Author deMause on Zimbalist: "a lot of people don't take him as seriously"

This is the third of a multi-part interview (conducted May 28) with Neil deMause, the Brooklyn-based co-author of the book Field of Schemes: How the Great Stadium Swindle Turns Public Money Into Private Profit, and writer of the companion web site. He testified at a 3/29/07 Congressional hearing that questioned taxpayer financing of stadiums, convention centers, and hotels.

One curious thing I noticed about the new edition of Field of Schemes is that it appears with a prominent blurb from Smith College sports economist Andrew Zimbalist, one of the scholars on whom deMause and co-author Joanna Cagan relied for the first edition of the book.

Zimbalist, of course, is notorious for writing a "promotional" study of the economic impact of the Atlantic Yards project, paid for by developer Forest City Ratner, and defending it poorly, as on the Brian Lehrer Show Monday.

deMause v. Zimbalist

It's safe to say that Zimbalist would not blurb the revised and expanded edition, since deMause has since publicly clashed with him about the Yankees Stadium and the book contains a skeptical account--though not as extensive as my critique--of Zimbalist's Forest City Ratner-sponsored economic impact study of Atlantic Yards.

If the housing component of the AY development would generate the most revenues, as per Zimbalist's analysis, why, deMause asks rhetorically in the book, wouldn't the state find a developer to build just apartment buildings, which would require no eminent domain nor special subsidies?

(Zimbalist improbably maintains, as he did on the Brian Lehrer Show Monday, that the benefits for Forest City Ratner would be as-of-right.)

Zimbalist's damaged reputation

Q. What do you think Zimbalist's Atlantic Yards "study" does to his reputation? You’re talking with someone who thinks it’s been damaged.

deMause paused before answering, knowing that Zimbalist is a highly combative sort.

A. I’m trying to figure out what I’m going to say that won’t have Andy calling me on the phone and yelling at me. He would never actually pick up the phone. I think Andy already hates me, because I’ve called him out on a lot of stuff. I think that, from the people that I have spoken to in the field, there is a lot of surprise and a lot of curiosity as to why he’s been so gung-ho about the New York City projects, the Nets and the Yankees and Mets project.

He wrote that op-ed about the Yankees project in the Times, saying it was going to help gentrify the Bronx, which is a claim Andy has never made about anything and a weird one to be trying to sell as a good thing, given that one of the complaints was that it was going to gentrify the Bronx and drive people out of that area.

I think a lot of people are wondering why he did this, and has changed his tune so much on these projects, and wrote that book praising [baseball commissioner] Bud Selig. And I think there are a fair number of people who don’t take him seriously any more. There are certainly people who will talk to him and cite him and refer people to him. He’s still a smart economist, but the fact that this is someone who has said, oh, consulting reports paid for by sports team owners are worth crap and then went and did a consulting report paid for by a sports team owner--that doesn’t make him look very good.

Q. It was not peer reviewed.

A. Yeah. I don’t think it's destroyed his reputation by any means, but I think there are a lot of people who don’t take him as seriously as they used to. I certainly don’t. I used to think he was somebody who you could go to and would give you a straight answer based on his years and decades of study. I’ve just seen too much work by him that seems to be bending over backwards to make a project look good. His response, when I ask him about it, is What do you know, you’re not an economist.

I’m like, Yeah, I know I’m a journalist. That’s why my job is to question the economists. So, if the numbers don’t add up, I’ve got a calculator. So it’s been very difficult. Andy has always been a prickly guy in the best of times and he’s never taken kindly to people disagreeing with him on stuff.

So, why aren't naming rights counted as sports facility subsidies?

This is the second of a multi-part interview with Neil deMause, the Brooklyn-based co-author of the book Field of Schemes: How the Great Stadium Swindle Turns Public Money Into Private Profit, and writer of the companion web site. He testified at a 3/29/07 Congressional hearing that questioned taxpayer financing of stadiums, convention centers, and hotels.

Q. Why aren’t naming rights counted as subsidies or, value? Forest City Ratner's deal with Barclays is worth a reported $400 million over 20 years.

(Imagine a mocking tone to the first sentence of his response.)

A. Because it’s industry standard, don’t you understand? That’s the only answer--the teams always said: we always get the money for this, so therefore it’s private money. There’s no reason for this to be private money. If the public is building the stadium, if the public is owning the stadium, why should the team get to slap a name and get the money from it, or consider the money from it that pays off the stadium as paying off their share?

Y’know, I rent; if I decide to put a giant billboard on the roof of my house here--if my landlord lets me do it, I really don’t think he could let me keep all the money from it. If I say, I’d like to move into your apartment, but in order to pay my rent, I have to put a big billboard outside, he’s going to look at me as if I had two heads.

I think what happened was, originally it was not very much money and the teams said, we can sell naming rights and we use that to help raise money and the city says fine. Now, in many cases, especially the Nets, it’s a huge amount of money… The arena will be owned by the state in order for them to use this PILOT dodge and be exempt from property taxes… It’s very odd that the state will own everything about the arena except the part that makes money.

Subsidy list doesn't quantify naming rights

Q. One of the things that struck me: even the IBO [Independent Budget Office] report on AY didn’t try to quantify the value of naming rights.

A. Yeah. I think it’s just something people stay away from, because they don’t want to get into an argument: is this private or public money? But it’s absolutely a gift. There’s no reason that the state could not have said: OK, we’re selling the naming rights.

What would Ratner have done? There’s no reason the state couldn’t have said: Fine, you’re paying PILOTs, but we want you to pay rent. There’s all kinds of things the state could have done. The MTA could’ve said: We want you to pay more for the property. The problem was it wasn’t trying to negotiate an equitable deal, it was about trying to get a deal done.

Once that’s your goal--how do we get a deal done--then you’ve lost the game, because the developers can basically say: well, I’m not going to do this unless you give me X, Y, and Z.

Does Beekman “blackmail” presage AY subsidy push?

The Downtown Express has the tale (excerpted on No Land Grab) of how Forest City Ratner got Manhattan Community Board 1 to endorse its applciation for a 421-a tax break for the luxury Beekman Tower, already subsidized by Liberty Bonds.

Without the tax break, said MaryAnne Gilmartin, Forest City Ratner’s executive VP (and the successor to Jim Stuckey), “Work would certainly stop on [the] site and then we would have delays.” So the CB complied, not wanting to see the school delayed.

The newspaper reported:
“I don’t think the project or the school were ever really in jeopardy,” said Paul Hovitz, a board member. “I think they were manipulating us [into helping them get the abatement]. We were being blackmailed.”

In the AY context

What might this mean in the Atlantic Yards context? That when Forest City Ratner CEO Bruce Ratner said that the project "will be almost exclusively privately financed," he could just as easily have said it would be “largely publicly assisted, more and more.”

Remember, Ratner claimed in 2003 that Atlantic Yards "won't touch the existing tax base."

