The Craftily Negative Promise Offered For Bonds Being Sold For Nets Arena: It’s Not “Assumed” Islanders Hockey Team Is Coming to Basketball Arena

This post has been updated to include additional analysis. We first posted with all the pictures. The pictures spoke so well for themselves we wanted to get them up without delay. (Click on any image to enlarge.)

In a marketing analysis commissioned by Forest City Ratner that has been made part of the Barclays Center Arena Preliminary Official Statement prepared by Goldman Sachs to market bonds for Forest City Ratner’s Nets arena bonds it says:

For purposes of this analysis, it has not been assumed that the New York Islanders would relocate to the Barclays Center.

(See: Friday, December 04, 2009, Market analysis (commissioned by Ratner) suggests arena would have no trouble attracting events, might even host hockey.)

This we-mentioned-but-we-can't-promise language is official statement language intended to keep people off the hook legally, but it does serve to introduce a definite (positive) possibility that, “Gee, just maybe, the Islanders will relocate to the Barclay’s Center.” In fact, this sentence follows another rather silly sentence that makes it sound like it would be fairly easy for the Islanders to relocate to the basketball arena:

If built as planned, the arena would need to be retrofitted to accommodate the ice-making abilities the NHL requires for its franchises.

"Ice-making abilities the NHL requires of its franchises"? Sounds so official! And so simple! But silly: Like you wouldn't expect a hockey team to play on ice? But is it just as simple as putting in some ice as this language suggests?

We think that disguises the bigger issue of bringing in the Islanders; whether the arena is actually large enough to do so.

Fitting Examination of the Suspect Promise in the Ratner/Goldman Bond Sale Document

Would a hockey rink fit? We think schematics posted by Atlantic Yards Report today probably answer that question in the negative. Evaluate the information and images we have to offer on this score. When you’re done you may also conclude that statements put into Goldman’s Preliminary Official Statement to help market the bonds are a joke (as well as misleading).

First, let's compare. How big is a basketball court in yards? An NBA basketball court is 94 feet x 50 feet. (31.33 yards x 16.67 yards) How big is a hockey rink? More than twice as long and 70% wider. The official size of a hockey rink is 200 ft long and 85 ft wide. (It is also surrounded by "boards" made of wood or fiberglass which will be not less than 40" high, and no higher than 48" above the ice surface. “Any variations from any of the foregoing dimensions shall require official authorization by the League.”
At the outset of this post we had a composite of images from Wikipedia that shows the comparative sizes of a basketball court and a hockey rink which we repeat above.

Below is the schematic of the proposed Forest City Ratner basketball arena.
Click on the image to the right if you'd like to see the larger version of the above image made available by Atlantic Yards Report today (Monday, December 07, 2009, Comparing the Gehry arena outline/orientation with its successor, thanks to an Ellerbe Becket interior design) click on the smaller image on the side.

Below is the schematic of the proposed Forest City Ratner basketball arena with the comparative basketball court and hockey arena overlaid with the basketball court in the center.
Below is the schematic of the proposed Forest City Ratner basketball arena with the comparative basketball court and hockey arena overlaid with the hockey rink in the center.
Below is the schematic of the proposed Forest City Ratner basketball arena with alternate overlays of the comparative basketball court and hockey arena overlaid that may help to envision more clearly how much is lost in terms of seating and also, apparently, functional access to the arena.

Consistent With Previous No Hockey Assessment

Previously, Atlantic Yards Report wrote that “inside sources” said that the redesigned arena would not accommodate hockey. This received public focus and became an embarrassment for Brooklyn Borough President Marty Markowitz when he subsequently made remarks that assumed the smaller redesigned arena would still accommodate the Islanders hockey team. (See: Thursday, June 04, 2009, Guess what: the Brooklyn arena, accommodating Ratner's short-term goal, would be too small to fit in hockey and Thursday, October 08, 2009, From hoops to hockey? Markowitz, contemplating Islanders' move to Brooklyn, disregards the planned arena's limitations.)

Why Mentioning Hockey Team as Real Possibility Is Material to sale of Bonds (& Moody’s Sizable Mistake)

We doubt that resurrecting a possible promise that the Islanders could come to the arena was put into the Forest City Ratner/Goldman Sachs Preliminary Offering Statement to assuage Marty Markowitz’s embarrassment. The reason why the question of whether the Islanders could actually relocate to the arena is very material to the sale of the bonds (and to the bonds needing a new PACB approval that the state Comptroller should scrutinize) is because the cash flow projections for the arena are apparently weak because so few events can be projected to be held in the arena. There will be only a projected 200 events a year in the arena. Related to this is the fact that somehow Moody’s Investor’s Service seems to have made a sizable 11% cash flow mistake in the analysis of how many events there will be. One has to wonder how that happened. It most certainly involves the human intermediaries highlighting facts in their communications. (See: Wednesday, December 02, 2009, Ratings agency Moody's, asked why it assumes 225 events a year at the AY arena, won't discuss it.)

