Atlantic Yards, Finance Footrace

c brownatlantic yards 1 Atlantic Yards, Finance FootraceDaniel Goldstein was sitting in his Prospect Heights condo Friday when an email hit his inbox. One of the last remaining holdouts in the footprint of the Brooklyn-based Atlantic Yards project, Mr. Goldstein was informed by the courts that his challenge of the use of eminent domain had been rejected.

Relatively unfazed, he did what he’s done now many a time before: He got in touch with his attorney, and drafted a press release in which he vowed an appeal and cast doubt on the developer Forest City Ratner’s claims that a groundbreaking was near.

“I felt disappointed, but it’s like there’s dual realities—you have the court saying go ahead with eminent domain,” he said. “At the same time, there’s a building suspension of disbelief that they’re going to do what they said.”

Disbelief or not, the clock is ticking. Forest City Ratner has until the end of the year to get financing for the arena, the key part of Atlantic Yards, at which point the cost of doing so will rise substantially for the firm, headed by Bruce Ratner. The firm is professing new confidence, saying it will be able to secure financing and get shovels in the ground. But there are still many balls in the air, including negotiations with the city and M.T.A., and the uncertainties warrant keeping the Champagne in storage for quite some time to come.

It’s now been two years and five months since a key state board approved the $4 billion project, which envisioned a new Frank Gehry–designed basketball arena for the Nets and 6,400 apartments near downtown Brooklyn. The delay comes as the developer has contended with a stream of lawsuits from Mr. Goldstein and other critics, opponents, landowners and tenants that has lingered into one of the worst recessions ever.

Expectations have been scaled back in the process: Forest City is now talking specifics about just one residential building, down from the 15 ultimately planned, and the arena. But what is most remarkable in all of this is the undying stamina of Mr. Ratner, who, along with his firm, has endured ever mounting losses as the delays continue.

The tough financial realities of this recession have scared off even some of the most quixotic developers in the city, forcing them to tuck their grand plans for new projects away, eating whatever costs they put into the early stages of development. By contrast, Mr. Ratner has refused to give up on Atlantic Yards, continuing to pour cash in. In the past year, Forest City has successfully extended a key loan, worked to redesign its arena, pushed various governmental agencies for revisions to agreements and all the while kept on contract an army of consultants and lobbyists.

This is an extraordinarily expensive task. Between the lawyers, the Nets, property purchases, lobbyists, architects, demolitions, and early infrastructure work, Forest City and its partners have spent hundreds of millions of dollars on this project in the past five years. That tremendous investment has been spent on a physically complicated project for which the developer hasn’t yet begun building or even clinched a deal to buy much of the land from the M.T.A. 

This is due in large part to the Nets, which, still in New Jersey at the Meadowlands-based Izod Center, showed a pre-tax loss of about $78 million last year, according to SEC filings. Of that, Forest City, which co-owns the team, was responsible for more than $40 million. The ever-pending move to Brooklyn and the recession have taken a toll on the fan base: The team ranks 25th of 30 in the NBA for average attendance, at 15,147 per game, on average, according to NBA figures.

And this constant injection of money is expected to continue so long as the team is in Izod without a definitive future. While Forest City owns 23 percent of team, last year it assumed 54 percent of the losses.

 

WHETHER OR NOT this continued devotion to, and investment in, Atlantic Yards is a sound decision, time will tell. Perhaps Forest City is dissuaded from wavering by what would seem to be high exit costs. The Nets would presumably be sold at a loss—Forbes recently valued the team at $295 million, down from the $300 million Forest City and investors paid for them in 2004—and the developer would have to undo the preliminary work it has done at the site to the M.T.A.’s rail yards.

The beginning of the end of the losses, Forest City now seems to think, will come this fall. The lawsuits to this point had been an obstacle to obtaining financing, but now, regardless of whether the affected property owners and tenants further appeal their eminent domain case to the state’s highest court, the developer says it plans to seek financing.

“We are proceeding with the financing,” said Joe DePlasco, a Forest City spokesman. “We believe that we can finance this deal even if there is an appeal.”

The arena would be financed by tax-free bonds, the market for which is far more robust than the broader credit market.

Mr. Ratner has pledged a groundbreaking by October. The financing would need to be secured by Dec. 31, an I.R.S.-set deadline, after which it would be far more difficult to get full tax-free financing, which is substantially less expensive than typical loans.