The Culture of Cheating: Forest City's inside track with the MTA

Published Sept. 18, 2012 and updated since then.

The spanking new Atlantic Avenue-Barclays Center subway entrance is an undeniable asset to the Barclays Center, Brooklyn, and the city of New York. But in this public-private partnership, the subway station will serve arena patrons more than anybody--and Forest City Ratner won't pay for additional service.

Moreover, the key parts of the developer's transaction with the Metropolitan Transportation Authority (MTA), notably the payment for development rights over the Vanderbilt Yard, and the subsequent development thereof, still wait, thanks in part to FCR's ability to get in on the ground floor in 2003 with no competition for years, then renegotiate the deal in 2009.

Did it have to be that way? Maybe not.

Yes, there’s a “fundamental asymmetry” in complex projects that favors a developer, because it “can generally leave the project and even the city while politicians cannot,” as planning professor Lynne Sagalyn warned in Times Square Roulette, her epic 2001 epic analysis of redevelopment.

With Atlantic Yards, however, the public had more power: Forest City was desperate to move the money-losing Nets from New Jersey into a profitable new arena, larded with luxury suites and sponsorships enabled by the country's richest media market, and to get tax-exempt bonds sold by the end of 2009.

Instead, when Forest City asked to renegotiate, the MTA, controlled by the governor and mayor, complied. This is the Culture of Cheating from another angle: less deception than an inside deal from the start.

(As of August 2014, Atlantic Yards has been disingenuously renamed Pacific Park by the new joint venture, Greenland Forest City Partners, led by the Chinese government-owned Greenland Group.)

On board from the start

Though the cast of characters changed, Mayor Mike Bloomberg and Gov. George Pataki had signed on, and the state agencies were on board. Not long after Atlantic Yards was announced in December 2003, an MTA spokesman even told the press that Ratner had already been awarded the 8.5-acre Vanderbilt Yard, the key piece of public property needed for the 21-acre (now 22 acres) Atlantic Yards project.

Agency spokesman Tom Kelly then backed off that claim. But the MTA was controlled by the mayor and governor, and they backed the project. Would other bidders for the Vanderbilt Yard would be considered. “Sure we’d entertain it,” Kelly said, adding that “that land had been there for 20 to 30 years, and nobody ever came forward to develop it.”

The essential question was asked exactly once, of Andrew Alper, a former Goldman Sachs investment banker now leading the New York City Economic Development Corporation, a city-funded nonprofit that managed development without the pesky oversight a city department would undergo.

“Are we doing this now because this has been brought to us,” or because the city proactively decided it was good, asked Council Member Eric Gioia at a May 4, 2004 City Council hearing. “How do you know it’s a good deal, unless we know that there is somebody else out there?

“This particular project came to us,” acknowledged Alper, calling Atlantic Yards “a very clever plan” because it went well beyond sports. “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.”

But the “very clever plan” went far beyond a “sports arena franchise.” The scarce commodity of a team leveraged the city’s support not just for a basketball arena, but also Forest City Ratner’s entire take-it-or-leave-it 22-acre project, and the inside track on the Vanderbilt Yard.

When the MTA on May 19, 2005 finally issued a Request for Proposals (RFP) for the railyard, it gave potential bidders all of 42 days to respond. Even a higher bid than Ratner’s bid would have to win over the MTA board. And the MTA request for proposals only came after the city and state had signed a Memorandum of Understanding with Forest City.

Forest City sounded confident. “We have said repeatedly that we would pay fair market value for this land,” said Bruce Bender, the company’s head of external affairs. “The RFP process is one way to determine that value.”

A new bid emerges

Exactly one rival for Ratner’s plan for the railyard emerged, submitted by Manhattan-based Extell Development Company, the only firm to reply to 96 recruitment letters--as far away as Singapore--sent by Develop Don’t Destroy Brooklyn (DDDB), the main Atlantic Yards opponents.

Extell, which had done a $1.8 billion deal with Donald Trump, was known around the city as a low-key but hard-nosed developer--it had partnered with the Carlyle Group in the Trump deal--but in this case it came off like a white knight. It surely didn’t hurt that there was bad blood between Extell and Forest City, as the latter won out for the site that was to become the Times Tower.

DDDB’s promotional package about Brooklyn included “color photos of quaint restaurants, brownstones and luxury lofts,” as the Daily News reported, but company spokesman Bob Liff put it, “What attracted the developer to this is that it's one of the great developable sites in Brooklyn. We're surprised there weren't more people.”

Extell’s plan would have only 11 buildings, not 17, and no arena. It would in some ways respect the UNITY plan, since it would not require eminent domain, it would eliminate superblocks, it would add streets, and it would aim to be more contextual. And Extell announced its willingness to go through the city’s land-use review process.

Yes, it was more in context with the neighborhoods, but it was another single-developer project, and, with buildings ranging up to 28 stories, it was by no means small.  Still, as one journalist put it, All those protesters who have trailed Brooklyn Beep Marty Markowitz over the past 18 months chanting ‘Not a done deal’ were right.”

On the Brian Lehrer Show, Extell President Gary Barnett acknowledged that the proposal was put together “in the last couple of weeks,” and said it wouldn’t require more subsidies than the $200 million already allotted.

