Atlantic Yards: the financial salt mines
Mix up the uses! Mix up the incomes! Mix up the numbers!
— proposed to rise in Brooklyn. My post triggered first a telephone call and then an extended email exchange with Norman Oder, whose monomaniacal blog seeks to document, and serve up for public view, anything and everything to do with Atlantic Yards.
As Mr. Oder himself explains, he’s filling a niche on the journalistic ecosystem:
Instead, Atlantic Yards–even though the activism and blogging and independent journalism has had some effect—Atlantic Yards still does not get reporters looking much beyond the surface.
That’s left room for me.
I’ve dug into Forest City Ratner’s pattern of campaign donations. I scoured the state’s blight report—the highly questionable blight report—I’ve shown how their analysis of crime around the project site just isn’t believable. I’ve gotten documents from city agencies that show that Frank Gehry, the project architect, is working on another Forest City Ratner project across the street. Never announced. And I source what I do—it’s a blog—so my work is checkable.
Mr. Oder has been highly critical of Atlantic Yards, as are many grass-roots Brooklyn bloggers and some local activists, even as much of New York City’s and New York state’s elected officials favor the property.
For myself, regarding the property as an entirety, I don’t have a view — it’s so enormously complex and charged an issue I’m more than happy to leave those honors to those who’ve studied it at length — but I do believe in good process, full disclosure, and informed stakeholder commentary. So, when Mr. Oder obtained a set of financing schedules delivered to the Empire State Development Corporation, I offered to give him a quick read on what the schedules say, imply, invite, and omit. Mr. Oder, as is his wont, quoted me in his extended post on the subject, on which he also posted the actual schedules themselves.
The ESDC released three pages dated 10/10/06 and 10/11/06, but with no explanation for the assumptions behind the numbers. I showed them to David A. Smith, an affordable housing expert in Boston, who’s paid close attention to the Atlantic Yards plan.
(Readers are strongly encouraged to read Mr. Oder’s post in its entirety, downloading and printing the schedules before reading further. They’re fascinating and will make the ensuing exposition much easier to follow.)
I will take the liberty of quoting myself (excerpts from Mr. Oder’s post, including my quotes, are in Palatino linotype):
It’s really smart to quote myself, isn’t it? Why yes, it is!
Assemblyman Jim Brennan’s effort to get the Empire State Development Corporation (ESDC) to release the Atlantic Yards business plan provided by developer Forest City Ratner reaped some results yesterday, but not nearly enough to evaluate the project.
This property — any public-private partnership — needs to be evaluated in two ways by the two different large-scale interests involved:
- The developer is evaluating for financial feasibility and reward-risk ratios.
- The government is evaluating whether it is achieving value for money by securing the best
“These cash flow schedules are like a Japanese landscape watercolor; fascinating and evocative in their own right but only lightly drawn,” he wrote in response.
More evocative than descriptive
“They make one hungry for more detail, without which it is impossible to have a properly informed opinion about either the expected profit the developer may make relative to the risk, or whether the public is receiving fair public benefit for the public resources contributed.”
Here’s the first problem. Even without considering whether the information is comprehensive for review, the same information may be used in two different but internally consistent schedules, but one schedule does not suffice for both. The developer provided a partial, developer-oriented schedule. Fine, but to reverse-engineer from these outputs back to a government benefits schedule is fiendishly tricky, if not downright impossible.
Meanwhile, the tenacious Mr. Oder poked some information holes of his own:
These projections are air, not cheese
They also show that the new arena would easily pay for its operations; as sponsorship revenue, starting at $31.2 million annually, would nearly cover operating expenses. (That revenue would include $20 million a year from the Barclays Center naming rights deal.)
Thus, non-basketball events, ticket surcharges, and other revenue would help offset heavy losses currently experienced by the Nets. Develop Don’t Destroy Brooklyn called it “a publicly subsidized golden parachute.”
Beyond that, the documents seem to lowball the developer’s revenues. There is no figure assigned to non-box/loge tickets to Nets games—seemingly a significant source of admission revenues.
From a sponsor’s perspective, any financial transaction offers three distinct types of flows:
Pick one of three routes
- Costs, which may include legitimate fees paid to entities affiliated with the developer.
- Debt service on loans, usually but not categorically from third parties (affiliates may lend too).
