Revealed: Without construction at Site 5, May 2020 deadline looms for developer to pay NYC for its development rights (estimate: just $1 million)

Greenland Forest City Partners presentation Jan. 2016
shows bulk shift to 250-foot Site 5 from B1 site. The
appraisal covers the 2006-approved variation.

Guess what: New York City might get paid $1 million-plus if construction doesn't start at Site 5-- currently home to Modell's and P.C. Richard across from the Barclays Center--by next May.

(Psst: construction almost surely won't start by then.)

Or, perhaps, the city might not get paid. Or maybe--though far less likely--the developer will simply forfeit development rights. Who knows? After all, Atlantic Yards/Pacific Park is an ever-shifting project.

The city retained development rights (as I wrote two days ago), but the unbuilt square footage ultimately doesn't have significant value, given that the appraisal was on terms seemingly generous to the developer. Still, this obligation has never been publicly discussed; it was disclosed thanks to a Freedom of Information Law request.

At right, Site 5 at 350 feet

Big plans, slowed

Let's back up. Developer Greenland Forest City Partners has big plans for Site 5, named for its position in the Atlantic Terminal Urban Renewal Area, or ATURA: a giant, two-tower complex far larger than the substantial tower approved in 2006 as part of the Atlantic Yards plan.

That new bulk would be based on the transfer of development rights from the unbuilt tower (B1, aka “Miss Brooklyn”) originally planned for what’s now the arena plaza. (See graphic near top.)

The Site 5 tower, once proposed at 350 feet (see image at left) was approved in 2006 at 250 feet, but the bulk shift could enable a project with towers stretching 785 feet. Alternatively, a wider but shorter office building has been contemplated, at similar bulk.

But that bulk transfer, and the lengthy public process needed to approve it, has not begun, in part because P.C. Richard earlier this year won the initial round in a lawsuit against original developer Forest City Ratner/Forest City New York, claiming that it was promised space in the future tower.

From appraisal

That lawsuit has been appealed, though it could presumably be settled financially. Even if the lawsuit were resolved, the public process to approve the bulk transfer surely would take a year.

Deadline approaches

So Greenland Forest City Partners faces a 5/12/20 deadline—ten years after the project Effective Date, 5/12/10, surely once seen as far-off—to either start construction at Site 5 or pay New York City for its retained development rights.

That payment, the previously undisclosed appraisal shows, would be just $800,000, plus--from my reading of the associated City Participation Agreement--3% interest calculated for more than nine years. That should exceed $1.05 million.

Why such a small total? Well, the appraisal, as described below, assessed the parcel disregarding the state's initial override of zoning for a larger building, then subtracted the developer’s expected costs. (The contemplated bulk transfer from B1 is also outside the appraisal, which was conducted in June 2012 for a 3/3/10 valuation date.)

Does Greenland Forest City expect to pay, or reach any other resolution? A representative did not respond to my query.

2010 assessment

Documents below illuminate the issue: the appraisal itself, the City Participation Agreement governing repayment terms for this and other city properties, and correspondence between representatives of Forest City and the New York City Economic Development Corporation (NYC EDC).

Site 5 was said to have 323,598 square feet of development rights overall, given a 1.24 acre parcel (53,933 square feet) and a buildable Floor Area Ratio (FAR) of 6, meaning a multiple of a fully built-out parcel. 

While P.C. Richard owns and occupies a store with 30,300 square feet and Modell's leased 16,980 square feet from original developer Forest City Ratner (now part of Brookfield), the appraisal did not subtract that square footage from the overall buildable area.

Rather, the appraisal calculated the costs to achieve the exit of the two retailers, and subtracted that from the overall value of the then unencumbered buildable square footage.

The overall value, $35.6 million, assumed $660 per square foot of land, or about $110 per buildable square foot. That may have been reasonable in 2010, but seems generous in hindsight, given that the price per buildable square foot for the project and other sites nearby has steadily risen.

Appraisal; click to enlarge

As noted yesterday, other property in the project site was assessed in 2009, with comparables mainly between $90-$105 per buildable square foot. By contrast, when the Greenland-Forest City Ratner deal was announced in December 2013, the project's overall price per square foot was $180-$220.

