Atlantic Yards Becomes a Question Mark

brown 19 Atlantic Yards Becomes a Question MarkIn a Forest City Enterprises conference call last week, the top executives at the real estate developer took a decidedly solemn tone, addressing analysts and investors who have seen the company’s share price drop 92 percent in the past 18 months.

“I must confess, I’ve never seen anything quite like this,” Forest City’s president, Chuck Ratner, said of the financial crisis. “We believe conditions will worsen.”

With the financial crisis swallowing planned developments around the city, it has become very much an open question as to whether Forest City can actually build Atlantic Yards, the massive mixed-use development and new home for the Nets, planned for Brooklyn and headed up by its subsidiary Forest City Ratner Companies.

In a Forest City Enterprises conference call last week, the top executives at the real estate developer took a decidedly solemn tone, addressing analysts and investors who have seen the company’s share price drop 92 percent in the past 18 months.

“I must confess, I’ve never seen anything quite like this,” Forest City’s president, Chuck Ratner, said of the financial crisis. “We believe conditions will worsen.”

With the financial crisis swallowing planned developments around the city, it has become very much an open question as to whether Forest City can actually build Atlantic Yards, the massive mixed-use development and new home for the Nets, planned for Brooklyn and headed up by its subsidiary Forest City Ratner Companies.

Forest City executives, in the conference call and in statements, insist they can, but confident declarations of a forthcoming groundbreaking are now a relic of a different era, supplanted by vague vows of commitment.

“We remain committed to this,” Mr. Ratner said in the call. “When we get—and we believe we will—successfully through the last of the litigation in 2009, we’ll evaluate the market at the time, and see what our next steps are.”

Bruce Ratner, the Brooklyn-based cousin of Chuck Ratner who runs Atlantic Yards, seems to be rushing to patch a leaky dam. According to multiple people familiar with discussions, his subsidiary company, Forest City Ratner, is attempting to cobble together extra money; trying to speed up tens of millions of dollars it is owed by public entities; delay tens of millions in payments it owes to both the public and private sectors; and tack on new subsidy programs for the housing piece of the project. Earlier this month, Bruce Ratner abruptly shut down preliminary construction efforts related to the NBA arena in an apparent attempt to preserve cash.

At a glance, Atlantic Yards would certainly seem a prime candidate for collapse. The project had an unusually low margin of return back in 2006—according to state and Forest City figures from the time, at the height of the real estate boom—as Mr. Ratner slathered on promises and concessions in an attempt to win political support. Since, several key assumptions changed in Mr. Ratner’s disfavor, surely challenging the project’s financials.

For now, with Forest City still planning to build at some point, the question becomes how long the developer can keep doling money out without seeing any come back in. Forest City is awaiting what is likely the last major court challenge to the use of eminent domain, with a decision expected in the first half of 2009. But even if that concludes in its favor, as many legal experts expect it will, the developer may very well have an additional wait ahead of it. At this point it is unclear—many would say unlikely—that in six months to a year, investors would be willing to provide the nearly $1 billion in bonds needed for an arena or other financing for high-rise residential developments.

All the while, the company is signing checks. Bruce Ratner bought the Nets in 2004 for the purpose of moving them to a new arena at Atlantic Yards. For now, paying rent in someone else’s arena, Forest City reported losses of more than $30 million on the Nets in the first nine months of 2008.

 

THE FINANCIAL CRISIS and project viability aside, lawsuits challenging the use of eminent domain have held back any construction on Atlantic Yards to date. But, for the first time since the state approved the project, an end to the major legal challenges seems to be within Forest City’s grasp, an act that would allow for construction to begin if only the company could raise the money to do so.

After failing in federal court, owners and tenants in the project’s footprint are contesting eminent domain in state court, a long-shot bid given that New York State law is generally regarded as relatively favorable to the state on eminent domain issues.

In the process of fighting the project through the slow-moving judicial system, the opponents have scored a perhaps unintended victory with Forest City’s financials.

In addition to the constant losses on the Nets during the two-plus years of legal challenges, construction costs have skyrocketed; the costs of financing have jumped (for those that can obtain any financing); demand for new office space has fallen precipitously; housing prices are on their way down; and low-income tax credits are significantly less valuable than they were in 2006.

One example on which Forest City has released hard numbers is the Frank Gehry–designed arena: Bearing a price tag of nearly $680 million in 2006, according to company documents, the developer said earlier this year that its cost estimate had soared to $950 million.