So, when Forest City Enterprises CEO Chuck Ratner said “We still need more” subsidies, that could mean that local officials will have to pony up more money to get the precious affordable housing that might have been funded elsewhere, in another way.

AY vs. Beekman

The Atlantic Yards project is not, however, as far ahead as Beekman Tower, which already has financing. While the developer—not the government—has already spent $219 million, the value of the property acquired remains substantial.

The question of tax-exempt financing for the new Yankee Stadium—and, by extension, the planned Atlantic Yards arena—will be taken up at an Assembly hearing today.

FCR consultant Zimbalist adds millions to AY subsidy total, calls for ULURP hearings (not quite)

Andrew Zimbalist, the sports economist Forest City Ratner hired to produce a dubious study of Atlantic Yards costs and benefits, mostly dismissed a very big thing: the economic value of the tax-exempt bonds used to build the arena. And when writing about a very similar financing plan for the West Side Stadium, he called such bonds the equivalent of a public contribution.

So, would the $800 million in tax-exempt bonds for AY count as a public subsidy? Not under Zimbalist's logic, given that, in a 1/22/06 New York Times op-ed, he blessed a similar financing plan for the new Yankees Stadium, contrasting it with the West Side Stadium by noting that "the Bronx is already in a tax abatement zone."

But maybe that's not quite right--and it deserves scrutiny as the State Assembly takes up tax-exempt financing for the Yankees, if not the Nets, during a hearing on Wednesday.

There's increasingly less justification for such tax exemptions. Just as the city's longstanding 421-a tax exemption for outer-borough residential construction recently got an overhaul, given that the residential market had long since improved in certain neighborhoods, so have there been recent calls to reform the city's Industrial and Commercial Incentive Program (ICIP), on which the AY arena tax exemption would rely.

The PILOTs game

Let's recap. Neither Zimbalist's May 2004 report nor his June 2005 update looked deeply at the financing arrangement: the use of tax-exempt bonds repaid via PILOTs, or payments in lieu of taxes. Atlantic Yards critics, notably lawyer and urban planner Michael D.D. White, have argued that this essentially would give Forest City Ratner the arena for free, since it would be paying only the equivalent of real estate taxes, rather than both taxes and construction bond repayments.

The government's argument is that the waiving of taxes is an inducement to build (of course that should've raised the value of the railyard bid), while the PILOT arrangement--now questioned by federal regulators--allows the issuance of bonds. In fact, the Independent Budget Office, in its September 2005 report, did not treat it as the equivalent of a direct subsidy.

Zimbalist on the West Side Stadium

However, consider this contrast. In an 11/14/04 New York Times op-ed on the West Side Stadium headlined Games People Play, Zimbalist attacked PILOTs:
The proposed financing plan for the stadium contains other hidden public costs. Under the plan, the city and state would form a local development corporation. Among other things, this quasi-public entity would issue bonds to finance roughly $400 million of the Jets' $800 million contribution. The team would cover the debt service on those bonds. But it would do so under a financial arrangement known as a "pilot," or payment in lieu of taxes. To the extent that this payback scheme is in place of the Jets' paying sales and property taxes, doesn't it make sense for the $400 million to be considered a public, rather than a private, contribution?
(Emphasis added)

Note that, of the projected $950 million cost of the Atlantic Yards arena, Forest City Ratner CEO Bruce Ratner told the New York Times that $800 million in tax-exempt bonds would be sought.

Zimbalist didn't address that issue in his report. Rather, he suggested that only $200 million in direct contributions was expected and also inaccurately speculated that additional contributions were unlikely.

Foregone property taxes?

Zimbalist stated in his report on AY:
Second, FCRC will pay no property tax on the improved value (the arena) on the land. Nonetheless, to be cautious, I add the foregone property taxes as a cost to the city, after taking account of the as-of-right ICIP tax abatement program that would apply to any commercial building project on the site.

Zimbalist calculated a 2006 net present value of $24.6 million for those foregone property taxes; the only property taxes that would count would be the modest ones outside of the ICIP abatement. Thus the PILOTs disappear.

IBO's George Sweeting explained the arena tax benefit:
ICIP in that part of Brooklyn provides for 16 years of full exemption followed by a 9 year phase-in towards full taxes. There is also 'inflation protection' in the first twelve years.

ICIP reform

ICIP, which was created in November 1984 (its precursor was created in 1976), was due to expire today: June 30, 2008. A report, titled Senseless Subsidies, issued 5/29/08 by Manhattan Borough President Scott Stringer criticized the tax break:
Finally, in the spring of 2007, prior to the most recent reauthorization of ICIP, the City's Economic Development Corporation working with the Office of Management and Budget and Department of Finance, completed a study that identified ways to restructure and streamline ICIP to better target the types of development most in need of incentives. While the proposed reforms were not widely released, reportedly because of fear that they would be unpopular with developers, they were cheered by progressive and good-government groups. In the end, the state and the City failed to adopt the proposed reforms and passed legislation extending ICIP in its current form for one year, until June 30, 2008.

Stringer's report recommended some changes:
Already, in a large portion of Manhattan, ICIP exemptions are available only to businesses making a construction expenditure that is proportionally larger than expenditures made elsewhere in New York City. Other parts of the City benefiting in past years from strong real estate development should be similarly identified, and the qualification criteria for ICIP exemptions in these areas should be expanded to include a determination of need made by the NYC Economic Development Corporation. Such a determination of need would temper ICIP's unrestrained as-of-right approach, which has produced enormous fiscal losses for the City.
(Emphasis added)

Among the provisions driving the fiscal loss to the city, according to NYC EDC's report, include long benefit periods and inflation protection, both of which can cost the city but are worth little to developers as they make their decisions. The report recommends a shorter benefit period and elimination of inflation protection.

Both could shrink the tax exemption for the arena site, and thus could cap the amount of the PILOTs that would essentially be subsidies.

Only modest changes

As it turns out, the city supported only modest reforms, according to the New York Observer, citing both political pressure and the fear of slowing development. Mayor Mike Bloomberg, however, called the changes the result of "a hard look." (Here's the bill.)

Still, it's worth recalculating the amount of foregone property tax. And, as Zimbalist should have done, it's worth analyzing whether such incentives are in fact necessary for building on what Forest City Enterprises executive Chuck Ratner calls "a great piece of real estate."

In other words, if the financing for the West Side Stadium was a "payback scheme," wouldn't the same apply to the financing for the AY arena?

Zimbalist on democracy

In the West Side Stadium op-ed, Zimbalist wrote:
When Rudolph W. Giuliani was mayor, he opposed the idea of a referendum on public financing for a new Yankee Stadium on Manhattan's West Side. His reasoning was that were it put to a referendum, New Yorkers would vote it down.

