Monday, June 1, 2009

Negotiating With Your Contractor: The Atlantic Yards As Kitchen Renovation Metaphor

At Friday’s state senate hearing on Atlantic Yards, Marisa Lago (head of the Empire State Development Corporation and responsible for Atlantic Yards on behalf of Governor Paterson) tried to make current negotiations with proposed project developer, Forest City Ratner easy to explain by likening Atlantic Yards to a kitchen renovation. That therefore allowed Ms. Lago to tell Senators Bill Perkins, Velmanette Montgomery and Assemblyman Hakeem Jeffries that Forest City Ratner is going to give the public a lot less than the public was once supposedly going to get by telling the legeslators that there isn’t going to be a garbage disposal, the level of trim and finishes won’t be the same (Formica countertops instead of granite?) and that the stove was only going to have four burners rather than six.

We’ll figure that the four burners instead of six outcome was meant to be suggestive of the fact that Forest City Ratner is now, among other things, only going to be giving the MTA a 7-train capacity train yard rather than a 9-train capacity yard. (a 22% cutback). So much for the future growth of a growing city! Along with this were the revelations that Forest City Ratner wants to pay the MTA less than previously specified for its land, wants more money from the public and is going to take a lot longer to deliver any public benefit. Some dates for delivery of public benefit may simply go unspecified. (See: Friday, May 29, 2009, Today’s State Senate Hearings on Atlantic Yards and Noticing New York Testimony.)

We rather like the kitchen renovation metaphor. Maybe it provided Ms. Lago with an out to avoid saying things in less blunt, specific or informative terms but we think that it does help make some things easier to explain. We will come back to that in a minute but first let’s note what this is really all about in basic, big-picture terms. It’s about government negotiations with a private developer, what the developer gets and what the public is going to foot the bill for while the developer takes away private benefit. It is also about whether given the “weakness in the economy,” public authorities should reopen agreements to tilt things more in favor of the private developer though it would be “at the expense of the authority’s primary mission.”

The New York Times had an interesting editorial Wednesday, Stalemate at Ground Zero, taking some positions that ought to be relevant. (We just quoted from that editorial above.) In this case, the Times was writing about negotiations respecting redevelopment of the World Trade Center site.

Mr. Silverstein . . . [who is building at the Trade Center site] . . wants to reopen a 2006 building agreement with the authority, citing delays by the authority and the weakness in the economy.

. . . . Mr. Silverstein made his pitch that the authority should use its money to help him build two skyscrapers that the private market won’t finance in the current climate. Basically he is asking the authority, which has limited resources and many other demands, to get even deeper into real estate speculation.

* * * *

The authority’s board has authorized over $800 million so far to help with Mr. Silverstein’s financing. The mayor and his dealmakers should not drain any more of the funds the authority needs to maintain and manage the bridges, tunnels, ports, terminals and airports in the metropolitan area. We all want the ground zero memorial and the other structures finished. But it cannot come at the expense of the authority’s primary mission.
Because it seems that the Times has let its business relationship with Forest City Ratner influence it coverage, we doubt that the Times will be publishing any similar editorials about Atlantic Yards. We are happy to be here to fill the void.

Should “weakness in the economy” cause a public authority like the MTA to reopen its negotiations with Forest City Ratner and agree to take even less for its land “at the expense of the authority’s primary mission?” (Remember that, going back, Ratner was not even willing to match the offer of another developer to pay more to the MTA for its land than Forest City Ratner was originally willing to pay.)

In fact, is“weakness in the economy” a reason to give more to a developer or is a downturn in the economy a reason to do exactly the reverse? We have previously written about how:

. . . state and local governments everywhere else are saving significant money on public sector work by getting bids during this economic downturn, and Forest City Ratner claims it is similarly going to reduce costs for itself through the lower bids they can get during the economic downturn. .
(See: Thursday, April 16, 2009, The Great Recession: A Stimulus to Get Our City Back to “Bidness?”)

The latest on this (in an article appearing only one day after the Times editorial) is that Ratner has reportedly reduced his cost of building his Beekman Tower by negotiating with the construction unions “a series of concessions on work rules that proponents said would save builders as much as 20 percent on labor costs.” (See: Savings on Labor Allow Work on Residential Skyscraper to Resume, by Charles V. Bagli, May 28, 2009.)

As we said before, it looks like the New York taxpayer is the only one who isn’t being invited to the party to get the benefits of saving through such bidding and negotiation. This takes us back to Ms. Lago’s kitchen renovation metaphor. Now is a great time to be in the market for a kitchen renovation! Contractors are hungry for work and they are bidding for it aggressively. The same thing applies to Atlantic Yards.

When it comes to kitchen and apartment renovations we have a few rules which we would like to supply for the sake of analogy. Those of us who have actually renovated our apartments, bathroom or kitchens know these things but it is time for our public officials to wake up and do what makes sense when spending the really big (billions) bucks:

(Applicable also to NYC megadevelopments)

1. When selecting a contractor, get bids. Forest City Ratner was selected to build the 22-acre Atlantic Yards without an effective bid process. If you don’t get bids, expect to get soaked.

2. If you can (as noted above), it is good if you can bid out your kitchen renovation when things are otherwise slow in the construction business.

