Tuesday, January 13, 2009

I Wish I Could Quit You, Marty

I thought it was time to blog about something else. Maybe that wrong-headed story in the Wall Street Journal that wanted to pat Exxon on the back for ignoring global warning and alternative energy, but then overreached by suggesting that Exxon was therefore in a good enough cash position to dictate terms to state-owned oil companies (It isn't, even with lower oil prices).

And then Marty Markowitz said something witless, and I had a Michael Corleone moment.

[Obligatory digression. Top local cable news channel NY1 (Mrs. Cutesome won't allow News Channel 12 in the house, and I don't think that has anything to do with the channel's Dolan-ownership, but I digress within a digression) has a section of news designed for the viewer's particular Borough. For some reason I'm getting Queens News Now, from the delightfully ginger Jon Weinstein, despite living far in Brooklyn from Ridgewood or Greenpoint or some other disputed ground. I thought of complaining to Time Warner Cable, who I guess regulate this kind of thing before I realised that Brooklyn News Now would double my exposure to Marty Markowitz, and therefore triple my blood pressure. I'm learning to love Mr. Weinstein. Oh I see. there is no Brooklyn version. They've abandoned us to Cablevision. The bastards.]

Anyhow, as I'd predicted, leaking news of this proposed reduction in the size of the arena at Atlantic Yards served to warm up the local politicians rather nicely. Only Marty was shameless enough to pretend that this is all his idea. He did a similar thing in calling for the reduction in height of the project's largest tower after the decision to reduce it was probably made. Now THAT"S leadership, kids.

Here's part of the statement:

"To that end, I am asking Forest City Ratner and the Empire State Development Corporation to give Barclays’ design a second look, and conceptualize a sports and entertainment venue that is more economically feasible but provides the modern amenities our residents and visitors to Brooklyn demand and deserve."

Back from the lavs? Good, I'll continue. So Marty, not normally known for his gum-chewing-and-walking-concurrently skills, has now set up stall as a value engineer. I'm absolutely sure that just as soon as he's put down his copy of the Very Hungry Caterpillar he'll be telling us where we can trim the costs from the project.

Now I've just put down my copy of the Very Hungry Caterpillar, which I was using to induce unconsciousness in Federico N. Corp. And some utterly brutal (in a good way) individual sent me a link to the financing plan for the project that Assemblyman James Brennan pried out of Forest City Ratner in 2007. Since I always complain that the inputs and outputs of the arena financing are rather opaque it behooves me to take a look at these.

So what do we find out?

1) The arena costs were estimated back then at $777 million. So, roughly halfway between the most recent Gehry estimate of $950 million, and $500 million price tag for the value engineered arena that the received wisdom is congealing around. But this "total cost" includes a bunch of things like legal and financing costs that are absolutely not going to be easy to scale back. The hard cost of the arena in the Brennan projections was about $537 million. Was the subsequent increase, which we'll generously assume to be all hard cost increases, just a result of costing in the Gehry Shiny? I doubt it. I'd love to know, thanks to Mr. Goldstein's efforts, whether they've kept within their $3.5 million legal budget, though.

2) Financing costs. Total debt on the project was forecast to be $672 million, and according to the projections the arena would be finding $43 million a year to pay that off. Which gives us 6% debt service. Unless the arena is just meeting interest, and not paying down principal on the loan, that's a ridiculously low figure, even for then. You could throw another 2% and still be hopelessly optimistic, and that takes your debt service to $60 million. That, right there, is your explanation as to why the arena's economics are so sensitive to debt market conditions. $60 million would be almost twice as much as the arena's projected operating costs.

3) What Ratner will use to pay back the arena debt. As far as I can tell, Ratner is not dedicating Nets ticket revenue to arena debt repayment. Can he? I've got no idea. NBA experts do chime in. He's throwing in luxury box revenue, revenue from non-basketball events, a ticket surcharge, and "sponsorship" revenue. Luxury box revenue and sponsorship (I'm guessing naming rights and other advertising) would account for roughly 2/3 of projected revenues. When we say the economic climate is necessitating a smaller arena, we're hearing that $40 million from box sales and $32 million from sponsorship couldn't be increased in the current climate to meet the debt service and operating costs of a $950 million arena. Can he even hold on to those figures, given how brutally the current climate is afflicting market conditions?

4) Fun fact. Do the projections really say that for three years the arena company would make contributions to the Nets to cover team losses? I think they do. That would be your tax subsidies going to help Ratner defray the costs of his ill-advised venture into the business of sports. He's already borrowed $60 million from hedge fund Fortress at above ten percent interest to help meet these losses, and unless Fortress wants to maybe convert that into an ownership stake we can't imagine that servicing the loan would do wonders for the amount of cash Ratner expects to get out of the Nets even if they did start losing less money. I even saw today that Fortress has stopped funding on a loan to the Winter Olympic Village in Whistler, British Columbia. That project has a pretty solid rationale and is coming in alongside direct government funding, so lord knows what they're making of Ratner's flounderings.

I am absolutely no expert in the economics of sports, and probably have no right, as I did the other day, to call sports consultants "sheisty". But going through those figures has been a revelation. Remember, the arena is apparently the bit that's most feasible in the current climate, and it looks well shaky to these eyes.

I dare say you read today about Barclays Capital, the saviour of Atlantic Yards and Lehman Brothers (an attachment to persisting in unforgiving circumstances that rivals St Jude's), is laying off another 2,100 workers. Do you think they'll waive their financing fees on the arena bonds if Bruce asks nicely? Fat lot it will probably do. It's been estimated that Lehman Brothers shelled out much more on luxury boxes on the Jets/Giants stadium than it could have made in underwriting fees on the stadium's debt, though the tax code might have left it out ahead on that one.

Wow. I need a lie-down. Coming up, a look at the queasy presence of children in cock-rock epics, and a salute to the return of Monsieur BonHomme, though not the circumstances of his return.


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