- Equity yield to capital providers, which normally involves judicious use of OPM financing.
As I pointed out to Mr. Oder, even presuming —as I do — that everything behind the schedules is on the up and up —
This is on the level, isn’t it?
the schedules released tell us only about the third of those flows. Debt is omitted, as is any discussion of those potentially provocative fees:
Smith likened the issue of fees to affiliates—and Forest City has created several corporate entities for this project—to the financing for Hollywood films, where the net revenues are significantly lower than the gross revenues because of fees charged by the studio. “Knowing the net cash flows without knowing the fees is like learning that the Nets scored 89 points last night, without knowing who they were playing, what the other team’s score was, and whether they won or lost,” he said.
Makes you want to know who’s got what, doesn’t it?
The capital stack is also significant other ways. Debt is normally cheaper than equity, and if debt can be placed at a Weighted Average Cost of Capital lower than the ‘raw’ Internal Rate of Return (IRR), then the return on equity (ROE) rises:
Smith said that the record-setting recent deal for Stuyvesant Town/Peter Cooper Village was equivalent to a 5% IRR if it’s presumed that the net operating income (NOI) won’t rise. Obviously, that NOI will rise, he said, “but I doubt that the unvarnished Stuy Town IRR (before considering debt financing) would be as high as 9.6%.”
Meanwhile, a cash flow is called a pro-forma for a reason — it’s a speculation, a projection, an informed guess.
Where we go for wisdom
It is not, in any way shape or form, a promise of future success. Lots of things could go wrong.
Nothing can go wrong … go wrong … go wrong …
In other words, Atlantic Yards might offer dramatic returns—and for good reason. “At the same time, large-scale investors may well find a project like Atlantic Yards more risky, so the premium over a safe rate that they would demand could well be higher,” Smith said. “In short, I don’t know whether 9.6% is a rich or poor rate even for the raw equity capital considered in the abstract, much less what equity could be raised from outside, nor how the deal pencils for the sponsor.”
Come to AHI for equivocations! Yet cash is not equivocal; cash is quantitative.
Forest City Ratner [Or its investor partners -- Ed.] has already invested $230 million. “The $230 million of capital already invested is a jaw-dropping sum, especially since we are four years into the transaction and it has not closed,” Smith observed.
Brother, can you spare $230,000,000?
“Very few entities could put up that much capital for that long. Setting aside whether one likes or dislikes the process or the property, no one should underestimate how few sponsors could attempt it, nor how many fewer would attempt it.”
Don’t try this at home
Adds the careful Mr. Oder:
(The city and state have pledged at least $305 million in direct subsidies for infrastructure and other costs, and the state has agreed to override zoning and take property by eminent domain, significant boosts for the developer.)
Yes, they are significant boosts. They are also not cash for this development. The capital requirements are amazing:
Even the second time, $230 mill is a chunk of change
Smith called the lag between first outflow of capital, in 2004, to net inflow, in 2013, a dramatic one. “A tremendous amount is riding on expected residual value in a decade,” he said. “I cannot imagine the developer will not have tried to lay a large portion of that off on outside capital sources.”
Not that there’s anything wrong with that!
Almost certainly, Forest City Ratner took in a deep-pocket institutional partner, and while those capital sources are often rapacious, they are patiently rapacious:
I’ve got all the time in the world
So it is all but impossible not to conclude that very critical financial structuring is contemplated, most likely already agreed, and not being displayed.
There are several unexplained gaps in the documents.
You didn’t ask the right questions!
For example, there’s no cost and value assigned to the retail space developed. Nor are there numbers for the hotel. Smith speculated that the hotel might be “fully net-leased to an outside party,” but noted the absence of any terms explaining that.
Also, there’s no revenue assigned to parking until the 2012-13 season, even though the arena is expected to open three years earlier. Even if the interim surface parking, rather than underground garages, would supply parking over that stretch, surely there would be revenues. The projected revenue of $238,000 for the 2012-13 year is paltry. Smith conjectured that it might come from a contemplated lease/operator agreement.
“Its origin … and purpose … still a total mystery.”
For the record, I have no past, current, or contemplated engagement or professional interest in Atlantic Yards; I’m doing this just for personal and ecosystemic satisfaction.
“It is well recognized that you have an unusual sense of fun.”