Only two (of five) city properties contributed to project might prompt payment. And that's not so likely. City tax relief also might prompt payment. Also constrained.
As I wrote three days ago, four New York City-owned parcels--two streets, one building, and one piece of land--contributed to Atlantic Yards/Pacific Park were appraised at under $2.3 million.
The details come in a document (bottom) called the City Participation Agreement negotiated by the New York City Economic Development Corporation in 2009, as the project went through its second round of state approvals. Notably, recovery can be achieved only from a so-called "Participating Site."
There won't be many such sites. A Participating Site is defined as any Development Site other than an Exempt Site. But most such sites are exempt.
For example, the arena is exempt. Any residential building with 21% or more affordable housing is exempt. And--wild card--any building "otherwise so designated by the City" is exempt.
In other words, the only Participating Site built so far is the 550 Vanderbilt condo building (B11). The other three residential buildings contain 50% or more affordable housing. Future residential buildings, in the next several years, likely will contain at least 25% affordable housing, at least under the current Affordable New York program.
City negotiators might not have anticipated that. At the time of the negotiation, on Block 1129, two of the four buildings (B11, B12) were to contain condos, and B14 was to be in 80/20 building, with 20% of the units affordable. Only B13 was to contain 50% affordable units.
On the arena block, one of the four towers was to contain office space and another was to be an 80/20 building, as shown in the chart at right.
Participating Site at arena block?
Repayment seems less likely when we look more closely at the Participating Sites. For example, the City Property Value of Block 1118, Lot 6--all of $220,000--would be compensated only by a Participating Site that contains Tower B1, originally planned to loom over the intersection of Flatbush and Atlantic avenues, including that parcel.
But B1 doesn't exist and won't exist.
The developer at Site 5, catercorner to the arena, plans a giant, two-tower complex far larger than the substantial tower approved in 2006. That new bulk would be based on the transfer of development rights from the unbuilt B1 (aka “Miss Brooklyn”).
So, might the value of Lot 6 be compensated if and when the B1 bulk is transferred to Site 5? That's unclear. What if Site 5 contains affordable housing? (Would the cost of litigation be worth $220,000, on either side?) And, as explained below, the payment would start only after a certain return threshold.
One Participating Site at Block 1129
On the southeast block of the site, Block 1129, each of the four towers could be a Participating Site, required to compensate 25% of the City Property Value of Pacific Street between Carlton and Vanderbilt avenues. The street was appraised at $230,000.
Those appraisals seem generous to the project developer, as is the appraisal that seemingly requires payment of barely $1 million for Site 5 development rights, as I wrote two days ago.
With Site 5, it looks--on the face of it--that the developer might be obligated to pay, though we we can't be sure.
But appraisals do not guarantee payment. Of the other five parcels, however, only two are even eligible to generate payment, while three have been conveyed gratis.
Regarding those two eligible parcels, however, there are significant question marks and roadblocks.
First, most buildings in the project will be exempted from having their profits diverted for such payments.
Second, only after significant returns--as of now unlikely, I suspect--would the diversion of profits even begin. Moreover, the tower assigned to contribute to payment for one parcel won't be built.
Looking at the City Participation Agreement
The details come in a document (bottom) called the City Participation Agreement negotiated by the New York City Economic Development Corporation in 2009, as the project went through its second round of state approvals. Notably, recovery can be achieved only from a so-called "Participating Site."
There won't be many such sites. A Participating Site is defined as any Development Site other than an Exempt Site. But most such sites are exempt.
For example, the arena is exempt. Any residential building with 21% or more affordable housing is exempt. And--wild card--any building "otherwise so designated by the City" is exempt.
In other words, the only Participating Site built so far is the 550 Vanderbilt condo building (B11). The other three residential buildings contain 50% or more affordable housing. Future residential buildings, in the next several years, likely will contain at least 25% affordable housing, at least under the current Affordable New York program.City negotiators might not have anticipated that. At the time of the negotiation, on Block 1129, two of the four buildings (B11, B12) were to contain condos, and B14 was to be in 80/20 building, with 20% of the units affordable. Only B13 was to contain 50% affordable units.
