IBO report: Hudson Yards projections were overoptimistic, leaving city on the hook

Rosy projections should be taken with a grain of salt regarding big development projects, right? From the Wall Street Journal, 4/23/13, Hudson Yards Woes Leave City on Hook:

When the city agreed to pick up the tab for the extension of the No. 7 subway line to ease the creation of a new office and residential district on the far West Side, it expected the project could begin paying for itself as early as 2008.
Instead, a single 1.7 million square-foot office tower in the Hudson Yards area has broken ground, while the project envisions 25 million square feet of new office space. And the district generated 40% less revenue from taxes and other development fees than projected between 2006 and 2012, according to a report to be released Wednesday by the New York City Independent Budget Office.
Hudson Yards was expected to produce $283 million in revenue through 2012, but it actually created $170 million, according to the report by IBO, an independent city agency that studies the local economy.
"The commercial development has been much slower than they thought," said Ana Champeny, a supervising analyst at IBO.
The city issued $3 billion in bonds to pay for subway construction and other infrastructure upgrades guaranteed by tax revenues in the area. If those revenues weren't enough to meet interest payments on the bonds, the Bloomberg administration agreed to pay those with additional money drawn from the city budget.
Typically such transit projects would be paid for by the Metropolitan Transportation Authority with help from the federal government, but that could have delayed construction of the subway-line extension for years.
The city agreed that if revenue to a quasi-independent agency, the Hudson Yards Infrastructure Corp., fell short, it would make up the difference: Between 2006 and 2012 the city gave HYIC $137 million from the budget to help it make interest payments. It has allocated $125 million for interest support payments in 2013, according to IBO.
The IBO cited a 2006 report commissioned by the city from real-estate firm Cushman & Wakefield that anticipated the city would have to help make one interest payment in 2008. In a more conservative scenario, that report said the city would likely have to continue helping pay interest until 2014,

At least the report provided multiple scenarios. How many scenarios did Atlantic Yards backers produce? Only uniformly optimistic ones, at first, then, after the project was approved a second time, they got the deadlines extended from ten to 25 years.

Note: because the Wall Street Journal got a scoop, acquiring the report before publication, other dailies didn't pick up on the news. That's pissy news judgment, denying readers important information just because the publication doesn't want to appear trailing others.

The IBO report

Here's the IBO report. The summary:

The Bloomberg Administration is now proposing a major rezoning of East Midtown. Concerned that this new initiative would compete with Hudson Yards and slow the revenue growth needed to make Hudson Yards self-supporting, Council Member Daniel Garodnick asked IBO to review city spending to date on the plan and to consider the short-term outlook for revenues at Hudson Yards. Among our findings:

• Public expenditures paid to the Hudson Yards Infrastructure Corporation, including funds to help make interest payments on the $3 billion in bonds issued by the corporation, have totaled $374 million since 2006.
• Over the same period, the city has committed an additional $22 million from its capital budget and $12 million from its operating budget to the project.
• Revenue collected by the Hudson Yards corporation has fallen short of expectations. The corporation projected that it would collect $283 million in tax and fee revenues through 2012, but in fact has collected $170 million.
• Property tax revenue that has been dedicated to the project (tax equivalency payments) from other newly developed buildings in the area is expected to grow from $28 million in 2012 to $33 million this year and $44 million next year. IBO expects payments from the first new office tower in Hudson Yards to begin in 2017 or 2018.

The extension of the 7 train, originally estimated at $2.1 billion, is now expected to cost $2.4 billion. The higher cost comes despite the complete elimination of one of the planned subway stations as well as savings on other parts of the subway-related work. The city is responsible for cost overruns on the 7 extension and $55 million of its $101 million in capital spending for Hudson Yards is for the transit work..