York City last week, Seth Pinsky, president of the New York City Economic Development Corporation, declared that, after canvassing a wide variety of thought leaders regarding a game-changing initiative, the consensus was the need for a new graduate school.

How to get there?

A competition

In a 10/17/11 article headlined Two Top Suitors Are Emerging for New Graduate School of Engineering, the New York Times reported
With less than two weeks left to apply in the competition for $400 million in land and subsidies to build a science and engineering graduate school in New York City, some of the world’s great universities continue to change plans and jockey for position, and there is a growing view among them that Cornell and Stanford have emerged as the favorites.

...People briefed on the universities’ plans, whose cost estimates exceed $1 billion in some cases, speculate that one or more of the contenders will try to improve their standing by forgoing the city’s offer of up to $100 million to upgrade roads, water and power supplies, offering to pay those costs themselves. 
By contrast, Atlantic Yards was embraced by city officials as a package deal, and there was never any competition to build a mixed-use arena complex, only a belated RFP, 18 months later, for a key piece of property, the Metropolitan Transportation Authority's Vanderbilt Yard.

The MTA never took seriously the one competitive bid, $150 million cash from Extell, since it chose to negotiate solely with Forest City Ratner, which bid $50 million. Yes, Forest City argued that the overall value of its bid was higher, but Extell was never asked to develop its bid further, or to bolster it.

Who knows--perhaps if the bidding had gotten competitive, as with the new graduate school, a bidder might have proposed forgoing some of the city's proposed subsidies.

Subsidies

The city has granted Forest City Ratner less than $200 million in direct city subsidies for the arena, but the overall cost to the city FCR is far more than that, considering the value of opportunity costs, according to the Independent Budget Office's 2009 report.

The IBO calls the arena a loss to the city. That's no game-changer.

And that's not counting all the savings on federal taxes, also in the IBO report, as well as tens (hundreds?) of millions more in city housing subsidies, that were not calculated.

So the city may be more judicious about subsidies these days. After all, a grad school leads to new business enterprises--new forms of tax revenue--while an arena generates some entertainment-related retails, as well as lots of sponsorship money for the promoter.

The city and state say that their calculations of benefit relate to the Atlantic Yards project as a whole, not the arena. But they only calculated the best-case scenarios--that the project would be built in full, in a decade. Where are the alternative scenarios?

The justification

As I wrote 1/23/09, the 5/4/04 City Council hearing on Atlantic Yards ventilated the notion that, because a pro sports team was a scarce commodity, the city had to fall in line.

There was a key exchange between City Council Member Eric Gioia and Andrew Alper, then president of the New York City Economic Development Corporation.

GIOIA: My last question, is, if we are trying to maximize public investment for public benefit, are we, for this issue, are we proactively then going out and saying to other similar developers, similar type entities? In other words, have you been doing a road show looking for other NBA teams or other athletic teams, or other developers to build stadiums? Or are we sitting back and that we’re in this position because this developer and this athletic team has come to us and said, 'I own this property, or I want to build this project and I think it is good for the City'? In other words, how proactive is the City's economic development plan: are we doing this now because this has been brought to us, or are we doing this because we proactively looked and said, we think this is good for Downtown Brooklyn, or we think this is good for New York City? And, depending on your answer, the second part of it: how do you know it’s a good deal, unless we know that there is somebody else out there? In other words, if we’re negotiating and it’s not--what else is the market out there, or are we negotiating against ourselves?
(Emphases added)

ALPER: Well the answer is yes and no. We are actively out marketing the City all over the US, all over Europe, all over Asia to talk to companies and prospective tenants for buildings and prospective projects. We have been doing that very aggressively, and I think with some early success to bring more jobs to New York. This particular project came to us. We were not out soliciting, we were, as you know, developing a Downtown Brooklyn plan, but we were not out soliciting a professional sports franchise for Downtown Brooklyn. The developer came to us with what we though was actually a very clever plan. It is not only bringing a sports team back to Brooklyn, but to do it in a way that provided dramatic economic development catalyst in terms of housing, retail, commercial jobs, construction jobs, permanent jobs. So, they came to us, we didn’t come to them. And it is not really up to us then to go out and try to find a better deal. I think that would discourage developers from coming to us, if every time they came to us we went out and tried to shop their idea to somebody else. So, we are actively shopping, but not for another sports arena franchise for Brooklyn.

As I wrote, the developer's plan may have seemed "very clever," but there's ample evidence that the city knew that the market for increased office space was already tanking. And there's no evidence that city planner had evaluated whether there'd be enough tax-exempt bonds for the ambitious housing plan.

The "very clever" plan involved not only a claim on valuable public property, the Metropolitan Transportation Authority's Vanderbilt Yard, plus a host of special benefits, including a state override of zoning and a state use of eminent domain to acquire private property.

Boiled down, Alper's justification was apparently that sports franchises are such a scarce commodity that the city must "negotiate against ourselves."

Though Alper claimed that "trying to find a better deal" would "discourage developers from coming to us," since then the city, in projects like Hudson Yards and Willets Point and the new grad school, has put everyone at the same starting line.

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