Atlantic Yards paradox, Part 1: the multiple developer alternative seems impractical--because the state changed the rules for Forest City

If Forest City Ratner can't build Atlantic Yards in the originally estimated/promised ten-year time frame, some community critics have suggested that the development parcels be bid out to other developers.

The state agency overseeing/shepherding Atlantic Yards says that won't work, and makes a plausible case that the complexity of the project--including a platform over the railyard, the open space, and the need to coordinate construction--likely would invite litigation and other snags.

But the answer from Empire State Development omits one key piece of context: the state in 2009 agreed to give Forest City 25 years to do a project it promised to complete in ten years. Had ESD written contracts so they would automatically unwind, trigger clawbacks, or force coordination if Forest City couldn't meet deadlines, then the multi-developer alternative could indeed be practicable.

So the question goes far deeper than whether ESD can unwind the deal. The question--without solution--is what happens when a government agency fails or becomes captured by private interests.

The Supplementary Environmental Impact Statement (SEIS) was ordered by state Supreme Court Justice Marcy Friedman, who did penalized the agency and developer, not only requiring the SEIS for Phase 2 (but not the unbuilt parts of Phase 1, which are significant), but also awarding attorneys' fees to the community coalitions challenging state's decision to extend the deadline without studying the potential for impacts over 25 years.

The judge suggested that the petitioners "persuasively" argued that the process for an SEIS should consider alternatives beyond Forest City Ratner's project to alleviate blight and "create affordable and market-rate housing with less adverse environmental impacts."

In her decision on fees last September, Friedman left the tantalizing possibility that, had the agency come clean in early 2010, she might have stalled arena construction:

Had the ESDC disclosed the terms of the Development Agreement that were being negotiated when the petitions were initially heard, or brought the Agreement to the court’s attention promptly after it was executed, construction would not have been as advanced on the arena at the time of the court’s determination requiring an SEIS, and the balance of the equities may have favored a stay pending preparation of the SEIS.

Multiple developers and real-estate cycles

Of course, multiple developers have been part of numerous projects around the city, as was detailed at last Friday's meeting.

Here's one example I haven't seen referenced: in a Queens project abandoned by Ratner in the early 1990s, a city housing official said sites would be parceled out to allow the development to span real-estate cycles: "We don't want to be stuck with a cash bid made at the height of a real-estate market."

That, of course, is what happened to Forest City's 2005 bid for the MTA's Vanderbilt Yard. The MTA in 2009 agreed to Forest City's request to renegotiate, and allowed far more generous terms.

The state's answer

Regarding the potential for an accelerated time frame, the truncated answer, in the Executive Summary of the court-ordered Draft Supplemental Environmental Impact (Draft SEIS) for the 11 towers in Phase 2, was:

MULTIPLE DEVELOPER ALTERNATIVE
The analysis of the multi-developer alternative concludes that the alternative would not be practicable, and would not be effective in accelerating construction of Phase II of the Project.

That's all the board members of Empire State Development had to go on, as far as I know, when they voted last Friday to accept the Draft SEIS.

Community criticism

At that meeting, Gib Veconi of the Prospect Heights Neighborhood Development Council observed that had the agency and Forest City "been candid about the 2009 change from a 10-year to a 25-year build out”—a change revealed only after the project was re-approved—“public pressure would have required the agency not only to conduct an SEIS, but also to explore a strategy of including other development partners to preserve the schedule under which the project was originally approved."

“I’ve detailed to the board before, how in 2008 the block association I am part of sat at this table with Community Board 8 and another block association when MaryAnne Gilmartin and Jane Marshall from Forest City Ratner told us with the support of [ESD's] Avi Shick and his staff that the project was going to be built in 10 years, so no further mitigations were necessary,” Dean Street resident Peter Krashes also said at the meeting.

“Only the community in the room seemed aware the principal benefit, purpose, and use of the project is to eliminate designated blight," he continued. "A year later [developer] Bruce Ratner told the public, ‘It was never supposed to be the time we were supposed to build them in.’ If so, how come the value of the project was assessed as it was in 2006?"

The explanation

As it happens, the Alternatives chapter of the DSEIS, made public after the meeting, offers a litany of reasons why engaging other developers would be extraordinarily complex and challenging:

...a multi-developer alternative under new agreements among ESD, MTA and additional developers would not be practicable, and would not be effective in accelerating construction of Phase II of the Project. On the contrary, because of the complexities and delay that would result from unwinding the existing transactions, putting multiple new arrangements in place, and possibly defending ensuing litigation, the alternative may cause construction to cease for many years, would prolong construction, and might well imperil the Project altogether. In addition, as discussed below, one major objective of the multiple developer alternative— providing additional capital to facilitate an accelerated construction schedule for Phase II development—can be attained through the existing arrangements with the project sponsors. 