Brooklyn Borough President Markowitz, however, suggested that it wouldn’t produce enough jobs or affordable housing, nor an arena to accommodate a “national sports team for Brooklyn.”

Times editorial

Even before the bids emerged, the New York Times editorialized in favor of Ratner’s plan, saying it it had “the very important advantage of carrying with it a commitment to create jobs for area residents, including minorities and women, and to build as many as 3,000 affordable housing units," commitment that, as we've seen, were a bit fuzzy.

In a letter in response, Steve Kroeter, a former chairman of the department of design and management at the Parsons School of Design, suggested that  the editorial “condescendingly admonishes those in opposition to the Forest City Ratner proposal not to object just because ‘Brooklyn has never before seen anything that big.’”

But the Times, he wrote, has failed to provide an overview of what the planning standards should be for the site, and then evaluate Ratner’s plan against those standards. (The Times editorial page answered to the publisher, who was doing a deal with Forest City to build a new headquarters.)

“I'm troubled that Brooklyn is being regarded as an opportunity rather than as a place,” added columnist Karrie Jacobs, a Brooklyn resident, in the design magazine Metropolis, which, via another columnist had once endorsed Atlantic Yards. Surveying the grand plans for Downtown Brooklyn and the Williamsburg-Greenpoint waterfront, she warned, “It's not nostalgia or NIMBYism to want planning that intelligently integrates past, present, and future."

The bid totals revealed

On July 22, the MTA released a bombshell: Extell had bid $150 million for the 8.5-acre railyard, while Ratner had bid only $50 million. Both bids were considerably less than the appraisal the MTA commissioned, which valued the rights at $214.5 million, after the cost of a deck and a new railyard. But the Ratner well-stuffed bid came with seeming form letters from numerous elected officials, many quoting hired sports economist Andrew Zimbalist’s estimate of $6 billion in new revenues, with others more prudently suggesting “billions.”

Westchester Assemblyman Richard Brodsky, who chaired the Assembly Committee on Public Authorities, argued that the MTA should respect a recently-passed law, though not yet in effect, that the highest bidder should win. Forest City argued that its overall bid was worth far more, given additional taxes and a new subway entrance.

The Daily News agreed with Forest City’s argument about the value of its overall bid, and suggested the borough would benefit from a much larger protect. Its advice sounded nonsensical but turned out to be oddly prescient: “The MTA should award the yards to Ratner and then get into serious negotiations aimed at pushing his $50 million cash contribution higher.”

Charged rhetoric

The rhetoric at an MTA committee meeting became charged. "If this thing doesn't come out in favor of Ratner, it would be a conspiracy against blacks," James Caldwell of BUILD (Brooklyn United for Innovative Local Development) told a reporter.

Another BUILD member asserted, "When you reject the Ratner project and embrace the Extell project, you're saying you don't care about the 55% unemployment in the black community." Still, black elected officials like state Senator Velmanette Montgomery opposed the project, warning that Atlantic Yards "seeks to overbuild and destroy the communities around it."

Two days later, the scene at the full board meeting, the tensions again were high, as hundreds of people lined up on Madison Avenue, in Manhattan’s midtown office district. “Two Days to Deliberate?” read the sign from one protester. “Vote in September.” “Jobs, Housing, & Hoops” read the ubiquitous buttons.

Daniel Goldstein of DDDB  held a provocative sign, “Thugs and Puppets,” referring to the aggressive union workers and Ratner’s community partners. While some opponents showed up at 7 am, BUILD members had been out there since midnight. Forest City Ratner p.r. people distributed breakfast to the BUILD people.

At the full board meeting, with 53 speakers offering two-minute comments, as one attendee reported, “no one stayed on topic” regarding the question of which bid was more valuable.

“Representatives of numerous black groups and labor groups testified to the virtues and good works of Ratner. He will subsidize daycare. He will hire minority contractors. He will hire union labor. He will solve unemployment. And so on,” recounted Mary Campbell Gallagher. “What I said to the MTA board was that they have a fiduciary duty not just to the MTA treasury but to the City of New York. They need not destroy Brooklyn in order to develop the rail yards.... The MTA paid no attention to any of us.”

The chairman in charge

As soon as the comment period ended, MTA Chairman Peter Kalikow took out a prepared resolution, urging that the board negotiate exclusively with Forest City Ratner, asking the developer to increase the cash.

That passed 11-1, with one board member, Long Island's Mitchell Pally, arguing that both bidders should be asked to bid against each other. "We have no assurance that they'll come up with one more cent," he said of Forest City. "It is not our responsibility to make the determination of what to build there," he added.

Kalikow, a real estate veteran, retorted, “I’ve been in business for 38 years... I’ve had my ups and downs, but in all those years I’ve never sent two tenants the lease for the same space at the same time. It’s just not right, it’s immoral and it’s not the way l like to do business.”

But it was not a lease, “Rather, he's auctioning off an incredibly valuable piece of public property,” commented journalist/activist Aaron Naparstek. “You don't have to be an eBay PowerSeller to know that an auction works best when you've got more than one bidder."

While “people close to the board” had predicted the issue would not come to the vote, something changed. According to the New York Post, it was “last-minute intervention by Mayor Bloomberg,” whose aides said that “that keeping Ratner twisting in the wind was ‘no way to deal with the business community in this town.’”