Since then, of course, the price per buildable square foot in the Downtown Brooklyn area has rocketed further, reaching between $300-$400 per square foot by July 2018, according to this article.

Assume existing zoning

More importantly, as with the other city properties assessed, the appraisal assumed the zoning that existed before Atlantic Yards emerged.

That means it ignored that New York State, overriding city zoning, had already permitted at Site 5 a building with 439,050 square feet, about one-third more than current zoning allowed.

That suggests another $12.7 million in appraised value, even at the modest $110/psf.

So the screenshot from the appraisal that declares a Zoning Change "Not likely" seems absurd, since the zoning override had already been approved.

(As I wrote yesterday, a separate appraisal conducted by the Metropolitan Transportation Authority for its Vanderbilt Yard development rights used the expected future bulk, not the current buildable square footage.)

The contours of the deal

An 11/19/15 email from Forest City’s Winthrop Hoyt to NYC EDC’s Jeffrey Nelson (and copied to colleagues at Forest City and Greenland USA) set out the deal, shortly before Forest City, then an active participant in Greenland Forest City Partners, started pursuing the new Site 5 plan.

“I wanted to give you some background as to the agreement that we reached with EDC on this topic some time ago,” Hoyt wrote. “The City owns the development rights above the current buildings on Site 5 – approximately 270,000 sf based on the underlying zoning. The City agreed to contribute these development rights, as well as certain other properties and benefits (e.g, certain streets, two parcels on the arena block, PILOT benefits, etc.), to the project.”

(The square footage cited was incorrect. The email is part of the first file, below.)

The contours of the appraisal

CBRE, the appraiser agreed on by both parties, completed the retrospective appraisal on 6/29/12.

The appraisal used comps from 2009—a DUMBO site selling for $97.73 per buildable square foot, a Downtown Brooklyn/Boerum Hill site selling for $112.96 psf, a Williamsburg site for $98.35 psf, and a Downtown Brooklyn site for $95.32 psf.

A Greenpoint site selling in December 2008 for $199.20 psf was cited, but the report noted the latter was more valuable as a waterfront site, and a “downward adjustment is necessary for weakening market conditions since this property went under contract.”

As noted, that resulted in a price of about $110 per buildable square foot, not far off the other appraisals cited yesterday.

Deducting costs

Forest City's Hoyt explained in an email, “The appraisal accounted for the appropriate value deductions that would be required to realize the value of the City’s air rights, namely, the buyouts of the fee interests of both Site 5 parcels (occupied by Modell’s and PC Richard), the cost of buying out Modell’s long-term lease, and certain development cost premiums caused by the site’s environmental status and proximity to multiple subway lines.”

So significant sums were subtracted from the $35.6 million total: $13.7 million to buy out P.C. Richard, an owner of one lot, plus $10.2 million—$6.7 million plus $3.5 million—to buy out Modell’s, a tenant. That totals $23.9 million.

The cost “associated with the Subway related infrastructure has been provided to us and totals $10,900,000," the appraisal stated. "We have not done any independent verification of this figure as it has reportedly been agreed upon by both parties to this transaction."

That left development rights worth just $800,000, before interest.

Presumably, if this deal were renegotiated or recalculated today, the numbers would change. The value per square foot would be much higher, based on current valuations. But the infrastructure costs, and the costs to buy out the retailers, also would be higher. So perhaps it’s moot.

The $13.7 million to buy out P.C. Richard was not much below an appraisal apparently conducted later. Aiming to avoid the condemnation process, Empire State Development in February 2016 offered to pay  P.C. Richard $15.1 million, a sum that seems low, given the value of the site for future development, as well as the importance of staying at the crossroads. No wonder P.C. Richard refused.

Deadline triggers possible payment

“The agreement,” wrote Hoyt, “also contains a provision calling for payment to the City if the developer fails to start construction of the project by May 12, 2020. In that scenario, we would either pay the City the value of the development rights or forfeit them back to the City. The agreement calls for the City to receive a 6.25% annual return on the value of the development rights and its other contributions.”