3. Establish a schedule by which the contractor must complete the renovation. If you establish a long, protracted schedule and distant deadline for completing construction, letting the contractor complete at his leisure (and work only when it is most convenient in terms of scheduling his labor, picking up his materials, prioritizing your job versus somebody else’s), expect the contractor to give you a really good break on price. But also consider that it will cost you a lot in that you have to pay rent or maintenance and your mortgage for a long time while not being able to use your property. Atlantic Yards has few real deadlines. From a pragmatic standpoint most of the deadlines are essentially nonexistent, many of them not even existing within the span of many people’s professional lifetimes. To the extent that deadlines are supposed to represent a day of reckoning, a time when the contractor can be held to account, a time to determine whether standards have been met, Forest City Ratner seems to have escaped such accountability. About all that is being required is that of FCR as Atlantic Yards developer is that it is supposed get the project underway by the end of the year. The sole requirement to simply get the project underway only benefits FCR by locking them into the job and has nothing to do with completion or delivery of public benefit. Without practical deadlines, Forest City Ratner is essentially strapping on a feedbag and the fact that it can munch at its leisure, taking decades to complete the monopoly it has been given (speeding up or slowing down at will) amounts to an extraordinary public subsidy for the firm. Apparently, our public officials believe that this subsidy will go undetected by the public.

4. Specify ahead of time all the work to be done before bidding out the job. This of, of course, is pretty basic stuff, but notice that this wasn’t done with Atlantic Yards.

5. Don’t let the contractor demolish the kitchen before you have a contract. It puts you in a tremendously weak negotiating position. How are you going to negotiate effectively when you have to eat out at restaurants or order take-out and there is nowhere to do the dishes? You’ll be sitting in a pile of construction dust and will probably feel that you need to agree to practically any outrageous proposal the contractor trots in. This is essentially the kind of situation Forest City Ratner has worked to create by tearing down much of the neighborhood while not having funding or a go-ahead to replace any of it. This includes demolishing the Ward Bakery Building and the Carlton Avenue bridge and creating unnecessary blight.

6. Don’t front-load the payments to the contractor. If you give all your money to the contractor up front it eliminates the incentive for the contractor to come back on a timely basis to finish the rest of the work. It also tends to lock you into continuing to use the contractor for the job because you won’t have money to engage a replacement contractor when you discover that you want to fire the original one. So why have the city and state been giving Forest City Ratner their contributions to Atlantic Yards up front?

7. If you advance money to the contractor that is going to be used to buy materials, you probably want to specify that the materials bought will belong to you rather than the contractor. That way you will be all set and ready to redirect the work to a new contractor whenever you need to. When you switch contractors, you don’t want your old contractor blackmailing you, saying that he is not going to turn over to you the custom-made granite countertops or the special-order tiles he took possession of at your expense. The city and state have been careless and are now at an analogous disadvantage whenever they decide to get rid of Forest City Ratner because Ratner took money that the city gave them (that was supposed to upgrade infrastructure) and used it to buy and take title to property within the Atlantic Yards footprint; Forest City Ratner is likely to try to hold that property hostage when the ESDC and the city send them packing.

8. If you’re trying to economize and save money, don’t let the contractor turn the job into a bigger, more costly job than it needs to be by going crazy and ripping out and throwing away a lot of walls, baseboard moldings and appliances that are perfectly serviceable and ought still to be used. If you want to save money, don’t rip out walls that are sound just because they have a few cracks. If new plumbing was recently installed, don’t rip it out to replace it all over again. Don’t let your contractor get rid of sound appliances and fixtures that could serve you perfectly well just so that the contractor can make a profit on selling you everything all new even though that is not what you needed. That is a form of churning. Have you noticed that Atlantic Yards involves plans to demolish some perfectly wonderful co-op and condominium buildings that were just fully and completely renovated?

9. Check out your contractor’s credit worthiness before engaging him. Forest City Ratner is teetering financially. On reason we have government officials who are likely going to be telling us that the public needs to come to the financial rescue of FCR because of the “weakness in the economy” is because of FCR’s own financial weakness. If you were doing a kitchen renovation you want to start with a contractor strong enough so that you would not have to face such ridiculous arguments.

10. Maintain the option to terminate and bring in another contractor- especially if the contractor wants to renegotiate after accepting the job. If a contractor doesn’t believe you are going to be able to replace him, he is going to try to take advantage of you during negotiations- Like asking for extra concessions because the economy is weak. How ridiculous is it that Forest City Ratner doesn’t think they can be replaced when the work being talked about won’t be done until as much as thirty years in the future and Forest City Ratner hasn’t even been specific what it is they are going to produce or the price they will produce it for?
We expect we could go on with other analogies about what is being done wrong at Atlantic Yards and that anyone with home renovation experience could add additional points of wisdom to this list. For instance, don’t get taken in by the contractor’s high-pressure sales job to buy super-glitzy name brand stuff that he can sell to you at an especially high mark-up. Maybe you do want a Sub-Zero refrigerator for your home rather than a top-of-the-line GE product, but do you really want to get suckered into paying extra for some Frank Gehry frippery that leaks? Everyone should feel free to add their advice to ours in the comments section to this post. Our public officials have a lot to learn about kitchen renovations!

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