A $950 million arena? Either that cost is bogus (goosed for PILOTs?), AY might now cost $6 billion, or the ESDC math was off
The rapid escalation of the cost of the arena--from $435 million [clarified] in 2003 to $637.2 million at approval in 2006 to $950 million this year--significantly outpaces local inflation in construction costs.
That leads to some troubling speculations--even if the cost may have dipped a bit recently.
Has entire project cost jumped 50%?
If the $950 million figure is in fact accurate, then the entire Atlantic Yards project has increased in cost nearly 50% from $4 billion, and government oversight agencies should be taking a second look at whether a $6 billion project is remotely viable, as Develop Don't Destroy Brooklyn suggested in June.
Was value of arena inflated?
Alternatively, if the project cost as a whole has not gone up commensurately, the value of the arena may have be inflated by adding improper costs, perhaps in the same way as Assemblyman Richard Brodsky and Rep. Dennis Kucinich have alleged in their recent investigations of Yankee Stadium.
(An inflated value would allow for more tax-exempt bonds, repaid via PILOTs, or payments in lieu of taxes.)
Were the numbers off?
Were the numbers not accurate from the start? For example, at right is a document the Empire State Development Corporation (ESDC) released to the Public Authorities Control Board before the latter's December 2006 vote to approve state financing for Atlantic Yards. It did not become publicly available until it surfaced in litigation last year, well after the approval vote.
There are two curious aspects to this document. (Click to enlarge.)
First, the cost of the Urban Room is included, but the Urban Room is not a sports facility eligible for tax-exempt bonds. (Would only taxable bonds be used for the Urban Room?) The ESDC described it as a "publicly accessible atrium that would serve as a dramatic gateway to the arena and provide a place for people to congregate... [I]t would serve as an entrance to the office space and hotel in Building 1, the restaurant and cafe, the arena (its ticket booths would be located here), and a new access point to the subway via an underground connection..."
Developer Forest City Ratner, apparently, is prepared to brand the Urban Room as ADT Plaza.
Also, the cost of the land for the arena was never included in the total cost. If it is now part of the $950 million cost, then the information presented to the PACB was misleading.
Whatever the explanation, there's good reason for Brodsky and Kucinich to investigate the Atlantic Yards numbers.
Let's recap. When Atlantic Yards was announced in 2003, the arena was projected to cost $435 million.
By April 2004, the cost was said to be at least $500 million. By September 2005, the cost was $555.3 million, as noted in the Independent Budget Office's Fiscal Brief.
By project approval in December 2006, the cost was $637.2 million. In March 2008, the developer announced a $950 million cost, a 49.1% increase in just 15 months.
Construction cost comparisons
How does that compare to construction costs elsewhere?
New York City Department of Finance Commissioner Martha Stark testified before Congress on October 24 regarding Yankee Stadium: "Labor, transportation and overall construction costs are about 40 percent higher in New York City, on average, than in the other cities."
However, the Atlantic Yards arena would be 250% the cost of the Prudential Center, which opened last year in Newark and cost $380 million. Even though that figure would need adjustment--the AY arena wouldn't open for three years--it still seems out of line.
Construction costs rise, but not as much
As of this summer, construction costs were rising, as the New York Post on 7/30/08 reported:
The cost of construction in the Big Apple has risen faster than the city's skyline - 32 percent in just three years, due to the high price of local labor, tighter supplies of materials and the added expense of building in a congested city, a new study found.
Three years ago, the projected cost was $555.3 million; 32% of that is $177.7 million. Add those numbers together and the total is $733 million, not $950 million.
Construction costs now declining?
Note that, since the $950 million figure was announced, construction costs likely have declined, due to the economic downturn, as noted on a recent episode of Fox Business News.
That suggests that the entire project may have declined somewhat in (projected) cost. But it still doesn't explain the relationship between the cost of the arena and the cost of the rest of the project.
Arena as % of total cost: $6B project?
Initially, the project was announced at $2.5 billion; a $400 million arena would represent 16% of the total cost.
Note that in 2005, a one-acre plot of land, Site 5, was added to the project, and would be occupied by a significant tower.
As approved, a $637.2 million arena would be 15.9% of a $4 billion project cost.
If the arena would be just 16% of the total project cost, a $950 million arena implies a project cost nearing $6 billion.
Possible inflated costs
Though Brodsky's investigation of Yankee Stadium did not come to definitive conclusions, his interim report pointed to "various categories of cost asserted by the Yankees and accepted by DOF seem unusual in both their nature and their value," including “Luxury/Sky/Boxes,” apparently duplication of contingency costs, unusually high soft costs (legal, architectural, etc.), plus costs for the construction of property not legally part of the Stadium, such as a new police station.
Kucinich, in a letter in October to Mayor Mike Bloomberg, drew similar conclusions. At an October 24 hearing, Stark did not in her prepared testimony directly address such alleged cost inflation and the hearing mostly concerned the use of comparable sites for assessment, not such cost inflation.
Perhaps a follow-up hearing will look more deeply into the Yankee Stadium numbers--and those for Atlantic Yards.
Savings on bonds
The IBO, in its 2005 report on AY, attempted to estimate the savings on tax-exempt bonds:
Using the current spread of 1.5 percentage points between interest rates for tax-exempt economic development bonds and corporate bonds and assuming that the entire $555.3 million cost of constructing the arena is debt financed over 30 years, this subsidy has a present value of $91 million (in 2005 dollars) over the financing period.
That's 16.4% of the total. If, as reported, Forest City Ratner seeks $800 million in tax-exempt bonds, a 16.4% savings would be $131.2 million.
However, based on updated numbers from the IBO, I previously estimated $165 million. While that may have been more accurate a few months ago, the changing economic environment may demand a recalculation--for this and a whole lot more.