Hoyt attached the governing agreement, aka the “Atlantic Yards – City Participation Agreement,” to his email. “Realizing the complicated nature of this information, I’m happy to discuss it further at your convenience.”

It is complicated. In fact, I think the City Participation Agreement (below) indicates a different interest rate. While the Regular Accrual Rate is 6.25%, it only applies after the Construction Commencement Date, so the Primary Accrual Rate of 3% would instead obtain.

From the document:

"City Property Value" means, with respect to each City Property, the Net Appraised Value of such City Property, as such Net Appraised Value shall accrue with interest compounding annually: (i) at the Primary Accrual Rate from and after the Title Vesting Date until the date on which a Site Owner commences construction on the first Development Site containing such City Property (with respect to each City Property, the "Construction Commencement Date"); and (ii) at the Regular Accrual Rate from and after the Construction Commencement Date until the applicable Substantial Completion Date. 

(Emphases added)

At 3%, that would've been worth about $1.05 million after 9 years, as of March 2019. The Title Vesting Date was 3/4/10, according to this memo from Empire State Development.

Other options

The City Participation Agreement presents two options at the ten-year deadline, forfeiture of development rights or payment:

(e) If the Construction Commencement Date of the Development Site that contains the Site 5 Development Rights has not occurred on or prior to the date (the "Site 5 Deadline") that is ten (10) years after the Project Effective Date, then on the Site 5 Deadline, either:
(i) the Site Owner of such Development Site shall convey to the City the Site 5 Development Rights, and such Site Owner shall be deemed to have made a City Participation Payment to the City in an amount equal to Appraised Value of the Site 5 Development Rights, as such value shall accrue with interest compounding annually at the Primary Rate from the Title Vesting Date to until the Site 5 Deadline (the "Site 5 Development Rights Value"); or
(ii) if either (x) the Site Owner cannot effectively transfer the Development Rights to the City through a zoning lot merger and associated zoning lot development agreement, (y) the Site Owner is prohibited from transferring the Site 5 Development Rights to the City or (z) the Site owner otherwise so elects in a written notice delivered to the City prior to the Site 5 Deadline, then the Site Owner shall pay to the City an amount equal to the Site 5 Development Rights Value, and such payment shall be deemed to be a City Participation Payment for all purposes of this Agreement.

Feasibility of development

As of the time of the appraisal, according to CBRE, “In the subject’s neighborhood, speculative retail/office construction development is not considered feasible at this time.” That means “the highest and best use of the site, as vacant, would be to hold for future commercial development when economic conditions improve.”

To bolster that argument, CBRE included a paragraph from a land value appraisal report for an unrelated property that it had prepared in April 2010, illustrating the investment sentiment as of the retrospective value date:

With the onset of the national economic recession and the intensifying of the credit crisis, there has been significantly reduced demand for land sites. This is primarily due to the lack of financing for new development, although the likelihood of increased vacancy and lowered expectations for revenue growth have contributed to the reduced demand. Additionally, based upon our conversations with brokers, property values, and more specifically, land values, are seen to be down anywhere from 20-60% in today’s market. Importantly, the lack of financing, capital, equity and debt, along with the risk averse mindset in the marketplace, has further eroded value at the present time by limiting the number of potential buyers, and severely limiting those that are able to obtain financing and put up the required equity of somewhere between 40-50% in this market.

Improved economic conditions, and low rents

Presumably economic conditions had improved by June 2012, though speculative office/retail still probably comes with question marks.

Modell's lease description

Surely Modell's would like to stay, under the lease it had in place. Its 20-year lease expires 6/14/20, but contains three five-year renewal options, with the rent increasing from $43 psf to $48 psf next year, then two 12.5% jumps every five years.

That's fairly low rent by local standards. For example, the new owner of the Atlantic Terminal/Atlantic Center malls, in December 2017 predicted a rise in rents: “This is $30-$50 going to $100 per square foot.”

Presumably P.C. Richard also appreciates its location and ownership presence. That's why it wanted a replacement space in any future building.