And, neatly enough, it suggests that the best solution would be to bring more capital into the project, which the pending deal with the Chinese government-owned Greenland Group would do.

Also neatly enough, the SEIS has been delayed--it's taken longer than the first environmental review, for the entire project--long enough for the Greenland deal to arrive.

From the document (emphases added)

D. MULTIPLE DEVELOPER ALTERNATIVE

A number of commenters on the Draft Scope of Work for the SEIS requested that ESD assess a “multiple developer alternative” as a strategy for speeding construction of the Project, so as to reduce the duration of its construction impacts and to achieve the benefits of the Project more rapidly. ESD owns a portion of the Phase II site and intends to acquire the parcels that remain in private ownership through the use of eminent domain; the MTA also owns a substantial portion of the Phase II site (the Vanderbilt Yard on Blocks 1120 and 1121). Therefore, it is assumed that in order to pursue an alternative involving additional developers in Phase II construction, ESD and MTA would either separately or together solicit proposals through one or more new requests for proposals (RFPs). ESD and MTA would then evaluate any proposals that they receive and seek to negotiate individual agreements with different developers for discrete areas of the Phase II site.

The discussion below evaluates the feasibility of this approach and its effectiveness in speeding construction. It also considers this “multiple developer approach” in light of the structure that is currently in place, which allows the current project sponsors to transfer one or more Phase II building sites to other developers or to enter into one or more joint venture agreements with other developers to co-develop one or more of the Phase II buildings.

THE PROJECT SPONSORS’ EXISTING CONTRACTUAL ARRANGEMENTS AND PROPERTY RIGHTS

FCRC affiliates have extensive contractual and property rights in the Phase II site that must be taken into account in considering an alternative involving the engagement by ESD and the Metropolitan Transportation Authority (MTA) of other developers for construction of the Phase II area.

Among these rights are those relating to the rail yard on Blocks 1120 and 1121 – two blocks that comprise more than half of the Phase II site, and that are expected to accommodate about 65 percent of the floor area to be constructed in Phase II. MTA and certain Forest City Ratner Company (FCRC) affiliates have entered into several agreements with respect to this MTA- owned property. Under those agreements, the FCRC affiliates are obligated to construct a new rail yard for the Long Island Rail Road (LIRR) as part of Phase I of the Project, and is granted the right, upon completion of that new facility, to purchase air space over the yard, construct a platform, and develop the six Phase II buildings on Blocks 1120 and 1121, subject to a number of terms and conditions.

The contractual arrangements between MTA and the FCRC affiliates are summarized in Chapter 1, “Project Description.” Those agreements were challenged in one lawsuit (Montgomery v. MTA, Index No. 114304/09), but that case was dismissed and no appeal was taken. Accordingly, under contracts that are in full force and effect with MTA, an affiliate of FCRC holds exclusive rights to purchase the air space parcels over the Vanderbilt Yard through 2031. Those rights would have to be modified or rescinded for ESD and MTA to engage other developers to construct any of the buildings over the rail yard.

Affiliates of FCRC have also entered into a number of agreements and leases with ESD. Among these are the Land Acquisition Funding, Property Management and Relocation Agreement, the Development Agreement and several interim leases and development leases. These contracts are also summarized in Chapter 1, “Project Description.” Under the agreements, an FCRC affiliate has paid for ESD’s acquisition of the land on Block 1129, for Lot 35 on Block 1120, and for Lots 42 and 47 on Block 1121, and ESD has acquired this land. ESD has leased Block 1129 (the future site of four of the Phase II buildings) to FCRC entities under long-term leases that grant those entities the right to develop the property up to the outside date of 2035, subject to certain terms and conditions. The remaining privately owned land on the Phase II site (i.e., Lots 19 and 28 on Block 1120 and Lots 1, 4, and 85 through 87 on the western portion of Block 1128) have not yet been acquired by ESD, but the Development Agreement and Land Acquisition Funding, Property Management and Relocation Agreement specify the rights that the project sponsors would have to develop these areas when they are acquired for Phase II.
The only lawsuit brought to challenge the Development Agreement (Peter Williams Enterprises, Inc. v. N.Y.S. Urb. Dev. Corp., Index No. 105101/10) was dismissed in 2010.1 None of the leases or other agreements between ESD and the FCRC affiliates were challenged in court. Accordingly, the FCRC affiliates’ rights and obligations under their agreements with ESD are in full force and effect, and would have to be modified or rescinded for ESD to engage other developers to construct any of the Phase II buildings.

EVALUATION OF THE PRACTICABILITY OF A MULTI-DEVELOPER ALTERNATIVE INVOLVING CONTRACTUAL ARRANGEMENTS AMONG ESD, MTA AND ADDITIONAL DEVELOPERS

The feasibility of the multi-developer alternative as a means of accelerating the completion of Phase II has been considered in light of circumstances as they currently exist with respect to the Project, and in light of the obstacles that would be encountered if it were to be implemented.

