Ratner puts debt-ridden Brooklyn Nets arena up for sale after just two years

Bruce Ratner, the developer who spent ten years buying the New Jersey Nets and then fighting a bitter court battle to tear down houses in Brooklyn to make way for a new arena and brought in a Russian billionaire partner to help pay the bills, is celebrating his ultimate victory the only way he knows how: by putting the arena up for sale.

Developer Forest City Ratner is marketing its majority interest in the Brooklyn arena that is home to the NBA’s Brooklyn Nets, seeking a buyer for some or all of its 55% stake in the building, according to people familiar with the matter.

An arena spokesman declined to offer details, but said in an email that “Our goal is to identify a strategic partner as we continue to capitalize on the great performance of Barclays Center.”

“Great performance” sounds nice when shopping the place around to buyers, but the fact of the matter is that the Barclays Center hasn’t done great in terms of its bottom line: It just about barely broke even in its first full year of operations, 2013, despite record-setting ticket sales. (The Wall Street Journal’s Eliot Brown, who earlier reported that the arena turned a tiny profit, now says that the arena reported a small loss in 2013.) And while arena revenues were up in the first half of 2014, they’re still well below projections, and not likely to improve significantly as the Nets honeymoon wears off and a trade war for concerts heats up with the newly renovated Madison Square Garden. (Yes, the Islanders arrive in 2015, but as we’ve seen elsewhere, sports teams often cost as much in lost concert revenue as they pay in rent.)

The reason for all this red ink? The $29 million a year in debt that Ratner saddled himself with, while turning over majority ownership of the arena’s biggest money-maker, the Nets, to Mikhail Prokhorov in exchange for more cash to feed the arena’s $1 billion construction budget maw. Even the most successful arenas don’t churn out that kind of profit margin year after year, which is no doubt one reason why Ratner is looking to cash out, though it’ll be extremely interesting to see what price he gets for a building saddled with $500 million in debt, not to mention Brook Lopez’s tender feet.

There’s much more, as you’d expect, at Atlantic Yards Report, including the observation that Ratner is really only selling operating rights to the arena, since it technically belongs to the state of New York in a complicated tax-dodge arrangement.

The big question remains, however: Why on earth did Ratner care so much about this project that he moved heaven and earth (and Daniel Goldstein), plus assumed half a billion dollars in debt, to make it happen? The man has never shown any interest in basketball, and ditched control of the team as soon as possible after the project was approved. There was the theory that the arena was a loss leader for getting hold of valuable Brooklyn land to develop with housing, but Ratner’s planned housing towers are doing even worse than the arena, though he’s still shopping around in China for investors. That leaves … wanting to drum up foot traffic for his mall across the street? Wanting to make even more of a name for himself in Brooklyn real estate, even if it’s not an especially positive one? Presumably he had something in mind all along — or maybe it’s just Hanlon’s Razor.

Brooklyn arena tower builder ups and quits, affordable housing back on “maybe someday” timetable

Skanska, the Swedish construction giant that previously stopped work on the first housing tower slated to accompany the Brooklyn Nets arena — which, so it happens, is right down the street from the library where I am typing this — has now quit the project altogether, on the grounds that it is a fruitless money suck:

Skanska USA Building canceled its contract Tuesday for the much-anticipated yet long-delayed modular apartment building at Forest City Ratner Cos.’ 22-acre Atlantic Yards project, which was recently rebranded Pacific Park—though the long-running legal dispute is far from over.

“We could not continue to incur millions of dollars in extra costs with little hope that Forest City would take responsibility for fixing the significant commercial and design issues on the project,” Richard Kennedy, co-chief operating officer at Skanska USA Building, a subsidiary of Swedish construction company Skanska, said in a statement.

The timing of the announcement was not accidental: As Atlantic Yards Report reports, Forest City Ratner and Skanska had a court date today to try to resolve the construction contract, which has now officially expired. Instead, Skanska wants FCR to re-bid the work back out to them as a job (enabling them to keep running the custom modular construction unit factory — aka GIANT LEGO FARM — at a price they’re happier with), while FCR wants the judge to order the factory to reopen, and let FCR run it, or something like that. The judge, from the sound of it thoroughly disgusted with the whole matter, ordered the two sides back to the bargaining table, but if all they’re going to say is “Screw you!” “No, screw you!” then this isn’t going to get very far.

And speaking of not getting very far, what likely happens next?

