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.
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.
The rising costs have particular significance for Atlantic Yards, as its projected returns were apparently very marginal, especially for a development of this size.
A state-commissioned study by accounting giant KPMG, intended to replicate Forest City’s business plan in 2006, found that the internal rate of return—more or less the annual yield on an investment—was a mere 7.28 percent on the housing and office space component of the project, and just 5.09 percent on the arena. (In Forest City documents obtained in a lawsuit filed by Assemblyman James Brennan, the company put its own projections slightly higher, at 9.6 percent and 7.7 percent, for the mixed-use component and arena, respectively).
Risky, large-scale projects typically have much higher returns, and one of the bidders for the 26-acre West Side rail yards—a semi-comparable project on property also owned by the Metropolitan Transportation Authority—said the planned project’s internal rate of return was more than 15 percent.
TO EASE the financial pressures on the project, Forest City is attempting to change some terms with various city and state agencies, according to multiple people familiar with discussions.
The developer is due to owe the M.T.A. $100 million when it closes on the three-block Vanderbilt rail yards, an act that is slated to happen after the eminent-domain litigation is completed. But financing is nearly impossible to find and Forest City is hardly swimming in cash. Thus, according to one person familiar with talks, the developer has asked the M.T.A. to restructure the payments so it does not pay the full $100 million upfront.
The developer is seeking the converse from the city, which owes Forest City a total of $100 million in direct payments to be spread out over time. About $40 million of this sum has already been paid to Forest City, and according to multiple people familiar with discussions, the city is considering speeding up the payments on the balance.
As for the housing component, much of which is for families with low or middle incomes, Forest City is in discussions to add on additional affordable-housing programs or incentives beyond what it outlined in 2006, bringing greater subsidy to the apartments. According to the KPMG report from 2006, the developer outlined three main programs to subsidize the housing: a tax abatement program known as 421-a; the Federal Low-Income Housing Tax Credit Program, which is providing less valuable credits than it did in 2006; and tax-exempt bond financing through a middle-income-housing program set up by the city.
(Spokesmen for the M.T.A., Empire State Development Corporation and the city declined to comment on negotiations.)
And in terms of the private sector, the developer is seeking to extend a loan with Gramercy Capital on Forest City–owned property in the project’s footprint, slated to come due in February. The large bridge loan—a $152 million loan from Gramercy was listed in property records—was originally intended to be rolled into a larger financing package that Forest City would have obtained before construction started, according to an executive involved with the loan.
In a statement, Bruce Ratner expressed a commitment to the project.
“As the country weathers the worst financial crisis since the Great Depression, it should come as little surprise that there are real challenges to development,” he said. “With our partners we are working even harder to make sure Atlantic Yards goes forward. And we’re confident that it will.”
Indeed, there are some bright spots—Forest City claims it still has a commitment from Barclays Bank for naming rights, a sum reported at about $20 million a year that could be financed to bring in more money, for instance. But, overall, the risk of Atlantic Yards has become quite apparent in the past two years, as the low projected returns were revealed and the price tag increased, if the original numbers are to be believed.
“Had those numbers been disclosed way at the beginning, somebody could have said, ‘Hey, you’re way off,’” said Mr. Brennan, the Brooklyn-based assemblyman who forced disclosure of Forest City’s business plan for the project. “Had they been disclosed in 2004, or had there been an authentic public process … and a transparent approach that included the community, I think there would have been an immediate recognition that the [viability of the] affordable housing was problematic.”
ebrown@observer.com
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