On the arena block, one of the four towers was to contain office space and another was to be an 80/20 building, as shown in the chart at right.
Ineligible parcels under the arena
City land for the arena itself was free, though not the full arena block.
"For the avoidance of doubt," the document states, "the City Property Value of the Arena Block Streets"--Fifth Avenue between Pacific Street and Atlantic Avenue, and Pacific Street between Fifth and Sixth avenues--"and the FDNY Parcel shall not be included in the Contributed Property Value of any Participating Site."City land for the arena itself was free, though not the full arena block.
In other words, they're free, a bonus for the arena and the adjacent towers. The streets were appraised at $310,000 and $360,000, while the FDNY parcel was appraised at $1,155,000, all quite lowball by my estimates.
Participating Site at arena block?
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| From 2006 Blight Study |
But B1 doesn't exist and won't exist.
The developer at Site 5, catercorner to the arena, plans a giant, two-tower complex far larger than the substantial tower approved in 2006. That new bulk would be based on the transfer of development rights from the unbuilt B1 (aka “Miss Brooklyn”).
So, might the value of Lot 6 be compensated if and when the B1 bulk is transferred to Site 5? That's unclear. What if Site 5 contains affordable housing? (Would the cost of litigation be worth $220,000, on either side?) And, as explained below, the payment would start only after a certain return threshold.
One Participating Site at Block 1129
But only one of those towers, 550 Vanderbilt (aka B11), would qualify, as opposed to the 2009 projection of three towers, as described above.
The 535 Carlton (B14) rental tower is 100% affordable. The two towers in between (B12 and B13), expected to start next year, should contain at least 25% affordable housing.
Interest payment required
With all parcels, the property value would be compounded by interest. For example, the developer's payment for city-owned Site 5 development rights, if it happens, would include interest, thus lifting an $800,000 appraisal above $1 million.
Similarly, the "City Property Value" for the other parcels should exceed the Net Appraised Value, since they also include interest: first, at the Primary Accrual Rate (3%) from the Title Vesting Date (3/4/10) until construction start, then at the Regular Accrual Rate (6.25%) from construction through substantial completion.
What's the threshold?
Interest payment required
With all parcels, the property value would be compounded by interest. For example, the developer's payment for city-owned Site 5 development rights, if it happens, would include interest, thus lifting an $800,000 appraisal above $1 million.
Similarly, the "City Property Value" for the other parcels should exceed the Net Appraised Value, since they also include interest: first, at the Primary Accrual Rate (3%) from the Title Vesting Date (3/4/10) until construction start, then at the Regular Accrual Rate (6.25%) from construction through substantial completion.
What's the threshold?
That doesn't guarantee payment, though.
First, it doesn't look like profits from 550 Vanderbilt, for example, could repay the full City Property Value for Pacific Street on Block 1129. The "Contributed Property Value," with respect to each Participating Site on that block, would be just 25% of the City Property Value of the Block 1129 Streets.
So, as far as I can tell, 550 Vanderbilt revenues could pay for at most $57,500, one-quarter of the appraised value of Pacific Street between Carlton and Vanderbilt.
But that doesn't happen automatically. The agreement describes a complex set of calculations, in which profits on equity contributed would ultimate be used to pay off the city's property rights.
“At the time of the Atlantic Yards / Pacific Park “Master Closing” in December of 2009, Forest City negotiated with EDC... a participation agreement by which the City would be repaid the value of these contributions via waterfall‐based project cashflow sharing once the project achieves a 15% IRR [internal rate of return],” wrote Forest City's Winthrop Hoyt in an email.
That's a reasonably healthy return on the money invested.
That's a reasonably healthy return on the money invested.
The Internal Rate of Return escalation, and negotiation
But the repayments merely start, rather than are fulfilled, once a 15% IRR is achieved.
(Part of that requires an extremely complex set of calculations involving the developer's spending, known as General Allocation Costs, which I find indecipherable.)