Now Mayor Michael R. Bloomberg is doing Mayor Giuliani one better. He plans not only to avoid a popular vote but also to bypass a budgetary vote of the people's elected representatives on the City Council.

If the stadium's economic benefits are as obvious as Joe Namath asserts, the project's supporters should have no problem with standard democratic operating procedures and full disclosure.

Of course, with Atlantic Yards, the financing was not put to a referendum.

Nor did the City Council get a vote, as the project bypassed ULURP, the city's Uniform Land Use Review Procedure. If the arena's economic benefits are as obvious as the city, state, and developer assert, then there should have been full disclosure and democratic oversight, according to Zimbalist's logic.

But he's said nothing of the sort regarding Atlantic Yards.

Gargano flashback: "no taxpayer money will go to build a sports arena"

Develop Don't Destroy Brooklyn points to a 8/23/04 interview with Charles Gargano, then chairman of the Empire State Development Corporation, who seemed definitive that there would be no help for Forest City Ratner's Atlantic Yards arena:
The governor and I have made it clear for nine-plus years that no taxpayer money will go to build a sports arena. We will consider helping with infrastructure improvements, like a platform over the rail yards on the West Side or new subway stations, which helps the public at large.

Direct subsidies to arena

DDDB points to the wide universe of support for the arena, such as support for tax-exempt bonds, and cites much evidence that the arena is a priority, despite Gargano's claim that "we don't care about the arena."

Even looking narrowly at only direct subsidies, Gargano should have known that the city and state committed in the project Memorandum of Understanding to more than infrastructure. According to a 3/4/05 ESDC press release:
Under the MOU, the State and the City will each contribute $100 million in capital contributions to fund site preparation and public infrastructure improvements on and around the arena site, including streets, sidewalks, utility relocations, environmental remediation, open space and public parking.

Actually, the MOU allowed some wiggle room, stating:
The City’s capital contribution shall be used for the same purposes as the ESDC’s capital contribution [site preparation and public infrastructure improvements], except that the City's capital contribution may also be used to fund a portion of the costs of acquisition of the Arena Site (other than the MTA Properties).
(Emphasis added)

That suggests that city taxpayer money would be used for both infrastructure and property acquisition. The word “except” did allow the city to use its capital contribution for property acquisition, but the phrase "may also" suggested that the city's $100 million would not be used exclusively to buy property.

Instead, that $100 million in fact was used to buy property rather than pay for infrastructure, and the city has since added another $105 million.

Congressman offers unskeptical endorsement of Zimbalist's dubious AY study

In Congress last year, Andrew Zimbalist's dubious study of Atlantic Yards for Forest City Ratner got a mindless endorsement from the ranking minority member of the Subcommittee on Domestic Policy of the Committee on Oversight and Government Reform of the House of Representatives, even though an expert witness warned that accepting studies that were not peer-reviewed was akin to federal drug regulators embracing reports created by the drug companies themselves.

It was during the 3/29/07 hearing called "Build It and They Will Come: Do Tax Payer-Financed Sports Stadiums, Convention Centers and Hotels Deliver as Promised for America's Cities?"

Subcommittee Chair Rep. Dennis Kucinich (D-OH) had elicited critical testimony from several observers. At one point, asked by Rep. Danny Davis (D-IL) whether there was room for public-private partnerships in sports facility construction, Frank Rashid of the Tiger Stadium Fan Club responded (see p. 61 of this transcript):
I think each project has to be looked at very carefully and really independently analyzed, and that is the problem. Right now, there is no independent analysis. I think if there were, we would see considerably fewer publicly funded stadiums and a lot more money from the private sector in those projects.

There is a whole set of powerful interests that can control the debate. What really needs to happen and where I think federal enforcement would be valuable is in establishing requirements that there be real solid and verifiable analysis for each project, and that is not done.

The value of peer review

During that same hearing (p. 68), Brad Humphreys, an economist and professor at the University of Illinois at Urbana-Champaign pointed out how the public can be hoodwinked:
I also want to point out for people who are trying to decide on these subsidies, that there are two types of evidence that we have about what the economic impact of professional sports facilities are. One are these promotional studies or economic impact studies that are generated by proponents of these subsidies, and they typically find huge economic benefits. This other type of evidence that we have is scholarly, peer-reviewed academic research, the kind that I do.

Often in the court of public opinion, these two types of evidence are treated equally, and I would argue that is a very bad public policy... One of the previous panelists said that we need to have independent oversight... That is what peer-reviewed academic research is....

We don't make policy about drugs and things like that just based on what pharmaceutical companies say. We have research that is peer-reviewed, that tells us about those things. We should have the same sort of standards when we are considering whether or not there is economic benefit to be gained from professional sports.

Fluffing Zimbalist

Still, later in the hearing, some non-peer-reviewed research, albeit with an academic gloss, was promoted by Rep. Darrell Issa (R-CA), the ranking minority member. He declared (see p. 123):
Mr. Chairman, I would also like to put into the record an economist's study from the Robert A. Woods professor of economics at Smith College in Massachusetts. It is from May 1, 2004, and it specifically deals with Atlantic Yards, estimating that the total of $2.93 billion over 30 years or a net present value of $1.08 billion would be the advantage for that operation. Although it may not be the one that is going to carry the day, it certainly seems that independent bodies such as university economist very much believe that there can be a net economic benefit, and I ask that be placed in the record.

Except that Zimbalist was a consultant "retained" by the developer, not an "independent body," his study was deeply flawed, and it was never peer-reviewed (nor the subject of journalistic scrutiny).

Brodsky to hold hearing on bonds for Nets arena and two stadiums

The news about the city's efforts to get the Internal Revenue Service to obtain tax-free bonds for the Nets arena and Yankees and Mets stadiums has prompted two legislators to schedule a public hearing in less than three weeks.

The press release:

Assemblyman Richard Brodsky (D-Westchester), Chairman of the NYS Assembly Committee on Corporations, Authorities & Commissions, and Assemblyman Sam Hoyt (D-Buffalo), Chairman of the NYS Assembly Committee on Local Governments, have today invited the New York City Industrial Development Authority (NYCIDA) to testify a Public Hearing to be scheduled on either June 30, July 1 or July 2 in New York City. Final date and location will be announced shortly.

The Hearing will examine the NYCIDA’s practices and procedures for issuance of public debt with respect to sports facilities for the Yankees, Mets and Nets. The Committees have been investigating the facts and actions of the issuance of public debt by state-created entities that operate in secret and without the control of elected officials. Legislation to reform such practices is being considered by the committees.

As officials admit lobbying IRS for Nets arena, Lieber says AY groundbreaking by 2009 (at least)

Deputy Mayor for Economic Development Robert Lieber, speaking at a Crain's New York Business breakfast yesterday, declared that Atlantic Yards would be "under construction by the end of 2009."

