Monday, June 22, 2009

Plus Ça Change, (The More Things Change,) Plus Une Chose En Particulier Ne Change Pas: La Transaction Fixée (The Wired Deal)!

At Senator Bill Perkins’ Senate hearing on Atlantic Yards on Friday, May 29, 2009, Assemblyman Hakeem Jeffries questioned whether the MTA and its board members would be acting in accordance with their fiduciary duty to the public if, as the MTA is discussing doing, the MTA and its board act to bail out the financially ailing Forest City Ratner, the proposed developer of the proposed Atlantic Yards project.

What’s Contemplated in Terms of Bailing Out The Developer

In terms of bailout, the MTA is talking about:

1. Letting the developer construct a project of significantly lesser public value under rubric of "value engineering" (translated, that means, among other things, constructing a train yard with 7 tracks rather than 9 or the original 10, delivering a project of much lesser quality, and with less “green space”).

2. Giving the MTA’s property to the developer (property for which the developer did not bid in the first place) for a considerably smaller payment despite this currently being a time of financial need for the MTA. (We are now talking in terms of the pathetically paltry. See Atlantic Yards Report “What could $20 million buy?” series.)

3. Less will be done by the developer up front, and

4. Postponing, even further, the borrower’s obligation to deliver the ostensible benefits of the project. For instance, one housing tower that would be front-loaded with luxury units while others will be postponed.
Further, this proposed bailout is being pushed at a time when we are learning that the project will not, in fact, deliver the de minimus ostensible benefits it was once supposed it would. At least the arena, and probably for a very long time the entire project, will NOT be a net economic positive for New York City according to the reckoning of the City Independent Budget Office. Even when the boosters of the project (the government officials working for the development agencies) were telling the questionable version of the story, which they apparently hoped would sell the project, they said that the completed project would provide the benefits they calculated only upon the passage of 30 years. By current projections it may take 30 years before the project is even complete. Does that mean the “benefits” take sixty years to fully materialize? It seems fair to ask.

Fiduciary Duty Reminder

Not long after the Perkins hearing, Assemblyman Brodsky, who chairs the state Assembly Committee on Corporations, Authorities, and Commissions, followed up on Assemblyman Jeffries' question about the board members’ fiduciary duty to the public. He “warned . . . that, if the Metropolitan Transportation Authority (MTA) board accepts `less money’ for the property destined for the Brooklyn arena, it would “be a violation of the fiduciary duty”--their obligation to act with the highest standard of care. (See: Monday, June 08, 2009, Brodsky: MTA board’s acceptance of Ratner’s lesser offer for railyard would violate its fiduciary duty.)

Time Ushers in Changes (Et Non . . .)

We think the board members of the MTA and ESDC are now in a pretty good fix if they want to vote for Atlantic Yards but want to claim they are not violating their fiduciary duties. This is because time has done a remarkable job of melting away all aspects of Atlantic Yards, leaving nothing but one sinewy strand that won’t dissolve, one single cord that represents Atlantic Yards, its core essence. What is that core essence? It is Atlantic Yards as the wired deal, the mega-boondoggle, designed to serve no one but a single connected developer.

Pardon Our French (For a Change)

What can be a more instructive to learn about this exercise in civic malfeasance than to look, on one hand, at all that has changed, and, on the other, at the very little that has not changed, going back to when the original project approvals were rammed through with a concerted effort to shun a proper public vetting. Hence the title of this article. The French say that “the more things change, the more they stay the same.” (“Plus ça change, plus c'est la même chose.”) But in the case of Atlantic Yards, it seems as if just about everything does change and only one thing does not. We had thought, originally, to title this: “Plus ça change, (The more things change,) plus c'est la même chose particulier- Le Deal (Transaction) Wired!” but we will, instead use what we understand to be the better French and say: “Plus Ça Change, (The More Things Change,) Plus Une Chose En Particulier Ne Change Pas: La Transaction Fixée (The Wired Deal)!” No matter, the facts are perfectly plain in any language no matter the precision of our syntax.

