Did the new 485-x tax break make railyard development sites more viable? Site 5, too? More sunlight needed on transactions.

The new 485-x tax break may not be as lucrative as the predecessor 421-a tax break, even if limited in the extension that could apply to the B5 tower, as I wrote earlier this week (link).

But does 485-x now make development of the six tower sites, offering nearly 3.5 million square feet of development rights over the Vanderbilt Yard, more viable?

Likely, because the certainty of a tax break--even if less lucrative than its 421-a predecessor and requiring deeper affordability--offers potential developers a way to fill in their spreadsheets. 

That's surely part of why Empire State Development (ESD), the state authority that oversees/shepherds Atlantic Yards/Pacific Park last week said that a new developer for the six railyard sites, offered as collateral in a foreclosure auction, was expected to emerge. 

The Real Deal since reported that The Related Companies, a major firm that developed Hudson Yards, is apparently the candidate.

Of course, the cost for the "land"--the development rights--is another factor, along with the cost of a platform, interest rates, and more.

Looking at the sites

As approved in 2006--and, who knows, perhaps subject to revision--the six railyard sites (B5-B10) encompass about 3.49 million buildable square feet (bsf).

What's the value?

How much is buildable square footage worth now?

Sean Kelly, a partner at brokerage Ariel Property Advisors, told the Real Deal, in Whole new world: How NYC values 421a, 485x sites now, of two sites that had traded for about $200 bsf, less than the $200-$250 bsf under 421-a. 

Note that the article doesn't identify the location or size of those sites, which is important, given that 485-x imposes more requirements for affordability and wages for larger sites.

Then again, Atlantic Yards/Pacific Park likely offers a premium, given proximity to transit and established neighborhoods, while also adding costs for the platform required to enable the six towers.

Keep in mind that another brokerage, Terra CRG, reported that development site transactions in Greater Downtown Brooklyn last year--perhaps grandfathered into 421-a--averaged $281/bsf, including two neighborhoods with larger sites: Downtown Brooklyn, at $307/bsf and Gowanus, at $274 bsf.

Perhaps the Atlantic Yards/Pacific Park location offers at least a 20% premium, so $240/bsf.

So, if we take that guesstimate of $240/bsf, that means the development rights over the railyard, including the new requirements for affordable housing, at a weighted average of 60% Area Median Income (AMI) and construction worker wages, could be worth nearly $838 million.

That's a significant sum. 

The cost of encumbrances

We might eliminate the expected cost of affordable housing, given that it should be baked into the price per buildable square foot--at least if that $200 bsf estimate applies to sites of this size.

But those parcels come with encumbrances, starting with the $286 million in debt to EB-5 investors, who were offered the sites--technically a development company's interest in those sites--as collateral. Surely the "bid" from a developer like Related would want the parcel at a discount, likely a significant one.

Also, the two-block platform over the Vanderbilt Yard, a precursor--in two stages--to construct the six towers, likely would cost more than $300 million. That adds a significant cost for a site, compared to terra firma.

Then there's payment to Metropolitan Transportation Authority for development rights, which, by my calculation, had reached $96 million by last year, with $77 million more due, in payments of about $11 million a year, through June 2030.

And then there's the question of the $2,000/month fines for each affordable housing unit not delivered by May 2025. With 876 units to go, that would cost $1,752,000 per month and more than $21 million a year. 

It's hard not to imagine any new developer would try to extend, eliminate, or otherwise renegotiate that obligation.

Crunching the numbers?

I'm not the expert, and we don't have all the information,  but it might even have been be plausible--assuming more certainty about financing and the affordable housing fines--for Greenland USA to pay off the EB-5 debt and proceed with development or sell development rights to another developer, especially if that's paired with Site 5, as discussed below.

But the foreclosure started before the 485-x tax break passed.

So it seems like Greenland may be out of the picture for the railyard sites, and the "lender"--an affiliate of the U.S. Immigration Fund, which managed the EB-5 loan by recruiting investors--is managing the foreclosure process and finding a new developer acceptable to ESD.

More sunlight

This is all an argument for having some third-party experts acting in the public interest, as then Atlantic Yards Community Development Corporation Director Jaime Stein proposed in 2018, that ESD undertake a "planning and financial evaluation" of Site 5 before anything is built there.

That could extend to the railyard sites as well, rather than let it all be decided behind closed doors.

What about Site 5?

Keep in mind that Site 5 is approved at 439,050 square feet. At $240/bsf, that's $105.4 million. That's buildable today, albeit not necessarily for residential space without a change in project plans.

However, there's a longer gambit at stake. Since 2015-16, the developer has floated plans to move most of the bulk of the unbuilt B1 flagship tower, which original architect Frank Gehry had dubbed "Miss Brooklyn," across Flatbush Avenue to Site 5, creating a giant, two-tower project.

At 1,142,052 bsf in total, that new version could be worth, at $240/bsf, $274.1 million--a big payday, especially if affordability levels simply match the 485-x tax break. There's no cost for a platform, just to go through the public process to transfer development rights.

(Then again, do families living in affordable housing want to live in a 70-story building, as AY CDC Director Ron Shiffman asked last week?)

That's worth waiting for, at least if they can get ESD to agree to revise project documents.

Note that, in a rather curious and seemingly orchestrated move, with no discussion about scale and affordability, the Chair of the advisory Atlantic Yards Community Development Corporation last week invited ESD to ask Greenland to provide a new plan for Site 5.

Of course, any re-start of the project would come with calls for deeper affordability than currently allowed, even under 485-x, which could lower the land value.

New tax break not for everybody

Note that there are different flavors of 485-x, with different wage requirements required at different locations.

Albany’s flawed new housing tax break just killed a magnificent Brooklyn project, wrote New York Post columnist (and megaphone for real estate) Steve Cuozzo perhaps conclusorily, referring to the River Ring project in Williamsburg proposed by Two Trees just north of its Domino Sugar site.

Wrote Cuozzo:

Although 485-x doesn’t require a higher percentage of affordable units than 421-a did, it fatally lowers the income level for tenants to be eligible for affordable units to far below what they were under 421-a: from 130% of so-called “area median income” in the past to between 60% and 80%.

Since permissible affordable rents are based on those incomes, developers such as Two Trees would receive significantly less rental income from its apartments.

Um, even the real estate industry acknowledges that units at 130% of AMI were a mistake. Two Trees also cited the wage requirements.

The Real Deal added:

Under 485x’s zone A, which includes the River Ring site, rental projects with more than 150 units must set aside 25 percent of units for households earning an average of 60 percent of the area median income. Two Trees had already agreed to that, but the new program also caps the income bands at 100 percent of the AMI, down from 130 percent.

But developers calculate other factors, too. Company spokesman Dave Lombino "also acknowledged that if interest rates fall or the lending environment for ground-up development improves, River Ring’s prospects could change."

Politico reported on a similar situation in Queens, Durst halting plans for final piece of Halletts Point in light of new tax break, citing wage and affordability requirements.

Gaming the system?

Will developers try to game 485x to avoid wage, affordability rules?, TRD reported, citing the possibility that developers might built 149-unit buildings to avoid the requirement of 25% affordability at an average of 60% AMI, and to pay construction workers certain wages,

That seems very unlikely with Atlantic Yards/Pacific Park, given the large size of the buildings approved.

  

Then again, it's a "never say never" project. So expect some more twists.