Nets of Plenty

Few New York politicians want to see Bruce Ratner fail in his quest to build the Brooklyn Atlantic Yards, which is why the project could cost him very little of his own money. By leveraging hype over the New Jersey Nets, Ratner wants to use millions in public funds in a clever, pay-us-later bid to execute an unprecedented land grab.

On nearly 20 acres of dense residential and commercial property, including the ruins of 150 housing units that would be razed under the province of eminent domain, Ratner envisions more than just a new Nets stadium. The Brooklyn Atlantic Yards (BAY) would include the 19,000-seat Nets arena plus four office towers with an estimated 2.1 million square feet of office space, 300,000 square feet for retail, 4,500 new apartments and a running track that converts seasonally to an ice rink.

This would not be a first for the developer. Ratner is responsible for orchestrating centerpiece projects like the New York Mercantile Exchange, the New York Times building and Brooklyn's MetroTech Center and Atlantic Center Mall. Over the years, he has developed a casual stewardship in his business dealings with New York, most notably as the commissioner of consumer affairs under Mayor Ed Koch. He's also a longtime chum of Gov. Pataki and other political glitterati. His inside relationship with key power brokers should allow Ratner to build the BAY for little more than the administrative costs of applying for state- and city-sponsored loans and managing bond offerings that will attract outside investors. When it's done, Ratner will have gained one colossal equity: a $2.5-billion product, practically all paid for up-front by taxpayer and investor money.

Of the nine projects Ratner has built in New York over the last decade, he has never been shy about seeking public financing and government subsidies-in other words, tax dollars. His apologists play the urban renewal card, claiming that Ratner is sticking his own neck out by developing "under-served" areas where private money won't dare venture, and thus his projects deserve a steady diet of city and state assistance.

The results don't always meet expectations. MetroTech and the Atlantic Center Mall, for example, still fall short of their promise of dramatic economic stimulation. But Ratner's experience with these projects has sharpened his knack for developing well-subsidized marquee projects that look great on the covers of city maps and phone books. He knows how to build stuff that incumbents can point to and say, "Be proud; we're doing big things."

The Brooklyn Atlantic Yards takes that knack to another level. With his winning bid for the Nets, Ratner added the nostalgia power of bringing a professional sports team back to Brooklyn after nearly half a century. Now he's rolling that momentum into support for fronting him the needed $2.5 billion.

Ratner's people argue that their boss will use as much private funding as possible for the BAY, although nothing is yet set in stone. Bruce Bender, head of Forest City Ratner's public affairs, says Ratner's development plan is far from finished and will be refined with input from the local community. "What makes the current plan work is that the arena is directly above one of the busiest transportation hubs in the city," says Bender.

But without a written contract detailing how he plans to finance and build the Brooklyn Atlantic Yards, Ratner has the legal right to be as capricious as he wants when it comes to cobbling together his development plans. This makes Brad Lander, the director of the Center for Community and Environmental Development at the Pratt Institute, a tad uneasy.

"I'm very nervous," says Lander. "What's going to make Ratner live up to the commitments he's made to the community? It's just a little more than a spectacular idea right now. And Ratner is well-connected enough that most everyone has just stood back to let him work.

"How do you ensure that something like this is going to be done in a certain way? Simple: You have a contract. But there isn't one. There may not be one. So I don't see how anyone could be comfortable just trusting Ratner to do the right thing."

Then there's the relative ease with which properties can be condemned under the state's eminent domain law. In September 2002, Pataki vetoed a bipartisan bill that would have required developers such as Forest City Ratner to send a letter to those losing their homes. With Pataki's veto, "ample notification" to homes and businesses slated for condemnation now means nothing more than publishing one of those tiny, barely legible legal notices in the newspaper that no one reads except those checking to make sure their required legal notice is actually in print.

Carol LaGrasse, president of the Property Rights Foundation of America, says that because of the Pataki veto, "unlike almost every other states, New York leaves property owners in the dark until their property is actually condemned." At that point, she says, the public hearing has already passed, and it's too late for property owners to raise objections.

"Unless the government agency has made an important technical error in procedure, all that is left for the property owner is to fight the price that will be paid for the condemned land."