[Update: The remarks, as prepared: In Downtown Brooklyn, we, along with colleagues in the State, have created the conditions to jump start the development at Atlantic Yards where the Nets Arena and at least one residential tower will be under construction by 2009. We’ve built in penalties to the agreements should the project not proceed as planned, but we’re confident that these projects are well poised to move forward.]

That raised a few eyebrows, given developer Forest City Ratner's stated goal--reiterated with confidence in today's New York Times--to begin construction this year. After his remarks, Lieber backed off the prediction, saying he was just responding to the request by Crain's Editor-in-Chief Greg David to list projects under way by the time the administration leaves office. (Actually, however, his speech came before David’s question.)

He acknowledged he couldn't predict a specific starting date for Atlantic Yards, saying that depends on the “last bit of litigation.” So perhaps he chose the end of 2009 as a date by which it's more likely litigation will be concluded, yet Mayor Mike Bloomberg would still be around to participate in a groundbreaking.

Needless to say, a 2009 groundbreaking makes an arena opening in 2010 almost impossible.

IRS rules challenge AY

Ratner’s plans depends not only on litigation but also the capacity to get tax-exempt bonds, a challenge highlighted this week by the New York Yankees' apparent effort to complete the new Yankee Stadium with tax-exempt bonds.

But it turns out that was only the tip of the iceberg--the Yankees' new stadium is mostly on the way, but the $950 million Nets arena would be very dependent on such bonds.

Today's New York Times, in an article headlined A Question Mark Looms Over 3 Expensive Projects, reports that, while the new Yankees and Mets stadiums were financed through tax-exempt bonds, the IRS quickly issued a proposal in 2006 to tighten the rules governing the use of tax-exempt bonds so that it would be more difficult, and perhaps impossible, for this kind of financing to be used again by profitable, private enterprises like professional sports teams.

So maybe Lieber, when he said that the city had been "working with colleagues in the state to create conditions" to get Atlantic Yards moving, meant not only the creation of infrastructure and distribution of subsidies but also lobbying in Washington to change Internal Revenue Service rules.

(Note that the "Arena Site" caption in the Times is incorrect: rather than stretch solely along the Metropolitan Transportation Authority's Vanderbilt Yard, as in the picture, the arena site would end at the Sixth Avenue Bridge in the upper left quadrant of the photo and stretch south below the Pacific Street boundary, at the far left of the photo. Below is the arena site outlined, more or less, in a photo by Jonathan Barkey. Click to enlarge.)

NYC EDC helping developer

Indeed, Seth Pinsky, who heads the New York City Economic Development Corporation told the New York Sun that the developer Forest City Ratner Co. had expressed interest to the city about seeking additional tax-exempt funding, but that the request was being handled by the state.

What "additional tax-exempt funding" means is unclear--is that the difference between 2006l plans for a $637 million arena and current plans for a $950 million arena? Or has the arena tab continued to grow?

Assemblyman Richard Brodsky, who's been looking into such financing arrangements--which hurt the federal treasury more than the city and state, hence the attraction to local officials--told the Sun he was concerned about the city's willingness to go to bat for the team owners: "These decisions are being made in secret in these Soviet-style meetings and it is outrageous."

More subsidies for AY?

During the Crain's session, David pointed out that “the opposition which has dogged” Atlantic Yards had been inflamed by reports in March of delays in project construction, the developer’s call in early April for more subsidies, and the general question of what might be done with the site, as exemplified by City Comptroller William Thompson’s April 30 acknowledgement that “I’m not sure what that project is any longer” and his hint that it might be revived by bringing in additional developers.

[Updated: Lieber's response, verbatim comments: You know, Atlantic Yards is going through the last stages of the litigation. You know, again, what I wanted to try and emphasis here is that we’re trying to do is to lay the foundation so that the private market can respond appropriately here. So the development activity that’s going to take place in Atlantic Yards is going to be a byproduct of what the economic conditions and what the financing markets are going to be. But we do believe this project is going to get underway. We do believe you’re going to see construction begin on the Nets arena and we do believe you will see residential begin there. And as far as bringing in other developers, no I don’t see any reason to do that. That’s- and frankly that’s nothing that’s ever even been contemplated at least that I’ve heard about.

He was asked, "Do you think the project needs additional subsidies and would you entertain a request for additional subsidies?"

Lieber's response, verbatim: Well, we have not received any kinds of requests formally from Forest City Ratner to date but we’re open minded and we’ll listen and if we think there are things that make sense we’ll contemplate that.]

Remember, Brooklyn Borough President Marty Markowitz, during an interview shortly after the December 2003 announcement of Atlantic Yards, said: He made it clear, over and over again, the mayor, this city has no money, no money to provide in any way at all. This is all incremental funds.

The few or the many?

David also asked whether the administration should concentrate on moving a few projects rather than the many projects—he counted 15—Lieber mentioned in his remarks, given the short window until the end of Bloomberg’s term in December 2009.

Lieber said no. “We have to think big,” he declared. “It’s critical for us not to back off… If anything, we’re putting our foot down and accelerating harder.” Indeed, he said the administration was making “not just the money choices, but the political choices” to ensure that projects stay on track.

Yankees need bonds?

Also, Lieber was asked about the apparent effort by the Yankees to seek $350 million (or, as has been reported, $400 million) in tax-exempt financing to finish their new stadium.

Lieber said that he didn’t think there was a connection, that there were “a number of alternatives” in the taxable and tax-exempt bond markets. (Of course, the former would cost the team more.) He said he had no "iota of doubt” that the stadium would be completed on time.

So the discussion about the lobbying in Washington apparently has to do with Atlantic Yards more than anything else.

"Voodoo" actuary provokes firestorm, but "voodoo" economist for AY gets a pass

The New York Times and others have rightly made a big deal out of the scandal that an actuary paid by unions was relied on by the State Legislature in its estimate that a bill that would offer early retirement to city workers would not cost a cent. But a not too dissimilar reliance on a partisan source regarding Atlantic Yards raised nary an eyebrow.

The May 16 Times article, headlined Unions Bankrolled Analyst Vetting Pension Bill, made the front page. Later that day, faced with a storm of press criticism, Assembly Speaker Sheldon Silver decided that any bills with fiscal notes prepared by that actuary would be placed on hold, with new, more objective analyses sought. The headline on the Times's City Room blog: Speaker Tosses Work of ‘Voodoo’ Actuary.

Critical editorial

On May 24, the Times's editorial page was in high dudgeon, in an editorial headlined Have We Got a Deal for You:
Just when it appears that the New York State Legislature has hit bottom, we find a false floor. The Times’s Danny Hakim recently uncovered another appalling example of how a politically powerful group can order up laws in Albany, even skewing the estimates of how much it will cost taxpayers.

... When asked about his estimating methods, Mr. Schwartz told The Times that his job is “a step above voodoo.”

New York City officials would certainly agree since they estimate the bill’s cost at $200 million a year.