What’s Changed? For Starters, the Economy

We have already written about how the changes in the economy should mean that now is the very time when the public should be expecting a much better deal from any developer it is dealing with. (As opposed to the significantly worse one now proposed for Atlantic Yards.) As we have written, other state and local governments are finding that public funds go a lot further and can buy a lot more considering the downtown in the economy. Furthermore, it is reported that Forest City Ratner is taking advantage of the downturn to get a much better deal from the contractors it is dealing with. (See: Thursday, April 16, 2009, The Great Recession: A Stimulus to Get Our City Back to “Bidness?” and Monday, June 1, 2009, Negotiating With Your Contractor: The Atlantic Yards As Kitchen Renovation Metaphor.)

If anyone tells you that a downturn in the economy is a reason the public should get a worse deal and the developer a better one (See: Friday, June 19, 2009, Keep your eye on the ball: FCR began renegotiating this deal well before the economic downturn), don’t believe them.

What Else Has Changed? Almost Everyone Else in the Cast of Characters, But. . .

It was startling to read the other day a No Land Grab accounting that summed up all of the individual players, public officials included, that have come and gone since the original Atlantic Yards mega-boondoggle was unveiled on the public stage. (See: June 6, 2009, More Disarray for the ESDC: Chairwoman Marisa Lago Quits.) Not only is Starchitect Frank Gehry now gone but Governors: George Pataki and Eliot Spitzer have departed, the latter rather ignominiously (including the way he acquitted himself on Atlantic Yards). It looks as if Governor Paterson is also likely to depart the Atlantic Yards scene sans any distinction unless he exercises his ability (and we would say clear duty) to let Atlantic Yards die the death it so richly deserves.

No Land Grab goes on with its listing, Assemblymember: Roger Green has departed, ESDC Heads Charles Gargano, Patrick Foye, Avi Schick, and Marisa Lago are all listed as departing. No Land Grab’s summing up was before the even more recent reports that ESDC Chairman Bob Wilmers, resigned from his post. (See: Thursday, June 11, 2009, Even more turmoil at ESDC: the Chairman resigns, and a Republican businessman from Rochester will be in charge.) No Land Grab reminds us that MTA heads Peter Kalikow, Katherine Lapp and Eliot Sander also have all departed. From the Forest City Ratner team there were these exits (in addition to Gehry) listed by No Land Grab: Jim Stuckey, Loren Riegelhaupt, Randall Toure. No Land Grab mentions that any key players missing was unintended. We would have added to this list the departure of landscape architect Laurie Olin. Concluding the list are departures from the “Team Nets”: Kenyon Martin, Jason Kidd, Richard Jefferson.

Changed Politics

The politics of Atlantic Yards have also changed. Once there were a few politicians who were sufficiently hornswoggled (or thought others were) to support the project in some (perhaps lukewarm) fashion. More recently, the project hasn’t found that kind of support. (See: City Council candidates don't support AY project, May 08, 2009, May 7, 2009, City Council Races (33rd and 39th CDs): Candidates’ Positions on Development and Effective Action They Would Take to Stop Atlantic Yards and Friday, June 19, 2009, Brennan, other elected officials urge MTA to delay June 24 vote, say hasty decision may hurt transit system.) The only kind of support it now gets is by Marty Markowitz or by the stealth of politicians like Bloomberg and Paterson who seem to prefer not to mention the project when they can avoid doing so.

Political support fell out from under the mega-boondoggle before the recent set of proposed changes that would make the megadevelopment so much worse, before the most recently released information concerning the calculations about the ways in which, for instance, the arena will be a net loss to the public.

IRS Position on Tax Exemption Changed

Even the financing permissible under applicable IRS regulations has changed. The contemplated financing of the Atlantic Yards Nets arena (about the only thing proposed to proceed in the near future) by the peculiar mechanism of “R-TIFC Bonds” (pronounced "Artifice-PILOT"- or "Return Total Intercepted For Costs-Payment In Lieu Of Taxes") is something that the IRS would not now permit for any project of this sort. It is a testament to exactly what we are talking about: Atlantic Yards as a “wired deal,” that somehow this very substantially changed deal may be “grandfathered” under an IRS regulation to allow this single project to issue Artifice-PILOT bonds that probably should always have been illegal. Procuring the IRS ruling involved New York public officials coordinating with the developer in making misrepresentations to the IRS when the IRS ruling was requested. (See: Tuesday, May 19, 2009, Looking back at that IRS letter: did ESDC stretch the truth about the project timetable? and Monday, July 21, 2008, Asking feds not to approve tax-exempt bonds for AY arena, DDDB criticizes city/state letter) Those public officials were likely already inured to the making of misrepresentations to the IRS based on prior similar conduct. See: Wednesday, October 1, 2008, Safety in the Numbers You Pull out of a Hat.)

