Friday, January 09, 2009

Bye-Bye Shiny Shiny

I bumped into Norman Oder quite a while back on the subway, and after he listened to my rantings about the way that financial markets interact with the Atlantic Yards project for a few minutes, he suggested that I write these down. I didn't, partly because travel, work, and family commitments intervened, and partly because most of what I'd have to say about market conditions would be very speculative.

But the news that Forest City Ratner is looking to scale back the size of the new Nets arena and possibly ditch a Frank Gehry design gives me a news hook you could hang a slab of beef on.

Norman wants to know who's responsible for the rather coordinated leaking of news about the scaling-back to three major news outlets. Robert Guskind of the Gowanus Lounge notes that he'd posited just such a future for the project, although he didn't lay down the mechanism by which it would happen.

Allow me to elaborate. What we are seeing here is the debt markets, usually viewed as a somewhat inert mass, biting back. My utterly frivolous guess is that someone involved in the financing process wants to prime city and state officials, as well as that buffoon Marty Markowitz, to realise that the only way for the arena to happen is for them to acquiesce in a big dump of ugliness. That's going to make concrete Bruce Ratner's dream of the Atlantic Terminal Mall looking more attractive than something.

The crowd of financial types surrounding the project - ratings agencies, potential bond investors, the underwriter Goldman Sachs, and whatever sheisty "sports consultant" they're using to produce revenue predictions - have produced a number for the cash they think the stadium will throw off, and it isn't the number FCR wants. Because this number is not anywhere close to the required debt service and return on equity for a $1 billion stadium.

Never mind that the Jets and Giants managed to borrow much more for their Jersey stadium (and their bondholders paid taxes on the interest) for a stadium that will see less use for sporting events. That was then. Required debt service was lower (maybe 1-2%), fans were richer and more devoted, and seat licenses were more lucrative, even if they did enrage the fans.

Maybe, as I've written about in the past but don't have the time to google, Ratner threw every single revenue stream he could think of into the mix, right down to the Jones Soda and Brooklyn Brewery concession takes. And it still didn't make it. Maybe the debt guys went back to Ratner and said "put in more equity" and Brucie's boys said "what f***in' equity? Our properties are mortgaged to the eyeballs and our stock's in the toilet. Where's more equity going to come from?"

At which point, the bankers and analysts and "sports consultants" come back to Brucie and say "weeeeeeell, if we don't think you're going to generate that much buzz, then why don't you slap down something cheap and ugly? There may be some squealing from the local pols but they have proved to be cheaper to pay off in the past than Mr. Gehry,"

Now, I'm not convinced that there is some cheap-ass off the peg stadium that can be slapped down in the middle of Prospect Heights at half the price, even in an economic downturn. I'd venture that NY's construction market is a tad more constrained than, say, Newark's, and there are quite a few condo projects that need to get to completion (and then go rental. Heh) before we see some downward pressure on labour costs. Without knowing anything about relative levels of unionisation, I'd also note that unions have proved a bit of a brake on cost decreases elsewhere.

Can they save some money by ditching Frank Gehry's Shiny Materials? Maybe, but I'd like you to recall that the Yankees and even the Mets stadiums went over budget, and they were basically pastiches of every single other ballpark that's gone up in the past few years. Not that much Shiny there.

So here we are now, observing a rather complex game of three-dimensional chess with ugly buildings as pieces. Aesthetic considerations never really loomed large in the politicians' considerations, certainly nowhere near as much as money and jobs. It probably helped sell the project to the public, at least initially, but Ratner's always been comfortable in foisting ugly and unpopular buildings on Brooklyn when the money's right.

So let's assume that the final tab on the new uglier stadium hits $800 million. Is that what the bond market wants, is it what the politicians can support with a straight face, and will it change the dynamics of the project's legal challenges? Mr. Oder's reporting, and my hunches don't give me any grounds for optimism.


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