AY "voodoo"

Curiously, Atlantic Yards backers openly relied on a partisan expert, but were never called to account for it. For example, the ESDC and governor's office both on 3/4/05 issued press releases relying on revenue projections made by the developer’s paid consultant, Andrew Zimbalist, rather than commission their own analysis. The press release stated:
The project is expected to create 15,000 construction jobs and over 10,000 permanent jobs. According to an economic analysis completed earlier this year for FCRC by the economist Andrew Zimbalist, the net fiscal benefit to the City and State from the Atlantic Yards project is estimated to be at least $2.819 billion over thirty years, or a present value of at least $812.6 million.

Unlike with the pension bill, there was no "other side" sought out to argue that the figures in the governmental projection were off. The city's press release, interestingly enough, cited a study by the NYC Economic Development Corporation that had not been released. I wonder whether city officials were more wary of appearing to endorse a partisan study.

This episode does not directly parallal that of the "voodoo" actuary, given that it involved a press release rather than a bill to be passed by the legislature. However, there was an "other side," just disregarded. Some seven months earlier, the Times reported briefly on a study critiquing Zimbalist's report. But the newspaper gave Zimbalist the last word and never sought independent review of the costs of the project.

Zimbalist's study was, arguably, "voodoo," ignoring costs that, for example, the Independent Budget Office later found. The Zimbalist study was enormously flawed, and should not have been relied on. But it was and nobody blew the whistle on it at the time.

Just as the Times pointed out in recent coverage that city officials reached very different conclusions than that of the "voodoo" actuary, so coverage of Atlantic Yards should have acknowledged that there were alternate views.

For example, see 3/29/07 testimony of Brad R. Humphreys of the University of Illinois at Urbana-Champaign, testifying on public financing for sports facilities, during a hearing of the Subcommittee on Domestic Policy of House of Representatives' Committee on Oversight and Government Reform.

Humpreys stated:
Since “promotional” economic impact studies are forecasts, they have the same inherent weaknesses as any other economic forecast, like a forecast of the growth rate of GDP over the next five years. But “promotional” economic impact studies always project a high degree of precision. Rather than being stated in terms of a predicted value plus or minus some margin of error, the forecasts in these studies are always a single number, implying a higher degree of precision than other economic forecasts, even though there is no evidence that they are more precise.

(Note that Zimbalist's report assumes a timetable for construction and an office space allotment that no longer exist, thus rendering his forecast significantly imprecise. Add to that his reliance on counting taxes paid by new residents, which economist James Parrott commented, "I don't know of any serious cost-benefit analyses of mixed-used economic development projects that count the taxes of residents.")

The importance of peer review

Zimbalist's study got no backup from anyone but Forest City Ratner spokesman Barry Baum, whom the Times quoted.) Humphreys pointed out that "promotional" studies don't get peer review:
The most important difference between evidence from academic research and evidence from “promotional” economic impact studies is the degree of scrutiny they undergo. “Promotional” studies are typically carried out by consultants. They are released with great fanfare in the local media, and typically get widespread coverage for a brief time. The press releases and sound bites associated with these studies are typically short on details and long on large round numbers. Very few people ever read the entire reports. The vast majority of these “promotional” studies disappear within a few days of their release. The methodology used in “promotional” studies, and the results, are not reviewed or evaluated in any way. I do not know of a single instance where the predicted outcomes from a “promotional” economic impact study have been systematically evaluated for accuracy after a sports facility was completed.

In stark contrast, academic research on the economic impact of professional sport published in scholarly journals goes through a rigorous peer review process. In this process, the papers are
distributed to other experts in the field, often stripped of identifying information about authorship, who are asked to anonymously evaluate the quality of the research.

Zimbalist vs. Zimbalist

Zimbalist himself has criticized "promotional" studies. For Forest City Ratner, however, he wrote one. Humphreys, in his testimony, laid out the difference:
In contrast, journals that publish academic research on the economic impact of professional sports charge researchers submission fees to consider their papers for publication. They do not pay royalties to research who write the papers they publish. A researcher in this area has no personal financial stake in the outcome of the research.

Humphreys concluded:
It is imperative that those who make decisions on sports subsidies understand this important difference in the evidence about the economic impact of professional sports. Results that have been through the peer-review process should be given much more credence by decision makers than “promotional” economic impact studies. We do not make health policy decisions based solely on the claims of pharmaceutical companies, and we should not make decisions on subsidies for professional sports based solely on the claims made by professional sports team owners and others proponents of these subsidies.

FCR, at least, says there's $205 million from NYC for AY

Remember that Crain's New York Business article this week quoting anonymous sources (presumably city officials) who said that critics mischaracterized the $105 million in infrastructure funding added to the city's initial $100 million subsidy:
Though listed under Atlantic Yards in the city budget, the work is not part of the development.

Well, Forest City Ratner's recently updated official Atlantic Yards FAQ doesn't make such fine distinctions, adding the city's $205 million to the state's $100 million subsidy.


Previous version

Even though the extra $105 million was added in early 2007, the FAQ was only recently updated. Here's the previous version:

Crain's defends the funding agreements, takes aim at "opponents"

A brief article in Crain's New York Business this week, headlined "Fine distinctions on Atlantic Yards," takes dubious aim at criticisms of state and city funding agreements raised first by AYR and later amplified by groups like Develop Don't Destroy Brooklyn.

The article begins:
Atlantic Yards opponents omit key details when criticizing the project’s city subsidies, supporters say.

Well, maybe if state and city agencies had released the funding agreements with some explanation, we'd have a more enlightening discussion. Instead, the state agreement was released quietly by the Empire State Development Corporation and the city agreement was made available only after a Freedom of Information Law request, and the New York City Economic Development Corporation was hardly expansive in answering questions.

Not for condemnation, OK

The article continues:
Developer Forest City Ratner Cos. can use the city’s $100 million to buy but not condemn land, and only in tandem with its own investment.

As I reported, the $100 million was for land already purchased, not condemned. Obviously it would have to be in tandem with its own investment; while the $100 million would go for a good portion of the property already purchased for the arena block, the money doesn't cover the whole tab.

Repayment?

The article continues:
Officials say Forest City must repay the money if it doesn’t finish the first phase on time, and would still be obligated to create 1,800 apartments, 35% of them affordable.

What does "repay the money" mean? The State Funding Agreement refers to "a portion, to be established in the Project Documentation, of State Funding Payments previously paid to developer by ESDC with interest and (ii) pay Liquidated Damages as set forth in the City Funding Agreement."

In other words, we don't know how much of the state's $100 million would be paid back. And the Liquidated Damages would be just a portion of the city's $100 million.

Forest City's obligations

As I reported, the State Funding Agreement makes reference to a "City Purpose Covenant" that would govern not just Forest City Ratner but any future owners of the premises.

