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Forest City's Gilmartin on "owning" air rights they haven't paid for, and a reminder of the bargain they got

An interview in the Commercial Observer's Owners Magazine 2015--Owners Magazine—a yearly compendium of interviews and features about the city’s landlords and developers—with Forest City Ratner CEO MaryAnne Gilmartin has a couple of nuggets.

Q: What are your thoughts about the “b” word [bubble]? 
A: I think NYC remains incredibly strong. The shaky international markets may certainly have some impact over time on the super high end, but NYC will continue to attract a wide range of people from all economic backgrounds and we are focused on meeting all of those needs.

Of course it helps when, in the case of Atlantic Yards/Pacific Park, you're partnered with a foreign majority owner, the Greenland Group, which owns 70% of the project going forward (excluding the Barclays Center and B2 tower).

Q: If you could own air rights over any NYC building, which would it be? 
A: I prefer air rights over rail yards—bigger, bolder and even more complicated.

Um, they don't *own* the 3.6 million square feet of air rights over the Vanderbilt Yard yet, because Forest City, instead of paying the full $100 million in cash originally promised, in 2009 got to put down $20 million for the portion of the railyard needed for the arena, then could pay the rest over 22 years, at a gentle 6.5% interest rate, for 3.6 million square feet. 

They will now pay faster, in about 16 years, if the buildout is by 2025 as now projected. As I wrote last year, the upside went to Forest City, as the economy, and real estate market, swung back quickly.

A new appraisal in 2010 of Atlantic Yards land, which included some land over the railyard, valued development rights at more than $179/square foot. The market has continued to rise. At $350/square foot, 3.6 million sf is worth $1.26 billion!

Forest City--now Greenland Forest City Partners--has/had hundreds of millions of dollars in additional costs for the new railyard, deck, and new transit entrance that were part of the deal and required to get vertical development started over the railyard segment

But even if that cost hits $400 to $600 million--now, with increased construction costs, a sum far more than Forest City ever estimated--it still looks like a huge bargain.

In Manhattan, with Hudson yards, the Commercial Observer reports:
In total, the rail yards have a whopping 4.5 million square feet of development rights sitting above them. While most air rights cost whatever the market deems them to be, the MTA controls the rights above the eastern rail yards, according to the DCP report. Instead, the price of air rights transferred is determined by a ratio that’s calculated at 65 percent of what the property under development is appraised. When the Moinian Group bought 240,156 square feet of rights from over the rail yards last year for 3 Hudson Boulevard, the developer paid about $350 per square foot, according to DCP.
So maybe the rail yards in Brooklyn are worth less, because you have to factor in the infrastructure cost. But at $250/sf, with no subtraction for the cost of railyard and deck, 3.6 million square feet over the Vanderbilt Yard are worth $900 million. At $200/sf, the development opportunity is worth $720 million.

Remember, they're paying $100 million--and now interest aimed to reach that same $100 million present value.

Most exciting other projects

Asked the most exciting project under development in the city her firm is not involved with, Gilmartin cited the New York Wheel/Staten Island Ferris wheel. (Bonus: it's another project funded by below-market EB-5 loans from immigrant investors seeking green cards.

The other 33 interviewees cited a range of projects, with a modest plurality to Hudson Yards and the World Trade Center. But Tommy Craig, Senior Managing Director, Hines, said:
Pacific Park—formerly Atlantic Yards—which is currently being carried out by Forest City Ratner and Greenland. Brooklyn is arguably the most exciting “new” urban location in the country and this project has been one of the catalysts in establishing a real focal point in place within the historic neighborhoods.

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