Scarpulla did give Forest City a smaller win, agreeing was a “Major Decision” for the LLC to change its managing member, and forced Skanska to hold a vote it had otherwise avoided.
That vote, presumably ending in a 3-3 tie, would trigger a months-long deadlock process contemplated by contract, leading to potential buyout of one or the other’s interests.
That, over time, also would jeopardize the modular factory’s future, given the need to rehire and/or retrain workers, and further delay the completion of B2.
No wonder Scarpulla several times urged the parties to consider mediation. “I’m not trying to scold anyone,” she said. “I’m just saying that the path you’re going down is just going to cost you more money.”

Yep, this is only going to get uglier from here. Good thing it’s just a private construction dispute, and not something that was being counted on as the payoff for hundreds of millions of dollars in tax breaks and other public subsidies — oh, wait.

Nets arena housing halts construction, as builder says newfangled design “just doesn’t work”

I’m not up to researching the Atlantic Yards section of The Brooklyn Wars just yet (current status report: wrapping up Coney Island chapter, starting to move on to Bushwick and Downtown Brooklyn), but I may have to make an exception for this news: Work on the housing tower next door to the Nets‘ arena, which in recent months had finally started to take shape as the first of the project’s promised housing component, abruptly shut down this week amid complaints by the builder that designer/arena owner Forest City Ratner massively underestimated costs.

Take it away, Charles Bagli of the New York Times:

Skanska on Wednesday unilaterally closed the factory in the Brooklyn Navy Yard where 157 workers assembled and built the steel-framed modules for the first of a planned 14 prefabricated apartment buildings, at Flatbush Avenue and Dean Street.

A day earlier, Skanska ceased work at the construction site, where the building rises to only 10 floors of its 32-story height, 21 months after work started.

“The purpose was to save time and money and they’ve done neither of those things,” said David Burney, a former commissioner of the city’s Department of Design and Construction.

For those who haven’t been religiously following the Atlantic Yards saga, this building was supposed to be a breakthrough in “modular construction,” where sections of the building are assembled offsite by assembly-line workers and then stacked up like Legos to make a giant apartment block. (As you can see from the work done so far, they even picked Lego colors.) This required building an entire factory to manufacture the modular units, which, surprise surprise, took a while; the finished building was originally supposed to open this summer, but remains only one-third completed.

And it looks like it’ll stay that way for a while, to hear Skanska tell it:

Richard A. Kennedy, co-chief operating officer of Skanska USA, was emphatic that, contrary to Forest City’s claims, it had not “cracked the code.” Its design, he said, was flawed.

“It just doesn’t work the way it was sold to work,” he said. “We’ve had real challenges with it that’ve delayed the project and led to cost increases. We finally came to the decision to stop work on the project until our significant commercial issues are resolved.”

Forest City, Mr. Kennedy said, had ignored its “design responsibility” under the contracts.

“It was represented to be a complete and buildable modular design,” he said. “That simply was not the case and that’s what we’ve been struggling with.”

None of this should be terribly surprising, given that using modular construction on anything over 20 stories is “quite out of the ordinary,” as Brooklyn modular architect James Garrison told me shortly after the project was first announced, since taller building require stiffer frames for wind resistance, which isn’t modular’s strong point. Still, here we are, two years after the arena opened, and the promised 6,430 units of new housing (one-third of which were supposed to be “affordable,” though it turned out most of those would go to families earning more than $100,000 a year) currently amount to one half-finished building that will now likely be tied up in litigation, or at least some really nasty out-of-court wrangling. According to a new deal negotiated in June to speed up development, Forest City Ratner will be subject to up to $2,000 per unit in penalties if the buildings aren’t completed by 2025, but the way things are going, it has to be a serious worry that FCR will just throw in the towel and take the fine.

New book “The Brooklyn Wars” to rake muck of Nets arena deal

I know I already ask my readers here to become Supporters of this site (which reminds me, I need to set my next members-only chat date soon), but I do want to alert you to another project I’ve just launched that may be of interest: “The Brooklyn Wars,” a book drawing on my decade-plus of reporting on the massive changes that my home borough has undergone.

I’ve launched a Kickstarter site where you can preorder the book and win fabulous rewards. (One FoS reader has already availed himself of the “Go to a Nets game with Neil and have him complain about the terrible sightlines the whole time” level.) And yes, there will be sports subsidy content: One of the four main sections will focus on the machinations behind the construction of the Brooklyn Nets arena and what it’s meant for its Prospect Heights neighborhood and Brooklyn as a whole since.

Please check it out if you’re interested — and given the way nearly every city seems to have its own burgeoning mini-Brooklyn, or at least is trying to create one by force of will, it’s a story that should have relevance far beyond the confines of one borough. Besides which, everybody is fascinated by Brooklyn, right?