An Extell representative, Lela Goren, said afterward, that had the developer had more time, it would have done more to reach out to unions and to provide an analysis of project benefits--and could have done so by the planned September 29 meeting. But Extell only had a few weeks.

“Ratner is not just a builder. He has a big heart," one BUILD representative suggested. "God has sent someone like him to help us." Then why, mused one reporter, would “such a generous, experienced and knowledgeable business man would submit such a low bid.”

Naparstek saw a succession from the political machine of Boss Tweed to the “all-powerful, unelected bureaucrat” Robert Moses to “the big-time real estate developer who doles out the jobs and justifies the means. Meet the new Boss. His name is Bruce Ratner. You can fight him or apply for a job.”

Real estate writer Peter Slatin put it another way, asking if developers care about the places they transform: “The answer is, They do care… up to a point. Good development is almost always a trade-off that begins and ends with the [financial] pencil.”

The deal gets done

The negotiations, presumably, continued. As the MTA scheduled a special meeting for Sept. 14, DDDB, along with 32 organization, asked the MTA to release Ratner’s financial projections: “we believe that it is in the public interest to understand, not just what the public is getting back in revenues for our investment, but also what FCRC is getting in profits from our investment.”

Signatories included the Citizens Union, NYPIRG Straphangers Campaign, Transportation Alternatives, and the Tri-State Transportation Campaign. Even the Regional Plan Association got into the act, asking for full value for the MTA property, full public disclosure of competing bids, and an analysis of the cost of traffic and transportation impacts.

But there was a “glum tone” to the meeting, given that, despite opportunity to comment--on scale, on minority participation--it was a done deal. “The humiliation begins at eight o’clock,” observed Brooklyn Rail's Brian Carreira. “It is catered. Bagels, coffee and juice, passed out along with “Jobs, Housing, and Hoops” pins.” One union worker, describing attendance as the equivalent of mandated picket duty, acknowledged,“I don’t even know what I’m supposed to do.”

“Yesterday I won by a mandate, 85 percent,” testified Council Member Letitia James. "[I]t was a referendum on this project,” she said, which was likely an exaggeration. But James was surely right in saying, “The voting public is particularly cynical about government and about politicians. Now I know why,”

State Sen. Carl Kruger, a grandiloquent politician from South Brooklyn and a longtime ally of Forest City's Bender, said Atlantic Yards would serve “all of us in Brooklyn that are proud of our heritage and our lineage,” and envisioned that “the Vanderbilt Yards will no longer be the cesspool that they currently are.” (Kruger was later convicted on unrelated corruption charges.)

It was Goldstein’s girlfriend (and later wife) Shabnam Merchant who responded with appropriate theatrics: “If you won’t play pretend that these hearings are part of the democratic process,” she said, ‘then I won’t play pretend either.” So she stood silently for the rest of her two minutes, letting the tension in the room rise, with no one meeting her eyes.

Again, MTA board member Pally was the lone dissenter, asking why the deal depended on other approvals of the Atlantic Yards project and noting that the agency had not, in its needs assessment, described the need to upgrade the railyard.

“We're selling the property for less than we can get," Pally, to one observer “as cross as futility can manifest,” provoking Kalikow to argue testily that $214.5 million appraisal "is just some guy's idea of what it's worth," adding, as if in some bizarro free-market world, "That was his opinion, and it wasn't borne out by the marketplace.”

Kalikow also contended that Extell’s bid was incomplete, which prompted Extell president Barnett to say the MTA could have queried him.

DDDB, noting that its actions had provoked Forest City to raise its bid by $50 million, cheekily requested a $6 million finder’s fee. That would have been a lot. Ratner only had to come up with a $10 million down payment.

Was this planning?

On Nov. 15, 2005, WNYC radio host Brian Lehrer interviewed Charles Gargano, the veteran pol who was serving as Chairman of the Empire State Development Corporation, the state agency overseeing the project. Though he’d had a successful business career, Gargano was better known for prodigious fundraising for Republican candidates like President Ronald Reagan, Sen. Alfonse D'Amato, and Gov. George Pataki, who appointed him to his current post.

Under the administration of President George H.W. Bush, Gargano was named ambassador to Trinidad & Tobago, and liked to be addressed as “Ambassador.” Lehrer cited planning professor Tom Angotti’s essay arguing that the Atlantic Yards planning was “all backwards.” Was this, asked Lehrer, "a through-the-looking-glass version of how development should work?”

Gargano was unbowed, though also unmoored. “Well, first of all, if you understand development and how it does it work,” he said, “we have a process in government, state government... whereby we put out, first of all, on any area we’re trying to develop, we put out what we call, um, an RF--um, I, um, Request for, EI, Request for Expressions of Interest. And the reason why we do it, is we want to pick the brains of the private sector and see what kind of ideas they have. After all, they’re the ones with the resources and are going to build all these projects.”

He cleared his throat. “So we want their ideas. We put out this RFEI as the initial--that’s the first part of the process, and it has worked very well for many many decades. So it’s not necessarily so that the governments put out a plan of how they want to see something done. An example of that is 42nd Street.”

