Lessons from the Barclays Center: public benefits were overpromised but underdelivered; exaggerations gain more public support, according to an academic analyst.

Recently the Brooklyn Nets and Barclays Center tweeted an excerpt from Courtside Conversations, a podcast with in-arena host Ally Love, sponsored by arena ticketing partner SeekGeek.

A snippet of the 34-minute interview, with Queens-raised Brooklyn resident and BMX athlete Nigel Sylvester, praises the arena. 

"I've got nothing but love for the basketball scene that's growing here in Brooklyn, and to see how the community is galvanizing around the Nets," he tells Love.

After invoking The Block, the fan section, Sylvester says, "It's just awesome to see what the Barclays has done in the Brooklyn community, everything from the games to the concerts to the other events.... So yeah, keep doing the damn thing."

However, it's no rigorous assessment to observe that a big venue has lots of events, including home games, and people have fun there, especially since the Barclays Center is a publicly-subsidized and -supported venue.

Assessing the arena

So after ten years, the Barclays Center deserves some rigor. 

One example came in a 2019 paper, Do professional sport franchise owners overpromise and underdeliver the public? Lessons from Brooklyn’s Barclays Center, written by Geoffrey Propheter, who teaches in the School of Public Affairs at the University of Colorado Denver and was formerly the property tax analyst at the New York City Independent Budget Office. 

The answer is yes. 

And the failure of the public sector to assess accurately before or after the subsidy debate has costs, according to Propheter: "oversupplying subsidies, because an investment looks better on paper than what it would be in fact."

The paper was published by the International Journal of Public Sector Management in January 2019 and based on the arena's performance (and related statistics) over the first four years, through mid-2016, comparing it with promises and financial projections. 

Exaggerated promises gain more public support

Propheter's conclusion:

The franchise owner is found to have exaggerated the arena’s financial condition, under-delivered on its employment promises, and exaggerated the scope and timeliness of ancillary real estate development. Only promises of event frequency and attendance levels, measures of the public’s demand for the facility, have been met during the first three years.

Those metrics are all significant in terms of assessing the credibility of the developer, but they're not of equal importance in terms of the public interest. Also, as noted below, I don't think the event frequency goal was met. 

What does it mean? Propheter cordially suggests that lying advantages the team owner/project developer, which means the public loses:

Franchise owners have a financial incentive to overpromise public benefits, since subsidy levels are tied to what the public is perceived to receive in return. This case study demonstrates that the public sector should not take owners’ promises and projections of public benefits at face value. Moreover, the case study reveals that the public sector should put more effort into ensuring ex post policy and data transparency in order to facilitate benefit-cost analyses of such subsidies.

I'd add that it's not just the public sector that should be skeptical. The press should be, as well, but too often does not probe.

The cost of delay

And even if the developer--no longer Forest City Ratner, which is also no longer the franchise owner--does deliver on that ancillary development, there's a cost to delay, as Propheter notes: a "higher opportunity cost to the public." 

In other words, the public investment was based on certain expectations. Because those expectations were not met--because the developer's projections were generally endorsed by public officials, not rigorously evaluated--that public investment is far less valuable.

Writing before the pandemic, Propheter suggested the associated real estate project "will be mostly completed as planned but ten years late." That was worth skepticism then, and now even more so, since it's now more likely 20 years, if at all.

First promise: arena financials

Propheter notes that original developer Bruce Ratner, in an interview, projected annual profits, after operating expenses and debt service, of about $35 million a year--figures "generally consistent" with projections provided to bond investors.

That didn't happen. While operating revenue "generally exceeded expectations," operating expenses were far higher than projected. That meant net income was half that projected and, within the arena's first three years, limited profit and in one case a loss.

So income barely covered bond payments, far below the projected DSCR, or Debt Service Coverage Ratio. While Propheter doesn't say so, the implication is that the arena's bonds should not have gotten an investment-grade rating. 

A junk-bond rating, commensurate with the actual performance, would have increased the costs of financing, either preventing it from getting built or making it even harder for the arena operator to cover its costs.

Propheter notes that the arena's financial performance may improve, "but typically stadia enjoy novelty periods when first constructed." That said, there are potential new revenue streams unmentioned, some already implemented, such as additional advertising signage around the arena, sponsorships, and even gambling. 

And the Brooklyn Nets this year are filling the arena, at a higher price point, albeit with a much higher payroll. (It's unclear how many of the tickets are giveaways.)

Second promise: arena construction and operating jobs

After noting the general consensus "that sports relocate economic activity and by extension they relocate jobs, not grow job opportunities," Propheter uses a "crude model"--assessing employment statistics by zip code--that casts doubt that the arena created significant new jobs in the area.

What about construction jobs? Propheter says it's impossible to calculate, given Forest City's original projection of 15,000 job-years for the full project, and reports by the arena construction monitor that, while noting about 400 construction workers on site each month, did not specify hours worked. 

Regarding arena jobs, while Forest City said the arena would employ over 2000 workers, that's not borne out by statistics, and hours worked are variable.

The author concludes that post-subsidy transparency is crucial for evaluating whether the public got what was promised.

Third promise: number of events and attendance

Forest City's forecast of 204 annual events was accurate, Propheter writes, citing 210, 203 and 239 events in 2014, 2015 and 2016, with the latter increase due to the (short-term) arrival of the New York Islanders.

I'm not so sure about that.

That deserves a little unpacking, since, as shown in the screenshot at right, consultant Conventions Sports and Leisure, in a 2016 report to potential bond buyers, said the arena averaged 180 to 200 events a year.

