Tuesday, December 17, 2013

The Greenland deal: real cost fuzzy, the case against future subsidies, the impact of a faster timetable--and the tension between affordable housing and density

Yesterday's announcement that Forest City Enterprises and the Chinese government-owned Greenland Group have reached a definitive agreement--still subject to expected approval by the respective national governments--for the latter to invest in 70% of the remaining Atlantic Yards project should have prompted some skepticism.

The real cost to the parties

First, Greenland, according to the press release, "would also make a capital contribution to reimburse Forest City for certain costs incurred to date."

[Updated and clarified] That sum was unspecified, but it certainly suggests that Forest City's paper loss on Atlantic Yards--an "impairment of $250 million to $350 million"--is not nearly as bad as announced. Or--I am told--that's a roundabout way of saying Forest City is selling its share at a discount.

The Journal reported:
The price of the stake wasn’t disclosed, but it appears Greenland is getting it for significantly less than what Forest City put in. Last week, Forest City said the $500 million it had invested in the project was worth between $150 million and $250 million, a major cut.
Still, surely both parties are expecting nice long-term returns once the project hums along. That suggests that, in the long-term, Forest City will do OK.

Note that Forest City's stock price yesterday rose 1.48%, which was ahead of the market. (The DJIA rose .82%.)

Future subsidies and government help

Thus, until and unless Forest City opens its books further regarding the Greenland deal, it would be unwise for government negotiators, especially the incoming de Blasio administration, to grant further subsidies, as Forest City undoubtedly will request.

It's likely Forest City will not so much ask for cash but simply request more generous terms, such as continued deviation--as with the first tower--from the pledge to make 50% of the affordable units, in floor area, family-sized.

It's again clear that Empire State Development, the state agency overseeing and shepherding Atlantic Yards, is more partner and enabler than overseer. After all, ESD CEO Kenneth Adams provided an effusive quote in the press release about how Greenland would bring forth the public benefits.

Also, you have to wonder whether a project mostly owned by the Chinese government--just like an arena 45% owned and a team 80% owned by a Russian oligarch--would have found it so easy to get Atlantic Yards passed, including the array of government help, direct and indirect, including eminent domain, that Forest City Ratner wrangled.

Increased pace, dampened criticism?

The combination of modular construction and Greenland's cash infusion may spur--as the parties claim--a much more rapid construction pace. (I still find it hard to believe the reported claim by Greenland that the project would be done in eight years.)

So that might dampen, but not quiet the call, by BrooklynSpeaks and numerous elected officials, that the sale be conditioned on guarantees that affordable housing be delivered when originally promised.

But they still have an argument for getting it all in writing.

The issue of scale

The project, at least in terms of renderings, does not seem to include the single largest building, the flagship tower at the corner of Flatbush and Atlantic avenues. 

Even so, there's a potential contradiction between the call for affordable housing and the longtime BrooklynSpeaks request, at least regarding the Atlantic Yards plan as approved, to scale down the project.

A 2006 argument, redux

So it's worth another look at the July 2006 shadow debate between Bertha Lewis of ACORN and Kent Barwick of the Municipal Art Society (which later spawned, and then left, BrooklynSpeaks), held in City Limits. 

Lewis wrote 'SIMPLY NOT ENOUGH HOUSING IN BROOKLYN'  and defended Forest City Ratner's decisions:
The cost of acquiring the MTA land, moving the rail yard, doing environmental remediation and building infrastructure combine to make this an extraordinarily expensive development site. These costs would need to be borne by any developer, even a nonprofit or public entity that sought to develop the site.
Let’s not beat around the bush. Forest City Ratner is not the United Way. They are looking to make a profit. You can make money building affordable housing only two ways: through direct subsidy to reduce the extraordinary cost of this project, to any developer who chose to undertake it, or cross-subsidy from the market-rate rentals and condominiums.
Any developer who built on this site would need both subsidy and cross-subsidy to make the amount of affordable housing units included in the project financially viable. None of the so-called alternative plans advanced for the site adequately address this fundamental economic reality.
That also leads to the other bogeyman of the Atlantic Yards debate: density. In order to make the cross-subsidy between market rate and affordable units work in this project, you either need to allow the developer to build more, which means taller buildings, or to replace the cross-subsidy from market-rate units with more direct subsidy from government. Currently there is no other existing model for building affordable housing in New York City.
Lewis noted that city tax dollars, via abatements like 421-a, were already subsidizing as-of-right abatements in luxury towers in Downtown Brooklyn.

Kent Barwick of the Municipal Art Society took on the issue of citywide policy, in 'FAILS TO ACCOMPLISH A DELICATE BALANCE' :
The issue is not whether the city should be pursuing aggressive policies to generate affordable housing. Justice and equity demand that we take steps to ensure our neighborhoods remain economically diverse, and create and preserve housing for low and middle-income New Yorkers. But the scale of Atlantic Yards indicates that the strategy the city is pursuing is flawed. In the rezoning of Hudson Yards and Greenpoint-Williamsburg, the city created an incentive for developers to build affordable housing by permitting them to build bigger buildings than would otherwise be allowed. Atlantic Yards follows this pattern, as the excessive scale of the project -- the developer has proposed 8.7 million square feet, the equivalent in floor area to three Empire State Buildings -- is clearly only acceptable to the project’s political sponsors because of the inclusion of affordable housing.
But Atlantic Yards will still overwhelm the surrounding neighborhoods even as it houses residents with a mix of incomes, and New York should not have to sacrifice neighborhood character to get affordable housing. The city needs a better approach to this problem. One alternative would be to create a comprehensive requirement that all new high-density development in the city include a modest proportion of affordable housing.

There would be several advantages to this. First, we could set density and height limits according to what is right for neighborhoods and the city as a whole, instead of what we think is required to get developers to build affordable units. Second, we would generate far more affordable units: if this policy were in place today, thousands of the units that are being built across the city today -- notably in Downtown Brooklyn -- would be affordable. Finally, the approach would establish a level playing field. A developer building in Queens would be required to build affordable housing just as one in Brooklyn would, and there would be no need for negotiations to establish the quantity he or she needed to build, which instead would be established by the city's zoning resolution or state law.
The real estate community has argued that such a requirement would deter development, but this has not been the case in Boston and San Diego, which require all new development to have 10 percent of units be affordable. The simple fact is that developers build if market conditions are right, and almost all of them would be able to adjust to producing affordable units, particularly given the generous housing subsidies the city offers to developers for building affordable housing.
Thing is, Barwick's solution sounds not unlike some policies proposed by Mayor-elect Bill de Blasio, an Atlantic Yards supporter.

It's just that de Blasio supported Atlantic Yards without such a public process, and now he's trying to establish a more rational policy. The density and height limits with Atlantic Yards--which still seem to be changing--were subject to the whim of the developer.

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