There was no RFEI or RFP for the Atlantic Yards site as a whole, and the RFP for the Vanderbilt Yard was rather belated. Lehrer, rather than challenge Gargano’s evasive response, evenly quoted from Angotti’s essay, pointing out how Atlantic Yards would evade city oversight and local votes because of the state process. “Are you helping Forest City Ratner do an end run around the usual land use democracy?”

“That’s one way of characterizing it, but we don’t believe that’s the case at all,” declared Gargano mildly. “More the 40 years ago, the Urban Development Corporation was created with the powers of getting projects done. That doesn’t mean that we abuse any kind of process or circumvent any process.” In fact, he contended, the environmental review meant that “we go through a lot of process. What we try to eliminate is a lot of red tape that doesn’t necessarily make for a better project.”

“Why shouldn’t a big project like this, that affects several city neighborhoods” go through ULURP? asked Lehrer. “Why isn’t that just better democracy?”

“You’re going through many layers of government,” Gargano replied, with a bit less confidence, “ and we don’t feel it really is always necessary. As I said before, we do go through a process here.” He cited the public hearings and suggested “it’s a lengthy process in itself.”

“Do you have your own opinion,” Lehrer asked, “that the Ratner plan is better on the merits than the Extell plan?”

“What I do know is we have a lot more detail on the Ratner plan,” Gargano said, cagily deferring to the MTA’s decision. “But I can tell you what I do know. The Ratner plan is a very detailed extensive plan to clean up a blighted area within that area, finally develop railyards. Isn’t it interesting”--his voice became energized with the talking point--“that these railyards have sat for decades and decades and decades, and no one has done a thing about them.”

“I remember these yards,” he said. “I grew up in Park Slope, Brooklyn. These railyards have been sitting there for 40 or 50 years--or longer, obviously, that I remember. The reality is that when someone comes in to develop and everyone is up in arms about how valuable they are.”

“Are you concerned at all,” Lehrer asked, “about the density of the project, 17 [actually 16] high-rises?” Many people, he noted, were taken aback by the blueprints.

“Well, there’s going to be a lot of open space as well,” Gargano parried. “Y’know, you can build in many ways, Brian. You can spread it out with lower buildings, or you can concentrate taller buildings and have a lot of open space.”

“Do you have any particular environmental questions or concerns?” asked Lehrer.

“I think we have to do is make sure we have the proper infrastructure that is required,” Gargano said evasively.

None of his successors would ever gone on Lehrer’s program to discuss Atlantic Yards, though Gargano would proudly return. Atlantic Yards would be passed by Gargano's board in December 2006, then be slowed by lawsuits and the world economic crisis.

Four years later

Forest City wanted to renegotiate. In late May 2009, as the first and only state oversight hearing on Atlantic Yards approached, the developer floated some details via Errol Louis, the project-supporting Daily News columnist.” “Project insiders say Ratner's most pressing short-term financial hump is the need to pay $100 million” for the railyard, Louis wrote May 28.

Ratner wanted to pay “$20 million or so” for the railyard, and the rest over time. But government officials, at least in Louis’s telling, were “balking at giving any more help.”

Also enlisted was Kruger, the new chair of the Senate Finance Committee. He produced a bizarro-world press release charging, “The MTA’s refusal to act on Forest City Ratner Companies’ revised agreement... succeeds in fulfilling the MTA’s widely-held image as a secretive entity that works not for the good of the public but for its own financial benefit.”

Some insight emerged May 29 at a hearing, held at Pratt Institute in Brooklyn under the auspices of the state Senate’s committee on corporation, led by Harlem Sen. Bill Perkins. Only recently had the Democratic party gained control of the Senate, which, in a state with was reliably Republican, thanks to gerrymandering and pork. And that meant that Assembly Speaker Sheldon Silver, an Atlantic Yards supporter, couldn’t stymie a hearing.

It was eerily reminiscent of the epic hearing in August 2006 on the Draft Environmental Impact Statement. Union members handed out whistles from a box, blasting noise so that those waiting to go in plugged their ears. “Goldstein’s gotta go,” they chanted, ominously bloodthirsty. Inside, despite the presence of many project opponents, most occupying seats were union members and Community Benefits Agreement signatories. They wore "Atlantic Yards Now" buttons, and many disrupted the hearing, with no sanction.

“They’re blocking the program!” the Rev. Herbert Daughtry would cry out, a kente-clad clerical Jack-in-the Box, fulfilling some unwritten clause in the Community Benefits Agreement that he signed.

MTA on board

The MTA, despite the screeds of Louis and Kruger, sure sounded like it was on board. Acting head Helena Williams even managed a revisionist history, describing the agency’s 2005 Request for Proposals as “an opportunity to look at the yards." Actually, it was an ex post facto response to a project that already seemed to be a done deal.

The MTA, Williams disclosed, had completed negotiation with Forest City Ratner on a cheaper, less elaborate railyard--seven tracks rather than nine, and that negotiations regarding a delayed schedule for payments were ongoing.

In early 2008, she said, Forest City Ratner “came to me and said we need to go through a value engineering exercise” to reduce the cost of construction of the permanent railyard.

“I am pleased to announce we have reached a tentative agreement on that new design,” she said, explaining that “the new yard will have seven tracks plus an eight-car drill track, and will be sufficient to support future ridership growth.”

Perkins asked Williams about Ratner’s $100 million pledge, saying he’d heard a rumor that it would be cut to $50 million.

