Tuesday, October 14, 2014

Forest City selling Downtown Brooklyn site for far more than it'll pay for Vanderbilt Yard, though latter offers six times the development rights

Developers of Atlantic Yards/Pacific Park are getting the Vanderbilt Yard cheap, aren't they, as the value of land in and around Downtown Brooklyn continues to skyrocket.

Crain's New York Business yesterday wrote,  Forest City puts $185M downtown B'klyn site on market:
Forest City Ratner Cos. is looking to either sell a development site it owns in downtown Brooklyn worth an estimated $185 million, or find a developer willing to partner with Forest City Ratner on building a residential tower there, the company confirmed Monday.
The site, at 625 Fulton St., between Hudson Avenue and Rockwell Place, is being marketed by CBRE Group, and has the potential for more than 600,000 square feet of residential space, according to city records. The details of the potential sale were first reported by Real Estate Alert late last month.
While the price is based on an estimated $300 per buildable square foot at the former chocolate factory--which once held offices, including that of Atlantic Yards Community Benefits Agreement signatory BUILD-- it's possible the price could go even higher, to $350 per square foot or more, according to Crain's.

It's a remarkable turnaround for a site that, earlier this year, left Forest City technically in default on the mortgage, as noted by Crain's. It's also interesting that Forest City's partner on Atlantic Yards, the Chinese government-owned Greenland Group, is not (yet) a partner on this new site.

The huge gain

Not only does the sale likely represent a huge gain for Forest City, which bought the land in 1989 when real estate was cheap, it offers a significant contrast with what Forest City--now Greenland Forest City partners--will pay for the Vanderbilt Yard development rights, the key public property that's part of the Atlantic Yards/Pacific Park project.

As I wrote in March, development rights for the 8.5-acre Vanderbilt Yard, after a MTA-requested appraisal, were appraised in 2005 at $75 per buildable square foot, for more than 3.6 million square feet. That's six times the buildable area offered at 625 Fulton.

In 2009, the MTA, faced with Forest City Ratner's request to renegotiate the deal, said that it would be dangerous to get a new appraisal and seek new bidders because of the bad economy. And the MTA ignored the suggestion, from the Regional Plan Association, that the public agency should claim a piece of future revenues.

So Forest City, instead of paying the full $100 million in cash originally promised, got to put down $20 million for the portion of the railyard needed for the arena, then could pay the rest over 22 years, at a gentle 6.5% interest rate, for 3.6 million square feet.

In other words, the upside went to Forest City, as the economy, and real estate market, swung back quickly.

Looking at the details

new appraisal in 2010 of Atlantic Yards land, which included some land over the railyard, valued development rights at more than $179/square foot. 

The market has continued to rise.  At $350/square foot, 3.6 million sf is worth $1.26 billion!

Yes, it's not an apples to apples comparison.

Forest City has/had hundreds of millions of dollars in additional costs for the new railyard, deck, and new transit entrance that were part of the deal and required to get vertical development started over the part of the railyard where there will be housing. (The part of the railyard used for the arena is below-grade.)

But even if that cost hits $400 to $600 million--now, with increased construction costs, a sum far more than Forest City ever estimated--it still looks like a bargain.

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