Atlantic Yards is Not Too Big to Fail

The Atlantic Yards project is way behind schedule. Local elected officials are angry about delays in critically-needed affordable housing. Forest City Ratner is claiming economic hardship and promises its new plan to restructure the project will solve all the problems.

Those may sound like last month’s headlines, but I'm actually referring to the events of spring 2009, when Forest City Enterprises’ stock had declined more than 80% in the wake of the financial crisis. FCRC fired starchitect Frank Gehry in an effort to reduce the cost of Atlantic Yards’ arena and towers. In May 2009, State Senator Bill Perkins and other City and State legislators held a public hearing at which officials from the Empire State Development Corporation (ESDC), the MTA, and City agencies were grilled as to what was being done to hold Atlantic Yards accountable to its original promises of affordable housing and jobs—and were told by New York City Economic Development Corporation President Seth Pinsky that the his agency and other were engaged in “sensitive negotiations” with Forest City to “make this project, and its associated benefits, feasible.”

The outcome of those negotiations came to light a few weeks later when the MTA Finance Committee reviewed a proposed change to its agreement to sell development rights over the Vanderbilt rail yard to FCRC: instead of a $100 million payment, the MTA would accept just $20 million up front to be able to allow FCRC to build an arena over the western part of the yard, and give it 21 years to acquire the rights to the remainder of the yard for an additional $80 million.

The delayed acquisition of development rights over the rail yard raised serious doubt that Atlantic Yards would be completed on the ten-year schedule approved by the ESDC in 2006, and it would be necessary for the agency to approve a change to the Atlantic Yards plan to accommodate the terms of the new MTA deal. But to avoid the time and expense of preparing a supplemental environmental impact statement (SEIS), ESDC publicly maintained that the project completion date had not changed. The ESDC board met to review the 2009 Modified General Project Plan on June 23, 2009. Introducing the new plan, Senior Counsel Steve Matlin told the directors, “Without these changes, the project cannot move forward.”

As I sat in the board meeting listening to Mr. Matlin, I could not help considering his presentation against the backdrop of government response to the financial turmoil of 2008 and 2009 that had then only recently crested. In order to avoid a global financial meltdown, rescue packages were assembled for Citigroup, AIG and other financial institutions that were perceived to be in danger of collapse due to over leverage in the derivatives market. Mr. Matlin’s appeal on behalf of Forest City Ratner had a similar ring, ascribing to the Atlantic Yards project a moral imperative requiring an urgent government response. Like the banks, Atlantic Yards should also be considered too big to fail. To no one’s surprise, ESDC’s board voted to adopt the new plan.

We know what happened next. By avoiding an SEIS, Forest City Ratner was able to close financing for the Barclays Center arena before a deadline allowing it to issue tax-exempt debt expired on December 31, 2009. Then, after a prolonged legal battle by residents, community organizations and elected officials marked by obfuscation by ESDC, a State Supreme Court in July 2011 ruled that ESDC’s approval of the 2009 plan without an SEIS violated State environmental law. The same Court later found that had ESDC been candid about the terms of its agreement with FCRC at the initial hearing, Atlantic Yards may not have been allowed to proceed under the 2009 plan.

Fast forward to today. ESDC has yet to produce the court-ordered SEIS, which is supposed to include a study of alternatives to the delayed plan. Meanwhile, Forest City now expects to complete the first residential tower to be built at the Atlantic Yards site in January 2015—three years later than the schedule renegotiated in 2009. No date for the start of the next building has even been announced.

This time, delays at Atlantic Yards can’t be blamed on litigation from the project’s opponents. Nor can delays any longer be blamed on a bad economy: a recent report by the Downtown Brooklyn Partnership shows residential development in the area near Atlantic Yards skyrocketing, with 8,000 apartments completed since 2006, and 3,300 under construction. No, the chronic problems with Atlantic Yards not performing on its expected schedule must now be recognized as primarily a function of its status as a single-source project. With Forest City Ratner granted a 25-year lock on the entire 22-acre site, Atlantic Yards now exists outside the booming Brooklyn real estate market, and its progress is wholly dependent upon the financial resources of its only developer.

In its haste to bail out a project suggested to be too big to fail, ESDC may have acted not only illegally, but irresponsibly relative to its fiduciary obligation to the people of New York State. The notion of “too big to fail” is also associated with the concept of “moral hazard,” the tendency for people to be willing to take greater risks if they believe others will bear the consequences of their failure. Atlantic Yards is said to be the largest single-source construction project in New York City history. Yes, Forest City has invested hundreds of millions in Atlantic Yards, but would it have done so if it could not expect to get bailed out by the State when the project fell behind schedule? What if Atlantic Yards really represents more risk than any one developer can safely assume?

That possibility is now acknowledged by Forest City itself, which in October of last year announced a plan to sell a majority interest in Atlantic Yards to Greenland Holdings Group, a foreign developer owned by the government of China. Under the expected terms of the sale, a joint venture will be created in which Forest City will own 30%, and Greenland will own 70%. As I suspected in an earlier post, Greenland will have control of the project, appointing a majority of directors as well as the Chairman and CEO. Forest City will receive cash from Greenland to cover its capital outlay to date.

The Greenland transaction is being merchandized by Forest City and ESDC as a way to move Atlantic Yards forward more quickly, but in fact it is nothing more than another bailout for Forest City. Under the proposed joint venture, Atlantic Yards will remain a single-source contract, but now the public will be exposed to the financial vicissitudes of a foreign government in a country whose economy is experiencing significant volatility, with unpredictable and potentially significant future risks. Despite calls from elected officials, Forest City and Greenland have so far been unwilling to commit to restoring the original schedule on which affordable housing was to be delivered. And by approving the Greenland deal before the court-ordered SEIS is issued, ESDC will be essentially cementing the delayed 25-year project schedule it illegally approved in 2009 before it has completed a study of alternatives. Forest City, on the other hand, will walk away from the deal having realized a return of capital from its investment, while maintaining an upside in the project going forward.

What could possibly justify the approval of this sale by our State government? Forest City’s involvement in Atlantic Yards alone surely does not make the project too big to fail. Its default on its obligations under agreements with ESDC and MTA would not precipitate a national or even regional economic crisis. In fact, it’s unlikely that such a default would dent the exploding residential real estate market in downtown Brooklyn. And even though there would probably be a short-term impact to the shareholders of Forest City Enterprises, the company itself is diversified enough that it would over time recover. On the other hand, bidding the remainder of the project out to multiple developers would reduce the public’s risk, improve its chances of getting benefits like affordable housing delivered sooner, and even provide an opportunity for more transparent and accountable project oversight.

When the U.S. government came to the rescue of troubled financial institutions (and automakers), it took back equity and was able to make a profit for the public. But another bailout for Atlantic Yards will only increase the potential for loss to the public, do nothing to increase the certainty of realizing promised benefits, and so virtually assure we’ll be in the same place again in a few years. Conversely, ESDC’s illegal approval of Atlantic Yards’ 2009 plan based upon representations by FCRC that it could still complete the project in ten years provides ample justification for the agency to defer approval of Greenland transaction until it’s clear it represents the best deal for the public. So it’s time for the Governor to break the cycle. If he doesn’t, expect his successor to negotiate the next bailout with a government half way around the globe.