LaGrasse agrees that the Pataki veto was assurance against a full-scale repeat of the MetroTech condemnation, wherein Ratner was forced to cough up $6 million for 250 stubborn buyouts.

Also working in Ratner's favor are flexible qualification standards for a form of financing known as tax increment financing, or TIF, which was first proposed in New York to finance the $1.5-billion extension of the No. 7 train in anticipation of hosting the 2012 Olympics. Essentially, TIF is a way to raise an almost unlimited amount of cash for a project by using subsequent property tax revenue to pay back the debt. With TIF, Ratner can get the money he needs on loan, and instead of paying it back or paying property taxes on the BAY, the property tax revenue goes right to settling the TIF debt.

According to Theresa Divine, a senior economist with New York's Independent Budget Office, "TIF is supposed to be for blighted areas," which doesn't exactly describe the area slated for the BAY. "But in New York, as in most states, that definition is pretty vague." Word is, Ratner will ask his pals in the state for TIF to build the BAY, and only those with a beef against Ratner believe he won't get it. With help from TIF, Ratner can pull in hundreds of millions of dollars to fund the project. Bulldozers will roll and cranes will be raised-with no money out-of-pocket from Ratner.

Tax increment financing is ideal for big-ticket items like the BAY. Unlike general obligation bonds, which are interest-bearing loans that count against the city's limited budget, TIF bonds are basically off the books. Because TIF dollars aren't secured by the full faith and credit of either the city or the state of New York, Ratner can ask the city for amounts that far exceed the city's constitutional debt limit.

Legislation will have to be drawn up for the TIF dollars, just as it is for any form of public debt. But with lawmakers in Albany already in lockstep with Ratner's plans, legislation will be little more than a formality. As for the BAY location fitting the description of "blighted," the weakened qualifiers for TIF money will allow planners to draw their own lines on the Brooklyn map, delineating the area he wants declared TIF-eligible for the BAY. Then he can just make up the name of the entity that seeks the funding.

Since TIF is not formally backed by New York's good credit, the additional risk may lead Ratner's investors to demand a higher interest rate. This means the BAY creates even more debt, and if ample property tax revenue doesn't start rolling in by the time the debt service begins, more borrowing will be necessary. If the debt goes into default, the state and city could end up bailing him out with tax dollars just to keep the peace. That's a risk Ratner and his friends in office seem willing to take.

Should a second source of money become necessary, an array of tax-free bond options await him. Pundits of the BAY have tossed around the suggestion that Ratner may use the state's 80/20 program to collect capital for the project, a borrowing process that would require him to incorporate low- to moderate-income housing into 20 percent of the BAY's residential dwellings.

There is no guarantee Ratner will go the 80/20 route, says Brad Lander of the Center for Community and Environmental Development. "As far as the 80/20 bonds go, Ratner is under no obligation to use them. He has indicated that he will do affordable housing [in the BAY], but he's not obligated to use the 80/20 method, regardless of what he said. Ratner could just as easily opt for Liberty Bonds, the kind he's currently using to build a tower for the Bank of New York on the Atlantic Mall site."

After Sept. 11, the city and state received $8 billion in tax-exempt Liberty Bonds to help rebuild Lower Manhattan. Ratner was the first developer to step up and, almost unbelievably, used the bonds outside of Manhattan. To date, $114 million in Liberty Bonds have been sold to help fund the Atlantic Terminal addition to the Atlantic Center Mall, which will house the Bank of New York and other tenants, including Target and Red Lobster. Mayor Bloomberg gave his approval to this use.

There's little doubt that Ratner can get the okay to use Liberty Bonds for the Brooklyn Atlantic Yards. As an added incentive, because Ratner will be the BAY's landlord, the use of Liberty Bonds through the city requires only a five-percent total commitment to low-income housing. Either way, he has time to decide-the Liberty Bond program, still flush with billions of dollars in headroom, was just extended by the Bush administration for another five years.

"The oligarchy has arranged this. Whoever runs the city-and I don't mean the mayor-the powers that be have given Ratner the nod of approval," says veteran New York City real estate developer Peter Williams, who opposes Ratner's plans.

Williams has reason to be angry. One of his buildings-where his children live-will be condemned and then destroyed to make way for construction. He learned about the planned destruction of his property after speaking to neighbors who saw it on the television news.