“We’re in the midst of negotiation,” Williams said. “Between what you heard and what was in the paper [$20 million], I like your number better.”

“You would like even more, I would dare say,” Perkins continued.

Williams nodded.

Assemblyman Hakeem Jeffries, grandstanding a bit, asked, “Isn’t it correct that that if you were given $100 million payment up front,” that would ward off a fare increase?

Williams, in a steady voice, responded that the money was always directed at the MTA’s capital funds, not operating expenses.

Maybe, maybe not. After all, former MTA Chairman Richard Ravitch, in a June 3 article, said monies from a new payroll tax destined for capital projects likely would be used in next year’s operating budget. (Could Ravitch, one of the city’s most respected fiscal voices, have looked askance at Atlantic Yards? He never entered the fray, neutralized in part by his investment banker son’s role brokering the team.)

Jeffries pressed on. Was was MTA upholding its fiduciary duty, their obligation to act with the highest standard of care?

Williams parried: "I think there is room to say the board’s meeting its obligation, the community is getting benefits of going forward, and we don’t have to demand the $100 million on closing. At the end of the day, it’s got to equal the value of the $100 million.”

“Good answers,” shouted Daughtry.

“We all would like a discount,” Jeffries responded, but “at whose expense?”

Would Brodsky stand up?

It seemed like Assemblyman Brodsky, chair of the Corporations Committee, was no fan of the Atlantic Yards deal. After all, Brodsky had launched a year-long crusade, with hearings, reports, and much media coverage, to slam what he called the city’s $4 billion giveaway for a new Yankee Stadium.

The state’s unelected authorities, he contended at a speech in Albany, “are the most dependent agency in government, because they’re run by mayor and/or governor out of the second floor, out of the executive chambers, their boards are told what to do... Have you ever seen a board of an authority stand up to a governor or mayor and say no?”

“There are no checks and balances,” Brodsky lamented. But a new bill, he maintained would require board members to be reminded of their fiduciary duty. “This is going to come up very quickly, because the Nets are going to ask the MTA to take less money for the Nets arena,” he said, and accepting that would be “a violation of the fiduciary duty of the board members.”

More sanguine was Albert Ratner, chairman of parent company Forest City Enterprises, with the comfortable authority of a man born in 1927. He declared confidence in the firm’s ability to withstand business cycles over 88 years, as “we have been consistent in three beliefs.”

“The first one,” he told attendees at Forest City’s annual meeting June 5, held, as usual, at the company-owned Ritz-Carlton Hotel in Cleveland, “is our belief... that our business is built on relationships. The second is, that over that period of time, we have been very creative. We have been able to figure out what comes next. And, the third one is that we understand and have an ability to develop great real estate.”

It hearkened back to a claim FCE made in November 2008, counting Atlantic Yards as among "Active Large Scale Projects Where We Control the Pace."

MTA hearing redux

A few weeks later, in June 2009, combatants gathered for yet another hearing at MTA offices, and Albert Ratner’s vision prevailed. Brodsky chose not to comment, nor send a representative. Though Brodsky denied pulling his punches, the legislator likely didn’t want to antagonize Silver, whose endorsement he sought, and got, in his unsuccessful 2010 campaign for Attorney General.

As in 2005, things seemed a bit backwards. The MTA Finance Committee took public testimony before revealing the contours of the deal.

The Partnership for NYC’s Kathryn Wylde, the voice of the business community, spoke as if touting the 2003 iteration of the plan: Atlantic Yards would further diversify the city's economy and create a new source of jobs that goes well beyond Wall Street.

Carpenters Union official Ray Brugueras testified, confoundingly, that the MTA should comply with Forest City’s request because Bruce Ratner "has the monies available" to get through economic hard times.

Project opponents denounced the rumored--and, ultimately, accurate--information that Forest City Ratner would have to pay only $20 million down. Musician and Fans for Fair Play blogger Scott Turner, his mini-Mohawk and retro glasses turning him into an urban Jeremiah, warned, “This is a Finance Committee. It's not a hopes and dreams committee."

The unions, he added, “will get renegotiated." Indeed, Forest City months earlier had stalled construction of the Beekman Tower, a Gehry-designed residential building in lower Manhattan, only to resume after extracting union concessions.

Turner honed in on the essential injustice: "No matter how angry we [transit users] get, we don't come to you asking to renegotiate our two-dollar fare when the trains don't get there."

Deal details

MTA CFO Gary Dellaverson, in a matter-of-fact way, summarized the deal. Forest City Ratner would put $20 million down, then pay the equivalent of $80 million--thus totaling the once-promised $100 million--by 2031 to acquire six parcels for six buildings. Forest City could speed up the payments if it wished, but it had a gentle 6.5% interest rate.

“With interest, the agency comes out whole,” the Daily News would opine, urging “Build, Bruce, build." By contrast, investment firm Keefe, Bruyette & Woods would declare the deal “a significant positive for Forest City.” A real estate investment firm called the interest rate “ a real coup,” given the absence of financing.

The savings went well beyond cash. The permanent railyard, instead of having nine tracks with capacity for 76 cars, would have seven tracks with capacity for 56 cars. While there would be several improvements, the new railyard would be valued at $147 million, while Dellaverson said the previous iteration could be worth $250 million, after inflation.