The FCRC affiliates’ existing rights under the numerous agreements they now have with the agencies would affect the feasibility of this alternative. As discussed above, under those agreements certain FCRC affiliates hold extensive contractual and property rights in the Project and the Phase II project site. As described in the 2006 FEIS (Chapter 1, “Project Description”), FCRC affiliates had acquired a substantial portion of the project site prior to affirmation of the 2006 MGPP. Subsequently, most of the properties were acquired by ESD from certain FCRC affiliates through the exercise of eminent domain for nominal consideration, because ESD’s acquisition occurred under agreements that provided for the lease back of the properties to certain FCRC affiliates obligated to develop the Project. The FCRC affiliates also have spent hundreds of millions of dollars in performing their obligations under these contracts, and have used many of those agreements as security for financing the Project. Since the FCRC affiliates have given no indication that either they or their secured lenders would be willing to give up their existing rights, issues arising in connection with a switch by ESD and MTA to a multi- developer alternative would take years to resolve, prolonging the construction period.

In addition, in the event that issues arising from cancellation of the existing contracts were resolved in a way that would allow a multiple developer alternative to proceed, the agencies (ESD and MTA) would then, either individually or together, begin a formal procurement process to engage other developers. It is speculative to estimate how long that process would take, but it is clear that even with the consent and cooperation of the FCRC affiliates, it would be complex and time consuming. One or more RFPs would have to be prepared and issued, and (in the event responsive proposals are submitted by responsible entities) either simultaneous or sequential consideration and negotiation of proposals would ensue. Amendments could be required to the MGPP, following UDC Act procedures, if negotiations with other developers result in material changes to the Project or ESD’s financial obligations; further environmental review under SEQRA would be required to address any material changes to the Project; new Public Authorities Control Board approval might have to be obtained depending on the nature of the new development agreements and their financial risks to ESD; appraisals would be needed with respect to any property dispositions; and applicable requirements of the Public Authorities Accountability Act would have to be satisfied. A new round of litigation, arising from the approval process, may then have to be resolved.
Given the complexity of addressing Project obligations among multiple developers, it is not clear that multiple developers would have an interest in the opportunity presented by an RFP. It is also uncertain whether the necessary transactional arrangements could be put into place, because negotiations would be exceedingly complicated. Numerous parties would participate in such negotiations, including additional developers, ESD, MTA, the City, FCRC, existing and prospective lenders, and other parties in interest. The complexity of the negotiations would be compounded by the inter-related nature of several of the key Project elements, since a number of capital improvements are being constructed for the benefit of several or all of the Phase II buildings.1 For example, affiliates of FCRC have already invested substantially more than $100 million to build public infrastructure improvements in the area, including the new transit entrance, sewers, and new rail yard improvements. The new rail yard is a public improvement that is required to allow the platform and six Phase II buildings to be constructed. A substantial new phase of this work is scheduled to begin in or around July 2014, to be secured by a completion guarantee to be posted on or before June 30, 2014. These large capital investments are for an LIRR facility that will not generate any revenue for the project sponsors. Therefore, they have been and will be made by the project sponsors only to allow them to proceed with the development of the buildings over the rail yard. The financial ramifications of diluting their existing conditional rights to build such Phase II buildings would have to be sorted out in the negotiations, and it is likely that all work on the rail yard would cease pending completion of such negotiations, Thus, pursuing the multi-developer alternative through direct contractual arrangements with other developers would result in a delay in the completion of the permanent rail yard, a significant public benefit of the Project. Similar consequences would result for other common Project benefits, such as the platform and the open space.

Other inter-related elements of the Phase II portion of the Project are the parking facilities. Most or all of the parking in the Phase II area is to be located on Blocks 1128 and 1129, and it is anticipated that parking facilities on those blocks will also serve the buildings on Blocks 1120 and 1121, as well as certain Phase I buildings. Similarly, the new platform and open space to be developed on Block 1121 will not just benefit the three buildings on that block. They would also be of material benefit to the four residential buildings on Block 1129, because they would replace the depressed open rail yard contiguous to that parcel with at-grade open space.

1 Because of the overlapping jurisdictions of the MTA and ESD and the need to provide for the allocation of infrastructure and Project-wide amenities such as open space, the timing of development and the cooperation of multiple developers in implementing the Project, the responsibilities of all of the developers would need to be put into place at the same time, adding considerable time and complexity to the negotiations.
Although it is possible that the costs commensurate with the relative benefits of the common improvements could be allocated among multiple developers, the cross-site interdependency of critical Project elements would add considerable complexity to the negotiations. Moreover, it is unknown what the effect on financing would be if an individual developer’s project were to be dependent on the actions (and solvency) of other developers in a multiple developer arrangement, adding an additional complication to an effort to have multiple developers share common costs such as the rail yard, platform, open space and parking facilities.