In the Sea of Change What Doesn’t Change?

It is scary to think that with all that has changed, the economy, the design of the project, the architect and landscape architect, the project’s measurable public benefit (actually its total lack of actual measurable benefit), the politicians, the transaction technicians, only one thing durably remains- The designation of a developer who is on the receiving end of a humongous boondoggle. This fits with the theories of the conspiratorialists who tell us that politicians are just irrelevant intermediaries and that power truly resides in a plutocratic class of businessmen who get to tell politicians what to do. We don’t subscribe to such theories, but we are hard pressed to refute these ideas when confronted by scenarios like what we see playing out now with Atlantic Yards.

The Developer Hasn’t Changed? Let Us Offer a Correction

Actually, it is misleading to say in unequivocal terms that the developer hasn’t changed. The developer is nominally the same developer, but much has changed about the developer. What is different is that the developer is now teetering financially. Forest City Ratner’s credit is in the toilet and we have been watching, wondering whether they will go under entirely. (See: Tuesday, March 17, 2009, Three months later, Morningstar again says Forest City Enterprises stock is worthless.) The developer is certainly not now the kind of strong credit-worthy developer you would rationally contemplate choosing if you were going to hand out a monopoly for the development of a vast swath of the nation’s largest city.

Putting it more frankly, this is exactly the kind of situation where, because of the changes with the developer, public officials ought to be looking for ways to terminate the transaction with the developer.

Contemporaneous Beekman Problems

We found it interesting that, contemporaneously with Morningstar once more calling Forest City Ratner’s stock worthless, the developer stopped construction on its Beekman Tower in lower Manhattan. (See: Downtown Housing Complex May Downsize, by Matthew Schuerman, March 19, 2009.) The official story was that Forest City Ratner wanted to take advantage of the downturn in the economy to negotiate a better deal with its contractors. (You know, that better deal they don’t want to share with New York taxpayers when they do Atlantic Yards as we talked about earlier in this post.)

Musing on Forest City Ratner and Material Adverse Change

The fact is that Forest City Ratner reportedly did get that better deal on the Beekman (See: Savings on Labor Allow Work on Residential Skyscraper to Resume, by Charles V. Bagli, May 28, 2009.) but we were still wondering whether that was the real reason and the only reason that construction on the Beekman stopped when it did. In order for the Beekman to proceed, more bonds needed to be issued for the project. Those bonds could only be issued if they were backed by the bank providing its credit for the transaction. Might the bank have been reluctant at that point to further back FCR’s poor credit? In addition, the commercial real estate market in New York was way down so the value of the Beekman as an asset was probably unattractive additional security. It may not even be good for FCR’s balance sheet. (See: Manhattan real estate in freefall, by Edward Harrison on 22 February 2009.) So was the bank asserting its rights to withhold additional credit to the Ratner organization under the “material adverse change” clause, which the bank ought to have had in the documents whereby it would have been entitled to withhold the extension of credit for the issuance of additional bonds?

Abyss Dancing?

Forest City Ratner is still teetering but we noticed some strange coincidences as FCR danced near the abyss trying to scrounge up capital. Morningstar, (which had once called Forest City Enterprises stock worthless) on Thursday 05/14/09 raised the stocks fair value to $5.50 synchronously with the FCR’s filing of the Form 10-K filed after normal business hours (5:31pm) Wednesday 05/13/09 with the Securities and Exchange Corporation that set forth additional BAD news, and synchronously with FCR’s announcement that it was going to be selling more stock. (See: Thursday, May 14, 2009, Forest City Ratner mints money with new shares, stock declines only 16% coupled with Friday, May 15, 2009, Forest City warns SEC of potential new delays, new costs, and failure to meet (tax-exempt bond?) deadlines.)