Nets arena cheap seats should come with oxygen bottles

I attended my first Brooklyn Nets game last night, and my overall impression didn’t change much from my earlier visits to the Barclays Center for concerts: The design lends itself to major foot traffic jams both getting in and getting out, the acoustics are lousy, and the food is overpriced even by sports concessions standards. ($7 for a small container of popcorn, $6.75 for a square slice of pizza, beers starting at $8.50.) Mostly, though, since we had bought cheap tickets for the last rows of the upper deck, the overall impression was: Man, these seats are ridiculously high.

How high, exactly, is a question I’ve been trying to figure out since getting home from the game. The roof at Barclays Center peaks 137 feet above street level, and the floor is about 20 feet below. The New York Mets‘ Citi Field, by contrast, is 116 feet tall, with a field that’s pretty much at grade. Now, the last row of seats at Barclays isn’t quite up to the peak of the roof, but it’s pretty close — meaning that, at least by this rough guesstimate, the worst seat at the Nets’ 18,000-seat arena is just about as bad as the worst seat at the Mets’ 40,000-seat stadium.

If anyone out there has more precise figures, please share them, as this is a very rough back-of-the-envelope estimate. Still, it’s a reminder of just how bad a double layer of luxury suites can be for the views of everyone sitting above them, not to mention an indication that something went badly wrong in the design when Bruce Ratner was value engineering it. And, of course, it’s only going to get worse for hockey.

 

Brooklyn Nets project wants to raise more cash by selling more green cards

Atlantic Yards Report had a long story yesterday (it doesn’t have any other kind) about how the Brooklyn Nets‘ arena developers are looking to do another round of EB-5 financing, the mechanism that allows foreign investors — mostly Chinese, in this case — to jump the line for green cards if they’ll extend interest-free loans to U.S. development projects in blighted neighborhoods. It’s well worth a read if you’re interested, especially for the bit about how the Chinese government will actually be benefitting from this as a co-investor, but I just wanted to call out this quote it pulls from an article last year by Dartmouth business professor John Vogel:

One of the oddities about the EB-5 program is that the U.S. government is giving out the green cards, but the entrepreneur who puts together the investment gets the money. This scheme seems inefficient and open to corruption. If our government really believes that it is a good idea to sell green cards, maybe we should drop the pretense that this is a job creation program. It might be more efficient to have the money go directly to the U.S. Treasury and reduce the deficit by billions of dollars a year.

This is actually an excellent way of looking at it: Green cards are a public asset, one that the government mostly chooses to give away in order of application, but which here are being handed out in exchange for investment cash. In other words, the government is selling green cards, but it’s not getting the money — that’s going to private developers.

Now, you can say that it’s encouraging private development in places that need it (though it’s tough to imagine anyplace that needs a hand in promoting development less than Brooklyn), but still, is that the most efficient way to get housing built? Vogel suggests using the money to reduce the deficit, but it could equally be used for government construction projects, or jobs programs, or just handing out cash to poor people. It’d be nice to see a cost-benefit analysis of this, but somehow I doubt the lobbyists who helped institute EB-5 in the first place are going to be pushing for funding of that.

 

New arena has Nets’ value soaring, Nets’ profits in the toilet

The new Forbes NBA franchise value figures are out, and the Brooklyn Nets jumped almost 50% in value for the second straight year, thanks to their new arena in the borough of artisanal mayonnaise. Which must mean they’re making money hand over fist, right?

The Nets are on track to lose at least $50 million this season even with an extended playoff run, thanks to a $101 million payroll and luxury tax bill of at least $80 million.

Um, okay, then. There are three possible takeaways from this. One, which is Atlantic Yards Report’s view, is that it doesn’t matter how much money you lose on a pro sports team, since you’ll make it up when it’s time to sell. Two would be that Forbes’ team valuation figures are on crack. (It’s worth noting that the magazine’s annual profit and loss figures have been pretty much on target when compared to data later publicly released, but their team valuations haven’t matched up that well with sale prices.) Or three, people who buy sports teams will pay crazy money to sit in the owner’s box, even if it’s to own a team that has no hope of ever turning a profit. I wouldn’t have picked owner stupidity at one time, but recent evidence has me less certain.

Barclays Center barely breaking even despite #1 arena ranking

Hey, remember how the Brooklyn Nets’ Barclays Center was rated the top-grossing arena in the U.S. for the first half of 2013, and I concluded that it could be “an exception to the rule that arenas don’t usually make money” after paying off construction costs? Turns out I may have been slightly hasty:

In its first full year in operation, the arena brought in about $30 million in operating profit, the company reported on Monday, far less than the more than $76 million projected when the arena began construction in 2010.

That’s from the Wall Street Journal’s Eliot Brown, who took to Twitter to add:

So even the top-grossing arena in the country barely broke even in its first full year. Apparently John Christison was right when he said it’s tough to make money on these things. (Which isn’t really a surprise, him being a longtime arena manager and all.)