Propheter's totals include at least 25 private events each year, but, without knowing how large they were, and their revenue potential, that's not too meaningful. A private fundraising event, for example, could occupy a small space in the arena, while a college graduation, however much it fills the arena bowl or even upper deck, won't generate significant concession revenue.

In other words, I think the arena has underperformed, not just the forecast of 204 events but the previous forecasts that were far more optimistic (or, rather, exaggerated), such as 226 (report by Forest City Consultant Andrew Zimbalist, 250 (Forest City’s bid to the MTA), and 235: (Forest City presentation to City Council).

Propheter notes that event attendance forecasts have also generally been met. Even so, I'd add that announced attendance for the Nets during the early years vastly exceeded gate count, which meant many people weren't paying and thus adding to revenues.

Fourth promise: the associated real estate development

Writes Propheter, "Notwithstanding hosting an additional professional sports team, a major benefit of the Atlantic Yards development according to public officials, community groups and some residents was the construction of new housing in general and affordable housing in particular."

Indeed, jobs and housing were far more important than hoops for many. Now that the owner of the arena company and team (Joe Tsai, after Mikhail Prokhorov) is different from the master developer of the associated real estate project (Greenland Forest City Partners, dominated by Greenland USA but formerly Forest City Ratner), the package deal has been decoupled, but that's not how it was sold to the public and to public officials.

But the project was delayed by lawsuits and the Great Recession, as well as changes in political leadership. The lawsuits, he suggests, might have beeen avoided by public officials "with better negotiating of project commitments and timelines, by requiring more transparency from developers, and offering citizens more transparency on project details."

Yes, and no. Maybe the lawsuit, for example, challenging the Metropolitan Transportation Authority's willingness to revise its deal with Forest City could've been avoided with better negotiation and transparency, but not the lawsuits challenging the project's reliance on eminent domain.

"There is also evidence that [Forest City] knew it could not deliver the ancillary development in the timeframe committed to when the project was approved by ESDC," Propheter writes diplomatically, citing Bruce Ratner's post-approval admission that  they couldn't build the project in ten years.

(That's a reference to Empire State Development Corporation--today Empire State Development, or ESD--the state authority that oversees/shepherds the project.)

There's even more evidence than that, such as statements by project principals like landscape architect Laurie Olin and Forest City Enterprises CEO Chuck Ratner (Bruce's cousin) that were nevertheless discounted in court after community petitioners cited them in challenging the project's environmental review.

Information asymmetry

Concludes Propheter:

The nature of the sports subsidy context in the USA and abroad is such that there is an information asymmetry between the public and private sector: team owners know more about the sports market than the public sector. This puts public managers at a disadvantage, since it undermines their ability to function as impartial policy advisers to elected officials.

That means that they need fairminded experts as a consultants, not hand-picked ones in the "consultocracy." 

I'd note that, unfortunately, ESDC has relied on consultants, like KPMG, that tell them what they want to hear, such as the notion that a ten-year buildout was "not unreasonable." 

So Propheter concludes with a plug for the Independent Budget Office, a non-partisan agency that is not subject to the political winds for leadership or funding. 

Though this creates "arguably the most politically insulated research agency in local government in the USA," Propheter notes that the IBO's work on Atlantic Yards was "ignored" by ESDC.

Actually it was worse--the state authority actively discounted it, as did Mayor Mike Bloomberg.

Also--unmentioned in this paper--the developer promised an Independent Compliance Monitor as part of the Community Benefits Agreement, the private contract purported to guarantee jobs, job training, affordable housing, minority hiring, and minority contracting, but never did so. And no elected officials pushed.

Are professional sports teams "red herrings"?

Propheter notes that profits from the Nets and the Islanders, over that initial period, were less profitable than concerts and college basketball, "presumably owing to the more favorable lease and concession terms government can negotiate with event promoters than with the major leagues."

I'm not sure that college basketball remains as successful--unless the arena gets extra pay for TV rights, because college hoops games can seem pretty empty.

Propheter concludes that "professional sports teams are red herrings in arena subsidy debates: government can deliver an entertainment hub that benefits taxpayers without having to participate in sports subsidy debates." 

Maybe, maybe not. The Brooklyn arena wouldn't have sold naming rights to Barclays without the TV and media appetite for NBA sports. Nor would as many luxury suites have been sold. So it's unclear whether a non-NBA building, however less costly to build, would've reaped enough revenues.

Political realities

"For subsidy opponents, the Barclays Center case is a reminder of the political reality that franchise owners with champions in political office are difficult to stop," he concludes. "Of course, without access to the subsidy decision process black box, we cannot be sure what steps public managers in New York City actually took to protect the politically vulnerable."

True, we don't know what steps they took, but we know some that they didn't take.

ESD, for example, could have asked for additional rent, as per a non-binding Memorandum of Understanding, when a second major league team became an arena tenant. It didn't. 

Similarly, ESD could try to enforce the fines for the missing Urban Room. It hasn't. And that suggests it won't hold current master developer Greenland Forest City Partners to its obligations to build 2,250 affordable units by 2025.

It's not even a question of "champions in public office." It's basic competence. ”There really is no accountability," declared Arana Hankin, ESD’s former Atlantic Yards Project Manager in 2014, disillusioned and candid after leaving for a fellowship. 

Public agencies, she said, failed to count estimated jobs and project agreements were "drafted to be as complicated and obtuse as possible.” New Yorkers, she said, should demand more from their government. That observation stands.