So much for that 2005 letter of agreement that promised a configuration "that does not reduce yard/station capacity or functionality." Moreover, the temporary railyard with capacity for only 42 cars, which was once supposed to last 32 months after construction, could now last more than twice as long: 80 months.

A few board members were quizzical. “It seemed to me [Williams] was pretty clear about needing the nine-track yard,” asked Andrew Albert, representing transit users. “That has now changed to where she can accept a seven-track yard?"

Williams, responded Dellaverson, was "100 percent comfortable that the Rail Road's acquiescence in this value-engineering exercise... allows her to run the service she needs."

It was nearly four years after the MTA approved the deal, commented board member board member Doreen Frasca, a consultant, in steady, forceful tones. To be given less than 48 hours to understand the deal, “I think that's pretty outrageous.”

Why, she asked, did they have to vote in two days?

“Well, of course, you don’t” said Dellaverson, his hands clasped, his thumbs wiggling.

"I think that, in terms of why must it be now in the summer versus in the fall, I think that really relates to Forest City's”--he paused a beat--”desire to market their bonds as a tax-exempt issuance [by a December 31 deadline].” If not, he said, the arena would become “less viable and perhaps not viable, although that's not something that I'm prepared to say from my own knowledge.”

Indeed, not only were the tax-exempt bonds at stake, but Forest City was losing tens of millions of dollars a year in New Jersey on the Nets.

Frasca asked how the $20 million value of the parcel was calculated.

"Is this square footage one-fifth of the total square footage?” Dellaverson mused. “Y'know, I don't actually know the answer." (I estimated it was more than one quarter.)

Any competition?

"Just out of curiosity,” asked Albert, “if one of the losing bidders in the initial deal in 2005 said, 'Hey, our deal was better than that one and we're willing to give you more at closing'... notwithstanding the benefit of having the Nets in Brooklyn, are we contractually obligated to Forest City Ratner?"

Dellaverson responded with a distinct lack of enthusiasm. An unsolicited proposal from Extell Development “would be interesting," he said, but there was no great market for “parcels that require literally hundreds of millions of dollars of pre-development expense."

Why not wait, he was asked later by a WNYC reporter, until the economy recovers?

Dellaverson's response to the question was a talmudic question: did WNYC knew when that would happen?

The next day, No Land Grab rounded up the coverage under the heading "Acting Governor Bruce Ratner directs MTA to bailout Acting Governor Bruce Ratner." Indeed, several media outlets called it a sweetheart deal. The New York Observer quantified the savings: Ratner To Pay $180 M. Less Upfront For Atlantic Yards. The Times gave it a pathetically brief five paragraphs, sans byline.

One commentator was outraged. “Remember, the MTA is so cash-strapped that it had to beg the state for a permanent $2 billion-a-year bailout a couple of months back,” wrote Nicole Gelinas of the Manhattan Institute, in a Post op-ed. “Yet now, in effect, it's proposing to lend money to a speculative developer at a 6.5 percent interest rate for decades.”

Warnings, and a bid

Two days later, at the MTA’s full board meeting, the board endured two hours of public comment, then deliberated for 30 minutes. No one from Forest City Ratner spoke. The New York Post, whose editorial page still supported the project, nonetheless in an editorial (“The Original Deal--or None”) urged the MTA to reject the compromise.

“I’m here to discuss your duty not to squander your assets and your duty to be a good neighbor,” declared Brooklyn Assemblyman Jim Brennan crisply, with more passion than he usually devoted to Atlantic Yards. “The Public Authorities Accountability Act of 2005, which applies to the MTA, requires an independent appraisal.” (The board was later told that MTA legal counsel backed their vote.)

“This is the only time I agree with the New York Post,” declared Letitia James, brandishing Gelinas’s column. “It’s an outrageous giveaway.”

No elected officials spoke in favor of the deal, though Brooklyn Borough President Marty Markowitz sent his Chief of Staff, Carlo Scissura, as he'd done two days earlier. "As we all know, the Borough President would never support anything that is not in the interests of all of Brooklyn and all Brooklynites," the deputy declared soothingly.

When DDDB's Goldstein stepped up to testify, he presented a wild-card challenge: “You can issue an RFP, or you must consider our offer after tabling today’s vote. I’m here to announce that Develop Don’t Destroy Brooklyn is making an offer of $120 million to purchase the development rights to the Vanderbilt Yard.”

The mixed use development would be based on the UNITY Plan framework. (In a press release, DDDB said it could put down $5 million.)

Was this a stunt? The room got quiet. No one on the board would meet Goldstein’s gaze. MTA Chairman Dale Hemmerdinger, like predecessor Kalikow a real estate developer, had a sour look on his face.

“We are certain that our offer would receive stiff competition if the yards were put out for bid,” Goldstein declared. “But we do feel fortunate that we can make such a discounted offer for such a great piece of real estate due to the absence of a competitive bidding process.”

No one reacted to Goldstein. Nor was there much reaction to the caveats raised by some good-government groups. Gene Russianoff of the Straphangers Campaign, whose group had no overall position on Atlantic Yards, but warned against “a rush to judgment.”

