The Real Deal on "The Dismantling of Forest City Ratner": corporate infighting and an unforeseen opposition

The Real Deal's April issue, online yesterday, offers an interesting article by Konrad Putzier, The dismantling of Forest City Ratner, subtitled, "While still a major property owner, the once-powerful developer has retreated from the building game — and its future is in flux."

The analysis in some ways goes beyond my lengthier 3/20/18 coverage for The Bridge, Forest City in Brooklyn: a Real Estate Pioneer on the Way Out?, notably new reporting on corporate tangles at Forest City Enterprises, now Forest City Realty Trust.

But I think it misses part of what went wrong, cited in my article, and doesn't quite get the Atlantic Yards opposition right. Putzier writes:

The company, sources say, was hindered by two key problems: major missteps at Pacific Park and a corporate restructuring that marginalized its development business.

Those were surely key problems, but another--and I suspect there were smaller ones--was the ill-fated Ridge Hill development in Yonkers. While that didn't make it into my piece for the Bridge, it was cited by hedge funds critical of Forest City Ratner's contributions to losses at the larger Forest City Realty Trust.

The corporate structure

Putzier writes:

The fact that Ratner’s firm never moved on from Pacific Park to its next big development has to do with the company’s unique structure, sources say.

That's a reference to several things, starting with a 2006 restructuring in which Forest City Ratner became an official subsidiary of--rather than partner with--Forest City Enterprises, run by his family. 

Putzier reports that, after in 2011 David LaRue became the first non-family member to head Forest City, his job was "to rein in New York," according to a source, because it was spending too much of the firm's equity. 

At that point, I'd note, Ratner had made those Atlantic Yards and Ridge Hill investments, without them paying off. In 2013, as LaRue announced a huge Atlantic Yards impairment (loss in value), he acknowledged two “hard lessons … We need to control land rather than own it, prior to being ready to go vertical, and we need a strong capital partner up front for a project of this magnitude.” 

That said, I suspect that, with better luck and/or execution, Forest City Ratner/Forest City New York might have moved on, before the company in 2016 became a real estate investment trust (REIT). The recession and the slowdown in lending were blows.

Going forward, the firm bid unsuccessfully on the Seward Park site in Lower Manhattan, with a partner who turned out to be a criminal. And the modular construction experiment, which might have led to a new business line as well as new alliances with other firms, fell flat.

In 2016, when Forest City Enterprises became Forest City Realty Trust, it had to divest business lines and devote a smaller fraction of its efforts (and capital/loans) to risky ground-up development.

The Pacific Park miscalculations and the media ecosystem

Former employees, to the Real Deal, not only blame corporate change but "also point to miscalculations by Ratner," notably underestimating the Atlantic Yards opposition. 

Sure, but there were other elements, I suspect, including management issues, underestimating infrastructure costs, and the failure to maintain support in Albany for tax breaks after ally Sheldon Silver, the Assembly Speaker, was forced out.

From the article:

Anyone who was following New York real estate at the time no doubt remembers Daniel Goldstein, the founder of the opposition group Develop Don’t Destroy Brooklyn and a local condo owner. The group sued to block the project, claiming that the use of eminent domain was unconstitutional, and staged near-constant protests, which dominated the press coverage.

Near-constant protests? There were periodic protests, often lightly covered, but DDDB's more significant achievement was influencing the media ecosystem, as Goldstein was always at the ready with a press release or comment.

Notably, one key local element of that ecosystem, at least through 2009, was aligned with (and amplified) DDDB: the relentlessly critical (when independently-owned) Brooklyn Paper.

And some of the more skeptical reporters, such as at the New York Observer, took DDDB's critique seriously.

But it's wrong to claim that DDDB "dominated the press coverage." After all, Forest City Ratner got mostly great press from the New York Daily News, on the editorial page and from columnists Denis Hamill and Errol Louis (though not Juan Gonzalez), and often (though not always) in the news section.

Remember that 5/15/04 Daily News cover (right) that suggested that those selling to Forest City got a "slam dunk"? Years later, after I reported that taxpayers, not Ratner, were paying the bill, did that make anyone's coverage? Nope.

Remember how DDDB in 2005 broke the news, via Gonzalez, that Forest City's Community Benefits Agreement partner, BUILD (Brooklyn United for Innovative Local Development), expected millions from Forest City? 

The New York Times, which often produced gentle articles or ignored Atlantic Yards, followed up with the confounding To Build Arena in Brooklyn, Developer First Builds Bridges.

If project supporters thought Forest City's tactics smart business and opponents saw "something more sinister," that article said, "from whatever viewpoint, the project's seemingly inexorable movement suggests that Mr. Ratner is creating a new and finely detailed modern blueprint for how to nourish—and then harvest— public and community backing.” No source backed up the "modern blueprint" claim."

The impact of the opposition

Writes Putzier:

“You can’t overstate the impact that the opposition to the project had,” [former city official Seth] Pinsky said. “The delay meant Forest City was spending enormous sums of money while fighting the opposition until finally, when they were able to put shovels into the ground and go vertical, the market was no longer there.”

