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IBO responds to ESDC critique of fiscal analysis: "we remain confident in our methodology and results"

One intriguing mini-drama during the Empire State Development Corporation (ESDC) board meeting on September 17 concerned the agency's response to a New York City Independent Budget Office (IBO) report concluding that the Atlantic Yards arena would be a loss for the city.

The ESDC's dismissal of the IBO's report was noted both verbally and in a Response to Comments document, but the ESDC's logic was sketchy, as I'll describe below.

And, after I forwarded the critique to the IBO, the official behind the report told me "we remain confident in our methodology and results."

Indeed, as I'll describe, I think the IBO could've been considered too conservative.

Report issued

On September 10, the IBO issued its report The Proposed Arena at Atlantic Yards: An Analysis of City Fiscal Gains and Losses. Opponents and critics seized on the agency's finding that the arena would be a loss for the city, a modest gain for the state, and an opportunity for developer to gain $726 million in subsidies and tax breaks.

In the New York Times's CityRoom blog, representatives of the New York City Economic Development Corporation and Forest City Ratner criticized the study for not looking at the project as a whole.

Curiously enough, in 2005, Forest City Ratner had no problem with the IBO’s methodology, praising it for concluding that the arena was a “win-win” situation for the city and the state.

At the ESDC meeting

During the board meeting, Richard Neiman, the New York State Superintendent of Banks, brought up the issue: "With reference to the recent Independent Budget Office report--it makes several assessments of the various costs and benefits. I'd like to hear from the staff how that correlates to the analysis done by the ESDC."

"Sure," responded ESDC Senior Counsel Steven Matlin. "We did take a look at the IBO report, which did recently come out. What the IBO did was: they looked at an arena-only project and, as someone indicated, their conclusion was that the arena, as a standalone, was a negative. It would cost the city money and there would be modest benefits to the state. Our approach, which we think is the proper approach, is to look at the project as an entirety. Our bargain is not just for an arena; our bargain is for an arena and the 16 towers that are also included in the project. So the analysis that we've done, and the analysis that we've shown to the directors, is for the entire project. The other thing I do want to mention too is that, when you look at the IBO report, there are certain assumptions that we think are flawed and I'm not sure that that report, even looking at the arena alone, is a report that--it certainly is not a report that we would agree with their conclusions."

Neiman followed up: "And the major assumption that you believe was flawed?"

Matlin didn't mention any flawed assumptions regarding the arena alone: "The primary difference between the analysis that we've done and the analysis that the IBO did is: we looked at the entire project. They looked just at what type of fiscal benefits would be generated from an arena."

ESDC hypocrisy

Matlin's statement was more than a little hypocritical. The IBO makes a reasonable case that most of the direct subsidies go to the arena, as the other subsidies would be as-of-right.

More importantly, the IBO shows--at least in part--how it arrives at its calculations. The ESDC just provides an "economic benefit analysis", a successor to an "economic impact analysis," without any explanation of how it was calculated, nor with any subsidies and tax breaks factored in.

Also, the IBO didn't look at an "arena-only project," as Matlin suggested; had it looked at the project as a whole, it would've had to factor in many more tax breaks, though they are as of right.

Still, even the ESDC acknowledged in June that “prolonged adverse economic conditions” could slow all buildings after the arena and just one tower.

The ESDC's "economic benefit analysis" assumes a full buildout of the project in a decade; that's very unlikely.

The written response

The Response to Comments document distributed to the board also addressed the issue.

Comment 2: Numerous commenters stated that a preliminary report from the New York City Independent Budget Office (IBO) showed that the Arena would be a financial loss and thus requested that ESDC extend the public comment period beyond August 31st in order to consider an updated IBO report on the Arena.

