Monday, May 05, 2014

If land value skyrockets and Forest City already (nearly) swore off new subsidies, what's the justification for them?

From one perspective, the issue at last Wednesday's hearing on the Draft Supplementary Environmental Impact Statement (Draft SEIS) focused on the need to build the promised affordable housing. From another, it concerned whether and how to enforce new oversight on both construction activities and the project at large.

Underlying all that was the question of trust: for Empire State Development, the state agency overseeing/shepherding the project, as well as other government agencies (NYC Mayor's Office, and housing agencies), and for developer Forest City Ratner, enmeshed in a joint venture, not quite approved, with the Chinese government-owned Greenland Group.

For many long watching Atlantic Yards, there's ample reason for distrust. That doesn't mean that government and the developer are always in lockstep; it just means there's a general commonality of interest, as well as regular lines of communication.

New subsidy push

As Mayor Bill de Blasio is expected to issue his affordable housing plan today, and an advocate close to him suggested that future Atlantic Yards towers will have more family-sized apartments, it's worth comparing the apparent new push for subsidies to past disavowals by Forest City.

The Times reported 4/19/14:
In recent days, [FCR CEO] Ms. [MaryAnne] Gilmartin has met with Alicia Glen, the deputy mayor for housing and economic development, to talk about the next three buildings and the possibility of additional housing subsidies for apartments for poor and working-class families.“We’re going to drive a tough but fair bargain so we can get this project moving,” Ms. Glen said. “We’re not happy about the pace of construction. But we think that modular is something we should continue to pursue across the city.”
That suggests some kind of boost specifically for modular, but if the next three buildings--as announced in the Times--will be built conventionally, perhaps for them as well.

One thing to watch is whether the additional subsidy will be designed for Atlantic Yards exclusively or whether it will be a new citywide policy--perhaps to ensure larger apartments--applicable to all developments.

In 2009, no more subsidy "expected"

At a July 2009 public Q&A session, Steve Matlin, then-counsel for the Empire State Development Corporation (now simply Empire State Development, or ESD), was asked, "Has Forest City Ratner asked the city and/or state for additional subsidies?"

Video by Jonathan Barkey

“I think on every project that ESDC has been involved in, the developer always asks for more, and there’s always a dialogue and always a negotiation," Matlin responded. The level of state commitment has remained the same; it’s a hundred million dollars.”

Moderator Craig Hammerman, District Manager of Community Board 6, followed up: “Does Forest City Ratner anticipate asking for more?”

A union member in the audience heckled, “If these guys keep holding the project up, up, they’ll need more.”

Gilmartin responded, “Forest City does not expect to ask for more subsidy.”

Reasons for skepticism

As I wrote at the time, there was reason to be skeptical: Forest City had said it expected to open the arena many years earlier than it actually occurred.

I've suggested that, in the Forest City lexicon, anticipate does not mean foresee, but rather "the placeholder date we don't believe but think we can get away with." Similarly, "does not expect to ask apparently meant "we don't think it's prudent now."

Yet the incentives may go in the opposition direction for subsidies. In 2009, the economy had just begun to rebound.

Forest City, however, calculated that it needed some 20% in savings by building the towers using modular technology, and invested to launch a new process and a new factory, and endured tough negotiations with construction unions.

Past subsidy push

In March 2011, Rafael Cestero, the departing Commissioner of the Department of Housing, Preservation, and Development (HPD), was asked about the report that HPD had declined Forest City Ratner's recent request for an additional $10 million in additional subsidies--beyond the $14 million for 150 units--for the first residential building. (This is separate from the tax-exempt bonds from the New York City Housing Development Corporation that also provide savings.)

"One is, we have a set of programs that we use across the city... that fall within certain subsidy parameters that make sense for taxpayers and make sense for the city," Cestero responded. "We felt that the additional subsidy that Forest City was requesting... didn't meet those parameters and, frankly, that we felt was not a good public investment to go beyond what we have already committed."

"We want to see housing built there. We're all deeply committed to seeing not just the arena built, but to see... the affordable housing built," he added, "but we think the parameters that we've laid out, the program that we've laid out, allows that project to go forward."

In November 2011, then CEO Bruce Ratner acknowledged he didn't expect additional subsidy from the administration of Mayor Mike Bloomberg.

The situation today

Today, the real estate market in Brooklyn is sizzling. Greenland has decided that building the next three towers using conventional construction is feasible.

As land values skyrocket in Brooklyn, the value of Forest City's investment does too.

So, why are subsidies needed? How will they compare to subsidies with other projects? How much of that is a result of the developer's tight relationship with de Blasio?

Forest City's fuzzy bottom line

This occurs even as Forest City has hedged its bets--and, to some, taken a paper loss.

Last August, aiming to offload some of the risk and get back some of of the $545 million it has invested, Forest City sought a new investor for the majority of Atlantic Yards, beyond the first tower and the Barclays Center.

Expecting $200 million from Greenland for 70% of that investment (which works out to $381.5 million), Forest City acknowledged an "impairment" of $242.4 million, or $148.4 million net of tax, which suggests a hit to the bottom line.

"We're disappointed," said CEO David LaRue last December, who had previously said Forest City was not aiming to get more than book value for the land. They didn't get book value.

"Basically, you take an impairment when the probability of future cash flows dictate it," CFO Bob O'Brien elaborated. "It’s clear that the costs incurred to date, plus the future costs, as we evaluate them with Greenland, result in the range of impairment that we’ve indicated in our filing. It is accounting driven, but it reflects market values..."

Then again, such calculations are invariably fuzzy. While assets held for sales are supposed to be written down to fair value less the cost of selling them, as "with most generally accepted accounting principles (GAAP), the definition of 'impairment' is in the eye of the beholder."

And Forest City has not exactly been the most trustworthy source. Remember how in 2007 then-CEO Chuck Ratner, cousin of Bruce, told investment analysts that Atlantic Yards would take 15 years, then backpedaled, claiming, “When I referred to the project taking 15 years to build I was referring to the total time, from the idea or conception of the development to completion of the final building... The actual construction of Atlantic Yards will take 10 years."

Also, as I've pointed out, the Forest City/Greenland partnership is set to make tens of millions of dollars--maybe more than $100 million--from $249 million in cheap financing though the federally-approved EB-5 program. Forest City still gets a development fee of 5%.

It's unclear whether Forest City thought it would take a loss in the long run on Atlantic Yards, or just would make a smaller profit than predicted. But it is likely that the parent company, Forest City Enterprises, decided it didn't want to take more risks, or pony up the capital to build a new railyard and start new towers without a partner.

Despite the impairment, I find it tough to believe that Forest City doesn't expect Atlantic Yards to work out reasonably well. And the capacity to gain future subsidies and other government benefits--including, perhaps, a revised railyard plan--shows that the deal continues to evolve, and any conclusions are premature.

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