Friday, March 21, 2008

And Then There Was One

Well, it was printed in the Times so it must be true. Bruce Ratner has indicated to that the Atlantic Yards project just consists of a basketball arena, for the time-being. This is stunning. Ratner's expertise lies in building commercial space and then filling it with tenants he recruits through government and society connections. Got that? Ugly offices with public tenants. Not hoops.

What's irritating about the development is that there are very few people that object to some kind of housing being built in that spot. Not Develop Don't Destroy, not ACORE. A lot of us had assumed that the arena was an excuse for Broooooce to build some more of his signature ugly skyscrapers, but the man seems set on going ahead with the arena, with construction set to start by the end of the year.

The reason for the delay is pretty straightforward. The CMBS market has seized up, and construction lenders are reassessing their commitment to speculative office buildings in untried locations (Prospect Heights not being a white-collar hub right now). Actually, the CMBS issue is probably not a factor, since the debt would not be refinanced in that market for a good few years, I'm guessing.

Once we factor in the rumoured difficulties in finding enough tax-exempt capacity for the affordable housing element, and the looming condo glut on Fourth Avenue (I'm not saying it's going to pressure prices, just that there are a hell of a lot of units down here), it's evident that Ratner's crunch-related slowdown is not a head-fake. I guess one way to test this thesis would be to see if Extell's bid is still on the table.

So, where does this leave the arena? I'm glad to be proved right in my (definitely private, possibly public) predictions that the cost of the arena was going to get very close to $1 billion. I'm less happy to learn that Ratner still thinks he can make a go of moving a basketball team to Brooklyn.

The financing picture is beginning to look trickier. First bit of good news for the developer - the bond insurers are still open. The bad news is that they're not that interested right now in the more speculative end of the market (that just above what the agencies describe as speculative grade, and what the rest of us call junk). The ones that are still standing are raking in high premiums for turning silver bonds into gold, rather than bronze into gold, which is a business that is a little more capital intensive.

The alternative would be to turn to the banks to finance the arena, rather than the bond market. They've done this before, but interest on bank loans would not, as far as I know, be exempt from tax. The Times article suggests that if the arena loses its allocation of tax exempt bonds this might push up the "cost" of the arena. This is a little misleading. It won't push up the construction cost of the arena (in fact, banks might demand a less expensive set of insurance contracts for the contractors on the arena), and the upfront fees from banks and Goldman Sachs, as bond underwriter, would not be appreciably different.

But it would increase the debt burden on the project hugely, so much that Ratner, as team owner, would see even less of a return on his investment in the team because he's having to devote a higher proportion of team revenues to servicing the arena debt. I'm doubtful that the arena could go ahead with a bond financing without the bond insurers, unless Goldman can scare up a very highly-rated alternative insurer (Buffett?).

Right now Ratner's sitting on some sites with some serious potential in a gentrifying neighbourhood. Assuming that the area's demographics keep moving in the same direction despite a recession (a big if), he'll eventually see a return, though I can't help but think a Boymelgreen/Newswalk-type job on Ward's Bakery would have made him more money. The arena though is looking edgy. I'm sure he's too discreet to be shopping the team that publicly, but he'd be crazy not to look into it.


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