Response: ESDC received the IBO report on the Arena after the close of the public comment period but has nevertheless considered the report. The analysis was done without consultation with or inputs from the City, State, or FCRC. The report’s fiscal estimates focus on the Arena but are based on a number of materially inaccurate assumptions. The report incorrectly assumes that all direct city and state subsidies for the Project are solely for the Arena and also eliminates from consideration the fiscal benefits from the non-Arena portion of the Project. ESDC believes that this methodology does not account for the full fiscal and civic benefits of the Project and does not accurately characterize the direct subsidies. The opportunity cost analysis also contains a number of incorrect assumptions. For example, it relies on a claim that the MTA land sale was below market and uses the difference in the purchase price offered by Extell and FCRC without taking into account the difference in the value of the yard and other improvements that were part of the selected FCRC bid. It also attributes a value of $3.7 million to the City streets contributed to the Project based on $60 per square foot; however, the streets do not have development rights and therefore should not be valued according to other land comparables. The report incorrectly states that the Arena site will be leased to an FCRC affiliate for 99 years for $1.00. The lease will include the obligation to make significant payments in lieu of real estate taxes (PILOT), which will be applied to the payment of debt service on the bonds to be issued by the Local Development Corporation (LDC) for the construction of the Arena. After the term of the bonds (approximately 35 years), the lease would be for fair market value. The option to purchase the Arena would also be at fair market value, and if purchased, the Arena would return to the tax rolls. Revenue assumptions for the Arena, which are used to estimate tax receipts, are inaccurate, relying on a presumed average ticket price of $60. Across the entire NBA today, the average ticket price exceeds $60, and in major markets like New York City, the average ticket price exceeds $100.

The IBO response

After I forwarded that critique, IBO Deputy Director George Sweeting responded, "After reviewing ESDC’s comments on IBO’s fiscal impact analysis of the Atlantic Yards Arena, we remain confident in our methodology and results. The arena portion of the larger project accounts for the large majority of the non-as-of-right incentives being offered by the city and state and therefore it is appropriate to consider the public sector’s return from activity at the arena alone. This was the same analytic framework used in our 2005 report."

"ESDC correctly points out an error made by IBO in our report regarding the rent to be paid after the term of the tax exempt bonds expires," he continued. "We regret the error, but because it pertains to years beyond the 30 year time span used in our fiscal benefit calculations, it has no effect on our findings."

Other issues

Sweeting did not reply directly to the other criticisms, but I think they're worth a closer look.

1. Was the IBO correct in concluding that the MTA land sale was below market? Well, it was below the appraisal.

The ESDC says it "uses the difference in the purchase price offered by Extell and FCRC without taking into account the difference in the value of the yard and other improvements that were part of the selected FCRC bid." Well, Extell never got a chance to flesh out its bid, so we don't know the value of the yard it was to build. Nor do we know how that yard would compare to the downsized railyard Forest City Ratner now plans. In other words, the value of Forest City Ratner's bid should be downsized to encompasses the revised railyard.

2. The ESDC's claim that city streets should not be valued because they don't have development rights is odd. First, the $3.7 million is minor component of the calculations. Moreover, the streets are crucial to the construction of open space, which is a project requisite. The land would have to come from somewhere. Forest City didn't pay less for other land because it would go only to open space.

3. The ESDC's claim about PILOTs does not suggest additional revenue; actually, PILOTs allow the developer to divert the equivalent of real estate taxes to pay for arena construction.

4. The ESDC erroneously claims the average ticket price in New York exceeds $100. According the October 2007 Team Marketing Report, the average ticket price for the Knicks was $70.51 and for the Nets $60.98. According to the October 2008 Team Marketing Report, the average ticket price for the Knicks remained at $70.51, while for the Nets it dipped to $54.98.

The average price for the Nets has likely declined, given the number of giveaways and special deals to which the team has resorted. Surely the average ticket price would rise upon a move to a new arena in Brooklyn. Still, the ticket price for the Knicks remains a legitimate guideline and upper bound.

Naming rights

Shouldn't IBO have considered the arena naming rights--reported at $400 million over 20 years--as another lost (in part) opportunity cost and thus a benefit to the developer?

In other words, the ESDC gave Forest City Ratner the opportunity to sell naming rights. The ESDC could have kept some or all of that.

Here's the ESDC's explanation: that the naming rights were part of the financing for the project. However, no ESDC document confirms that claim.

In other words, the IBO may have been too conservative.