Yes, the delay put Forest City in an unfortunate position, but that also has to do with other factors, including the unforeseen impact of the Downtown Brooklyn rezoning and the company's pattern of underestimating infrastructure costs, as well as the unusually harsh recession.

(Update: The more people I talk to, the more they emphasize the impact of the halt in lending, which would have hurt Atlantic Yards sooner or later, whether or not opponents had delayed it.)

In April 2007, then-CEO of Forest City Enterprises Chuck Ratner (and Bruce Ratner's cousin) said, “We’re very good at estimating markets, we’re very good at estimating rents, at estimating lease-ups, and estimating costs. We are terrible, and we’ve been a developer for 50 years, on these big multi-use, public private urban developments, to be able to predict when it will go from idea to reality. All we know is that if we pick the right place and we’re in with the right people, that over time we’re going to create tremendous value.” This time that posture didn't work.

Putzier quotes a former Forest City employee:

“Community opposition is one thing. I don’t know that anyone can plan for someone like Daniel Goldstein,” said the source. “This was at the dawn of blogs and social media. Daniel Goldstein was masterful in using social media to amplify what was a very small, very localized opposition to the project.”

Wait a sec. The opposition was localized, sure, and it was amplified by blogs, but it was not merely "very small, very localized." It gained pockets of support in various Brownstone Brooklyn neighborhoods, served by the Brooklyn Paper, and allowed Develop Don't Destroy Brooklyn to recruit some big local names, including celebrities, for an advisory board.

Crain's columnist Greg David in 2009 said Atlantic Yards opponents had "conducted one of the most imaginative campaigns” he’d seen. Commented Eric McClure (of NoLandGrab) on the Real Deal site: 

Bruce Ratner's hubris brought down Forest City Ratner, and he took a good chunk of Forest City Enterprises down with him. And while Daniel Goldstein's tenacity was key to Atlantic Yards' opponents' ability to fight to the end, the characterization by a "former Forest CIty Ratner employee" that the opposition was "very small, very localized," is just not true. Many people in the surrounding neighborhoods opposed the project, and that helped sustain Goldstein and Develop Don't Destroy Brooklyn.

But Forest City, at least in retrospect, should have anticipated that educated, middle- and upper-class residents in a changing Brooklyn would've had the wherewithal to resist this project more than previous ones.

Perhaps more importantly, DDDB raised more than $1 million to fund major legal efforts, lawsuits over eminent domain (in federal court and then state court), and lawsuits challenging the project's environmental review, its re-approval, and the revised Metropolitan Transportation Authority approval.

Even if mostly unsuccessful, such lawsuits raised serious and substantial questions about the legitimacy of the project and the process behind it.

As to the use of "social media," well, Facebook and Twitter were hardly factors. Yes, Develop Don't Destroy Brooklyn's blog-like updates, and the daily NoLandGrab (run by McClure, in later years, before it went dormant in 2012) compiled media coverage with tart commentary, as resources for the press. And it was a time of independent bloggers and reporters, most notably, uh, me. 

But the overall media landscape was friendly to Forest City--and got friendlier over time, as the Brooklyn Paper was sold and coverage in general diminished.

What next and who wins?

Putzier notes that, while Forest City New York has some significant operating assets (my article from The Bridge cites those assets, notably MetroTech, as among the parent company's biggest contributors) in New York, it's not moving ahead with new development. He got a quote from corporate:

“New York is an important core market with a substantial base of very high-quality assets,” Forest City’s [Jeff] Linton said in a statement, adding that the city accounts for a third of the company’s net operating income. “We expect to continue to have a presence focused on leasing, asset management, operations and a core development capability.”

So "core development capability" means what, exactly? My article quoted LaRue as sounding distinctly lukewarm about new development.

Someone, suggests interviewee Pinsky to the Real Deal, will make Atlantic Yards/Pacific Park a "huge win," given the concept, location, and demand. 

A "huge win" for that real estate company (which may or may not be Greenland USA), because the predecessors made the land and infrastructure investments, and the new owner will have a more modest cost basis. Whether it will be a huge win for the public, or the borough/neighborhood, is another question.

Other comments

From Peter Krashes:

In his autobiography Daniel Doctoroff says he saw Atlantic Yards / Pacific Park as a "crazy risk," and as the project has very slowly moved forward, that has proven to be the case. But the risk wasn't just born by FCR; it was born by the community nearby and the public generally. The question for me is why Doctroff and later Pinsky and others in the Bloomberg administration let an approval process unfold, (not just once!), which assessed the value of the project based on the assumption it would be completed in ten years. Those same approvals were linked to environmental reviews with the same ten year assumption. The project, always of questionable feasibility, is a twenty to thirty year project -- if it ever is completed. It is a trope that the opposition is responsible for the project's delay. I think the problem is that government was overly optimistic, and in some ways still is. Why?

From Daniel Goldstein:

Yup, apparently the need by Ratner folks to diminish the opposition and spread the lie that the opposition was “very small, very localized” remains still today. But it’s just fake news. Sad.