Perhaps the most creative solution came from the Regional Plan Association, which had backed Atlantic Yards, though with reservations. The MTA, said Neysa Pranger, should claim more future revenues from Forest City, and a new ESDC subsidiary should oversee the project. It was a basic good government proposal: concessions should result in a trade.

The MTA folds

Instead, the MTA essentially folded. No board member even discussed Pranger’s proposals, though  Pally, who’d voted against the deal in 2005, said again didn’t believe the agency was getting fair value.  Dellaverson looked tense.

He found an ally in Allen Cappelli, an attorney and former state official, who said he’d come in undecided. “I’m very troubled by the idea that the state of the art railyard... which was a nine-track facility several weeks ago, is now sufficient with seven.”

Two Bloomberg appointees, however, pounded hard, even as the mayor, in the midst of a re-election bid, had publicly dismissed the possibility of new direct subsidy.

 “Y’know, these railyards have been there for a very long time,” suggested Jeffrey Kay, director of the Mayor’s Office of Operations. “The reality is, it’s only worth what someone’s willing to provide... There is no other market.”

“I think that realizing value from railyard property that we own is something that we have learned over the last number of years, much of which has been in a boom real estate cycle, is extraordinarily difficult,” added Mark Page, director of the city Office of Management and Budget.

Crucially, Frasca was on board, reporting that she’d spent five hours the day before examining the transaction. “I have never yet seen a perfect deal,” she said, but said the MTA was getting the “transportation elements... that we need and the financial safeguards that we require.”

“I’ve been in the real estate business a whole long time and I agree with Doreen no deal is ever perfect,” declared Chairman Hemmerdinger, with some relief. “You get what you can when you can. And I think, in this economy, jobs and an arena in Brooklyn is a public good.”

He even suggested that the deal was in some ways better because of a new twist: the first-ever sale of subway station naming rights. Forest City had committed $200,000 a year over 20 years to add “Barclays Center” to the Atlantic Avenue/Pacific Street subway hub.

Why Forest City, not Barclays, was spending the money was not explained, but it was understandable that, without a Gehry arena and the attendant delays, the developer was under pressure to adjust the deal.

Why $200,000? “I don't have a nifty little spreadsheet,” Dellaverson explained. “ Our real estate division did review some naming rights that had been done by transportation and other entities. But y'know, we kinda felt our way into it."

What to think? The Daily News, unsurprisingly, supported the deal to the hilt. The Times was editorially silent, though in a somewhat parallel situation in 1994, the newspaper repeatedly editorialized against renegotiating with a developer. “A rebounding economy will likely increase its value,” the Times opined. “It is wiser to walk away than stumble into a giveaway.”

The paper did express dismay regarding the subway naming rights, suggesting that individual cars, not locations, were better subjects, though it called the $200,000 annual payment “a goodly sum.”

Was it? “I wonder if we could raise that same amount of cash to rename the Franklin Avenue station ‘MTA Kiss My Grits’?” mused hip-hop filmmaker Dallas Penn.

“In 20 years’ time that $200,000,” observed Michael White, “will assuredly be a truly trivial sum to pay for advertising. Indeed, in a somewhat comparable deal in Philadelphia, announced a year later, the local transit authority would get $600,000 a year. Barclays seemed to be getting off easy.

Taking the MTA to court

On Oct. 13, 2009, on the eve of the crucial court hearing on the eminent domain case,  DDDB, joined by four elected officials and the Straphangers Campaign, sued the MTA and Forest City to annul the deal reached in June. It was the first time that elected officials--in this case longtime opponents James and Montgomery, joined by critics Brennan and Millman--had formally joined a lawsuit organized and funded by DDDB.

The suit charted that the MTA failed to obtain an independent appraisal, and that the MTA did not consider competing proposals, neither DDDB's announced bid, or an effort to contact Extell. But it would be an uphill climb, as state law requires judges to nearly always defer to agency action.

Though Brennan and Millman, hardly firebrands, were on board, Assemblyman  Jeffries steered clear. He agreed that the MTA had breached its fiduciary duty, but contended that a lawsuit would compromise his advocacy. More likely, he just didn’t feel comfortable with DDDB, or calculated that being on the losing end would not help with constituents hoping to get some benefit from Atlantic Yards.

Unlike with the eminent domain case, there would be no oral argument, no requirement for the government to defend itself in public. The lawsuit would be resolved bloodlessly, in a pile-up of paper, in little more than two months.

Was MTA fortunate, or was Forest City?

There was something curious about the MTA’s posture, especially given how the agency was cash-poor. MTA CFO Dellaverson asserted in an affidavit, "It is remarkable that MTA was able to negotiate a revised proposal that, despite those changed economic circumstances, maintained the main elements of consideration first obtained--albeit in somewhat revised form."

In the MTA's eyes, Forest City Ratner had the agency over a barrel. That's why the MTA didn't get a new appraisal of the railyard, figuring a new valuation—due to the decline in real estate values and the increased cost of building a platform--would inevitably be less than in 2005.

That was not implausible--at least in the short term.

But didn't the MTA, in a way, have the upper hand?

Forest City had a major stake in a money-losing team that it wanted desperately to move. The developer faced a December 31, 2009 deadline to get tax-exempt bonds issued. In April, Forest City executive Jane Marshall, emailing a counterpart in the Department of City Planning, confessed to being "a freaked out developer with an arena that must start this year."