The 15% IRR represents the "Initial Return Hurdle," with respect to a Participating Site. Once it's satisfied, the city gets 5% of net proceeds toward the City Property Value.
Then comes the "Intermediate Return Hurdle," which is 17.5% IRR. After that's satisfied, the city gets 20% of net proceeds.
Then comes the "Final Return Hurdle," which is 20% IRR. If that's satisfied, the city gets 50% of net proceeds, presumably until repayment is reached.
As documents released thanks to my Freedom of Information Law request show, the 15% IRR threshold represents a compromise. NYC EDC officials proposed a lower threshold, while Forest City proposed a higher one.
Then comes the "Intermediate Return Hurdle," which is 17.5% IRR. After that's satisfied, the city gets 20% of net proceeds.
Then comes the "Final Return Hurdle," which is 20% IRR. If that's satisfied, the city gets 50% of net proceeds, presumably until repayment is reached.
As documents released thanks to my Freedom of Information Law request show, the 15% IRR threshold represents a compromise. NYC EDC officials proposed a lower threshold, while Forest City proposed a higher one.
NYC EDC requested:
- 10% of cash flows after 12% IRR
- 15% of cash flows after 15% IRR
- the remainder after 18% IRR
In response, Forest City proposed:
- 10% of cash flows after 18% IRR
- 25% of cash flows after 20% IRR
- then 50% after 22% IRR
The compromise:
- 5% of cash flows after 15% IRR
- 20% of cash flows after 17.5% IRR
- then 50% after 20% IRR
Tax benefits
The City Participation Agreement also lists tax benefits provided by the city for Participating Sites, as long as they are on former city property, not the railyard, which represents state property.
As indicated in the chart below, those sites include towers around the arena and on the southeast block, Block 1129, but not--for reasons I don't understand--Site 5.
Those tax benefits include exemption from mortgage recording taxes (MRT), exemptions from sales taxes on the materials used in construction, and the use of PILOTs (payments in lieu of taxes) instead of paying property taxes.
Again, the notion of a Participating Site, one without more than 20% affordable housing, is crucial.
The numbers are not insignificant: nearly $2.7 million in potential PILOTs over 12 years for B11, 550 Vanderbilt, as shown in the exemplar graphic below. That tower does qualify as a Participating Site. But that depends on whether there's enough revenue to repay it.
Overall payments
"City Participation Payments," with respect to a Participating Site, represent the entire amount paid to the city, including the tax benefits and the land payment. Exhibit H below offers some sample calculations, which rely on assessments of the site owner's equity and those General Allocation Costs.
The City Participation Agreement also lists tax benefits provided by the city for Participating Sites, as long as they are on former city property, not the railyard, which represents state property.
As indicated in the chart below, those sites include towers around the arena and on the southeast block, Block 1129, but not--for reasons I don't understand--Site 5.
Those tax benefits include exemption from mortgage recording taxes (MRT), exemptions from sales taxes on the materials used in construction, and the use of PILOTs (payments in lieu of taxes) instead of paying property taxes.
Again, the notion of a Participating Site, one without more than 20% affordable housing, is crucial.
"Tax Value," with respect to a Participating Site, would equal to the sum of: (i) the Participating Site's PILOT Value; plus (ii) the Participating Site's MRT Value (if applicable); plus (iii) the Participating Site's Sales Tax Value (if applicable).
The numbers are not insignificant: nearly $2.7 million in potential PILOTs over 12 years for B11, 550 Vanderbilt, as shown in the exemplar graphic below. That tower does qualify as a Participating Site. But that depends on whether there's enough revenue to repay it.
Overall payments
"City Participation Payments," with respect to a Participating Site, represent the entire amount paid to the city, including the tax benefits and the land payment. Exhibit H below offers some sample calculations, which rely on assessments of the site owner's equity and those General Allocation Costs.
The total for the B1 site, suggested as an example, cumulatively represents $2.3 million after ten years, including both the value of the city property and the PILOTs. The only problem: B1 doesn't exist.
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