It could help reassure Moody’s that their mistake was perhaps less significant if hockey were actually a real possibility for the arena. National Hockey League teams play at least 82 games a year in the regular season and including playoffs they play at least 4 four more games, with 110 games being the maximum number of games played including both playoffs and the regular season. That means that if a hockey team plays in an arena, the team plays a minimum of 43 home games per year and as many as 55. But if a hockey team can’t play in the arena those numbers are big potential numbers to subtract from alongside the 200 to 224/225 events Moody’s was looking at.

Hockey, Bond Risk and Loose Ends

We previously wrote about how the fact that a hockey team apparently can’t play in the Nets basketball arena involves a material increase in risk. That was when we were writing about the sloppiness and extraordinary number of loose ends that plague the proposed issuance of these bonds. (See: Wednesday, October 28, 2009, So Many Unchecked Approval Boxes: Why Any Sensible Bond Buyer Should Probably Steer Clear of Buying Atlantic Yards Nets Arena Bonds and November 1, 2009, ESDC’s Bond Buyer Happy Talk About Restructuring and Refunding Arena Bonds.) More recently, others, like Neil deMause of Field of Schemes, have commented on how close to the financial edge this transaction is. (See: As Atlantic Yards Gets Pricier, How Much Red Ink Can Ratner Absorb? By Neil deMause in Atlantic Yards, Friday, Dec. 4 2009.)

We were writing in part about the risk to the bondholders of a transaction slapped together at the last minute but we were also writing about how that extra risk means that this is a far riskier and very different transaction from the one the Public Authorities Control Board approved. For instance, the PACB (and the ESDC board) approved a transaction that involved the financing of an 850,000 square foot arena, not the 20% smaller 675,000 square foot arena that developer Forest City Ratner currently plans to build. (See: Saturday, October 03, 2009, Did the ESDC board members know they were approving a 675,000 sf arena?) And at the time the PACB issued an approval the arena, at $637.2 million, was projected to cost only a fraction of the $1.1 billion (including infrastructure) it is now projected to cost according to the recent disclosures of the Preliminary Offering Statement.

This means that the PACB needs to be re-reviewing the transaction to consider whether it should still give its approval to a transaction that now involves such an escalated risk. Develop Don’t Destroy Brooklyn has written to the state comptroller pointing out that the comptroller has concurrent responsibilities in this area that it would be dangerous for him to shirk. (See: Paterson, Silver, Sampson Must Vote on Atlantic Yards Financing, For Immediate Release: November 19, 2009) So far the comptroller has not stepped in to alter the transaction's path toward debacle. It will be telling if nothing is done and the bonds default.

We have previously noted that fictions about the Atlantic Yards mega-project have been continually foisted on the public with a Ratner-comes-first mentality. Those fictions have been tolerated by our public officials and sometimes collaborated in by them. We have therefore wondered what kind of transaction will be foisted upon the buyers of the Ratner arena bonds. (See:Wednesday, November 25, 2009, Picturing What Could Have Been Said If Public Officials Accepted Public Comment at the Atlantic Yards Bond Approval Meeting and see also Tuesday, December 1, 2009, Unfair Substitution of Fiction For Fact in the Atlantic Yards Dialogue.)

What Is the Purpose the Craftily Negative Promise of Not "Assuming" the Islanders Hockey Team Will Come to Basketball Arena?

Why does the Forest City Ratner/Goldman Sachs Preliminary Official Statement say that bringing a hockey team to the arena is as simple as installing ice-making equipment? Is that representation true? Or is it pure hockey-sales hokum?

Looking again at the schematics, it looks as if the only possible way to get a hockey rink into the arena would be to raise the floor of the hockey rink many feet up in a bowl-shaped seating area. The good news is that would leave plenty of room for the “ice-making abilities” (equipment) underneath. But wouldn’t this also eliminate or block most of the functional access to the arena? Wouldn’t it eliminate a huge percentage of the seating in what is already very small arena? (East/West it looks like approximately 50% of the seating rows about 26 out of 52 rows of seats drawn in the Ellerbe Beckett schematic would be lost.) How possible is it really to have a second level ice floor raised so many feet above the main floor?

