Atlantic Yards, Pacific Investors

On October 11, the Wall Street Journal reported Chinese developer Greenland Holdings Group signed a memorandum of understanding with Forest City Ratner Companies to purchase a 70% interest in the undeveloped portion of the Atlantic Yards project. Forest City Ratner CEO MaryAnne Gilmartin was quoted as suggesting the deal would result in a faster build-out: "It's just for us a great way to roll out the project and build it quickly." A statement by Greenland’s chairman Zhang Yuliang emphasized the affordable housing component of the project, saying Atlantic Yards "is about how we build sustainable, well-designed housing to meet the needs of diverse groups of people." And Forest City's press release quoted Mayor Michael Bloomberg as saying, "This investment would allow us to move forward with one of the most ambitious affordable housing programs in our City's history," as if any housing at the Atlantic Yards site was dependent upon the closing of the proposed transaction, instead of being an obligation of a deal signed four years ago between Forest City and the State of New York.

It’s not surprising to see these sorts of comments in communications about the proposed transaction. Since the opening of Barclays Center in September 2012, the press has often focused on the fact that Atlantic Yards’ promised affordable housing has yet to be delivered. And in a mayoral race that has largely turned into a referendum on the policies of the Bloomberg administration, Atlantic Yards has often come up as an example of the type of generous one-sided deals the Mayor has made with powerful developers over the last twelve years. How better to position this sale than as a solution to criticism of Atlantic Yards’ delay in providing much-needed housing?

Of course, it hasn’t always been possible to rely on statements Forest City makes about Atlantic Yards. Remember when Frank Gehry was going to design the project? Or when construction would be completed in 10 years, instead of 25? And how about those 10,000 permanent jobs in the office building that is now indefinitely shelved? In this case, it seems to be just as likely the Greenland transaction will further erode Atlantic Yards’ accountability to the public, as it is that the deal will get the project done sooner.

The final terms have yet to be announced, but let’s start with what we know. When the Empire State Development Corporation and Forest City Ratner signed Atlantic Yards’ Master Development Agreement in December of 2006, Forest City owned about 60% of Atlantic Yards Development Corporation LLC, the entity that is to develop the residential portion of the project. Outside investors owned the other 40% of AYDC (the MDA does not identify these investors). The proposed 70% sale to Greenland therefore probably involves a recapitalization of AYDC where existing investors (both Forest City and others) will receive cash and new shares in exchange for their current shares. The Journal’s report supports this theory, mentioning that Forest City Enterprises CEO David LaRue in September told analysts that his company "wasn’t expecting to receive more than the cost of the land" from a sale at Atlantic Yards. Mr. LaRue’s admission that Forest City Ratner’s parent company will receive a return of capital makes sense: it seems highly unlikely Forest City would accept a significant dilution of ownership following the Greenland deal without receiving at least some cash. (The Journal stated that Forest City has $500 million invested in Atlantic Yards.)

Therefore, one probable result of the Greenland transaction is that Forest City will be taking money out of Atlantic Yards before the project has delivered any of its promised public benefits. Even if Forest City recouping its investment is not as politically objectionable as would be its realizing a profit at this stage, the public of course has no similar option to recover its direct investment to date of more than $300 million. The sale to Greenland will reduce Forest City’s exposure on Atlantic Yards, without any change to the risk the public bears in subsidizing such a large single-source development. With less skin in the game, will Forest City really feel motivated to move more quickly on development at Atlantic Yards?

Nor is it certain that Forest City will have sole authority to decide how quickly to build. The closing of the sale with Greenland itself will not provide all the capital necessary to complete the Atlantic Yards project. As stated in Forest City’s press release, “Under the proposed joint venture, Greenland Group would acquire 70 percent of the project, co-develop the project with FCRC, and share in the entire project costs going forward at the same percentage interest,” meaning that the sale to Greenland is mostly a license for the Chinese developer to invest even more later. Since Greenland would be on the hook to provide most of the future capital, it’s very likely it will also demand representation in decision-making about the schedule for future development as part of the final deal with Forest City. Maybe that’s why in its most recent 10-Q filed with the SEC, Forest City Enterprises disclosed its search for a joint venture partner at Atlantic Yards by stating, "if we are successful, it could result in forming joint ventures whereby we grant joint control or lose control of the asset."

And Greenland Holdings is owned by the government of China. While we may not find any problem with Chinese investment in New York City real estate, the idea that a foreign government could have a say on when affordable housing is made available to Brooklyn residents in danger of displacement is another question entirely. That possibility is particularly galling given the continuous calls for reform of Atlantic Yards oversight made by civic groups, affordable housing organizations and elected officials since the project’s approval in 2006. If it has been difficult for the public, its elected representatives, and the ESDC to get Forest City Ratner to deliver on its commitments, how much more influence can they expect in Beijing?

The Atlantic Yards Master Development Agreement requires the Empire State Development Corporation to approve any sale of Forest City’s interest in the Atlantic Yards project, allowing the agency "reasonable discretion" in granting such approval. As Atlantic Yards Report related from the last ESDC board meeting, CEO Kenneth Adams acknowledged his agency’s role, yet also managed expectations about the Greenland deal, stating the "infusion of financial support to the project should lead to a more timely buildout... time will tell. We're hopeful that will accelerate the pace."

That sounds a lot like the ESDC of the summer of 2009, when it approved what amounted to a delay in Atlantic Yards’ completion from 10 to 25 years, in turn prompting a lawsuit by community organizations and elected officials angry at the agency’s failure to first study the impact of such a change. ESDC later claimed in court papers that it had relied upon representations by Forest City Ratner that the project could still be built in 10 years. A State court didn’t buy that, and ruled that ESDC approved the modified plan illegally. In July 2011, the court ordered the agency to revisit the plan for the project’s second phase; ESDC has yet to comply.

Governor Cuomo wasn’t in office in 2009, but he’s still responsible for making sure that this time will be different. ESDC will simply not be in a position to know if the Greenland sale is good for the public until it has completed the study of development alternatives required by the court-ordered environmental impact statement, and the agency should not act on the deal before then. Properly formulated, those alternatives would include options, like bringing in additional development teams, that could reduce the public’s exposure to construction delays more effectively than would the proposed sale to Greenland.

But what if ESDC decides after alternatives are studied to move forward with the Greenland deal? The experience of the 2009 Modified General Project Plan for Atlantic Yards demonstrated that ESDC can’t rely on the good intentions and reassurances of Forest City Ratner to deliver on promises of affordable housing and other public benefits. Any approval of the Greenland transaction by ESDC must be conditioned on getting commitments from Forest City on timing and project oversight in writing—as part of a formal amendment to the Master Development Agreement whose terms are worked out in conjunction with elected officials representing the communities surrounding the Atlantic Yards site. Otherwise, with new owners on the other side of the world, the Governor will have let Atlantic Yards slip even further away from accountability to the people of Brooklyn.