In other words, the detail wasn't omitted, and Crain's got it wrong, since Forest City might not be the developer.

I reported that the agreement offers the possibility of a significantly smaller project, setting out a hierarchy of uses for the "Premises." If the General Project Plan is abandoned, the site would be used for not less than 1845 units of housing, of which 35 percent shall be Affordable Housing... and not less than 1.98 acres of environmentally sustainable publicly accessible open space.

Mischaracterizing subsidies

The article closes:
Critics also mischaracterize $105 million in city infrastructure work as a subsidy. Though listed under Atlantic Yards in the city budget, the work is not part of the development.

That's an interesting accounting distinction. Keep in mind that the state payments are for infrastructure, and the city's original $100 million subsidy was to be used for the same purpose as the state subsidy, along with the possibility of land purchases.

I reported that city officials had described the additional spending as money that would have to be spent anyway, but also reported skepticism from Doug Turetsky of the Independent Budget Office.

I also reported that Chuck Ratner, an executive with parent Forest City Enterprises, claimed, "[J]ust in these past six or eight months, we got the various governmental agencies, state, city, borough, in New York, to increase their commitments to Atlantic Yards by 105 million dollars on top of the 200 [million] they committed. We still need more."

So, whom can you trust, the "opponents" or the developer? In this case, they're both on the same page.

City agreement allows FCR to build 44% smaller Phase 1; what about NYC's extra $105M?

Despite assertions by Forest City Ratner officials that “all of Atlantic Yards... will be built," the State Funding Agreement, which the Empire State Development Corporation (ESDC) quietly released last month, gives the developer 6+ years to build the arena, 12+ years to build the five towers in Phase 1, and an unspecified amount of time to build the 11 towers in Phase 2.

A look at the previously-unreleased City Funding Agreement signed last September shows the developer has an even gentler deal: modest penalties for delay, plus allowance for a much smaller Phase 1 than that outlined in the General Project Plan passed by the ESDC in December 2006.

(I obtained the City Funding Agreement from the New York City Economic Development Corporation, or NYCEDC, via a Freedom of Information Law request. Warning: 13+ MB.)

The City Funding Agreement involves NYCEDC and ESDC, while the state agreement involves ESDC and the developer. There's considerable overlap between them. (Click on all graphics to enlarge.)

• The city agreement casts further doubt on the schedule for affordable housing units, perhaps the main generator of political support for the project.


• It includes no penalties as long as the developer builds, within 12+ years, 1.5 million square feet in Phase 1--some 44% smaller than promised less than a year earlier.


• It permits a scenario of only 300 affordable housing units by 2020


• With such a smaller Phase 1, it further reduces expected tax revenues.


• It does not address the city's $105 million contribution for infrastructure, raising the possibility that, upon the project's demise, the city could recover only its initial $100 million outlay.


• It confirms that the initial $100 million--once intended at least in part for infrastructure--will be used to reimburse Forest City Ratner for the seemingly generous checks the developer wrote to owners of properties destined for the arena footprint.


• It requires larger penalties for a delayed arena than a delayed Phase 1, suggesting that the arena is more of a priority.


• It sets a schedule for relatively modest penalties; an arena three years late (given the grace period), delayed to 2018, likely would cost the developer little more than $10 million in damages to the city.


• Such relatively modest penalties also apply to Phase 1 delays; should the Phase 1 site lie fallow until 2027--nearly two decades from now--the six-year delay (given the grace period) likely would cost the developer only $17 million in damages to the city.


• It also poses relatively small penalties if FCR abandons the project within three years; that suggests that a decision to pull the plug, should it be made, would come sooner rather than later.

City amplification?

Given the issues raised by the document, I posed several queries to NYCEDC. Agency spokeswoman Janel Patterson provided some limited factual answers, but cautioned, "Questions involving hypotheticals or processes are not topics we can address."

Those topics, however, are important, because they shape the incentives and pressures on the developer. Perhaps they’ll come up if the City Council addresses Atlantic Yards in an oversight hearing. For now, increases in construction costs and losses by the Nets basketball team may be more significant costs calculated by the developer.

(Note that, while Phase 1 has in the past been used to define the Arena, the four towers around it, plus the tower at Site 5, in this case, Phase 1 is defined as those first five towers.)

Oversight coming?

Indeed, when I summarized my findings for City Council Member Letitia James, the project's leading political opponent, she said she had no knowledge of the agreement. She said that both the Council's Contracts Committee, which she chairs, and the Economic Development Committee should look into the deal.

"I’m shocked that liquidated damages are higher" for an arena delay than for a Phase 1 delay, James said. "And why is the penalty so minimal?"

Also, given that the State Funding Agreement, in certain circumstances, would require repayment of state funds advanced for infrastructure, so should the City Funding Agreement, she concluded.

Is there a separate agreement between NYCEDC and Forest City Ratner regarding that $105 million contribution for infrastructure? There's no reference to it in either the city or state funding agreements, which raises the question of whether the city could ever get some of that money back.

"There is no such agreement at this time," Patterson replied, which could mean 1) they're working on it or 2) they forgot about it.

City oversight might fulfill some language in the document, a contract between NYCEDC and ESDC, which states somewhat conclusorily, “Whereas, the City and NYCEDC have determined that it is in the best interest of the people of the City that ESDC undertake the Project and desire to fund ESDC for the Land Acquisition Costs.”

While the City Council did authorize the $205 million in the budget, there was no vote or debate in City Council over the project as a whole.

A smaller Phase 1

Though the entire project was "anticipated" in the ESDC's General Project Plan to take ten years, the State Funding Agreement revealed that Forest City Ratner has six years after the close of litigation and the delivery of property via eminent domain to build the arena, and 12 years to build Phase 1 of the project before penalties--repayment of yet-unspecified portions of the state's $100 million in funding, plus liquidated damages to the city--kick in.

The City Funding Agreement grants even more slack, since it defines “Substantial Completion” of Phase 1 as the construction of at least 1.5 million square feet within those 12 years.
That’s 44% less space than that the 2.69 million square feet “expected” in the General Project Plan (right) approved by the ESDC in December 2006.

(How many buildings is 1.5 million square feet? According to a document in the General Project Plan delineating maximum building heights and square footages, the two largest towers, including Building 4, at the southwest corner of Sixth and Atlantic avenues, and the flagship Miss Brooklyn, conceivably could meet the 1.5 million sf minimum. However, that’s now unlikely, since Miss Brooklyn already seems to have been reduced. The city and state agreements incorporate a document that defines Phase 1 as five towers. Thus, the required 1.5 million square feet could mean five smaller towers. Or it could mean three towers completed within 12 years, with the other two completed at some later date.)

While a smaller Phase 1, once completed, should have less of an impact on traffic and transit, a longer buildout might cause other complications, such as from continued construction.