"Ratner," he admits, "has put together a brilliant plan. I take off my hat at how Machiavellian it is? The Nets don't even matter, it could have been any team. This is an area that's being homesteaded."

Williams understands that Ratner is poised to make the BAY into a financial equity. "Why is it an equity? Because Ratner gets it all financed. He doesn't have to sell it. It's not a profit until you sell it, and if you don't sell it, you can borrow against it," he explains.

Think of Ratner's plan in terms of a turn-of-the-century dotcom venture. If the BAY were, say, Pets.com, getting it off the ground with private money would require a venture capitalist, a daring businessman with deep pockets willing to take a risk. Private money would fund the initial development of a product that is then impressive enough to woo public money via an initial public offering of stock. When that money rolls in, the venture capitalist's investment is repaid, and the company moves forward on public money from investors who are rewarded with dividends.

With his successful Nets bid, Ratner has a selling point that fast-forwards the process to the equivalent of a public stock offering. With the Nets waiting to move their lockers to Brooklyn at the end of the 2007 season, the BAY as a revenue-generating business is already sold in the eyes of New York politicians. The risk of throwing around billions of dollars in public money has rapidly matured into a less-volatile gamble. The public spigots are turned on once again for Ratner.

With the BAY as a multi-billion-dollar equity run exclusively by Forest City Ratner-a complete shop that maintains its own legal, accounting, contracting and design services-Ratner hopes to see profit as tax revenues pay back the debtors. But if adequate revenues are not realized, if few tenants are attracted to the Gehry-designed, doorman-enhanced building, if businesses don't pour in, or if the neighborhood simply has a case of tissue rejection, then Ratner may be able to depend, once more, on his political friends to move some municipal office into the BAY to keep the lights on.

Such is the case with the Ratner's Atlantic Center Mall, which sits right next door to the BAY's lot.

The Atlantic Center Mall was built with $18.55 million dollars in tax breaks, and with another $4 million that was coughed up by citizens via city giveaways to modify the surrounding roads and sewage. The latter was kicked in by the city because Ratner promised the mall would jumpstart retail rejuvenation in its area. Today, one of the mall's biggest tenants is the New York Department of Motor Vehicles, which has come to Ratner's rescue by renting almost 50,000 square feet to the tune of about $1.6 million a year.

In other words, the taxpayer-funded mall was built on the premise of attracting retail business. But it's failed to do that, so taxpayer-funded agencies have moved in to fill up the tenant directory. This upset the area's representative, State Sen. Velmanette Montgomery.

"It just means that in addition to the up-front investment that the city made, the taxpayers are to a large extent bailing out the project because the retail part never worked out," she said in a recent article in the New York Post.

Developer Peter Williams figures that since the mall continues to struggle, Ratner should use the existing mall area to accommodate the Brooklyn Atlantic Yards. The way Williams has drawn it out, Ratner could build on the Vanderbilt Storage Yard and his mall property instead of condemning buildings to construct the BAY in the opposite direction.

"It just doesn't need to be this greedy. Maybe Ratner should be satisfied with $1 billion equity and spare our homes," he says.

That likely won't be the case. Since Ratner must seek eminent domain to move the rail tracks at the Vanderbilt site, he might as well go for the houses he needs and leave his mall alone.

"Ratner could go through the city and state procedures to get what he needs as far as the rail tracks moved and such," Lander explains. "There's been a rezoning in Brooklyn that now allows for some of the tallest high-rises allowed in the city. But that zoning doesn't include the BAY site, so Ratner is counting on New York State's power of eminent domain through the Empire State Development Corporation (ESDC).

"[He] could go through the city, but it's my feeling he'll just go straight up to the Empire State Development Corp."

What Ratner wants from the ESDC doesn't require legislation or a vote. It may not even require a trip to Albany-the ESDC rents offices in Brooklyn, mercifully right inside Ratner's struggling Atlantic Center Mall. He merely needs to ask the folks who run the ESDC for whatever he wants.

And who runs the Empire State Development Corp., the state-run company with the power to condemn private property in the interest of for-profit development?

Charles Gargano, an old friend of Ratner's, serves as its boss. Overseeing its decisions is none other than Ratner's old law school buddy, George Pataki.