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Real Deal on Pacific Park clouds: delays threaten 2025 housing deadline; may be tough to find investors

It's an opportune time, indeed, for the Real Deal (via Konrad Putzier) to ask, Is Pacific Park in trouble again?, subtitled "Brooklyn’s biggest development has been plagued by internal and external woes over the year and a half."

Some of the evidence is partial, but it adds up to clouds, at the very least. Some evidence is more clear. The project is clearly behind schedule, since two towers, 615 Dean (B12) and 664 Pacific (B15) have been announced but not launched.

The effort to market stakes in three construction sites (B12, B13, B3) has gotten nowhere, as I recently reported. (TRD merely said that Forest City "did not confirm" whether or not the joint venture had found a partner.) Forest City New York recently suffered layoffs, unmentioned in this article.

Forest City--the sole owner of 461 Dean, while the joint venture is a partner in other built/pending towers--has been forced to offer discounts on rent at the latter building. And sales have slowed at the 550 Vanderbilt condo tower, prompting the JV to switch brokers. Tonight's the (re)launch event.

Missing the 2025 deadline?

Perhaps the most interesting--and alarming--quote comes from real estate developer and former city official Seth Pinsky, who opines, without being asked about the penalty, that he wouldn't be shocked if the joint venture does not meet the 2025 deadline to build 2250 units of affordable housing. He doesn't have insider insight, but he does know the market is cyclical.

Three buildings, with about 782 units, are finished or nearly finished. I wouldn't be shocked either, given the difficulty in getting that much construction done. But what about the $2,000/month penalty required under a 2014 deal signed with neighborhood advocates?

If they're 500 units behind, that's $1 million per month. Is that the cost of doing business? Will they be able to revise the deadline? Or will the city and state come up with money or relaxed terms to ease the burden? I'd say don't count out Forest City's lobbying clout, but, then again, they managed to lose some very helpful 421-a benefits, which extended the tax break to the entire project--including 100% market-rate buildings--as long as the overall affordability met a threshold.

Tensions at the JV?

And despite the effort of Forest City New York CEO MaryAnne Gilmartin to spin it, the joint venture partners are not exactly on the same page:

Discussions over specific buildings or how much risk to take are “deliberate collisions that we intentionally knew we would be facing” and lead to a better project, she claimed.
"Claimed" is the right word. As TRD noted, Greenland USA leader Hu Gang "told TRD that the joint venture would likely break ground on one or two buildings by the end of the year," just a few days after David LaRue, CEO of parent Forest City Realty Trust, said the joint venture would wait to see how the market would shake out.

I wish TRD had asked Forest City if it had cleared its announcement last November of a Pacific Park pause with its joint venture partner/overseer, since Greenland was not mentioned as making a joint decision.

Putzier cites "persistent rumors of discontent.... Several sources claim Greenland is unhappy about Pacific Park’s slow progress and that both partners would sell if they found a taker." The problem is, finding such a taker isn't easy and one source suggests Forest City may be required to keep a stake. (I'm not sure about that.)

Keep in mind that Forest City does have a history of conflict with partners, such as Skanska USA, its one-time partner on the modular factory, or the Blumenfeld Development Group, its one-time partner on the Nassau Coliseum project. So a conflict with another partner wouldn't be a shock.

What about Greenland?

Putzier notes that Greenland--which I recently pointed out has slowed in its rise on the Fortune Global 500--faces new Chinese capital controls, which could make it harder to raise money. In other words, it once had deeper pockets, now it doesn't.

Gilmartin called Greenland "perhaps one of the most capitalistic enterprises I have ever partnered with.” She explained, in TRD's paraphrase, that meant "Greenland understands the American way of business better than most."

Or, perhaps, Greenland is bringing aggressive Chinese practices to the USA. As Forest City's Susi Yu once said, "I think there’s definitely a little bit of an educational process in learning that in New York you can’t just do everything because you say so."

421-a questions

Given the expiration of the 421-a tax abatement, TRD suggests that new buildings must include affordable units to get the replacement program. 

I'm not so sure. Yu has said that B12, at least, has footings in to preserve the old abatement, and I believe B15 has it too. Gilmartin told TRD--as her deputy Ashley Cotton said at a recent public meeting--that the new abatement may offer different opportunities.

That may be true, and lead to buildings with 25% affordability. But Cotton acknowledged that a full market-rate building is no longer likely, and the joint venture had planned three condo buildings (one grandfathered in) and two 100% market rental buildings.

This portends far fewer--if any--50% market/50% rental buildings, which was the foundation of the 50/50 plan that made Atlantic Yards so attractive to advocates and public officials.

The cost, and the future

TRD raises the question of whether Forest City will continue to build new project. Gilmartin sounds upbeat. An investment analyst suggests that real estate investment trusts (REITs), as Forest City's parent has become, are risk averse. Note this:
Still, [analyst Paul] Adornato thinks it’s unlikely Forest City will abandon Pacific Park. For one thing, the firm has already spent around $725 million on the project’s residential portion and has written its investment down to zero on its books, according to sources. From now on, any money it makes “is all positive” from an accounting perspective, the analyst said.
So the worst is over? They're not expecting any return from previous expenditures, so a low return is OK since it's all positive? Or does the possibility of lowered returns for any future building also mean that they'd have to offer further concessions to get a buyer to bite?