I asked NYCEDC’s Patterson to “explain the rationale for agreeing that building no more than 1.5M sf generates no penalty,” but was told that was among the topics they can’t address.

Less affordable housing

A smaller Phase 1 likely would bring less affordable housing, given the requirement that 30% of housing built in Phase 1 be affordable.

Given the timetable allowed in the State Funding Agreement, Forest City Ratner could, without penalty, build fewer than 300 affordable units--and only 120 low-income units--over 12 years. (That 12-year endpoint, in a best-case scenario, could be 2020 if litigation clears later this year and properties are delivered via eminent domain, but more likely would come a year or two later.)

How do I calculate 300 units over 12 years? For simplicity’s sake, I assume 500,000 square feet devoted to office space and 1 million square feet of housing. (Actually there’d be some space for retail and possibly a hotel; right now, the developer describes Miss Brooklyn as an office tower with 528,000 sf of zoning rights, though no anchor tenant has emerged.)

If 1 million square feet of housing means 1000 units (at 1000 square feet per unit), 30% of that would result in 300 affordable units. Of the 300 affordable units, 40% would be low-income.

Lower revenues

A smaller Phase 1 would mean lower revenues than the figures predicted in state documents. The state estimates presumed a project built within ten years. The slow buildout permitted in the state document--6+ years for the arena, 12+ years for Phase 1--was the first step in lowering the revenues.

The agreement that "Substantial Completion" of Phase 1 requires only 1.5 million square feet further diminishes such expected revenues.

The missing $105 million

Should the arena or Phase 1 be delayed, the developer would have to pay a schedule of liquidated damages, which I’ll discuss below. Should the project be abandoned, the City Funding Agreement, oddly enough, apparently requires repayment of only the initial $100 million promised by the city.

The document makes reference to “City Funding” of $100 million, defining it narrowly as funds used to help the ESDC buy the arena site--essentially, to reimburse Forest City Ratner for purchases already made. It does not offer a more commonsense definition of “city funding,” which presumably includes the $105 million added in 2007, leading the city to summarize (right) contributions as $205 million.

While the State Funding Agreement requires the developer, should the project be delayed or abandoned, to repay portions of the $100 million in state money advanced for infrastructure, the City Funding Agreement requires the repayment of only the initial $100 million, which the agreement defines as “Disbursements.”

So it may be that the additional $105 million, which like the ESDC’s payments, is directed at infrastructure, would not have to be repaid. Or, as Patterson's cryptic statement left open, another agreement may be under discussion.

Money for infrastructure, not benefit FCR?

Does that additional $105 million benefit just this project, or the neighborhood in general? City officials have suggested the latter. In January 2007, Deputy Press Secretary John Gallagher explained, "The additional funding is for infrastructure improvements, several of which would have been required with or without the construction of the Atlantic Yards Development and others that are necessary regardless of what is built on the site."

Mayor Mike Bloomberg, according to the Brooklyn Paper, attributed the higher allocation to the “rising cost of cement and steel,” adding “We have a commitment to pay for infrastructure costs and we will meet that commitment."

Doug Turetsky of the Independent Budget Office suggested to Neil deMause of the Village Voice that the city's additional expenditures were not generic: "some of which might have been on the books prior to Atlantic Yards, but some substantial amount of which is likely related to the scale of the project—such as the need for expanding sewer and water capacity."

In other words, maybe some of the money does benefit the developer. After all, Forest City Ratner officials apparently agree. Executive Joanne Minieri told investment analysts earlier this month:
We have executed the funding agreement with the city and state for the $200 million of subsidy and received an additional $105 million allocation from the city.

And executive Chuck Ratner of parent Forest City Enterprises followed up:
[J]ust in these past six or eight months, we got the various governmental agencies, state, city, borough, in New York, to increase their commitments to Atlantic Yards by 105 million dollars on top of the 200 [million] they committed. We still need more.

City contribution: infrastructure, property

The use of all $100 million to buy property was not explicitly contemplated in the nonbinding Memorandum of Understanding (MOU) signed in 2005. It stated (p. 5), The City’s capital contribution shall be used for the same purposes as the ESDC’s capital contribution [site preparation and public infrastructure improvements], except that the City's capital contribution may also be used to fund a portion of the costs of acquisition of the Arena Site (other than the MTA Properties).
(Emphasis added)

That suggests that city funds would be used for both infrastructure and property acquisition. The word “except” allows the city to use its capital contribution for property acquisition, but the phrase "may also" suggests that the $100 million would not be used exclusively to buy property. But the MOU was not binding.

(Last year, an NYCEDC spokeswoman said the MOU “had always included the possibility of buying land, as well as improving the infrastructure,” according to the Daily News. True, but it didn’t suggest that it would be used only to buy land.)

The “portion” of the costs for acquisition of the arena site comprises a large majority of those costs. While the city has advanced $100 million, plus a token $10 (above and right), another page included in the funding agreement (below) cites $103.5 million as the aggregate cost so far for properties on the planned arena block: Dean and Pacific streets, and Sixth and Atlantic avenues.

A few buildings and one condo are still not owned by Forest City Ratner, and some buildings owned by the developer have tenants with rent-stabilized leases who are suing the state. The cost of purchasing the extant buildings, either through negotiation or via eminent domain, as well as potentially settling with the tenants, would presumably be added to the aggregate cost.

"Stop Payment"

Some Brooklyn City Council members, at a hearing in March 2007, expressed dismay that city money would go to property acquisition, not infrastructure. And citizen groups at a protest last June made the same point, calling for “Stop Payment.”

The potential for a subsidy request greater than $200 million initially pledged by the city and state should’ve been evident to city officials well before the MOU was signed 2/18/05. Seven months earlier, as I reported, a 6/28/04 business plan submitted by FCR indicated that infrastructure and condemnation costs had already reached $221.2 million, and that costs were rising.

So government officials should have known that the developer might request a greater subsidy. However, when the project was approved in December 2006 by the ESDC, the official documents cited only a $200 million subsidy pledge.

The $105 million increase was announced only in January 2007, after the project had been approved. Had the expected increase in subsidy been made public earlier, would the project have faced more protest?

City money for *new* acquisition of land?

Did the city make clear that the public funding would go to reimburse Ratner for properties already purchased? Not quite. A hearing last year of the City Council Committee on Finance/Economic Development included this exchange between Council Member James and NYCEDC's Seth Pinsky:

JAMES: The other $100 million, which is unspecified and is basically one big pot; what is that $100 million for? Does anyone have any idea?

PINSKY: The $100 million will be exclusively for acquisition of land, to reimburse or pay for new acquisition of land for the project. None of it will go towards condemnation.

Pinsky’s language was not inaccurate, but a little disingenuous, since the $100 million will not be used for new acquisitions, and he was in a position to know that, though he may not have known yet. A look at the list of properties purchased as part of the Arena Land shows that all are on the map of properties owned or controlled by the developer as of 11/1/06.