So, readers give us your thoughts: Was this crafty negative promise in the bond sale documents accurate information intended to carefully convey the situation as it actually is? Is the main hurdle to bringing in a hockey team truly just the practical impediment of investing in some “ice-making abilities” as represented or is this a cold-blooded snow job? Maybe this is just an easy-to-identify example of the Ratner/Goldman team trying to use every trick in their book to get these bonds sold and, if it is, what other tricks have they got in their playbook? With Moody’s apparently already having made one big mistake, it doesn’t look as if the rating agencies will be reliable assessors of risk on this one. Time will tell: We’ll see what the Ratner/Goldman team manage to get away with. Or maybe they won’t.

ESDC’s Bond Buyer Happy Talk About Restructuring and Refunding Arena Bonds

We can’t help noting that our critique of ESDC’s sloppy work vis-à-vis its hoped-for issuance of tax-exempt bonds for an Atlantic Yards Nets basketball arena (So Many Unchecked Approval Boxes: Why Any Sensible Bond Buyer Should Probably Steer Clear of Buying Atlantic Yards Nets Arena Bonds) published Wednesday has been quickly followed up by two happy talk articles in which Frances Walton, ESDC’s chief financial officer, endeavors to convey the notion that ESDC’s preparations are in better shape than we and the Wall Street Journal asserted. Specifically, an article in Reuters, Thursday (NYS sets big bond sale, waits on other large issues) and one in the Bond Buyer today (Atlantic Yard Bonds May Be Sold, Escrowed: Official, By Ted Phillips).

Of the two articles, the one that interests us the most is the one in the Bond Buyer. (The Reuters article, and its headline, also addresses an unrelated proposed issuance of bonds for the World Trade Center site.) Develop Don’t’s Destroy has a report of the Bond Buyer article up at: Atlantic Yards Arena Bond Sale Still a Big Struggle, 10.30.09.)

In the Bond Buyer article Ms. Walton says, “The structure and the timing of the bonds are still in flux.” No kidding. Apparently things are so much “in flux” that Ms. Walton envisions the “flux” about how the bonds would be structured would carry right through until after the bonds were issued. The Bond Buyer article has Ms. Walton providing the information that the arena bond transaction would be issued:

. . . with the expectation that it would be coming out of escrow to be restructured. That’s one of the possibilities they are looking at,” Walton said. “But they’re also looking at the structure with an early call ... if something changes, if the court ruling went against you, you’d just refund the bonds. Those are the two different approaches.”

The article then notes that, “Forest City Ratner spokesman Joe DePlasco declined to comment on the deal.”

We are sure that Ms. Walton (who used to be in the habit of taking our legal advice when she joined us at the state agencies where she began in public finance) knows that a bond deal that is issued in order to be immediately “restructured” is pretty dead-on target to be exactly the kind of “black box” deal that the IRS has repeatedly found doesn’t meet its requirements for tax exemption (thus making bonds taxable). We also find curious the notion that if, as Ms. Walton suggests, the “court ruling went against you” (which is to say that no arena could be built) that ESDC would “just refund the bonds.” We can definitely understand Ms. Walton’s reference to an “early call” to redeem the bonds when for various reasons* the arena can’t be built, but the phrase “refund the bonds” in general public finance parlance means keeping bonds outstanding (i.e. not its not like “refunding” a ticket price and sending people home when your headline act doesn’t show up). Issue the bonds in order to immediately refund them and keep bonds outstanding with a different structure? The IRS surely ought to like that.- Not! (We refer once more to our comment about “black box” transactions.) Why talk about keeping bonds outstanding when you find out that the arena can’t, in fact, be financed? It wouldn’t be possible. The IRS would consider that an over-issuance prohibited by the tax code, making the bonds taxable (once again) as “arbitrage bonds” (retroactively to their date of issuance).

(* In Ms. Walton’s attempt to paint an optimistic picture she refers to only ONE “court ruling” as preventing the building of the arena. As per the more detailed analysis of our previous post there are a number of separate rulings that could make the arena unfinancible. One ruling would prevent the developer from getting the southern half of the site needed for the arena. An entirely separate legal action is likely to prevent the developer from getting the northern half of the property needed. Other rulings would simply deprive ESDC of any ability to proceed, period. Ironically, a number of the legal actions brought against the mega-project highlight the very poor record ESDC officials have when it comes to making accurate representations about the megadevelopment and its financing.)