Thus, the process required to implement the multiple developer alternative would be extremely time consuming, and its outcome would be uncertain. It is only after that process is completed that additional developers could begin final design, arrange for financing and commence construction. Therefore, assuming that the effort to modify the existing agreements and bring on additional developers could succeed at all, it would take many years to bring the Project back to where it is today, and the accelerated completion of Phase II, which would be the objective of the multiple developer alternative, would not be achieved. Moreover, ESD and MTA would have to incur substantial costs in resolving issues with the FCRC affiliates, preparing the RFP(s), considering proposals, preparing appraisals, complying with procedural requirements, conducting any necessary reviews and negotiating agreements with multiple new parties. The agencies would have to look to currently unidentified sources to fund this effort.

CONSTRUCTION AND PROJECT COORDINATION

The engagement by ESD and MTA of additional developers on the Project would not be effective in accelerating the schedule, given the logistical problems and inefficiencies that would result from concurrent independent operations at the Project site. The resources available to support construction of the Project are constrained due to the limited means of access, and limited space for staging, truck marshalling, and major equipment operation. Multiple unrelated contractors would compete for these resources, with conflicts arising over the use of Pacific Street and other critical access points and staging areas. Such conflicts would be compounded by the need for adjoining and overlapping MPTs for multiple unrelated construction sites. Efficiencies that now exist with respect to contractor coordination of deliveries and joint use of equipment and materials would be lost, and contractors would be faced with conflicts arising with respect to on-site operations, the timing of deliveries, and overall traffic control.

Contractor coordination issues would be particularly acute with respect to platform construction and the placement of building foundations within the rail yard. Any plan to break up that work into packages with unrelated contractors would require that MTA deal with multiple entities in the review and approval of design documents and project schedules, and in arranging for track outages. Since any change to one design or schedule for construction of the common platform could affect the work of other contractors, adjustments would have to be made in consultation with all affected developers. Conflicts with respect to the timely completion of common open space and infrastructure could also be expected to arise, particularly where the completion of development on one site requires infrastructure work on another site to be completed.

Given the spatial and engineering constraints associated with the Project site, it is critically important to the efficient concurrent construction of multiple Project components that a single entity—a “program manager”—have the authority to allocate logistical capacity among the competing parties. The project sponsors have been performing that role thus far, but would no longer be responsible to do so if multiple unrelated developers were to be brought into the Project.
In sum, multiple site developers would reduce the level of construction coordination at the Project site, and lead to conflicts that themselves would likely impede Project construction. The benefits of the project sponsors acting as a single overall development authority—in terms of efficiency and contractor coordination —would be lost.

For all these reasons, a multi-developer alternative under new agreements among ESD, MTA and additional developers would not be practicable, and would not be effective in accelerating construction of Phase II of the Project. On the contrary, because of the complexities and delay that would result from unwinding the existing transactions, putting multiple new arrangements in place, and possibly defending ensuing litigation, the alternative may cause construction to cease for many years, would prolong construction, and might well imperil the Project altogether. In addition, as discussed below, one major objective of the multiple developer alternative— providing additional capital to facilitate an accelerated construction schedule for Phase II development—can be attained through the existing arrangements with the project sponsors.

ENGAGEMENT OF OTHER DEVELOPERS BY THE PROJECT SPONSORS

Under the existing agreements and leases, the project sponsors have the flexibility under certain conditions to enter into joint ventures or other arrangements with additional entities for purposes of constructing the Phase II buildings. In particular, the Development Agreement, Interim Leases and Development Leases allow FCRC to assign its development interests to other entities if certain conditions are met. FCRC is also permitted, subject to certain terms and conditions, to enter into joint ventures with other developers or investors to bring additional capital resources to bear in funding one or more of the Project buildings. Thus, if additional capital is needed for Phase II of the Project, the existing agreements provide mechanisms for the project sponsors to bring on other developers or investors without fundamental changes to the Project structure, and without additional administrative and judicial proceedings.

FCRC has announced its intention of pursuing such a joint venture arrangement. As discussed in Chapter 1, “Project Description,” FCRC has advised ESD that pursuant to the existing contractual agreements, an affiliate of the Greenland Group may acquire 70 percent of Phase II of the Project (as well as certain elements of Phase I), provide an immediate infusion of capital into the Project, and share in the Project costs going forward. In the event that the joint venture transaction with the Greenland Group affiliate were to close, it is likely that it would inject substantial additional capital into Phase II, and thereby be more effective in accomplishing an accelerated development schedule than pursuit of a multiple developer alternative.