Generous developer?

Given that it’s now clear that the money would be used for reimbursement rather than new purchases, now we know that the seemingly generous payments made by the developer depended on taxpayer support. (The property owners had another reason to deal, of course: the threat of eminent domain.) So when project supporters like Errol Louis claim that some property owners were “newcomers who made out like bandits,” they should consider the additional context. (More here.)

Even if it had been Forest City Ratner’s own money, the developer’s willingness to pay an apparent premium was also an opportunity to acquire land that would increase enormously in value thanks to the state override of zoning.

Liquidated damages for delays

The City Funding Agreement posits a convoluted schedule of liquidated damages should either the Arena or Phase 1 be delayed. (See Exhibit I, p. 265-70 of the PDF.) Essentially, it assesses penalties that are keyed to both the extent of delay and whether the delay begins sooner rather than later.

I asked Brooklyn Law School Professor David Reiss, who specializes in real estate law, to take a look at that section. He suggested that, while the schedule may seem generous, he couldn’t ascertain how fair the deal was, given that he hadn’t seen the whole document nor was he familiar with the overall finances of the deal.

Liquidated damages, he explained, are a common solution in real estate deals, offering advantages to both sides--guaranteed calculation of damages vs. predictable costs, plus the opportunity to avoid litigation.

“The developer seems, as far as I can tell, to have a very long period (as reflected in the various Outside Dates provided for in Exhibit I) in which it has to do its work before the liquidated damages provisions kick in,” he commented. “The liquidated damages seem to come in two phases. A relatively modest phase (the first five years) and a more punitive phase (year six on) where the liquidated damages is at least twice as high as at the end of the first phase.”

“I would also note that the liquidated damages for the Arena being late are significantly higher than for Phase I being late (the latter being roughly five times higher),” he added.

(Note that the schedule at right does not apply directly to the damages the developer would have to pay; rather a "multiplier," beginning at 2%, would be applied, thus resulting in significantly lower payouts.)

“These liquidated damages provisions seem to provide significant redress to the City if the Developer deviates from the plans of, delays, or terminates the Project," he concluded. "Determining whether the amount of redress is proportionate to the overall size of the Project is beyond the scope of my analysis.”

Indeed, my suggestion is that the redress seems rather modest.

A delayed arena

The document gives an example of a late arena. It assumes that Year 0--the date of first funding --begins on August 15, 2007 and the Effective Date--the date by which “all litigation... shall have been sufficiently concluded so as to permit such financing and construction to proceed.... [and] ESDC has acquired and delivered vacant possession of the Project Site”--does not occur until November 10, 2014. (That assumes a much longer litigation process than most people expect.)

That means the Arena Outside Date--six years later--would be November 20, 2020, Year 13 after the initial funding. Upon that Arena Outside Date, the developer would have to deliver an Arena LOC (Letter of Credit) equal to three years of Liquidated Damages. That Arena LOC is calculated by applying a multiplier (2% for the first year, 3% for the second, etc.) to Column B of Schedule A. Thus the LOC would be the sum of the first three years, or 2%+3%+4% of the Column B amount, or $14,850,000. That would be the total due if the arena were three years late.

(If you click on the graphic to enlarge, the sum of $14,850,000 should be visible under the first shaded section. The bottom shaded section has two lines. The Total Due Upon Substantial Completion is $103,950,000, while the Total Less Arena LOC Amount is $89,100,000. Note that the Total Due assumes an arena eight years late, rather than three, and that the sum due increases steadily for the first six years, then doubles.)

The dates in the above example are not necessarily realistic. First, the date of the first city Disbursement was 2/22/08, NYCEDC's Patterson confirmed, so we're in Year Zero. Also, the Effective Date more likely would occur in 2009 or 2010.

Assuming the delivery of property via eminent domain by 2009, the Arena Outside Date would be six years later, in 2015, Year 7. That means the multiplier would be applied to $115,000,000, according to Schedule A, not $165,000,000. Thus an arena delayed until 2018--three years late--could cost the developer a total of $10,350,000.

The State Funding Agreement also would require repayment of a portion, not yet established, of the $100 million from ESDC.

A delayed Phase 1

The document gives an example of a delayed and partly complete Phase 1. It assumes that Year 0--the date of first funding--begins on September 25, 2007 and the Effective Date occurs on December 1, 2009.

That means that the Phase 1 Outside Date--12 years later--would be December 1, 2021, which is Year 14. For the purposes of the example, the developer has completed 1.1 million square feet, less than the 1.5 million square feet required.

The developer would have to deliver a Phase 1 LOC (Letter of Credit) equal to three years of Liquidated Damages. That adds up to a little more than $2.6 million. As the example shows, if the additional 400,000 square feet is not finished within ten years, the total damages would be $29.3 million.

(If you click on the graphic to enlarge, the sum of $2,638,350, the Phase 1 LOC, should be visible under the first shaded section. The bottom shaded section has two lines. The Total Due Upon Substantial Completion is $29,315,000, while the Total Less Phase 1 LOC Amount is 26,676,650. Note that the full chart assumes Phase 1 to be ten years late, rather than three. Note that the sum due increases steadily for the first six years, then doubles.)

Note that a “completion multiplier” diminishes the amount owed by 53.3% or nearly half. Thus, if Forest City Ratner were to build none of Phase 1, the completion multiplier would be 1 and the damages roughly double each year: about $5 million over the first three years, plus another $12 million over the next three years.

So an 18-year delay after the Effective Date--the 12-year grace period, plus six years of delays that would generate penalties--means the developer could sit on the project until 2027 and pay only $17 million to the city.

That's not necessarily realistic, given the developer's promises and the inevitable pressure from city officials, but it is, according to the city document, possible. So it may give the developer leverage in either gaining additional subsidies or access to scarce affordable housing bonds.

The State Funding Agreement also would require repayment of a portion, not yet established, of State Funding Payments.

Liquidated damages for abandonment

And what if Forest City Ratner abandons the project? Well, the City Funding Agreement states that, if the project is abandoned or terminated before the Arena Outside date (6 years after the close of litigation and the delivery of property), the ESDC--not the developer--would repay the Disbursements, up to the $100 million total, to NYCEDC, plus Liquidated Damages. Again, the additional $105 million is not mentioned.

Depending on the date of abandonment, the Liquidated Damages could be modest. It’s not clear to me where those Liquidated Damages come from, but possibly from refunds to ESDC of state monies advanced to the developer.

For example, if the final disbursement of city funding occurs in 2010, two years after the first disbursement, and the project is abandoned by 2011, the Liquidated Damages would be calculated according to Year 3 in Schedule D, and would total only $8 million.

If the delay is one year longer, the damage total would leap to $29 million. (Note that Schedule B applies to a scenario in which the final disbursement occurs during the same year as the first disbursement; Schedule C applies to