Does it make sense for Morningstar to raise the value of the stock when additional bad news undermining the value of the FCR stock was coming out? Did Morningstar, in fact, know about the bad news that was going to come out almost contemporaneously with their upgrade action? We can imagine the dance that must have gone along with these events with someone at FCR probably doing some Morningstar hand-holding to steer things the way they wanted for the important date they would announce the sale of their stock.

We want to observe a coincidence of timing with respect to the following: On the Friday following the above described Wednesday/Thursday events, the Second Department ruled in favor of Forest City Ratner with respect to one of the pending lawsuits against the project. (See: Friday, May 15, 2009, Eminent domain case is dismissed unanimously; appeal in this and EIS case remain as last legal hurdles.) All we can say is, we found this very interesting.

Here is another thing we note. It was just days after FCR’s stock sale to infuse capital that the announcement was made (see above) that construction would resume at the Beekman.

Apparently at least $20 million of the stock being offered to infuse capital into FRC was bought by members of the Ratner family. That has us wondering too. (See: Wednesday, June 10, 2009, What should $20 million buy? How much walking-around money do FCE family members have?)

None of this dancing is likely to be sufficient, without more, to bring back Forest City Ratner from the abyss. Forest City Ratner wants the Atlantic Yards and it wants it on terms, in addition, where New York taxpayers bail it out.

A Change That Maybe Isn’t a Change: Was the FCR “Bait-and Switch to a Bailout” Contemplated From the Beginning?

Atlantic Yards was always designed as a meal ticket for Forest City Ratner paid for by New York taxpayers. We have always observed that the project looks less like urban design than like the perfectly designed sponge to collect the maximum possible public subsidy. Now people are waking up and they are commenting that they see now that there has been a “bait and switch.” (See: Sunday, June 21, 2009, DDDB breaks down the "bait and switch"; New York magazine critic seems to agree.) But the thing about this bait and is that the switch was always built in and part of the project from the outset.

The first thing to realize is that Atlantic Yards was never designed to deliver benefits to the public. That is one reason there was never any legitimate bid and a reason the site is not being built by multiple developers. The next thing is to realize just what was contemplated from the beginning. One can try to blame the proposed Forest City Ratner’s bailout on the economic downturn in the economy but that is not how it actually works.

To quote former ESDC head Marisa Lago, had we all along been speaking with what Ms. Lago has now dubbed “realism” (as opposed to the played-up “bait” version we got promoting the project) we would have admitted from the very beginning that the mega-monopoly being given to Ratner was such an enormously huge one, (Ms. Lago’s term: “transformational project”) that it would be a multi-decade project of perhaps 30 or even 40 years duration. (See: Wednesday, April 15, 2009, Permission to Speak Frankly: How We Know More and Less From Breakfast Interviews With Marisa Lago.) That means that the mega-development could never have been done in a single real estate cycle so encountering the “downturn” was virtually inevitable. So many years being involved also make it extremely questionable how much of the project 80-year-old Frank Gehry would ever have been around to design and supervise. Some bemoan Gehry’s loss: We don’t (his projects leak), but we do recognize how with Gehry’s departure it as been announced that what Forest City Ratner wants to deliver something truly “low-rent.”

What should be recognized is something we have been complaining about from the start: It is a completely backwards process to select the developer first, give them an exclusive monopoly over a swath of city and then negotiate the transaction with that anointed developer after the fact. Proceeding backwards deprives the public of any opportunity to exercise negotiating leverage and, as such, it must be presumed that just as a the downturn was foreseeable as virtually inevitable, the proposal for this bailout was foreseen and always intended.

In the End, For All To See

There is, however, a significant impediment to the inevitability of this proposed Forest City Ratner bailout going forward at public expense, a legal one at that. It has now become glaringly obvious that the proposed bailout shortchanges the public on each and every count. Any MTA and ESDC board member who votes to approve a bailout now will be casting a vote that is conspicuously a violation of their public trust. (No, voting as `instructed’ by the Governor is certainly not an acceptable excuse.) Each director’s vote involves an inescapably stark proposition since there is obviously one and only thing that stands unchanged by time: It is clear that a vote to approve “Atlantic Yards” means a vote to approve a deal for one sole remaining reason . . . because it is wired.

Répétez-vous après moi, s'il vous plaît: Plus Ça Change, (The More Things Change,) Plus Une Chose En Particulier Ne Change Pas: La Transaction Fixée (The Wired Deal)!

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