Norman Oder of Atlantic Yards Report takes a closer look at why the Barclays Center had that $46 million shortfall in operating profit, and finds that it’s virtually all added expenses:

Brown’s article doesn’t link to the actual SEC filing, so we’re at a dead end for the moment on how the Barclays Center managed to blow through an extra $50 million in spending in its first year. More on this later, I hope.

[UPDATE: Brown informs me that the SEC and bond filings aren't exactly comparable because they don't use the same accounting measures, so it's probably not an extra $50 million in spending. His conclusion that the Barclays Center is barely breaking even stands, though. One possible explanation: Even though the arena is doing gangbusters business, it's likely doing so by offering "generous deals to woo big names, either by offering low rent or by guaranteeing a performer a high portion of ticket sales," as Brown reported in October.]

Brooklyn arena developer sues NYC to get lower tax bill on its parking lots

Forest City Ratner, the developer of the Brooklyn Nets arena and the as-yet-mostly-unbuilt surrounding Atlantic Yards housing tower project, is suing the city for lower property tax payments on one of its parking lots. Because that’s just what developers do:

The Finance Department put the block’s market value at $11.2 million for its current fiscal year, which began July 1. But FCR says in a lawsuit filed in Brooklyn Supreme Court that it’s only worth about $1.6 million…

“As you can imagine, real estate and development companies like Forest City have a fiduciary responsibility to review and question assessments in a timely manner,” FCR spokesman Joe DePlasco told DNAinfo New York.

“This is a standard operating procedure for these types of companies.”

FCR, you may recall, last year sued the city over its Barclays Center tax bill, then later said it was a mistake, after realizing that Barclays Center doesn’t pay taxes. Nor does the parking lot block, technically, but it does pay PILOTs (payments in lieu of taxes), which, unlike the PILOTs for the actual arena site, the city gets to keep, rather than kicking them back to pay off Ratner’s arena costs.

Under the deal to build on the Atlantic Yards, FCR leases the block for a nominal fee from the state’s Empire State Development Corporation.

Since the state owns the Atlantic Yards, the land is exempt from property taxes. However, FCR must make payments in lieu of taxes, or PILOTs, to the city to develop the block.

The PILOT amount for the block is the equivalent of what FCR would pay the city in property taxes, according to the ESDC. The Finance Department determined that for this fiscal year the property tax for the block would be nearly $700,000, according to city records.

If the court agrees to lower the city’s appraisal, FCR would in turn pay a smaller PILOT amount, according to the ESDC.

This is apparently the kind of lawsuit that land owners file all the time, so no hard feelings or anything between FCR and the city. Unlike the lawsuit by employees of Ludwig’s Drug Store charging racist treatment when they attended games in the store’s luxury suite, which looks to have hard feelings aplenty — understandable when you’ve been charged $1,000 for a pizza.

NYC development agency: Nets arena earning us more than half what it’s costing us, woohoo!

The Brooklyn Nets‘ Barclays Center brought in $14 million in new tax revenues to New York City last year, according to … well, according to the New York Daily News, which reported it in an exclusive this morning, but they got the info from … the New York City Economic Development Corporation, which got it from … “data provided by Barclays Center developer Forest City Ratner.”

Okay, then.

The $14 million figure claims to be a measure of spending by non-New York City residents both inside and outside the arena, as well as income taxes paid by Nets employees; the Daily News article doesn’t say whether this is only of non-city residents who came to the city just to go to Barclays, since as you may have heard, some people visit New York City for other reasons and might take in a basketball game while in town. Nor does it say how Forest City Ratner compiled the data — I’m guessing with fan surveys, since they claim to be tracking spending outside the arena as well, but no details have been provided. I’ve asked NYCEDC for more specifics; if I hear back, I’ll post an update here.

Anyway, if the $14 million in new tax revenues is true, how good is that for New York City? Assuming it lasts for another 30 years and doesn’t tail off as the new-arena smell wears off, that’d be worth about $200 million in present value to the city. City taxpayers, meanwhile, are putting up about $350 million toward the arena ($170 million in cash, $180 million in tax breaks), according to the New York City Independent Budget Office, meaning — okay, that’s a pretty crappy return even if you take the Nets’ claims at face value.

The IBO, incidentally, previously estimated that the city would earn about $130 million in new revenues to pay off its $350 million arena cost, a number that could end up just about right in line with the Nets’ claims, if out-of-town arena attendance dips some in coming decades. So props to the IBO for their projection, and way fewer props to the Daily News for citing the IBO’s report without ever mentioning the $350 million cost figure. It’s almost like they fired all their editors or something.