Might an appraisal, at least one accompanied by some longitudinal sense of the real estate market, have pointed to the property’s potential?

However, from the MTA's perspective, it was impossible to walk away. Despite a lack of final contracts, the Atlantic Yards train had left the station. Forest City, in a characteristic tactic, had begun significant work on the Vanderbilt Yard under a license agreement, without paying beyond its deposit. The city and state had contributed well over $200 million in subsidies. Forest City had bought most of the land needed.

The MTA said in court papers that a new appraisal would not only have "seriously jeopardized" its efforts to maximize its return regarding the disposition of Vanderbilt Yard property rights, but also the costs associated with track relocation and platform construction.  Moreover, it would "delay completion of the transit and yard improvements that the RFP had contemplated since 2005”--improvements not contemplated before Forest City proposed Atlantic Yards.

Could there be a bid?

So why didn’t the MTA contact Extell? There was no reason to think Extell would be interested in submitting a new proposal, the agency MTA responded.

The petitioners disagreed. “Given MTA’s failure to solicit any proposals at all in 2009 other than from FCR, its prior refusal to work with Extell on its proposal in 2005, and its clear, repeatedly stated preference for FCR since before 2005 up through 2009," they countered, "it would be illogical to assume that Extell would proactively approach MTA in 2009 without an express indication from MTA that it might genuinely consider a proposal from Extell.”

The lawsuit also provided fodder to answer an enduring question: was Forest City’s overall bid more valuable than that of Extell, despite the latter’s higher cash bid? Well, it was, but the two bids ultimately couldn't match. FCR's bid reflected higher costs: Extell, not building an arena, would not have had to build a temporary yard.

Extell, the MTA pointed out, did not offer indemnification for environmental risks and did not offer to pay MTA expenses when relocating the Vanderbilt Yard.

But Extell was not asked to develop its bid. And while Extell was not planning to build a new subway entrance, it wasn't asking for subsidies at the level Forest City had requested, nor the gift of arena naming rights from the ESDC. (That subway entrance, it turns out, has been very useful for the arena and certainly useful for the community at large._

A conundrum remained: if Forest City’s original $50 million cash bid was far more valuable than that of Extell, as the developer contended, why did it even had to raise its cash bid to $100 million?

In an affidavit, Hemmerdinger, by then the MTA board’s former chair, called DDDB offer a political stunt rather than a bona fide responsive offer. He added, “The Board determined, in addition, that the transaction would yield significant economic dividends to the residents of Brooklyn and those of the State as a whole.”

That determination, however, relied on some self-serving conclusions by the Empire State Development Corporation.

Would a smaller railyard be OK? Yes, said the MTA, as its plans had changed. Once LIRR service into Grand Central Terminal begins, upon completion of the so-called East Side Access project, the railroad would trade regularly scheduled service into Atlantic Terminal for shuttle service to Jamaica Station. That would mean more frequent service, but fewer and shorter trains in the yard.

A decision

On Dec. 16, 2009, the judge, Michael Stallman, deferred to the MTA's version of the case and rejected the challenge.

Stallman also agreed that the original plan and revised deal were essentially the same, subject to two modifications: the $20 million payment, and the value-engineered railyard. He left out the generous 6.5% interest rate granted Forest City Ratner and the extended time to operate a temporary railyard.

The judge almost didn’t reach the merits, agreeing that anyone other than the original bidder didn't have standing to challenge a contract. As for DDDB’s purported bid, he warned, opponents of other projects could claim to be last-minute bidders "and thereby bootstrap standing to challenge the determination."

Stallman did recognize a hypothetical, in the case of “a clear violation of the appraisal and bidding provisions," such as a giveaway to an official's relative or a political crony.

That wasn’t the Vanderbilt Yard deal, true, but wasn't Forest City a political crony with an appealing idea?

“[G]iven the unusual nature and scope of the project, only two experienced developers--FCRC and Extell--came forward in response to the RFP in 2005, and the MTA, for rational reasons, not subject to review here, rejected Extell's bid,” wrote the judge.

The inside track

But it wasn't merely the "unusual nature and scope of the project." It was that Forest City had the inside track from the start. In December 2007, Extell's Barnett was asked by the New York Observer about Atlantic Yards.

“We are shocked—shocked—that we bid $150 million, [Forest City Chairman Bruce] Ratner bid $50 million, yet he somehow managed to get it," Barnett declared.

Still, he chose not to comment further about the outcome and, when asked if he had any criticisms with the way the state handled the Atlantic Yards, said "no."

That was, most likely, a diplomatic statement, rather than a definitive one.

After all, the Hudson Rail Yards in Manhattan presented an unusual project, so much so the MTA produced an RFP 1369 pages long, while the Vanderbilt Yard RFP was just 42 pages. Those bidding on the Hudson Yards had 92 days to respond, rather than 42 days.

It was a far more fair process: the design guidelines and a planning process were set before any developer was solicited.

In March 2008, the developer Tishman Speyer offered more than $1 billion, upping its bid by more than $100 million in the last week. There were four finalists, so when the developer backed out, another firm, Related, stepped in--and while the deal stalled for four years, the MTA was still supposed to get its $1 billion.

When Forest City Ratner faltered, it didn't have to back out. Instead, it got a better deal.

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